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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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Form 10-K

|ý                                                             | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
|------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------
|OR                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                                        
|For the transition period
from                             to

Commission file number: 0-04041

ALLIED MOTION TECHNOLOGIES INC.(Exact name of registrant as specified in its charter)

|Colorado(State or other jurisdiction of
incorporation or organization)                       |  | 84-0518115(I.R.S. Employer Identification No.)
|-------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|23 Inverness Way East, Suite 150
Englewood, Colorado(Address of principal executive offices) |  | 80112(Zip Code)                               
|Registrant's telephone number, including area code:(303) 799-8520                           
|Securities registered pursuant to Section 12(b) of the Act:None                             
|Securities registered pursuant to Section 12(g) of the Act:Common Stock, no par value       

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes o No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.    Yes o No ý

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.    ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerate filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large
accelerated filer    o        Accelerated
filer    o        Non-accelerated filer    ý

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

The aggregate market value of voting stock held by non-affiliates of the Registrant, computed by reference to the average bid and asked prices of such
stock as of the last business day of the Registrant's most recently completed second fiscal quarter was approximately $20,000,000.

Number
of shares of the only class of Common Stock outstanding: 6,369,351 as of March 20, 2006

DOCUMENTS
INCORPORATED BY REFERENCE
Notice and Proxy for 2006 Annual Meeting of Shareholders



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Table of Contents



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

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All statements contained herein that are not statements of historical fact constitute "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and
may contain the word "believe," "anticipate," "expect," "project," "intend," "will continue," "will likely result," "should" or words or phrases of similar meaning. Forward-looking statements involve
known and unknown risks and uncertainties that may cause actual results of the Company to differ materially from the forward-looking statements. The risks and uncertainties include international,
national and local general business and economic conditions in the Company's motion markets, introduction of new technologies, products and competitors, the ability to protect the Company's
intellectual property, the ability of the Company to sustain, manage or forecast its growth and product acceptance, success of new corporation strategies and implementation of defined critical issues
designed for growth and improvement in profits, the continued success of the Company's customers to allow the Company to realize revenues from its order backlog and to support the Company's expected
delivery schedules, the continued viability of the Company's customers and their ability to adapt to changing technology and product demand, the ability of the Company to meet the technical
specifications of its customers, the continued availability of parts and components, increased competition and changes in competitor responses to the Company's products and services, changes in
government regulations, availability of financing, the ability of the Company's lenders and financial institutions to provide additional funds if needed for operations or for making future
acquisitions or the ability of the Company to obtain alternate financing if present sources of financing are terminated, the ability to attract and retain qualified personnel who can design new
applications and products for the motion industry, the ability of the Company to identify and consummate favorable acquisitions to support external growth and new technology, the ability of the
Company to establish Chinese manufacturing and component sourcing capabilities, and the ability of the Company to control costs for the purpose of improving profitability. The Company's ability to
compete in this market depends upon its capacity to anticipate the need for new products, and to continue to design and market those products to meet customers' needs in a competitive world. Actual
results, events and performance may differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements as a prediction of actual results. The Company has no
obligation or intent to release publicly any revisions to any forward looking statements, whether as a result of new information, future events, or otherwise.

New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk
factors on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. The
Company's expectations, beliefs and projections are expressed in good faith and are believed to have a reasonable basis; however, the Company makes no assurance that expectations, beliefs or
projections will be achieved.

PART I

Item 1. Business.

Allied Motion Technologies Inc. (Allied Motion or the Company) was organized under the laws of Colorado in 1962. Allied Motion utilizes its underlying core
"Electromagnetic Motion Technology/Know How" to provide compact, high performance products as solutions to a variety of motion applications. The Company is engaged in the business of designing,
manufacturing and selling motor and servo motion products to three primary segments, defined as 1) Commercial, 2) Industrial and 3) Aerospace/Defense. On a smaller scale, another
segment includes motion control system providers including motor, control and system solution providers as customers for our optical encoder devices. The Company now operates primarily in the United
States and Europe.

Commericial
Markets include medical mobility, health and fitness, truck, bus, construction and marine vehicles;and commercial grade equipment/tools, Motors, Gearmotors and Blower
Assemblies

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are
the primary products sold by Allied into this segment. Industrial Markets include medical equipment and devices, semiconductor equipment, packaging and sorting equipment and printing/imaging
equipment; primary products sold to the Industrial Markets include DC and BLDC motor, servo systems and embedded electronic solutions. Aerospace/Defense Customers are the Prime and
Sub-Contractors for the Aviation and Defense Markets. All technologies within the company are sold to this segment with a primary emphasis placed on our high resolution feedback and high
performance/compact motor solutions.

Examples
of the end products using Allied Motion's technology 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 pump applications for the specialty automotive market, wheel chairs, professional patient rehab
equipment, MRI scanners, diagnostic equipment, portable medical dosage pumps and surgical hand tools in the healthcare and medical market, high definition printers, tunable lasers, and spectrum
analyzers for the fiber optic industry processing equipment for the semiconductor industry, commercial grade floor cleaners, polishers and material handling devices for factories and commercial
buildings, arc-welders and cable pullers in the construction and repair and maintenance markets and missile/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 Motor Technology B.V. (PremotecDordrecht, The
Netherlands).

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

COPI
manufactures optical encoders. They are used to measure rotational and linear movements of parts in diverse applications such as printers, sorting machinery, machine tools, robots,
medical equipment, tunable lasers and spectrum analyzers. The primary markets for the optical encoders are in the industrial, computer peripheral manufacturing, medical and telecommunications sectors.
COPI also designs, manufactures and markets fiber optic-based encoders with special characteristics, such as immunity to radio frequency interference and high temperature tolerance, suited for
industrial, aerospace and military environments. Applications include airborne navigational systems, anti-lock braking transducers, missile flight surface controls and high temperature
process control equipment.

Motor
Products has been a motor producer for more than sixty years and is a vertically integrated manufacturer of customized, highly engineered sub-fractional horsepower
permanent magnet DC and brushless DC motors serving a wide range of original equipment applications. The motors are used in HVAC and actuation systems in a variety of markets including trucks, buses,
RV's, off-road vehicles, health, fitness, medical and industrial equipment.

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

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Premotec
has been manufacturing small precision electric motors for more than thirty years which utilize four different motor technologies: Brushless DC, Coreless DC, Iron Core DC, and
Permanent Magnet Stepper and Synchronous motors, and also offers a range of reduction gearboxes tailored to a number of these motors. The products are manufactured at Premotec's facility in The
Netherlands and at a contract manufacturing facility in Eastern Europe. Premotec's products are sold to OEM customers in Europe and the United States and through distributors to smaller OEM's in
almost all countries of the European Economic Community. The products are used in a wide variety of industrial, professional and medical applications, such as fuel injection systems, bar code readers,
laser scanning equipment, HVAC actuators, dialysis equipment, industrial ink jet printers, waste water treatment, cash dispensers, dosing systems for the pharmaceutical industry, textile
manufacturing, document handling equipment and studio television cameras.



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

|Period:                                                        |  | Referred to as:             
|-------------------------------------------------------------- |  | ----------------------------
|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            
|Audited results from July 1, 2000 through June 30, 2001        |  | Fiscal Year 2001            



The Company maintains a direct sales force. In addition to its own marketing and sales force, the Company has independent sales representatives, agents and
distributors to sell its various product lines in certain markets.



The Company faces competition in all of its markets, although the number of competitors varies depending upon the product. The Company believes there are numerous
competitors in the motion control market. Competition involves primarily product performance and price, although service and warranty are also important.



The information required by this item is set forth in Note 12 of the Notes to Consolidated Financial Statements contained herein.



All parts and materials used by the Company are in adequate supply. No significant parts or materials are acquired from a single source or for which an alternate
source is not also available.



The Company holds several patents and trademarks regarding components used by the various subsidiaries; however, none of these patents and trademarks are
considered to be of major significance.

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The Company's business is not of a seasonal nature; however, revenues may be influenced by customers' fiscal year ends and holiday seasons.



The Company currently maintains inventory levels adequate for its short-term needs based upon present levels of production. The Company considers the
component parts of its different product lines to be readily available and current suppliers to be reliable and capable of satisfying anticipated needs.



During years 2005, 2004 and 2003, no single customer accounted for more than 10% of total revenues.



The Company's backlog at December 31, 2005 consisted of sales orders totaling approximately $25,200,000 while backlog at December 31, 2004 was
$21,500,000. In our commercial motors markets, the Company continues to experience an increased number of 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 the product, the Company records the order and sale. There can be no assurance
that the Company's backlog will be converted into revenue.



Approximately $325,000 of the Company's backlog as of December 31, 2005 consisted of contracts with the United States Government compared to $918,000 in
2004. The Company's contracts with the government contain a provision generally found in government contracts that permits the government to terminate the contract at its option. When the termination
is attributable to no fault of the Company, the government would, in general, have to pay the Company certain allowable costs up to the time of termination, but there is no compensation for loss of
profits.



The Company's expenditures on engineering and development for the years ended December 31, 2005, 2004 and 2003 were $3,526,000, $2,896,000 and $1,853,000,
respectively. Of these expenditures, no material amounts were charged directly to customers.



No significant pollution or other types of hazardous emission result from the Company's operations and it is not anticipated that the Company's operations will be
materially affected by Federal, State or local provisions concerning environmental controls. However, there can be no assurance that any future regulations will not affect the Company's operations.



The information required by this item is set forth in Note 12 of the Notes to Consolidated Financial Statements contained herein.

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At December 31, 2005 the Company had approximately 515 full-time employees.



The Company maintains a website at www.alliedmotion.com. The Company makes available, free of charge on or through its 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 soon as reasonably practicable after
it electronically files or furnishes such materials to the SEC.

The
Company has adopted a Code of Ethics for its chief executive officer, president and senior financial officers regarding their obligations in the conduct of Company affairs. The
Company has also adopted a Code of Business Conduct that is applicable to all directors, officers and employees. The Codes are available on the Company's website. The Company intends to disclose on
its website any amendment to, or waiver of, the Codes that would otherwise be required to be disclosed under the rules of the SEC and the Nasdaq Capital Market. A copy of both Codes are also available
in print to any stockholder upon written request addressed to Allied Motion Technologies Inc., 23 Inverness Way East, Suite 150, Englewood, CO 80112-5711, Attention: Secretary.

Item 1A. Risk Factors.

In addition to the other information contained or incorporated by reference in this document, readers should carefully consider the following risk factors. Any of
these risks or the occurrence of any one or more of the uncertainties described below could have a material adverse effect 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 and annual operating results are affected by a wide variety of factors that could materially adversely affect revenues and profitability, including:



As
a result of the foregoing and other factors, we have and may continue to experience material fluctuations in future operating results on a quarterly or annual basis which could
materially and adversely affect our business, financial condition, operating results and stock price.

Our operating results depend in part on our ability to contain or reduce costs.

Our
efforts to maintain and improve profitability depend in part on our ability to reduce the costs of materials, components, supplies and labor, including establishing production
capabilities at our Chinese subcontractor. While the failure of any single cost containment effort by itself would most

6

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likely
not significantly impact our results, we cannot give any assurances that we will be successful in implementing cost reductions and maintaining a competitive cost structure.

There is substantial price competition in our industry, and our success and profitability will depend on our ability to maintain a competitive cost and price
structure.

There
is substantial price competition in our industry, and our success and profitability will depend on our ability to maintain a competitive cost and price structure. We may have to
reduce prices in the future to remain competitive. Also, our future profitability will depend in part upon our ability to continue to improve our manufacturing efficiencies and maintain a cost
structure that will enable us to offer competitive prices. Our inability to maintain a competitive cost structure could have a material adverse effect on our business, financial condition and results
of operations.

Our profits may decline if the price of raw materials continues to rise and we cannot recover the increases from our customers.

We
use various raw materials, such as copper, steel and zinc, in our manufacturing operations. The prices of these raw materials have been subject to volatility. As a result of price
increases, in 2005 we implemented price surcharges to our customers; however we 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 to fully recover the price increases through surcharges in a timely manner.

We may explore additional acquisitions that complement, enhance or expand our business. We may not be able to complete these transactions, and, if completed, we may experience
operational and financial risks in connection with our acquisitions that may materially adversely affect our business, financial condition and operating results.

Our
future growth may be a function, in part, of acquisitions. We may have difficulty finding these opportunities, or if we do identify these opportunities, we may not be able to
complete the transactions for reasons including a failure to secure financing.

To
the extent that we are able to complete the transactions, we will face the operational and financial risks commonly encountered with this type of a strategy. These risks include the
challenge of integrating acquired businesses while managing the ongoing operations of each business, the challenge of combining the business cultures of each company, and the need to retain key
personnel of our existing business and the acquired business. The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of the acquired business and
our existing business. Members of our senior management may be required to devote considerable amounts of time to the integration process, which will decrease the time they will have to manage our
businesses, service existing customers, attract new customers and develop new products. If our senior management is not able to effectively manage the integration process, or if any significant
business activities are interrupted as a result of the integration process, our business could be adversely affected.

We have existing debt and refinancing risks that could affect our cost of operations.

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



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



In
addition, certain covenants relating to our existing indebtedness impose certain limitations on additional indebtedness. If we are unable to obtain sufficient capital in the future,
we may have to curtail our capital expenditures and other expenses. Any such actions could have a material adverse effect on our business, financial condition, results of operations and liquidity.

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

Our
ability to execute our long-term strategy may depend to a significant degree on our ability to obtain new long-term debt and equity capital. We have no
commitments for additional borrowings, other than our existing credit facilities, or for sales of equity. We may 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 our indebtedness, we may need to refinance our indebtedness to repay it. We also may need to refinance our indebtedness at maturity. We may not
be able to obtain additional capital on favorable terms to refinance our indebtedness.

The market price of our common stock has been and is likely to continue to be volatile, which may make it difficult for shareholders to resell common stock when they want to
and at prices they find attractive.

Our
common stock has been and is likely to be highly volatile and there has been limited trading volume in the stock. The volatility could affect our stock irrespective of, or
disproportionately to, the operating performance of our company. The fluctuations and limited trading volume may materially adversely affect the market price of our stock and the ability to sell the
stock. Most of our outstanding shares are available for resale in the public market without restriction. The sale of a large number of shares could adversely affect the share price.

We are dependent on our key personnel.

We
are dependent upon the continued contributions of our senior corporate management, particularly Richard Smith, chief executive officer and chief financial officer, Richard Warzala,
president and chief operating officer, and certain other key employees of Allied Motion for our future success. If Mr. Smith, Mr. Warzala or other key employees no longer serve in their
positions at Allied Motion, our business, as well as the market price of our common stock, could be substantially adversely affected. We cannot assure you that we will be able to retain the services
of Mr. Smith or Mr. Warzala or any other members of our senior management or key employees.

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Our future success depends in part on the continued service of our engineering and technical personnel and our ability to identify, hire and retain
personnel.

There
is continued competition for qualified personnel in our markets. We may not be able to continue to attract and retain engineers or other qualified personnel necessary for the
development and growth of our business or to replace personnel who may leave our employ in the future. The failure to retain and recruit key technical personnel could cause additional expense,
potentially reduce the efficiency of our operations and could harm our business.

We could incur substantial costs under environmental laws.

Our
operations are subject to 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 cleanup of contaminated sites. Some of our operations require environmental permits and controls to prevent and reduce air and water
pollution, and these permits are subject to modification, renewal and revocation by issuing authorities. We could incur substantial costs, including cleanup costs, fines and civil or criminal
sanctions and third-party claims for property damage and personal injury as a result of violations of or liabilities under environmental laws or non-compliance with environmental permits.

We have pension plan and post-retirement obligations covering some of our domestic employees which could reduce cash flow and negatively impact financial
condition.

Our
pension plan has a projected benefit obligation in excess of the fair value of plan assets. Our pension plan assets consist primarily of equity and fixed income securities. If the
performance of investments in the plan does not meet the Company's assumptions, the excess obligation may increase and the Company may have to record additional costs and/or contribute additional
funds to the pension plan. An increase in pension expenses and contributions could decrease the Company's cash available to pay its outstanding obligations and its net income.

Our
retiree medical plans are unfunded. We record costs as employees render the services necessary to earn the benefits. The costs are based on estimates including health care cost
increases, retirement and mortality. Actual results may vary materially from estimates which could result in an increase to our expense and decrease in net income.

We have a significant amount of goodwill recorded and an impairment writedown would result in lower net income and a reduction in net worth.

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

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

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



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If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

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

Item 2. Properties.

As of December 31, 2005, 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        |  | 112,000                    |  | Owned          

The
Company's management believes the above-described facilities are adequate to meet the Company's current and foreseeable needs. All facilities described above are operating at less
than full capacity.

Item 3. Legal Proceedings.

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

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

Allied Motion's common stock is traded on the Nasdaq Capital Market System and trades under the symbol AMOT. The number of holders of record as reported by the
Company's transfer agent of the Company's common stock as of the close of business on March 20, 2006 was 669. The Company did not pay or declare any dividends during years 2005 and 2004 and the
Company's long-term financing agreement prohibits the Company from doing so without prior approval.

10

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The
following table sets forth, for the periods indicated, the high and low prices of the Company's common stock on the Nasdaq Capital Market System, as reported by Nasdaq.

Price RangeHigh

LowYear ended december 31, 2005First Quarter

$
8.90

$
6.66Second Quarter


7.62


3.65Third Quarter


4.73


3.82Fourth Quarter


4.50


3.36Year ended december 31, 2004First Quarter

$
6.22

$
3.56Second Quarter


5.89


3.86Third Quarter


6.96


4.75Fourth Quarter


7.29


5.00


Equity Compensation Plan Information

The following table shows the equity compensation plan information of the Company at December 31, 2005.

|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 |  | 1,448,650                                                                                       |  | $                                                                           | 3.62 |                                                                                                                                            

Stock Repurchase Program Information

Under an employee stock repurchase program first approved by the Board of Directors in fiscal year 1994, the Company may repurchase its common stock from its
employees at the current market value. The Company's Agreement with its lenders limits employee stock repurchases to $125,000 per fiscal year. The plan was discontinued effective December 31,
2005.

The
following table shows the purchases of stock under this program during the fourth quarter of 2005.

|Period                 |  | Total Number
of Shares
Purchased |  | Average
Price Paid
per Share |      | Total Number of Shares
Purchased as Part of
Publicly Announced Programs
|---------------------- |  | -------------------------------- |  | ---------------------------- | ---- | -----------------------------------------------------------------------
|Oct. 1 - Oct. 31, 2005 |  | 466                              |  | $                            | 3.87 |                                                                        
|Nov. 1 - Nov. 30, 2005 |  | 185                              |  | $                            | 3.50 |                                                                        
|Dec. 1 - Dec. 31, 2005 |  |                                 |  |                              |     |                                                                        
|                       |  |                                  |  |                              |      |                                                                        
|Total                  |  | 651                              |  | $                            | 3.77 |                                                                        
|                       |  |                                  |  |                              |      |                                                                        

Item 6. Selected Financial Data.

The following tables summarize data from the Company's financial statements for the fiscal years 2001 through 2005 and the Transition and Comparative Periods and
notes thereto; the Company's complete annual financial statements and notes thereto for the current fiscal year appear in Item 8

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herein.
See Management's Discussion and Analysis of Financial Condition and Results of Operation for discussion of non-recurring items that affect the comparability of results between
periods.

|                                                    |  | For the year
ended
December 31,
2005 |        | For the year
ended
December 31,
2004 |   | For the year
ended
December 31,
2003
|--------------------------------------------------- |  | ------------------------------------ | ------ | ------------------------------------ | - | ------------------------------------
|
|Statements of Operations Data:                      |  |                                      |        |                                      |   |                                     
|Revenues from continuing operations                 |  | $                                    | 74,302 |                                      | $ | 62,738                              
|                                                    |  |                                      |        |                                      |   |                                     
|Net income                                          |  | $                                    | 923    |                                      | $ | 2,250                               
|                                                    |  |                                      |        |                                      |   |                                     
|Diluted income per share from continuing operations |  | $                                    | ..13   |                                      | $ | ..36                                
|                                                    |  |                                      |        |                                      |   |                                     

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

|                                                           |  | For the fiscal years ended June 30, |       
|---------------------------------------------------------- |  | ----------------------------------- | ------
|
|
|Statements of Operations Data:                             |  |                                     |       
|Revenues from continuing operations                        |  | $                                   | 15,723
|                                                           |  |                                     |       
|Income (loss) from continuing operations                   |  | $                                   | (45   
|Operating (loss) from discontinued operations              |  |                                     | (221  
|                                                           |  |                                     |       
|Net income (loss)                                          |  | $                                   | (266  
|                                                           |  |                                     |       
|Diluted income (loss) per share from continuing operations |  | $                                   | (0.01 
|                                                           |  |                                     |       

|                                 |  | At December 31,
2005 |        | At December 31,
2004 |   | At December 31,
2003 |  | At December 31,
2002
|-------------------------------- |  | -------------------- | ------ | -------------------- | - | -------------------- |  | --------------------
|Balance Sheet Data:              |  |                      |        |                      |   |                      |  |                     
|Total assets                     |  | $                    | 53,337 |                      | $ | 54,820               |  | $                   
|Total current and long-term debt |  | $                    | 12,081 |                      | $ | 14,407               |  | $                   

|                                 |  | At June 30,
|-------------------------------- |  | -----------
|
|Balance Sheet Data:              |  |            
|Total assets                     |  | $          
|Total current and long-term debt |  | $          

12

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Allied Motion designs, manufactures and sells motion products to a broad spectrum of customers throughout the world primarily for the commercial motor, industrial
motion control, and aerospace and defense markets. The Company's products are used in demanding applications in medical equipment, HVAC systems for trucks, busses and off-road vehicles,
the specialty automotive market, industrial automation, pumps, health-fitness, defense, aerospace, semiconductor manufacturing, fiber optic-based telecommunications, printing, and graphic imaging
market sectors, to name a few.

Today,
five companies form the core of Allied Motion. The companies, Emoteq, Computer Optical Products, Motor Products, Stature Electric and Premotec offer a wide range of standard
motors, encoders and drives for original equipment manufacturers (OEM) and end user applications. A particular strength of each company is its ability to design and manufacture custom motion control
solutions to meet the needs of its customers.

The
Company has made considerable progress in implementing its new corporate strategy, the driving force of which is "Applied Motion Technology/Know How". The Company's commitment to
Allied's Systematic Tools, or AST for short, is driving continuous improvement in quality, delivery, cost and growth. AST utilizes a tool kit to effect desired changes through well defined processes
such as Strategy Deployment, Target Marketing, Value Stream Mapping, Material Planning, Standard Work and Single Minute Exchange of Dies.

One
of the Company's major challenges is to maintain and improve price competitiveness. The Company's customers are continually being challenged by their markets and competitors to be
price competitive and they are requiring their suppliers to deliver the highest quality product at the lowest price possible. In 2004, the Company began production of motor sub-assemblies
at a sub-contract manufacturing facility in China. During 2005, the Company made significant progress in establishing production of finished products in China, however was delayed in
putting into production the programs that we expect will generate a significant profit swing for some of our projects. We anticipate that we will be able to complete these programs in 2006.

The
Company's products contain certain metals, and the Company has been experiencing increases in the costs of these metals, particularly copper, steel and zinc, which are both key
materials in our products. The Company has reacted by aggressively sourcing material at lower cost from Asian markets, combining the sourcing of metals to benefit from volume purchasing and by passing
on surcharges to our customers.

The
Company has an aggressive motor development plan for five new standalone products and two new product lines that leverage the combined technology base of the Allied Motion companies.
The Company continues to focus on new product designs that design-out cost, provide higher performance and meet the needs of our served markets. Early in 2006, the Company announced
several new motor designs targeted at various markets. Each of these motors are targeted at precision motor applications. It normally takes twelve months to get new products designed into new customer
applications. All product development efforts are focused on adding value for our customers in our served market segments.

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

13

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Operating Results

Year 2005 compared to 2004

|                                                                                                           |                                   | For the year ended December 31, |        |        |   |        |      
|---------------------------------------------------------------------------------------------------------- | --------------------------------- | ------------------------------- | ------ | ------ | - | ------ | -----
|
|
|
|Revenues                                                                                                   |                                   | $                               | 74,302 |        | $ | 62,738 |      
|Cost of products sold (exclusive of amortization of acquired product designs and technologies intangibles) |                                   |                                 | 58,118 |        |   | 46,280 |      
|                                                                                                           |                                   |                                 |        |        |   |        |      
|Gross margin                                                                                               |                                   |                                 | 16,184 |        |   | 16,458 |      
|                                                                                                           |                                   |                                 |        |        |   |        |      
|Gross margin percentage                                                                                    |                                   |                                 | 22     | %      |   | 26     | %    
|                                                                                                           |                                   |                                 |        |        |   |        |      
|Operating costs and expenses:                                                                              |                                   |                                 |        |        |   |        |      
|                                                                                                           | Selling                           |                                 |        | 3,265  |   |        | 2,557
|                                                                                                           | General and administrative        |                                 |        | 5,952  |   |        | 6,226
|                                                                                                           | Engineering and development       |                                 |        | 3,526  |   |        | 2,896
|                                                                                                           | Amortization of intangible assets |                                 |        | 1,010  |   |        | 647  
|                                                                                                           | Restructuring charges             |                                 |        |       |   |        | 10   
|                                                                                                           |                                   |                                 |        |        |   |        |      
|Total operating costs and expenses                                                                         |                                   |                                 | 13,753 |        |   | 12,336 |      
|                                                                                                           |                                   |                                 |        |        |   |        |      
|Operating income                                                                                           |                                   |                                 | 2,431  |        |   | 4,122  |      
|Other income (expense), net:                                                                               |                                   |                                 |        |        |   |        |      
|                                                                                                           | Interest expense                  |                                 |        | (1,075 | ) |        | (696 
|                                                                                                           | Other (expense) income, net       |                                 |        | 125    |   |        | (17  
|                                                                                                           |                                   |                                 |        |        |   |        |      
|Total other (expense) income, net                                                                          |                                   |                                 | (950   | )      |   | (713   | )    
|                                                                                                           |                                   |                                 |        |        |   |        |      
|Income before income taxes                                                                                 |                                   |                                 | 1,481  |        |   | 3,409  |      
|Provision for income taxes                                                                                 |                                   |                                 | 558    |        |   | 1,159  |      
|                                                                                                           |                                   |                                 |        |        |   |        |      
|Net income                                                                                                 |                                   | $                               | 923    |        | $ | 2,250  |      
|                                                                                                           |                                   |                                 |        |        |   |        |      

NET
INCOMEThe Company achieved net income of $923,000 or $.13 per diluted share for 2005 compared to $2,250,000 or $.36 per diluted share for 2004. Included in net income
are results related to Stature Electric 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.

EBITDAEBITDA
was $5,800,000 for 2005 compared to $6,400,000 for 2004. EBITDA is a non-GAAP measurement that consists of income before interest expense, provision
for income taxes and depreciation and amortization. See information included in "Non-GAAP Measures" below for a reconciliation of net income to EBITDA.

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

GROSS
MARGINSGross margin as a percentage of revenues was 22% for 2005 and 26% for 2004. The decrease is due to a change in sales mix (significant drop in sales of our
higher margin business partially offset by increased sales of lower margin business), the weighting of the lower margins of the acquired businesses, additional costs incurred to set up low cost
manufacturing

14

---



capability
in China and the negative impact of the upward trend in the cost of purchased metal. The Company has proactively responded to the increased metal costs by aggressively sourcing materials
from Asian markets, by combining the sourcing of metals for its various manufacturing operations to benefit from volume purchasing and by passing surcharges to its customers. The Company anticipates
gross margins will improve company wide as we continue to improve manufacturing efficiencies through the implementation of lean manufacturing, by increasing offshore sourcing of materials and from
continued cost reduction efforts to reduce overhead costs and expenses. We also anticipate that we will start realizing improved margins from products manufactured in our low cost manufacturing
facilities in 2006. Cost of products sold excludes $324,000 and $170,000 for amortization of acquired designs and technologies for 2005 and 2004, respectively.

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 expenses from Stature and Premotec contributed 31% of this increase. The decrease in selling expense from existing businesses is due to cost reduction efforts and recruiting expenses
incurred in 2004 that did not repeat in 2005.

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

ENGINEERING
AND DEVELOPMENT EXPENSESEngineering and 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 to additional expenditures associated with new product development.

AMORTIZATION
OF INTANGIBLE ASSETSAmortization of intangible assets was $1,010,000 in 2005 and $647,000 in 2004. This increase was due to the amortization costs related to
the amortizable intangible assets acquired in the Stature and Premotec acquisitions during 2004.

RESTRUCTURING
CHARGERestructuring charges were zero and $10,000 in 2005 and 2004, respectively. The charges in 2004 relate primarily to severance costs arising from
workforce reductions from consolidation of 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 directly attributed to the increased outstanding balance on
the borrowings related to the financing of the acquisitions of Stature and Premotec.

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

15

---



Year 2004 compared to 2003

|                                                                                                           |                                   | For the year ended December 31, |        |       |   |        |      
|---------------------------------------------------------------------------------------------------------- | --------------------------------- | ------------------------------- | ------ | ----- | - | ------ | -----
|
|
|
|Revenues                                                                                                   |                                   | $                               | 62,738 |       | $ | 39,434 |      
|Cost of products sold (exclusive of amortization of acquired product designs and technologies intangibles) |                                   |                                 | 46,280 |       |   | 29,167 |      
|                                                                                                           |                                   |                                 |        |       |   |        |      
|Gross margin                                                                                               |                                   |                                 | 16,458 |       |   | 10,267 |      
|                                                                                                           |                                   |                                 |        |       |   |        |      
|Gross margin                                                                                               |                                   |                                 | 26     | %     |   | 26     | %    
|                                                                                                           |                                   |                                 |        |       |   |        |      
|Operating costs and expenses:                                                                              |                                   |                                 |        |       |   |        |      
|                                                                                                           | Selling                           |                                 |        | 2,557 |   |        | 2,022
|                                                                                                           | General and administrative        |                                 |        | 6,226 |   |        | 4,596
|                                                                                                           | Engineering and development       |                                 |        | 2,896 |   |        | 1,853
|                                                                                                           | Amortization of intangible assets |                                 |        | 647   |   |        | 315  
|                                                                                                           | Restructuring charges             |                                 |        | 10    |   |        | 211  
|                                                                                                           |                                   |                                 |        |       |   |        |      
|Total operating costs and expenses                                                                         |                                   |                                 | 12,336 |       |   | 8,997  |      
|                                                                                                           |                                   |                                 |        |       |   |        |      
|Operating income                                                                                           |                                   |                                 | 4,122  |       |   | 1,270  |      
|Other income (expense), net:                                                                               |                                   |                                 |        |       |   |        |      
|                                                                                                           | Interest expense                  |                                 |        | (687  | ) |        | (226 
|                                                                                                           | Other expense, net                |                                 |        | (26   | ) |        | (77  
|                                                                                                           |                                   |                                 |        |       |   |        |      
|Total other expense, net                                                                                   |                                   |                                 | (713   | )     |   | (303   | )    
|                                                                                                           |                                   |                                 |        |       |   |        |      
|Income before income taxes                                                                                 |                                   |                                 | 3,409  |       |   | 967    |      
|Provision for income taxes                                                                                 |                                   |                                 | 1,159  |       |   | 19     |      
|                                                                                                           |                                   |                                 |        |       |   |        |      
|Net income                                                                                                 |                                   | $                               | 2,250  |       | $ | 948    |      
|                                                                                                           |                                   |                                 |        |       |   |        |      

NET
INCOMEThe Company achieved net income of $2,250,000 or $.36 per diluted share for 2004 compared to $948,000 or $.19 per diluted share for 2003. Included in the results
for 2003 was a tax credit of $298,000 related to the realization of a prior year state income tax refund. Included in net income for 2004 are results related to Stature Electric and Premotec from the
dates of acquisition on May 10, 2004 and August 23, 2004, respectively.

During
2003, the Company sold its Calibrator Business. In accordance with SFAS No. 144, the business is included as a discontinued operation; however results of operations for the
discontinued business were zero and no gain or loss from the sale was recorded due to the previous writedown of the carrying value of the business to its estimated fair value.

EBITDAEBITDA
was $6,400,000 for 2004 compared to $2,550,000 for 2003. EBITDA is a non-GAAP measurement that consists of income before interest expense, provision
for income taxes and depreciation and amortization. See information included in "Non-GAAP Measures" below for a reconciliation of net income to EBITDA.

REVENUESRevenues
were $62,738,000 in 2004 compared to $39,434,000 in 2003 or a 59% increase. Of this 59% increase in revenues, 17% came from the Company's existing
businesses and the remaining 42% came from incremental revenues provided by Stature and Premotec, the companies acquired during 2004.

GROSS
MARGINSGross margin as a percentage of revenues was 26% for 2004 and 2003. This reflects improved margins of 2% from existing businesses offset by lower weighted
average margins of

16

---



the
two acquisitions. Cost of products sold excludes $170,000 and zero for amortization of acquired designs and technologies for 2005 and 2004, respectively.

SELLING
EXPENSESSelling expenses were $2,557,000 and $2,022,000 in 2004 and 2003, respectively. This increase was primarily due to the acquisitions of Stature and Premotec.

GENERAL
AND ADMINISTRATIVE EXPENSESGeneral and administrative expenses were $6,226,000 in 2004 compared to $4,596,000 in 2003. The increased administration costs related to
the acquisitions of Stature and Premotec made up approximately $1,000,000 of this increase. The remainder of the increase of $630,000 relates to additional incentive bonuses earned and to the increase
in the contribution to the Employee Stock Ownership Plan.

ENGINEERING
AND DEVELOPMENT EXPENSESEngineering and development expenses were $2,896,000 and $1,853,000 for 2004 and 2003, respectively. Of the $1,043,000 increase in
engineering and development expenses, $667,000 was due to the acquisitions of Stature and Premotec and the remaining $376,000 was due to additional expenditures associated with new product
development.

AMORTIZATION
OF INTANGIBLE ASSETSAmortization of intangible assets expense was $647,000 in 2004 and $315,000 in 2003. This increase was due to the amortization costs related
to the amortizable intangible assets acquired in the Stature and Premotec acquisitions.

RESTRUCTURING
CHARGERestructuring charges were $10,000 and $211,000 in 2004 and 2003, respectively. The charges relate primarily to severance costs arising from workforce
reductions from consolidation of the Company's manufacturing facilities.

INTEREST
EXPENSEInterest expense for 2004 was $687,000 and for 2003 was $226,000. The increase in interest was directly attributed to the increased outstanding balance on
the borrowings related to the financing of the acquisitions of Stature and Premotec.

INCOME
TAXESThe provision for income taxes for year 2004 was $1,159,000 compared to $19,000 for 2003. The effective income tax rate as a percentage of income before income
taxes from continuing operations was 34% in 2004 and 2% in year 2003. The difference in the effective tax rate between periods was primarily due to a $442,000 tax benefit realized in 2003 related to
the realization of a prior year state income tax refund and resolution of certain income tax related issues.

Non-GAAP Measures

EBITDA is not a defined term under U.S. generally accepted accounting principles (non-GAAP measures). Non-GAAP measures should not be
considered in isolation or as a substitute for net income or cash flow data prepared in accordance with GAAP and may not be comparable to calculations of similarly titled measures by other companies.

EBITDA
is provided for information purposes only and should not be viewed as indicative of actual or future results. EBITDA is presented because the Company believes that certain
investors may use it as supplemental information to evaluate a company's ability to service its indebtedness. EBITDA does not represent and should not be considered as an alternative to net income,
operating income, net cash provided by operating activities or any other measure for determining operating performance or liquidity that is calculated in accordance with generally accepted accounting
principles.

17

---



The
Company's calculation of EBITDA for 2005, 2004 and 2003 is as follows:

|(in thousands)                                                                                        |  | For the year ended
December 31,
2005 |       | For the year ended
December 31,
2004 |   | For the year ended
December 31,
2003
|----------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ----- | ------------------------------------ | - | ------------------------------------
|Net income                                                                                            |  | $                                    | 923   |                                      | $ | 2,250                               
|Interest expense                                                                                      |  |                                      | 1,075 |                                      |   | 696                                 
|Provision for income tax                                                                              |  |                                      | 558   |                                      |   | 1,159                               
|Depreciation and amortization                                                                         |  |                                      | 3,229 |                                      |   | 2,328                               
|                                                                                                      |  |                                      |       |                                      |   |                                     
|Income before interest expense, provision for income taxes and depreciation and amortization (EBITDA) |  | $                                    | 5,785 |                                      | $ | 6,433                               
|                                                                                                      |  |                                      |       |                                      |   |                                     

Liquidity and Capital Resources

The Company's liquidity position as measured by cash and cash equivalents increased $168,000 during 2005 to a balance of $624,000 at December 31, 2005.
During 2005, operations provided $3,671,000 in cash. Cash provided by operations included net income of $923,000 plus non-cash charges for depreciation and amortization of $3,229,000,
provisions for doubtful accounts, obsolete inventory and deferred income taxes totaling $602,000 and other non-cash charges of $254,000. Cash was used to increase inventories by $644,000
in support of increased sales volume and anticipation of production of motor sub-assemblies at a sub-contract manufacturing facility in China. Cash used in operations also
included an increase in trade receivables of $1,065,000 and increases in accounts payable of $1,051,000 reflecting increased sales levels. Accrued liabilities and other decreased $610,000 which mainly
represented the payment in 2005 of the incentive bonus awards earned in 2004. Offsetting these uses was an increase in prepaid and other current assets of $69,000.

Net
cash used in investing activities was $2,371,000 and $17,719,000 for 2005 and 2004, respectively. The Company paid $275,000 and $13,563,000, in years 2005 and 2004, respectively,
related to the acquisition of Stature and zero and $3,253,000 in years 2005 and 2004, respectively, related to the acquisition of Premotec. Purchases of property and equipment were $2,096,000 and
$953,000 during the years 2005 and 2004, respectively. During 2005, approximately $1,000,000 of the $2,096,000 in purchases related to the set-up of motor manufacturing in China. The
Company does not expect the level of purchases related to our China manufacturing capability to continue at this level.

Net
cash used in financing activities was $1,132,000 for the year 2005 compared to net cash provided of $12,937,000 for 2004. The Company had no new borrowings under term loans this year
compared to borrowings of $10,314,000 in 2004. The Company repaid $2,236,000 and $2,132,000 on term loans for the years 2005 and 2004, respectively. In June 2004, Allied Motion received
$1,000,000 for the issuance of 198,177 shares of common stock under the terms of a Stock Purchase Agreement. The purchasers of these shares were certain trusts and pension plans, the beneficiaries of
which are Michel Robert and members of his immediate family. The aggregate purchase price for the shares represented the fair value of the stock at the time the Company received the purchase price.
Cash was also provided from stock transactions under various employee benefit stock plans of $655,000 and $123,000 and repayment on a loan to the Company's Employee Stock Ownership plan of $155,000
and $45,000 in 2005 and 2004 respectively.

At
December 31, 2005, the Company had $11,809,000 of debt obligations representing borrowings on lines-of-credit, term loans and an overdraft facility.

Under
the domestic revolving line-of-credit agreement (Agreement), the Company has available the lesser of (a) $10,500,000 or (b) the sum of 85% of
eligible trade accounts receivable (excluding Premotec) and 50% of eligible inventory, as defined in the Agreement. The line-of-credit expires in

18

---



May 2007,
unless extended. Under the Agreement, the Company utilizes lock-box arrangements whereby remittances from customers reduce the outstanding debt, and therefore the
line-of-credit balance has been classified as a current liability. Borrowings under the line-of-credit bear interest at a rate equal to the bank's prime
rates plus 1% (8.25% as of December 31, 2005).

Under
the foreign line-of-credit agreement (Foreign Agreement), the Company has available the lesser of (a) EUR 1.25 million, or (b) 85% of
eligible trade accounts receivable of Premotec as defined in the Foreign Agreement. The line-of-credit expires in August 2006, unless extended. Borrowings under the
line-of-credit bear interest at a rate equal to the bank's base rate plus 1.75%, with a minimum of 4.75% (4.75% at December 31, 2005). Under the Foreign Agreement,
remittances from customers reduce the outstanding debt, therefore the balance has been classified as a current liability.

The
EUR 200,000 bank overdraft facility bears an interest rate equal to the bank's base rate plus 2%, with a minimum of 4.75% (4.75% at December 31, 2005). The facility has no
expiration date.

The
Company also has various term loans obtained in connection with its acquisitions. All borrowings are collateralized by substantially all assets of the Company.

The
loan agreements prohibit the Company from paying dividends and require that the Company maintain compliance with certain covenants related to tangible net worth and profitability. As
of December 31, 2005, the Company was in compliance with such covenants. As of December 31, 2005, the amount available under the lines-of-credit and overdraft
facility was $5,226,000.

The
Company's working capital, capital expenditure and debt service requirements are expected to be funded from cash provided by operations and amounts available under the
line-of-credit facilities. The Company believes the capital currently
available to it is sufficient for its currently anticipated needs for at least the next twelve months. If additional capital is needed in the future, the Company would pursue additional capital via
debt or equity financings. A key component of the Company's liquidity relates to the availability of amounts under its lines-of-credit. Any lack of availability of these
facilities could have a material adverse impact on the Company's liquidity position.

Price Levels and the Impact of Inflation

Prices of the Company's products have not increased significantly as a result of inflation during the past several years, primarily due to competition. The effect
of inflation on the Company's costs of production has been minimized through production efficiencies, lower costs of materials and surcharges passed on to customers. The Company anticipates that these
factors will continue to minimize the effects of any foreseeable inflation and other price pressures from the industries in which it operates. As the Company's manufacturing activities mainly utilize
semi-skilled labor, which is relatively plentiful in the areas surrounding the Company's production facilities, the Company does not anticipate substantial inflation-related increases in
the wages of the majority of its employees.

Critical Accounting Policies

The Company has prepared its financial statements in conformity with accounting principles generally accepted in the United States, and these statements
necessarily include some amounts that are based on informed judgments and estimates of management. The Company's significant accounting policies are discussed in Note 1 to the consolidated
financial statements. The policies are reviewed on a regular basis. The Company's critical accounting policies are subject to judgments and uncertainties which affect the application of such policies.
The Company uses historical experience and all available information to make these judgments and estimates. As discussed below the Company's financial position or results of operations may be
materially different when reported under different conditions or when using different assumptions in the application of such policies. In the event estimates or

19

---



assumptions
prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information. The Company's critical accounting policies include:

The
Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The allowance is based on historical
experience and judgments based on current economic and customer specific factors. Significant judgments are made by management in connection with establishing the Company's customers' ability to pay
at the time of shipment. Despite this assessment, from time to time, the Company's customers are unable to meet their payment obligations. The Company continues to monitor customers' credit
worthiness, and
use judgment in establishing the estimated amounts of customer receivables which may not be collected. A significant change in the liquidity or financial position of the Company's customers could have
a material adverse impact on the collectibility of accounts receivable and future operating results.

Inventory
is valued at the lower of cost or market. The Company monitors and forecasts expected inventory needs based on sales forecasts. Inventory is written down or written off when it
becomes obsolete or when it is deemed excess. These determinations involve the exercise of significant judgment by management. If actual market conditions are significantly different from those
projected by management the recorded reserve may be adjusted, and such adjustments may have a significant impact on the Company's results of operations. Demand for the Company's products can fluctuate
significantly, and in the past the Company has recorded substantial charges for inventory obsolescence.

The
Company records deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts recorded
in the consolidated financial statements, and for operating loss and tax credit carryforwards. Realization of the recorded deferred tax assets is dependent upon the Company generating sufficient
taxable income in the appropriate tax jurisdiction in future years to obtain benefit from the reversal of net deductible temporary differences and from tax credit and operating loss carryforwards. A
valuation allowance is provided to the extent that management deems it more likely than not that the net deferred tax assets will not be realized. The amount of deferred tax assets considered
realizable is subject to adjustment in future periods if estimates of future taxable income are changed.

The
Company reviews the carrying values of its long-lived assets, including goodwill and identifiable intangibles, in accordance with SFAS No. 142. SFAS No. 142
provides a fair value test to evaluate goodwill and long-lived asset impairment. As part of the review, the Company estimates future cash flows. Depending upon future assessments of fair
value and estimated future cash flows, there could be impairment recorded related to goodwill and other long-lived assets.

The
Company provides pension and postretirement benefits for certain domestic retirees and records the cost of the obligations based on estimates. The net periodic costs are recognized
as employees render the services necessary to earn the benefits. Several assumptions are used to calculate the expense and liability related to the plans including the discount rate, the expected rate
of return on plan assets, the future rate of compensation increases and health care cost increases. The discount rate is selected based on a bond pricing model that relates to the projected future
cash flows of benefit obligations. Actuarial assumptions used are based on demographic factors such as retirement and mortality. Actual results could vary materially from the Company's actuarial
assumptions, which may have an impact on the amount of reported expense or liability for pension or postretirement benefits.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS no. 123 (revised 2004), Share-Based Payment. SFAS 123R is a
revision of FASB No. 123 "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees", and amends SFAS No. 95,
"Statement of Cash Flows". SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options to be recognized in the

20

---



income
statement based on their fair values. The amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. Compensation
cost will be recognized over the period that an employee provides service in exchange for the award. Pro forma disclosure is no longer an alternative. The provisions of this statement will become
effective in our first quarter of 2006.

SFAS 123R
permits public companies to adopt its requirements using one of two methods:



The
Company will utilize the modified prospective method when it adopts SFAS 123R.

As
permitted by SFAS 123, the Company currently accounts for share-based payments to employees using Opinion 25's intrinsic value method and, as such, generally recognize no
compensation cost for employee stock options. The impact on net earnings as a result of the adoption of SFAS No. 123R is not expected to be significant based on options outstanding and unvested
at December 31, 2005. The Company will adopt SFAS No. 123R starting on January 1, 2006.

Contractual Commitments

For more information on the Company's contractual obligations on operating leases and contractual commitments, see Notes 5 and 9 to the consolidated financial
statements. At December 31, 2005, the Company's commitments under these obligations were as follows (in thousands):

|Year ended
December 31, |  | Operating
Leases |       | Capital
Leases(1) |   | Lines-of-
Credit(2) |  | Term
Loans(3) |       | Interest on
Debt Obligations(4) |   | Total
|----------------------- |  | ---------------- | ----- | ----------------- | - | ------------------- |  | ------------- | ----- | ------------------------------- | - | -----
|2006                    |  | $                | 598   |                   | $ | 205                 |  | $             | 4,981 |                                 | $ | 2,174
|2007                    |  |                  | 431   |                   |   | 93                  |  |               |      |                                 |   | 3,990
|2008                    |  |                  | 438   |                   |   | 4                   |  |               |      |                                 |   | 379  
|2009                    |  |                  | 354   |                   |   |                    |  |               |      |                                 |   | 285  
|2010                    |  |                  | 252   |                   |   |                    |  |               |      |                                 |   |     
|Thereafter              |  |                  | 632   |                   |   |                    |  |               |      |                                 |   |     
|                        |  |                  |       |                   |   |                     |  |               |       |                                 |   |      
|                        |  | $                | 2,705 |                   | $ | 302                 |  | $             | 4,981 |                                 | $ | 6,828
|                        |  |                  |       |                   |   |                     |  |               |       |                                 |   |      

---

21

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk

The interest payable on the Company's domestic and foreign lines-of-credit and its foreign term loan are variable based on the prime rate
and Euribor, and are effected by changes in market interest rates. The Company does not believe that reasonably possible near-term changes in interest rates will result in a material
effect on future earnings, fair values or cash flows of the Company. A change in the interest rate of 1% on the Company's variable rate debt would have the impact of changing interest expense by
approximately $89,000 annually.

Foreign Currency Risk

On August 23, 2004, the Company completed the acquisition of Premotec, located in The Netherlands. Sales from this operation are denominated in Euros,
thereby creating exposures to changes in exchange rates. The changes in the Euro/U.S. exchange rate may positively or negatively affect the Company's sales, gross margins, net income and retained
earnings. The Company does not believe that reasonably possible near-term changes in exchange rates will result in a material effect on future earnings, fair values or cash flows of the
Company.

Item 8. Financial Statements and Supplementary Data.

22

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We
have audited the accompanying consolidated balance sheets of Allied Motion Technologies Inc. and subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of operations, stockholders' investment and comprehensive income, and cash flows for the years ended December 31, 2005, 2004 and 2003. In connection with our audits of
the consolidated financial statements, we have also audited the consolidated financial statement Schedule IIValuation and Qualifying Accounts for the years ended
December 31, 2005, 2004 and 2003. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We
conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Allied Motion Technologies Inc. and
subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for the years ended December 31, 2005, 2004 and 2003, in conformity with U.S.
generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

Denver,
Colorado
March 20, 2006

23

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

|                                                            |                                                                                                                                                 | December 31,
2005 |        | December 31,
2004 |  
|----------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | ------ | ----------------- | -
|Assets                                                      |                                                                                                                                                 |                   |        |                   |  
|Current Assets:                                             |                                                                                                                                                 |                   |        |                   |  
|                                                            | Cash and cash equivalents                                                                                                                       |                   | $      | 624               |  
|                                                            | Trade receivables, net of allowance for doubtful accounts of $281 and $235 at December 31, 2005 and 2004, respectively                          |                   |        | 10,087            |  
|                                                            | Inventories, net                                                                                                                                |                   |        | 9,185             |  
|                                                            | Deferred income taxes                                                                                                                           |                   |        | 402               |  
|                                                            | Prepaid expenses and other                                                                                                                      |                   |        | 577               |  
|                                                            |                                                                                                                                                 |                   |        |                   |  
|Total Current Assets                                        |                                                                                                                                                 |                   | 20,875 |                   |  
|Property, plant and equipment, net                          |                                                                                                                                                 |                   | 12,939 |                   |  
|Deferred income taxes                                       |                                                                                                                                                 |                   | 582    |                   |  
|Goodwill and intangible assets, net                         |                                                                                                                                                 |                   | 18,941 |                   |  
|                                                            |                                                                                                                                                 |                   |        |                   |  
|Total Assets                                                |                                                                                                                                                 | $                 | 53,337 |                   | $
|                                                            |                                                                                                                                                 |                   |        |                   |  
|Liabilities and Stockholders' Investment                    |                                                                                                                                                 |                   |        |                   |  
|Current Liabilities:                                        |                                                                                                                                                 |                   |        |                   |  
|                                                            | Current maturities of capital lease obligations                                                                                                 |                   | $      | 180               |  
|                                                            | Debt obligations                                                                                                                                |                   |        | 7,155             |  
|                                                            | Accounts payable                                                                                                                                |                   |        | 5,543             |  
|                                                            | Accrued liabilities and other                                                                                                                   |                   |        | 3,877             |  
|                                                            | Income taxes payable                                                                                                                            |                   |        | 664               |  
|                                                            |                                                                                                                                                 |                   |        |                   |  
|Total Current Liabilities                                   |                                                                                                                                                 |                   | 17,419 |                   |  
|Long-term capital lease obligations, net of current portion |                                                                                                                                                 |                   | 92     |                   |  
|Debt obligations, net of current portion                    |                                                                                                                                                 |                   | 4,654  |                   |  
|Deferred income taxes                                       |                                                                                                                                                 |                   | 1,862  |                   |  
|Pension and post-retirement obligations                     |                                                                                                                                                 |                   | 3,503  |                   |  
|                                                            |                                                                                                                                                 |                   |        |                   |  
|Total Liabilities                                           |                                                                                                                                                 |                   | 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; 6,369 and 6,070 shares issued and outstanding at December 31, 2005 and 2004, respectively |                   |        | 15,110            |  
|                                                            | Deferred compensation                                                                                                                           |                   |        | (119              | )
|                                                            | Loan receivable from Employee Stock Ownership Plan                                                                                              |                   |        |                  |  
|                                                            | Retained earnings                                                                                                                               |                   |        | 10,970            |  
|                                                            | Other comprehensive income (loss)                                                                                                               |                   |        | (154              | )
|                                                            |                                                                                                                                                 |                   |        |                   |  
|Total Stockholders' Investment                              |                                                                                                                                                 |                   | 25,807 |                   |  
|                                                            |                                                                                                                                                 |                   |        |                   |  
|Total Liabilities and Stockholders' Investment              |                                                                                                                                                 | $                 | 53,337 |                   | $
|                                                            |                                                                                                                                                 |                   |        |                   |  

See
accompanying notes to consolidated financial statements.

24

---



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

|                                                                                                           |                                        | For the year
ended
December 31,
2005 |        | For the year
ended
December 31,
2004 |   | For the year
ended
December 31,
2003 |      
|---------------------------------------------------------------------------------------------------------- | -------------------------------------- | ------------------------------------ | ------ | ------------------------------------ | - | ------------------------------------ | -----
|Revenues                                                                                                   |                                        | $                                    | 74,302 |                                      | $ | 62,738                               |      
|Cost of products sold (exclusive of amortization of acquired product designs and technologies intangibles) |                                        |                                      | 58,118 |                                      |   | 46,280                               |      
|                                                                                                           |                                        |                                      |        |                                      |   |                                      |      
|Gross margin                                                                                               |                                        |                                      | 16,184 |                                      |   | 16,458                               |      
|Operating costs and expenses:                                                                              |                                        |                                      |        |                                      |   |                                      |      
|                                                                                                           | Selling                                |                                      |        | 3,265                                |   |                                      | 2,557
|                                                                                                           | General and administrative             |                                      |        | 5,952                                |   |                                      | 6,226
|                                                                                                           | Engineering and development            |                                      |        | 3,526                                |   |                                      | 2,896
|                                                                                                           | Amortization of intangible assets      |                                      |        | 1,010                                |   |                                      | 647  
|                                                                                                           | Restructuring charges                  |                                      |        |                                     |   |                                      | 10   
|                                                                                                           |                                        |                                      |        |                                      |   |                                      |      
|Total operating costs and expenses                                                                         |                                        |                                      | 13,753 |                                      |   | 12,336                               |      
|                                                                                                           |                                        |                                      |        |                                      |   |                                      |      
|Operating income                                                                                           |                                        |                                      | 2,431  |                                      |   | 4,122                                |      
|Other income (expense), net:                                                                               |                                        |                                      |        |                                      |   |                                      |      
|                                                                                                           | Interest expense                       |                                      |        | (1,075                               | ) |                                      | (696 
|                                                                                                           | Other income (expense), net            |                                      |        | 125                                  |   |                                      | (17  
|                                                                                                           |                                        |                                      |        |                                      |   |                                      |      
|Total other expense, net                                                                                   |                                        |                                      | (950   | )                                    |   | (713                                 | )    
|                                                                                                           |                                        |                                      |        |                                      |   |                                      |      
|Income before income taxes                                                                                 |                                        |                                      | 1,481  |                                      |   | 3,409                                |      
|Provision for income taxes                                                                                 |                                        |                                      | 558    |                                      |   | 1,159                                |      
|                                                                                                           |                                        |                                      |        |                                      |   |                                      |      
|Net income                                                                                                 |                                        | $                                    | 923    |                                      | $ | 2,250                                |      
|                                                                                                           |                                        |                                      |        |                                      |   |                                      |      
|Basic net income per share:                                                                                |                                        |                                      |        |                                      |   |                                      |      
|                                                                                                           | Net income per share                   |                                      | $      | .15                                  |   | $                                    | .40  
|                                                                                                           |                                        |                                      |        |                                      |   |                                      |      
|                                                                                                           | Basic weighted average common shares   |                                      |        | 6,245                                |   |                                      | 5,581
|                                                                                                           |                                        |                                      |        |                                      |   |                                      |      
|Diluted net income per share:                                                                              |                                        |                                      |        |                                      |   |                                      |      
|                                                                                                           | Net income per share                   |                                      | $      | .13                                  |   | $                                    | .36  
|                                                                                                           |                                        |                                      |        |                                      |   |                                      |      
|                                                                                                           | Diluted weighted average common shares |                                      |        | 6,869                                |   |                                      | 6,185
|                                                                                                           |                                        |                                      |        |                                      |   |                                      |      

See
accompanying notes to consolidated financial statements.

25

---





ALLIED MOTION TECHNOLOGIES INC.        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT  AND COMPREHENSIVE INCOME  (In thousands)

|                            |                                                                            | Common Stock |       |   |        |        |   | Other
Comprehensive
Income
Adjustments |      |   |       
|--------------------------- | -------------------------------------------------------------------------- | ------------ | ----- | - | ------ | ------ | - | -------------------------------------- | ---- | - | ------
|
|
|Balances, December 31, 2002 |                                                                            | 4,837        |       | $ | 8,100  |        | $ |                                       |      | $ | 6,849 
|                            | Stock transactions under employee benefit stock plans                      |              | 183   |   |        | 271    |   |                                        | (200 | ) |       
|                            | Issuance of restricted stock                                               |              | 1     |   |        | 3      |   |                                        |      |   |       
|                            | Stock compensation expense                                                 |              |       |   |        | 9      |   |                                        |      |   |       
|                            | Foreign currency translation
adjustment                                    |              |       |   |        |        |   |                                        |      |   |       
|                            | Net income                                                                 |              |       |   |        |        |   |                                        |      |   |       
|                            |                                                                            |              |       |   |        |        |   |                                        |      |   |       
|                            | Comprehensive income                                                       |              |       |   |        |        |   |                                        |      |   |       
|                            |                                                                            |              |       |   |        |        |   |                                        |      |   |       
|Balances, December 31, 2003 |                                                                            | 5,021        |       |   | 8,383  |        |   | (200                                   | )    |   | 7,797 
|                            | 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                                    |              |       |   |        |        |   |                                        |      |   |       
|                            | Net income                                                                 |              |       |   |        |        |   |                                        |      |   |       
|                            |                                                                            |              |       |   |        |        |   |                                        |      |   |       
|                            | Comprehensive income                                                       |              |       |   |        |        |   |                                        |      |   |       
|                            |                                                                            |              |       |   |        |        |   |                                        |      |   |       
|Balances, December 31, 2004 |                                                                            | 6,070        |       |   | 14,169 |        |   | (155                                   | )    |   | 10,047
|                            | 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                           |              |       |   |        |        |   |                                        |      |   |       
|                            | Foreign currency translation
adjustment                                    |              |       |   |        |        |   |                                        |      |   |       
|                            | Net income                                                                 |              |       |   |        |        |   |                                        |      |   |       
|                            |                                                                            |              |       |   |        |        |   |                                        |      |   |       
|                            | Comprehensive income                                                       |              |       |   |        |        |   |                                        |      |   |       
|                            |                                                                            |              |       |   |        |        |   |                                        |      |   |       
|                            | Balances, December 31, 2005                                                |              | 6,369 |   | $      | 15,110 |   | $                                      | (119 | ) | $     
|                            |                                                                            |              |       |   |        |        |   |                                        |      |   |       

See
accompanying notes to consolidated financial statements.

26

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

|                                                                                            |                                                                                       | For the year
ended
December 31,
2005           |        | For the year
ended
December 31,
2004 |        | For the year
ended
December 31,
2003 |        
|------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ---------------------------------------------- | ------ | ------------------------------------ | ------ | ------------------------------------ | -------
|Cash Flows From Operating Activities:                                                       |                                                                                       |                                                |        |                                      |        |                                      |        
|Net income                                                                                  |                                                                                       | $                                              | 923    |                                      | $      | 2,250                                |        
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |                                                                                       |                                                |        |                                      |        |                                      |        
|                                                                                            | Depreciation and amortization                                                         |                                                |        | 3,229                                |        |                                      | 2,328  
|                                                                                            | Provision for doubtful accounts                                                       |                                                |        | 146                                  |        |                                      | 52     
|                                                                                            | Provision for obsolete inventory                                                      |                                                |        | 586                                  |        |                                      | 136    
|                                                                                            | Deferred income tax provision                                                         |                                                |        | (130                                 | )      |                                      | 901    
|                                                                                            | Loss on disposition of assets                                                         |                                                |        | 84                                   |        |                                      | 164    
|                                                                                            | Tax effect of non-qualifying option exercises                                         |                                                |        | 124                                  |        |                                      | 44     
|                                                                                            | Other                                                                                 |                                                |        | 46                                   |        |                                      | (39    
|                                                                                            | Changes in assets and liabilities, net of effects from acquisitions and dispositions: |                                                |        |                                      |        |                                      |        
|                                                                                            |                                                                                       | Increase in trade receivables                  |        |                                      | (1,065 | )                                    |        
|                                                                                            |                                                                                       | Increase in inventories, net                   |        |                                      | (644   | )                                    |        
|                                                                                            |                                                                                       | Decrease (increase) prepaid expenses and other |        |                                      | (69    | )                                    |        
|                                                                                            |                                                                                       | (Decrease) increase accounts payable           |        |                                      | 1,051  |                                      |        
|                                                                                            |                                                                                       | Decrease in accrued liabilities and other      |        |                                      | (610   | )                                    |        
|                                                                                            |                                                                                       |                                                |        |                                      |        |                                      |        
|Net cash provided by operating activities                                                   |                                                                                       |                                                | 3,671  |                                      |        | 3,273                                |        
|Cash Flows From Investing Activities:                                                       |                                                                                       |                                                |        |                                      |        |                                      |        
|                                                                                            | Purchase of property and equipment                                                    |                                                |        | (2,096                               | )      |                                      | (953   
|                                                                                            | Cash paid for acquisition of Motor Products                                           |                                                |        |                                     |        |                                      |       
|                                                                                            | 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                                                       |                                                                                       |                                                | (2,371 | )                                    |        | (17,719                              | )      
|Cash Flows From Financing Activities:                                                       |                                                                                       |                                                |        |                                      |        |                                      |        
|                                                                                            | Borrowings (repayments) on lines-of-credit, net                                       |                                                |        | 441                                  |        |                                      | 3,736  
|                                                                                            | Borrowings on term loans                                                              |                                                |        |                                     |        |                                      | 10,314 
|                                                                                            | Repayments on term loans                                                              |                                                |        | (2,236                               | )      |                                      | (2,132 
|                                                                                            | Proceeds from sales/leaseback                                                         |                                                |        | 50                                   |        |                                      |       
|                                                                                            | Repayments on capital leases                                                          |                                                |        | (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                                 |                                                |        | 655                                  |        |                                      | 123    
|                                                                                            |                                                                                       |                                                |        |                                      |        |                                      |        
|Net cash (used in) provided by financing activities                                         |                                                                                       |                                                | (1,132 | )                                    |        | 12,937                               |        
|Effect of foreign exchange rate changes on cash                                             |                                                                                       |                                                |       |                                      |        | 5                                    |        
|                                                                                            |                                                                                       |                                                |        |                                      |        |                                      |        
|Net increase (decrease) in cash and cash equivalents                                        |                                                                                       |                                                | 168    |                                      |        | (1,504                               | )      
|Cash and cash equivalents at beginning of period                                            |                                                                                       |                                                | 456    |                                      |        | 1,960                                |        
|                                                                                            |                                                                                       |                                                |        |                                      |        |                                      |        
|Cash and cash equivalents at end of period                                                  |                                                                                       | $                                              | 624    |                                      | $      | 456                                  |        
|                                                                                            |                                                                                       |                                                |        |                                      |        |                                      |        
|Supplemental disclosure of cash flow information:                                           |                                                                                       |                                                |        |                                      |        |                                      |        
|Net cash paid (received) during the period for:                                             |                                                                                       |                                                |        |                                      |        |                                      |        
|                                                                                            | Interest                                                                              |                                                | $      | 1,085                                |        | $                                    | 687    
|                                                                                            | Income taxes                                                                          |                                                |        | (384                                 | )      |                                      | (57    
|                                                                                            | Acquisitions                                                                          |                                                |        |                                     |        |                                      | 16,816 

See accompanying notes to consolidated financial statements.

27

---





ALLIED MOTION TECHNOLOGIES INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



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



The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts
and transactions are eliminated in consolidation.



Cash and cash equivalents include instruments which are readily convertible into cash (original maturities of three months or less) and which are not subject to
significant risk of changes in interest rates. Cash flows from foreign currency transactions are translated using an average rate.



Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the
amount of probable credit losses in the Company's existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances
in the future.



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

December 31,
2005

December 31,
2004Parts and raw materials

$
7,739

$
7,510Work-in-process


1,418


1,485Finished goods


1,710


1,88310,867


10,878Less reserves


(1,682
)

(1,496
)$
9,185

$
9,382


28

---





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

|                                     |  | Useful
lives |  | December 31,
2005 |        | December 31,
2004 |  
|------------------------------------ |  | ------------ |  | ----------------- | ------ | ----------------- | -
|Land                                 |  |              |  | $                 | 332    |                   | $
|Building and improvements            |  | 5-39 years   |  |                   | 4,537  |                   |  
|Machinery, equipment, tools and dies |  | 2-8 years    |  |                   | 15,271 |                   |  
|Furniture, fixtures and other        |  | 3-10 years   |  |                   | 764    |                   |  
|                                     |  |              |  |                   |        |                   |  
|                                     |  |              |  |                   | 20,904 |                   |  
|Less accumulated depreciation        |  |              |  |                   | (7,965 | )                 |  
|                                     |  |              |  |                   |        |                   |  
|                                     |  |              |  | $                 | 12,939 |                   | $
|                                     |  |              |  |                   |        |                   |  

Depreciation
expense is provided using the straight-line method over the estimated useful lives of the assets. Amortization of building improvements and leased equipment is
provided using the straight-line method over the life of the lease term or the life of the assets, whichever is shorter. Maintenance and repair costs are charged to operations as incurred.
Major additions and improvements are capitalized. The cost and related accumulated depreciation of retired or sold property are removed from the accounts and the resulting gain or loss, if any, is
reflected in earnings.

Depreciation
expense was approximately $2,219,000, $1,681,000 and $1,044,000, in 2005, 2004 and 2003, respectively.



Goodwill represents the excess of the purchase price over the fair value of identifiable net tangible and intangible assets acquired in a business combination.
Goodwill is required to be tested for impairment annually, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. The Company completed its annual analysis of
the fair value of its goodwill at October 31, 2005 and determined there was no indicated impairment of its goodwill. There can be no assurance that future goodwill impairments will not occur.



Intangible assets, other than goodwill, are recorded at cost and are amortized over their estimated useful lives using the straight-line method.



The Company reviews the carrying values of its long-lived assets whenever events or changes in circumstances indicate that such carrying values may
not be recoverable. Under SFAS No. 144, long-lived assets must be carried at historical cost if the projected cash flows from their use will recover their carrying amounts on an
undiscounted basis and without considering interest. However, if projected cash flows are less than their carrying value, the long-lived assets must be reduced to their estimated fair
value. Considerable judgment is required to project such cash flows and, if required,

29

---



estimate
the fair value of the impaired long-lived asset. No impairments of long-lived assets were recorded in 2005, 2004 or 2003.



The Company offers warranty coverage for its products for periods ranging from 12 to 18 months after shipment, with the majority of its products for
12 months. The Company estimates the costs of repairing products under warranty based on the historical average cost of the repairs. The assumptions used to estimate warranty accruals are
reevaluated periodically in light of actual experience and, when appropriate, the accruals are adjusted. Estimated warranty costs are recorded at the time of sale of the related product, and are
considered a cost of sale. Accrued warranty costs were $307,000 and $375,000 as of December 31, 2005 and 2004, respectively.

Changes
in the Company's reserve for product warranty claims during 2005 and 2004, were as follows (in thousands):

December 31,
2005

December 31,
2004Warranty reserve at beginning of the year

$
375

$
185Warranty expenditures


(171
)

(142
)Provision


113


101Additions due to acquisitions





223Effect of foreign currency translation


(10
)

8Warranty reserve at end of year

$
307

$
375




Accrued liabilities consist of the following (in thousands):

December 31, 2005

December 31, 2004Compensation and fringe benefits

$
2,494

$
3,428Litigation and legal fees (Note 9)


145


255Customer deposits


38


32Warranty reserve


307


375Other accrued expenses


893


1,226$
3,877

$
5,316




In accordance with SFAS No. 52, "Foreign Currency Translation," the assets and liabilities of the Company's foreign subsidiaries are translated into U.S.
dollars using end of period exchange rates. Revenue and expense transactions use an average rate prevailing during the month of transaction. The resulting comprehensive income is recorded in the other
comprehensive income translation adjustment component of stockholders' investment in the accompanying consolidated balance sheets. Transaction

30

---



gains
and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.



Engineering and development costs are expensed as incurred.



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



Basic income per share is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding. Diluted income per share
is determined by dividing the net income or loss by the sum of (1) the weighted average number of common shares outstanding and (2) if not anti-dilutive, the effect of stock
awards determined utilizing the treasury stock method. Outstanding options totaling 624,000, 604,000, and 136,000 had a dilutive effect for years 2005, 2004 and 2003, respectively. Stock options to
purchase 241,000, 130,000 and 734,000 shares of common stock, were excluded from the calculation of diluted income per share for years 2005, 2004 and 2003, respectively, since the results would have
been anti-dilutive.



Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from
non-owner sources. It includes all changes in equity during a period except those resulting from investments by and distributions to stockholders. Comprehensive income consisted of
cumulative translation adjustments from the translation of the financial statements of the Company's foreign subsidiary and an additional minimum pension liability (see Note 10) for year 2005.
Adjustments for comprehensive income for years 2004 and 2003 are comprised only of cumulative translation adjustments.



The Company accounts for employee stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and related interpretations. All options granted under these plans have an exercise price equal to the market value of the underlying common
stock on the date of grant and therefore no stock-based compensation cost is reflected in net income (loss), except as discussed in Note 8. Had compensation cost for these plans been determined
consistent with SFAS No. 123, "Accounting for Stock-Based Compensation" as amended by SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure, an
Amendment of FASB Statement No. 123", the

31

---



Company's
net income (loss) would have been adjusted to the following amounts (in thousands, except per share data):

|                              |                                                | For the year
ended
December 31,
2005 |   | For the year
ended
December 31,
2004 |   | For the year
ended
December 31,
2003 |       
|----------------------------- | ---------------------------------------------- | ------------------------------------ | - | ------------------------------------ | - | ------------------------------------ | ------
|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  

Cumulative
compensation cost recognized is adjusted for forfeitures by a reduction of adjusted compensation expense in the period of forfeiture.

For
SFAS No. 123 purposes, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average
assumptions:

For the year
ended
December 31,
2004

For the year
ended
December 31,
2003Risk-free interest rate

3.7%

2.9%Expected dividend yield

0.0%

0.0%Expected life

5 years

6 yearsExpected volatility

91.1%

102.7%


There
were no options granted during 2005. The weighted average fair value of options granted, assuming the Black-Scholes option-pricing model, during 2004 and 2003 was $3.81 and $1.64,
respectively. The total fair value of options granted was $1,290,000 and $324,000 in 2004 and 2003, respectively. These amounts are being amortized over the vesting periods of the options for purposes
of this disclosure.

The
weighted average fair value of employee stock purchase rights issued pursuant to the Employee Stock Purchase Plan during 2005, 2004 and 2003 was $.66, $2.45 and $1.62, respectively.
The fair value of the stock purchase rights was calculated as the difference between the stock price at the date of issuance and the employee purchase price.

The
Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics
significantly different than those of

32

---



traded
options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.



The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, trade receivables, accounts payable and accrued liabilities
approximate fair value because of the immediate or short-term maturities of these financial instruments. The carrying amount of the lines-of-credit and variable
term loans approximate their fair value because the underlying instrument is a variable rate note that reprices frequently. The carrying amount
of the term loan approximates its fair value because the fixed interest rate is a current market interest rate.



The current provision for income taxes represents actual or estimated amounts payable or refundable on tax return filings each year. Deferred tax assets and
liabilities are recorded for the estimated future tax effects of temporary differences between the tax base of assets and liabilities and amounts reported in the accompanying consolidated balance
sheets, and for operating loss and tax credit carryforwards. A valuation allowance may be provided to the extent management deems 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 the deferred tax provision or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets
and liabilities are reflected as adjustments to the tax provision or benefit in the period of enactment. The ultimate realization of net deferred tax assets is dependent upon the generation of future
taxable income, in the appropriate taxing jurisdictions, during the periods in which temporary differences become deductible. Management believes that it is more likely than not that the Company will
realize the benefits of these temporary differences and operating loss and tax credit carryforwards, net of valuation allowances.



Trade receivables subject the Company to the potential for credit risk. To reduce this risk, the Company performs evaluations of its customers' financial
condition and creditworthiness at the time of sale, and updates those evaluations when necessary. No single customer makes up more than 10% of trade receivables.



The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make
certain estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

33

---





Certain prior year balances were reclassified to conform to the current year presentation. Those reclassifications had no impact on net income, stockholders'
investment or cash flows from operations as previously reported.

2. OWOSSO MERGER

On May 10, 2004, the Company completed the merger of Owosso Corporation, and its sole remaining operating subsidiary Stature Electric, Inc. located
in Watertown, New York, with a wholly owned subsidiary of the Company pursuant to the terms of the Agreement and Plan of Merger dated February 10, 2004. The consideration for the merger of
$17.1 million consisted of $1 million of cash payable to Owosso's preferred shareholders, $11.7 million of cash for Owosso's debt, liabilities and transaction costs,
$1.2 million in fees and expenses incurred by the Company, the issuance of 535,527 shares of the Company's common stock (fair value of $2,421,000) and the issuance of warrants to purchase
300,000 shares of Allied Motion common stock at $4.41 per share (valued at $725,000 using the Black Scholes Model) which were issued to Owosso's preferred shareholders. There were no additional notes
issued by Allied Motion related to the acquisition. Allied Motion financed the cash portion of the acquisition price with existing cash, borrowings of $8.25 million under new term loan
agreements and borrowings under its revolving line-of-credit. The Company merged with Owosso to further the Company's strategy to expand its penetration into the motion control
market.

The
merger was accounted for using the purchase method of accounting, and, accordingly, the purchase price was allocated to the assets purchased and the liabilities assumed based on
their respective estimated fair values at the date of acquisition. The net purchase price allocation was as follows (in thousands):

Cash

$
99Trade receivables


2,058Inventories


1,676Prepaid expenses and other


328Property, plant and equipment


6,485Amortizable intangible assets


3,744Goodwill


5,502Accounts payable


(1,545
)Accrued liabilities and other current liabilities


(1,224
)Net purchase price

$
17,123


The
amortization of acquired goodwill and intangible assets are deductible for tax purposes. The amortizable intangible assets are amortized as discussed in Note 4.

The
accompanying consolidated financial statements include the operating results of Stature Electric, Owosso's remaining sole operating subsidiary, subsequent to May 10, 2004.

The
following presents the Company's unaudited pro forma financial information for the year ended December 31, 2004 and 2003 after certain pro forma adjustments giving effect to
the acquisition of Owosso Corporation as if it had occurred at January 1, 2003. The pro forma financial information is

34

---



for
informational purposes only and does not purport to present what the Company's results would actually have been had the acquisition actually occurred at the beginning of the fiscal period or to
project the Company's results of operations for any future period (in thousands, except per share data).

For the year ended
December 31,2004

2003Revenues

$
70,002

$
57,149Gross margin


17,172


13,118Operating income (loss)


3,041


(5,066
)Net income (loss)


1,236


(5,155
)Diluted net income (loss) per share


.20


(.94
)


3. PREMOTEC ACQUISITION

On August 23, 2004, the Company completed the acquisition of Precision Motor Technology B.V. (Premotec), located in Dordrecht, The Netherlands from
Premotec Holding B.V., both limited liability companies incorporated in The Netherlands, pursuant to the Stock Purchase Agreement dated July 23, 2004. Neither the companies acquired nor the
seller was related to the Company, and there is no
material relationship between those companies and the Company, other than in respect of this acquisition. The acquisition was completed to achieve European presence to provide additional opportunities
for the sale and support of the all of the Company's products while increasing purchasing volume provided by Premotec to enhance the Company's strategic sourcing opportunities. The purchase price was
EUR 3.75 million plus expenses (approximately $5 million total purchase price). The cash portion of the consideration of EUR 2.5 million (U.S. $3.1 million) was funded by a
term loan, a line of credit and an overdraft facility from a Netherlands bank and is discussed more thoroughly in Note 6 below. The remaining portion of the consideration of EUR
1.25 million (U.S. $1,471,000) was funded by the issue of 263,231 shares of the Company's common stock (at market value) to the seller, Premotec Holding B.V. The expenses of the acquisition
were funded from the Company's cash balances and amounts available under the lines of credit.

The
acquisition was accounted for using the purchase method of accounting, and, accordingly, the purchase price was allocated to the assets purchased and the liabilities assumed based on
their

35

---



respective
estimated fair values at the date of acquisition. The net purchase price allocation was as follows (in thousands):

Cash

$
82Trade receivables


649Inventories


1,740Prepaid expenses and other


426Property, plant and equipment


1,165Amortizable intangible assets


1,869Goodwill


2,283Accounts payable


(1,142
)Accrued liabilities and other current liabilities


(1,054
)Long-term capital lease obligations


(47
)Deferred income taxes


(971
)Net purchase price

$
5,000


The
amortization of acquired goodwill and intangible assets are non-deductible for tax purposes in accordance with tax regulations in The Netherlands. The amortizable
intangible assets are amortized as discussed in Note 4.

4. GOODWILL AND INTANGIBLE ASSETS

Included in goodwill and intangible assets in the Company's consolidated balance sheets are the following intangible assets (in thousands):

|                                         |                             | December 31,
2005 |        | December 31,
2004 |   | Estimated Life
|---------------------------------------- | --------------------------- | ----------------- | ------ | ----------------- | - | --------------
|Goodwill                                 |                             | $                 | 12,818 |                   | $ | 13,246        
|                                         |                             |                   |        |                   |   |               
|Amortizable intangible assets:           |                             |                   |        |                   |   |               
|                                         | Customer lists              |                   |        | 4,371             |   |               
|                                         | Trade names                 |                   |        | 1,340             |   |               
|                                         | Designs and technologies    |                   |        | 2,494             |   |               
|                                         | Accumulated amortization    |                   |        | (2,082            | ) |               
|                                         |                             |                   |        |                   |   |               
|                                         | Total net intangible assets |                   |        | 6,123             |   |               
|                                         |                             |                   |        |                   |   |               
|Total goodwill and net intangible assets |                             | $                 | 18,941 |                   | $ | 20,624        
|                                         |                             |                   |        |                   |   |               

36

---



The
change in the carrying amount of goodwill for 2005 is as follows (in thousands):

December 31, 2005

December 31, 2004Balance at beginning of period

$
13,246

$
5,213Goodwill resulting from acquisition of Owosso Corporation





5,502Goodwill resulting from acquisition of Premotec





2,283Effect of foreign currency translation


(326
)

248Other


(102
)

Balance at end of period

$
12,818

$
13,246


Total
amortization expense for intangible assets for the years 2005, 2004, and 2003 was $1,010,000, $647,000 and $315,000 respectively. Amortization expense of designs and technologies
included in total amortization expense for the years 2005, 2004 and 2003 was $324,000, $170,000 and zero, respectively. Estimated amortization expense for intangible assets is $1,008,000 for each of
the years ended December 31, 2006 through 2009 and $908,000 for 2010.

37

---



5. DEBT OBLIGATIONS

Debt obligations consisted of the following (in thousands):

|                                                                                                                                                                                                                                                                                                                  |  | December 31,
2005 |        | December 31,
2004 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------ | ----------------- | -
|Domestic revolving line-of-credit (A)                                                                                                                                                                                                                                                                             |  | $                 | 4,434  |                   | $
|Foreign revolving line-of-credit (B)                                                                                                                                                                                                                                                                              |  |                   | 547    |                   |  
|Bank overdraft facility payable to bank with no monthly repayments required, interest due at the bank's base rate plus 2%, minimum of 4.75% (4.75% as of December 31, 2005), due on demand, secured by Premotec's inventory;
EUR 200 ($237 at December 31, 2005 exchange rate) was available at December 31, 2005 |  |                   |       |                   |  
|Term loan payable to bank in monthly installments of $90 plus interest at 8.68%, due in May 2007, secured by machinery and equipment                                                                                                                                                                              |  |                   | 1,535  |                   |  
|Term loan payable to bank in monthly installments of $59 plus interest at the bank's prime rate plus 0.75% (8.0% as of December 31, 2005), plus balloon payment of $2,863, due in May 2007, secured by buildings, machinery
and equipment                                                                         |  |                   | 3,872  |                   |  
|Term loan payable to bank in quarterly installments of EUR 80 ($95 at December 31, 2005 exchange rate) plus interest at 4.74% until August, 2006, then at EURIBOR plus 2.5% with a minimum of 4.75%, due in July 2009,
secured by Allied Motion Technologies, B.V. shares                                         |  |                   | 1,421  |                   |  
|Term loan payable to bank, paid in full in January 2005                                                                                                                                                                                                                                                           |  |                   |       |                   |  
|                                                                                                                                                                                                                                                                                                                  |  |                   |        |                   |  
|Total                                                                                                                                                                                                                                                                                                             |  |                   | 11,809 |                   |  
|Less current maturities                                                                                                                                                                                                                                                                                           |  |                   | (7,155 | )                 |  
|                                                                                                                                                                                                                                                                                                                  |  |                   |        |                   |  
|Long-term debt obligations                                                                                                                                                                                                                                                                                        |  | $                 | 4,654  |                   | $
|                                                                                                                                                                                                                                                                                                                  |  |                   |        |                   |  

---

38

---





Future
maturities of debt obligations are as follows as of December 31, 2005:

2006

$
7,1552007


3,9902008


3792009


285$
11,809


6. INCOME TAXES

The provision for income taxes is based on income before income taxes from continuing operations as follows (in thousands):

|                           |  | For the year
ended
December 31,
2005 |       | For the year
ended
December 31,
2004 |   | For the year
ended
December 31,
2003
|-------------------------- |  | ------------------------------------ | ----- | ------------------------------------ | - | ------------------------------------
|Domestic                   |  | $                                    | 782   |                                      | $ | 3,151                               
|Foreign                    |  |                                      | 699   |                                      |   | 258                                 
|                           |  |                                      |       |                                      |   |                                     
|Income before income taxes |  | $                                    | 1,481 |                                      | $ | 3,409                               
|                           |  |                                      |       |                                      |   |                                     

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

|                              |                                   | For the year ended
December 31,
2005 |     | For the year ended
December 31,
2004 |   | For the year ended
December 31,
2003 |      
|----------------------------- | --------------------------------- | ------------------------------------ | --- | ------------------------------------ | - | ------------------------------------ | -----
|Current provision (benefit):  |                                   |                                      |     |                                      |   |                                      |      
|                              | Domestic                          |                                      | $   | 73                                   |   | $                                    | 131  
|                              | Foreign                           |                                      |     | 324                                  |   |                                      | 127  
|                              |                                   |                                      |     |                                      |   |                                      |      
|                              | Total current provision (benefit) |                                      |     | 396                                  |   |                                      | 258  
|Deferred provision (benefit): |                                   |                                      |     |                                      |   |                                      |      
|                              | Domestic                          |                                      |     | 274                                  |   |                                      | 1,063
|                              | Foreign                           |                                      |     | (112                                 | ) |                                      | (162 
|                              |                                   |                                      |     |                                      |   |                                      |      
|                              | Total deferred provision          |                                      |     | 162                                  |   |                                      | 901  
|                              |                                   |                                      |     |                                      |   |                                      |      
|Provision for income taxes    |                                   | $                                    | 558 |                                      | $ | 1,159                                |      
|                              |                                   |                                      |     |                                      |   |                                      |      

39

---





The
provision for income taxes differs from the amount determined by applying the federal statutory rate as follows (in thousands):

|                                          |  | For the year
ended
December 31,
2005 |     | For the year
ended
December 31,
2004 |   | For the year
ended
December 31,
2003 |  
|----------------------------------------- |  | ------------------------------------ | --- | ------------------------------------ | - | ------------------------------------ | -
|Tax provision, computed at statutory rate |  | $                                    | 504 |                                      | $ | 1,159                                |  
|State tax, net of federal impact          |  |                                      | 62  |                                      |   | 150                                  |  
|Nondeductible expenses                    |  |                                      | 28  |                                      |   | 30                                   |  
|Permanent tax deductions                  |  |                                      | (24 | )                                    |   | (109                                 | )
|Adjustments to prior year accruals(1)     |  |                                      | 52  |                                      |   |                                     |  
|Effect of changes in enacted tax law      |  |                                      | (18 | )                                    |   | (124                                 | )
|Prior year state tax refund(2)            |  |                                      |    |                                      |   |                                     |  
|Change in valuation allowance             |  |                                      | (37 | )                                    |   |                                     |  
|Other                                     |  |                                      | (9  | )                                    |   | 53                                   |  
|                                          |  |                                      |     |                                      |   |                                      |  
|Provision for income taxes                |  | $                                    | 558 |                                      | $ | 1,159                                |  
|                                          |  |                                      |     |                                      |   |                                      |  

---

The
tax effects of significant temporary differences and credit and operating loss carryforwards that give rise to the net deferred tax assets are as follows (in thousands):

December 31, 2005

December 31, 2004Deferred tax assets:Allowances and other accrued liabilities

$
645

$
303Restricted stock


13


Tax credit carryforwards


233


233Net operating loss carryforwards


408


1,002Total deferred tax assets


1,299


1,538Valuation allowance


(315
)

(352
)Net deferred tax assets


984


1,186Deferred tax liabilities:Property, plant and equipment


(1,081
)

(1,170
)Goodwill and intangibles


(781
)

(1,134
)Total deferred tax liabilities


(1,862
)

(2,304
)Net deferred tax liabilities

$
(878
)
$
(1,118
)


40

---



The
net deferred tax liabilities are classified as follows in the accompanying consolidated balance sheets (in thousands):

December 31, 2005

December 31, 2004Current deferred tax assets

$
402

$
1,186Non-current deferred tax assets


582


Non-current deferred tax liabilities


(1,862
)

(2,304
)Net deferred tax assets

$
(878
)
$
(1,118
)


The
Company has domestic tax credit carryforwards of $233,000 expiring in 2006 and 2007 and a domestic net operating loss carryforward of $1,132,000 expiring in 2023 through 2024.

Realization
of the Company's net deferred tax asset is dependent upon the Company generating sufficient taxable income in the appropriate tax jurisdictions in future years to obtain
benefit from the reversal of net deductible temporary differences and from utilization of net operating losses and tax credit carryforwards. The Company has recorded a valuation allowance due to the
uncertainty related to the realization of certain deferred tax assets existing at December 31, 2005. The amount of deferred tax assets considered realizable is subject to adjustment in future
periods if estimates of future taxable income are changed. Management believes that it is more likely than not that the Company will realize the benefits of its net deferred tax assets, net of
valuation allowances as of December 31, 2005.

7. STOCK COMPENSATION



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

41

---



Option
and restricted stock activity during years 2005, 2004 and 2003, was as follows:

|                            |                              |         |          | Stock
Options |          | Restricted
Stock | 
|--------------------------- | ---------------------------- | ------- | -------- | ------------- | -------- | ---------------- | 
|
|Balances, December 31, 2002 |                              | 270,640 |          | 1,192,330     |          | 3.21             | 
|                            | Granted                      |         | (197,000 | )             | 197,000  |                  | 
|                            | Forfeited                    |         | 45,900   |               | (65,900  | )                | 
|                            |                              |         |          |               |          |                  | 
|Balances, December 31, 2003 |                              | 119,540 |          | 1,323,430     |          | 3.00             | 
|                            | Additional shares authorized |         | 400,000  |               |         |                  | 
|                            | Granted                      |         | (404,600 | )             | 404,600  |                  | 
|                            | Forfeited                    |         | 3,500    |               | (11,000  | )                | 
|                            | Exercised                    |         |         |               | (29,160  | )                | 
|                            |                              |         |          |               |          |                  | 
|Balances, December 31, 2004 |                              | 118,440 |          | 1,687,870     |          | 3.48             | 
|                            | Granted                      |         | (47,000  | )             |          |                  | 
|                            | Forfeited                    |         | 32,667   |               | (38,317  | )                | 
|                            | Exercised                    |         |         |               | (200,903 | )                | 
|                            |                              |         |          |               |          |                  | 
|Balances, December 31, 2005 |                              | 104,107 |          | 1,448,650     |          | 3.62             | 
|                            |                              |         |          |               |          |                  | 

Exercise
prices for options outstanding and exercisable at December 31, 2005 are as follows:

|                     |                                             | Range of Exercise Prices |           | Total
|-------------------- | ------------------------------------------- | ------------------------ | --------- | -----
|
|Options Outstanding: |                                             |                          |           |      
|                     | Number of options                           |                          | 718,500   |      
|                     | Weighted average exercise price             |                          | $2.44     |      
|                     | Weighted average remaining contractual life |                          | 3.2 years |      
|Options Exercisable: |                                             |                          |           |      
|                     | Number of options                           |                          | 704,500   |      
|                     | Weighted average exercise price             |                          | $2.45     |      

Under
the terms of the plan, options may not be granted at less than 85% of fair value. All options granted to date have been granted at fair value as of the date of grant. Options
granted through December 31, 2003 generally become exercisable evenly over three years starting one year from the date of grant and expire seven years from the date of grant. Options granted in
2004 became exercisable on December 31, 2004.

During
2005, 47,000 shares of nonvested restricted stock were awarded with a value of $3.91 per share. The value at the date of grant is amortized to compensation expense over the
related three year vesting period. During 2005, compensation expense of $36,000 was recorded. None of the restricted shares awarded are vested as of December 31, 2005. The shares will vest
one-third in each of 2006, 2007 and 2008.

42

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In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, "Share-Based Payment" (SFAS 123R), which supersedes APB Opinion 25 and
related interpretations. SFAS 123R requires companies to measure and recognize compensation expense for all stock-based payments at fair value. SFAS 123R is effective for all interim
periods beginning after December 15, 2005 and, thus, will be effective for the Company beginning with the first quarter of 2006. For outstanding awards accounted for under APB No. 25 or
SFAS No. 123, stock compensation expense must be recognized in earnings for the portion of those awards for which the requisite service has not yet been rendered, based upon the grant date fair
value of such awards calculated under SFAS 123.



Until December 31, 2005, the Employee Stock Purchase Plan (ESPP) provided for the issuance of shares of capital stock through payroll deductions. Employees
who choose to participate in the ESPP receive an option to purchase capital stock at a discount equal to the lower of 85 percent of the fair market value of the capital stock on the first or
last day of an offering period. Employees purchased 58,000, 29,000 and 37,000 shares under the ESPP during 2005, 2004 and 2003, respectively.



The Company sponsors an Employee Stock Ownership Plan (ESOP) that covers all U.S. employees who work over 1,000 hours per year. The terms of the ESOP
require the Company to make an annual contribution equal to the greater of i) the Board established percentage of pretax income before the contribution (5% in 2005, 2004 and 2003) or
ii) the annual interest payable on any note outstanding to the Company. Company contributions to the Plan were $78,000, $181,000 and $51,000 accrued for 2005, 2004 and 2003, respectively.
Contributions were used to repay the loan as discussed below and/or acquire newly issued shares of the Company. During 2005 and 2003, contributions were used to acquire 2,000 and 17,000 shares,
respectively.

During
2003, the Company loaned $200,000 to the ESOP so that the ESOP could acquire 130,719 newly issued shares of the Company's common stock. The shares issued to the ESOP were pledged
as collateral for the debt. Company contribution amounts are used in the following year to repay the debt or acquire new shares for the plan. During 2005 and 2004, accrued contributions used to repay
the loan balance were $155,000 and $45,000, respectively. During 2005, the loan balance was repaid in full. As the debt was repaid, shares were released from collateral and allocated to active
employees, based on the proportion of debt service paid in the year compared to the total debt service estimated for the current and future years.



Up until December 31, 2005, the Company offered a stock repurchase program whereby up to $125,000 per year could be used to repurchase shares of common
stock from employees at fair value. The Company repurchased 2,000, 6,000 and 2,000 shares during 2005, 2004 and 2003 respectively. This program ended December 31, 2005.

8. LOANS RECEIVABLE FOR STOCK

At December 31, 2004 the Company had $155,000 receivable from its ESOP. This represents the unpaid balance of the original $200,000 the Company loaned to
the Plan during 2003. The note bore

43

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an
annual interest rate of 5.75% and was scheduled to mature May 31, 2018. The ESOP used contributions from the Company to repay the loan balance. On March 15, 2005, the 2004
contribution amount of $181,000 was used to repay the loan balance and purchase 2,000 shares of newly issued shares of the Company.

9. COMMITMENTS AND CONTINGENCIES



At December 31, 2005, the Company maintains leases for certain facilities and equipment. The Company has entered into facility agreements, some of which
contain provisions for future rent increases. The total amount of rental payments due over the lease term is being charged to rent expense on the straight-line method over the term of the
lease. The difference between rent expense recorded and the amount paid is credited or charged to "Deferred rent obligation," which is included in "Accrued liabilities and other" in the accompanying
Balance Sheet. Minimum future
rental commitments under all non-cancelable operating leases are as follows (in thousands):

Year ending December 31,

Total2006

$
5982007


4312008


4382009


3542010


252Thereafter


632$
2,705


Rental
expense was $715,000, $551,000, and $468,000 in Years 2005, 2004 and 2003, respectively.



The Company leases certain machinery and equipment under agreements that are classified as capital leases. The cost of equipment under capital leases included in
the accompanying consolidated balance sheets as property, plant and equipment was $680,000 and $610,000 at December 31, 2005 and 2004, respectively. Accumulated amortization of the leased
equipment at December 31, 2005 and December 31, 2004 was $229,000 and $106,000, respectively. Amortization of assets under capital leases is included in depreciation expense.

44

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The
future minimum lease payments required under the capital leases and the present value of the net minimum lease payments as of December 31, 2005, are as follows (in thousands):

Year ending December 31,2006

$
2052007


932008


4Total minimum lease payments


302Less: amount representing interest and other


30Present value of net minimum lease payments


272Less: Current maturities of capital lease obligations


180Long-term capital lease obligations

$
92




The Company has entered into annually renewable severance benefit agreements with seven key employees which, among other things, provide inducement to the
employees to continue to work for the Company during and after any period of threatened takeover. The agreements provide the employees with specified benefits upon the subsequent severance of
employment in the event of change in control of the Company and are effective for 24 months thereafter. The amount of salary and bonus that could be required to be paid under these contracts,
if such events occur, totaled approximately $1,822,000 and $1,731,000, respectively as of December 31, 2005 and 2004. In addition to the salary, severance benefits include payment of 20% of
annual salary for life, disability, accident and health insurance for 24 months and a pro-rata calculation of bonus for the current year.



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

10. PENSION AND POSTRETIREMENT WELFARE PLANS



Motor Products has a defined benefit pension plan covering substantially all of its hourly union employees hired prior to April 10, 2002. The benefits are
based on years of service, the employee's compensation during the last three years of employment, and accumulated employee contributions.

45

---



The
following tables provide a reconciliation of the change in benefit obligation, the change in plan assets and the net amount recognized in the Consolidated Balance Sheet at
December 31, 2005 and December 31, 2004 (in thousands):

December 31,
2005

December 31,
2004Change in projected benefit obligation:Projected benefit obligation at beginning of period

$
3,882

$
3,245Service cost


113


90Employee contributions


14


13Interest cost


214


197Actuarial loss


74


542Benefits paid


(201
)

(205
)Projected benefit obligation at end of period

$
4,096

$
3,882Change in plan assets:Fair value of plan assets at beginning of period

$
3,238

$
3,131Actual return on plan assets


168


299Employee contributions


14


13Benefits and expenses paid


(201
)

(205
)Fair value of plan assets at end of period

$
3,219

$
3,238


December 31, 2005

December 31, 2004Excess of projected benefit obligation over fair value of plan
assets

$
877

$
644Unrecognized loss


(263
)

(74
)Accrued pension cost

$
614

$
570Additional minimum liability


191


$
805

$
570


The
accumulated benefit obligation for the pension plan was $4,024,000 at December 31, 2005 and $3,773,000 at December 31, 2004.

Components
of net periodic pension expense included in the consolidated statements of operations for years 2005, 2004 and 2003 are as follows (in thousands):

|                                              |  | For the year
ended
December 31,
2005 |      | For the year
ended
December 31,
2004 |   | For the year
ended
December 31,
2003 |  
|--------------------------------------------- |  | ------------------------------------ | ---- | ------------------------------------ | - | ------------------------------------ | -
|Service cost                                  |  | $                                    | 113  |                                      | $ | 90                                   |  
|Interest cost on projected benefit obligation |  |                                      | 214  |                                      |   | 197                                  |  
|Expected return on assets                     |  |                                      | (282 | )                                    |   | (273                                 | )
|                                              |  |                                      |      |                                      |   |                                      |  
|Net periodic pension expense                  |  | $                                    | 45   |                                      | $ | 14                                   |  
|                                              |  |                                      |      |                                      |   |                                      |  

46

---



The
weighted average assumptions used to determine benefit obligations were as follows:

December 31,
2005

December 31,
2004Discount rate

5.50%

5.75%Rate of compensation increases

5.00%

5.00%


The
weighted average assumptions used to determine net periodic benefit cost are as follows:

For the year
ended
December 31,
2005

For the year
ended
December 31,
2004Discount rate

5.50%

5.75%Expected long-term rate of return on plan assets

9.00%

9.00%Rate of compensation increases

5.00%

5.00%


Quarterly
contributions were not required for 2005. The minimum required contribution for 2005 of $74,446 will be paid by the date the Company files its U.S. income tax return or
September 15, 2006,
whichever is earlier. The Company expects to contribute approximately $75,000 to the pension plan for 2006.

The
pension plan assets allocation at December 31, 2005 and 2004 were as follows:

December 31,
2005

December 31,
2004Cash equivalents

4%

1%Equity securities

71%

70%Fixed income securities

25%

29%Total

100%

100%


The
pension assets are managed by an outside investment manager. The Company's investment policy with respect to pension assets is to make investments solely in the interest of the
participants and beneficiaries of the plans and for the exclusive purpose of providing benefits accrued and defraying the reasonable expenses of administration. The Company strives to maintain
investment diversification to assist in minimizing the risk of large losses.



Motor Products provides postretirement medical insurance and life insurance benefits to employees hired before January 1, 1994 who retire from Motor
Products. Partial contributions from retirees are required for the medical insurance benefits. The Company's portion of the medical insurance premiums are funded from the general assets of the
Company. The Company recognizes the expected cost of providing such post-retirement benefits during employees' active service periods.

47

---



The
following tables provide a reconciliation of the change in the accumulated postretirement benefit obligation and the net amount recognized in the Consolidated Balance Sheet at
December 31, 2005 and December 31, 2004 (in thousands):

December 31,
2005

December 31,
2004Change in postretirement benefit obligation:Accumulated postretirement benefit obligation at beginning of period

$
3,522

$
2,136Service cost


68


46Interest cost


191


146Actuarial loss


2,464


1,272Benefits paid


(122
)

(78
)Accumulated postretirement benefit obligation at end of period

$
6,123

$
3,522Accrued postretirement benefit cost at the beginning of period

$
2,502

$
2,388Net periodic postretirement cost


300


192Employer contribution


(122
)

(78
)Other


18


Accrued postretirement benefit cost at end of period

$
2,698

$
2,502


In
determining the accumulated postretirement benefit obligation at December 31, 2005, the Company's blended insurance premium rate for all active and retiree participants in the
Company's medical insurance plans was used. The blended rate is higher than the rate would be for retiree participants only. The Company intends to re-determine the rate to use for 2006
based on a revision of retiree benefits.

Net
periodic postretirement benefit costs included in the consolidated statements of operations for years 2005, 2004 and 2003, and are as follows (in thousands):

For the year ended December 31,2005

2004

2003Service cost

$
68

$
46

$
61Interest cost


191


146


122Amortization of loss (gain)


41





(5
)Total

$
300

$
192

$
178


48

---



For
measurement purposes, an annual rate of increase in the per capita cost of covered health care benefits was assumed. The rate was assumed to decrease gradually to the ultimate rate
by a said year, and remain at that level thereafter, per the following:

December 31,
2005

December 31,
2004Annual rate of increase per capita of covered health care benefits

11.25%

12.00%Ultimate rate

5.00%

5.00%Year ultimate rate is reached

2014

2013


Postretirement
medical liabilities can be extremely sensitive to changes in the assumed rate of future medical increases, and, therefore the healthcare cost trend rate assumption has a
significant effect on the amounts reported. To illustrate, increasing the assumed healthcare cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit
obligation as of December 31, 2005 by $1,233,800 and the aggregate of the service cost and interest cost components of the net periodic postretirement benefit cost for year 2005 by $59,600.
Decreasing the assumed healthcare postretirement benefit obligation as of December 31, 2005 by 1% decreases the accumulated
postretirement benefit obligation by $953,600 and the aggregate of the service cost and interest cost components of the net periodic postretirement benefit cost for year 2005 by $45,200. The weighted
average discount rate used in determining the accumulated postretirement benefit obligation was 5.50% and 5.75% as of December 31, 2005 and 2004, respectively. The weighted average discount
rate used to determine the net periodic postretirement benefit cost was 5.50% for 2005 and 5.75% for 2004.

The
Company expects to contribute approximately $79,000 to the postretirement welfare plan during 2006.

11. RESTRUCTURING CHARGES

Restructuring charges include the costs associated with the Company's strategy of reducing its facility requirements and implementing lean manufacturing
initiatives. These charges consist of costs that are incremental to the Company's ongoing operations and, for Years 2004 and 2003, include employee termination related charges. The Company recorded
restructuring charges of zero, $10,000 and $211,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

At
December 31, 2005, there were no outstanding liabilities related to the restructuring charges included in accrued liabilities and other in the consolidated balance sheet.

12. SEGMENT INFORMATION

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" requires disclosure of operating segments, which as defined, are
components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in
assessing performance.

The
Company operates in one segment for the manufacture and marketing of motion control products for original equipment manufacturers and end user applications. In accordance with SFAS
No. 131, the Company's chief operating decision maker has been identified as the Office of the President and Chief Operating Officer, which reviews operating results to make decisions about

49

---



allocating
resources and assessing performance for the entire company. SFAS No. 131, which is based on a management approach to segment reporting, establishes requirements to report selected
segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and
reports revenue. All material operating units qualify for aggregation under SFAS No. 131 due to their similar customer base and similarities in: economic characteristics; nature of products and
services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by SFAS No. 131 can be found in the
accompanying consolidated financial statements and within this note.

The
Company's wholly owned foreign subsidiary, Premotec, located in Dordrecht, The Netherlands and is included in the accompanying consolidated financial statements. Financial
information related to the foreign subsidiary is summarized below (in thousands):

|                                           |  | For the year ended and as of December 31,
|------------------------------------------ |  | -----------------------------------------
|
|Revenues derived from foreign subsidiaries |  | $                                        
|Identifiable assets                        |  |                                          

Sales
to customers outside of the United States were $20,096,000 $13,737,000, and $7,371,000, in years 2005, 2004 and 2003.

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

13. ISSUANCE OF RESTRICTED STOCK

During 2004, the Company issued 198,177 shares of unregistered restricted common stock under the terms of a Stock Purchase Agreement. The purchasers of these
shares were certain trusts and pension plans, the beneficiaries of which are Michel Robert and members of his immediate family. The $1,000,000 aggregate purchase price for the shares represented the
fair value of the stock at the time the Company received the purchase price. Subsequent to the issuance of shares, Mr. Robert was appointed as a director of the Company.

14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Selected quarterly financial data for each of the four quarters in years 2005, 2004 and 2003 is as follows (in thousands, except per share data):

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

50

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

|Year 2003                       |  | First
Quarter |       | Second
Quarter |   | Third
Quarter |  | Fourth
Quarter
|------------------------------- |  | ------------- | ----- | -------------- | - | ------------- |  | --------------
|Revenues                        |  | $             | 9,176 |                | $ | 9,736         |  | $             
|Gross margin                    |  |               | 2,203 |                |   | 2,553         |  |               
|Net Income (loss)               |  |               | (149  | )              |   | 302           |  |               
|Basic income (loss) per share   |  |               | (.03  | )              |   | .06           |  |               
|Diluted income (loss) per share |  |               | (.03  | )              |   | .06           |  |               

51

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Item 9A. Controls and Procedures.

The Company's controls and procedures include those designed to ensure that material information is accumulated and communicated to the Company's management as
appropriate to allow timely decisions regarding required disclosure. As of December 31, 2005 the Company's chief executive officer and chief financial officer evaluated the effectiveness of the
Company's disclosure controls and procedures designed to ensure that information is recorded, processed, summarized and reported in a timely manner as required by Exchange Act reports such as this
Form 10-K and concluded that they are effective.

There
has not been any change in the Company's internal controls over financial reporting during the quarter ended December 31, 2005 that has materially affected or is reasonably
likely to materially affect, the Company's internal control over financial reporting.

PART III

Item 10. Directors and Executive Officers of the Registrant.

The Company's definitive proxy statement which will be filed with the SEC pursuant to Registration 14A within 120 days of the end of the Company's fiscal
year is incorporated herein by reference.

Item 11. Executive Compensation.

The Company's definitive proxy statement which will be filed with the SEC pursuant to Registration 14A within 120 days of the end of the Company's fiscal
year is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The
Company's definitive proxy statement which will be filed with the SEC pursuant to Registration 14A within 120 days of the end of the Company's fiscal year is incorporated
herein by reference. Also incorporated by reference is the information in the table under the heading "Equity Compensation Plan" included in Item 5 of the Form 10-K.

Item 13. Certain Relationships and Related Transactions.

Prior to its termination by mutual consent on April 28, 2005 the Company entered into a Consulting Agreement, effective September 1, 1998, with
Eugene E. Prince, who resigned from the offices of President and Chief Executive Officer on August 13, 1998 and retired from employment with the Company effective August 31, 1998. Under
the Consulting Agreement, he would be compensated for providing consulting services to the Company as requested by the Chief Executive Officer. During years 2005, 2004 and 2003, the Transition Period
and fiscal year 2002, Mr. Prince was not paid for providing any consulting services.

Item 14. Principal Accountant Fees and Services

The Company's definitive proxy statement which will be filed with the SEC pursuant to Registration 14A within 120 days of the end of the Company's fiscal
year is incorporated herein by reference.

52

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PART IV

Item 15. Exhibits and Financial Statement Schedules.



|Exhibit
No. |  | Subject                                                                                                                                                                                                                                                                        
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Restated Articles of Incorporation filed with the Colorado Secretary of State on November 13, 1989. (Incorporated by reference to Exhibit 3.1 to the Company's Form S-3 Registration Statement as filed on September 17, 2004.)                                                
|3.2         |  | Amendment to Articles of Incorporation filed with the Colorado Secretary of State on September 29, 1993. (Incorporated by reference to Exhibit 3.2 to the Company's Form S-3 Registration Statement as filed on September 17, 2004.)                                           
|3.3         |  | Amendment to Articles of Incorporation filed with the Colorado Secretary of State on October 31, 2002. (Incorporated by reference to Exhibit 3.3 to the Company's Form S-3 Registration Statement as filed on September 17, 2004.)                                             
|3.4         |  | By-laws of the Company, amended and restated as of February 16, 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*       |  | 2001 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit B to the Company's Proxy Statement dated September 21, 2000.)                                                                                                                                         
|10.3        |  | 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.)
|            |  |                                                                                                                                                                                                                                                                                

53

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|10.4   |  | 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.)                                                                               
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.5   |  | 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.)                                
|10.6*  |  | 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.)                                                                                                                                                     
|10.7*  |  | 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.)                                                                                     
|10.8*  |  | 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.)                                                                               
|10.9*  |  | 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.)                                                                                    
|10.10* |  | 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.)                                                                                          
|10.11* |  | 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.)                                                                                                                                                         
|10.12  |  | 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.)
|10.13  |  | 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.)                            
|10.14  |  | 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.)                                       
|10.15  |  | 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.)                                                                
|       |  |                                                                                                                                                                                                                                                                                                                

54

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|10.16 |  | 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.)
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.17 |  | Third Amendment to Revolving Credit and Security Agreement, Term Loan and Security Agreements, and Related Documents dated as of July 11, 2005.                                                                                                   
|10.18 |  | Fourth Amendment to Revolving Credit and Security Agreement, Term Loan and Security Agreements, and Related Documents dated as of November 1, 2005.                                                                                               
|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                                                                                                                                                                                                                              
|23    |  | Consent of KPMG LLP.                                                                                                                                                                                                                              
|31.1  |  | 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.                    
|31.2  |  | Certification of the President and Chief Operating 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.                                  
|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.                                                                 

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*Denotes
management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

| |  | ALLIED MOTION TECHNOLOGIES INC.
| |  | -------------------------------
| |  | By:                            

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the
dates indicated.

|Signatures                              |  | Title                                                         |  | Date          
|--------------------------------------- |  | ------------------------------------------------------------- |  | --------------
|                                        |  |                                                               |  |               
|/s/RICHARD D. SMITHRichard D. Smith     |  | Chief Executive Officer, Chief Financial Officer and Director |  | March 24, 2006
|/s/DELWIN D. HOCKDelwin D. Hock         |  | Chairman of the Board of Directors                            |  | March 24, 2006
|/s/EUGENE E. PRINCEEugene E. Prince     |  | Director                                                      |  | March 24, 2006
|/s/GEORGE J. PILMANISGeorge J. Pilmanis |  | Director                                                      |  | March 24, 2006
|/s/GRAYDON D. HUBBARDGraydon D. Hubbard |  | Director                                                      |  | March 24, 2006
|/s/MICHEL M. ROBERTMichel M. Robert     |  | Director                                                      |  | March 24, 2006

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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, 2005: |                                             |                                |   |                               |  |                          |     |       |   |                         
|                              | Reserve for bad debts                       |                                | $ | 235                           |  | $                        | 146 |       | $ | (92                     
|                              | Reserve for excess or obsolete inventories  |                                | $ | 1,496                         |  | $                        | 586 |       | $ | (348                    
|                              | Valuation allowance for deferred tax assets |                                | $ | 352                           |  | $                        |    |       | $ | (37                     
|                              |                                             |                                |   |                               |  |                          |     |       |   |                         
|Year Ended
December 31, 2004: |                                             |                                |   |                               |  |                          |     |       |   |                         
|                              | Reserve for bad debts                       |                                | $ | 106                           |  | $                        | 61  |       | $ | (32                     
|                              | Reserve for excess or obsolete inventories  |                                | $ | 805                           |  | $                        | 136 |       | $ | (242                    
|                              | Valuation allowance for deferred tax assets |                                | $ | 352                           |  | $                        | 59  |       | $ | (59                     
|                              |                                             |                                |   |                               |  |                          |     |       |   |                         
|Year Ended
December 31, 2003: |                                             |                                |   |                               |  |                          |     |       |   |                         
|                              | Reserve for bad debts                       |                                | $ | 148                           |  | $                        | 47  |       | $ | (89                     
|                              | Reserve for excess or obsolete inventories  |                                | $ | 1,024                         |  | $                        | 135 |       | $ | (354                    
|                              | Valuation allowance for deferred tax assets |                                | $ | 424                           |  | $                        |    |       | $ | (72                     
|                              |                                             |                                |   |                               |  |                          |     |       |   |                         

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