<PAGE>
                    U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                                  FORM 10-KSB
 
                  ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF

                      THE SECURITIES EXCHANGE ACT OF 1934
 
          For the fiscal year ended                   Commission file number
             September 30, 1997                               0-24012
         ---------------------------                -------------------------

                           ALLIED DEVICES CORPORATION
             ------------------------------------------------------
             (Exact name of Registrant as specified in its charter)
 
                   Nevada                                   13-3087510
          -----------------------                    -----------------------
          (State of incorporation)                         (IRS Employer
                                                      Identification Number)

   2365 Milburn Avenue, Baldwin, New York                      11510
   ---------------------------------------                  ----------
  (Address of principal executive offices)                  (Zip Code)


Registrant's telephone number, including area code: (516) 223-9100

Securities registered pursuant to Section 12 (b) of the Exchange Act:

Securities registered pursuant to Section 12 (g) of the Exchange Act:
 
                                              Number of Shares Outstanding
Title of Class                                   as of December 5, 1997
--------------                                ----------------------------
Common Stock, $.001 par value                          4,609,942

Check whether the issuer (1) filed all reports required to be filed by 
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 
months (or for such shorter period that the registrant was required to file 
such reports), and (2) has been subject to such filing requirements for the 
past 90 days     YES X     NO
                    ---

Check if disclosure of delinquent filers in response to Item 405 of 
Regulation S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB     X
                                               ---

Issuer's revenues for its most recent fiscal year: $16,215,931

The aggregate market value of the voting stock held by non-affiliates of the 
registrant, based on the last sale price on December 5, 1997 is approximately 
$5,848,337.

<PAGE>

                                     PART I
 
ITEM 1--BUSINESS

    Allied Devices Corporation ("Allied Devices" or the "Company") is a 
    broad-line manufacturer and distributor of high precision mechanical
    components used in the manufacture and maintenance of industrial and
    commercial instruments and equipment. The Company has the capability of
    producing close tolerance parts and intricate assemblies at competitive
    costs and with short lead times. The Company's business strategy is to
    provide prompt service and technical support in certain industrial and 
    high technology markets where customers generally expect extended lead 
    times, missed deadlines and otherwise poor customer service and support. 
 
    The Company's major product groups include precision servo and
    drive-train assemblies, instrument related fasteners, gears and gear
    products, and other components and sub-assemblies built to customer
    specifications. Allied Devices' customers are primarily original 
    equipment manufacturers ("OEMs").
 
    Allied Devices' principal marketing tool is its highly effective
    technical manual of standardized instrument components available through 
    the Company. This catalog is in the hands of buyers and engineers 
    throughout the United States and generates sales nationwide. Management 
    estimates that the Company has distributed more than 85,000 copies of its 
    catalog over the last decade, of which approximately 35,000 copies were 
    distributed during the last three fiscal years. The current edition, 
    published in 1994, is over 650 pages in length. Management intends to 
    update and re-issue the catalog during fiscal 1998.
 
    The breadth and standardized nature of the product line result in
    multiple applications in many industries, stimulating demand at the level 
    of both OEMs and distributors. The Company sells to a wide range of 
    industries, such as medical and operating room equipment; laser 
    equipment; robotics; computer peripherals; aerospace instrumentation; 
    factory automation equipment and controls; machine tool builders; 
    research and development facilities; semiconductor equipment makers; 
    nuclear control devices; scientific instrumentation; and optics.
 
    A typical customer is an OEM selling high ticket capital goods
    equipment. The components supplied by Allied Devices going into such
    equipment generally constitute a small percentage of the OEM's direct 
    cost of manufacturing, typically $200 to $500 per unit. Failure to 
    deliver reliable quality in a timely manner can have an impact far in 
    excess of the modest direct cost of the parts. As a result, the majority 
    of Allied Devices' customers deem it imperative that parts supplied be on 
    time and of reliably high quality. While these performance criteria are 
    not contractual requirements, they are critical determinants in the 
    placement of repeat business.


                                       1


<PAGE>

ITEM 1--BUSINESS (continued)

    Allied Devices has structured itself as far as possible to provide 
    the service of "one stop shopping" for mechanical instrument components. 
    Furthermore, the Company's organization and inventory policies are 
    designed to provide fast and timely response to customer orders, and to 
    support "just in time" methods of purchasing being used by more and more 
    companies. Because the Company's lead times in response to customer 
    orders are generally short (four weeks or less), backlog is not a 
    meaningful indicator of business trends; therefore, no effort is made to 
    monitor backlog accurately. Based on new orders, the Company is 
    projecting growth in revenues of approximately 12.5% and availability of 
    related incremental cash flow in planning for fiscal 1998.
 
    Allied Devices' sales volume is not dependent on just a few large 
    customers. The Company draws from a customer list of over 6,000, thereby 
    minimizing its vulnerability to the fortunes of any one industry or group 
    of customers. In each of the past three years, the Company's twenty 
    largest customers have represented as many as ten different industries 
    and account collectively for only about 30% of shipments. Geographic 
    concentration is relatively low and fluctuates with conditions in each of 
    the regions served. Allied Devices uses independent multi-line 
    manufacturers' representatives to gain national coverage, thereby 
    fielding some 70 salespeople in virtually all significant territories in 
    the United States. 

    As the market for the Company's products has evolved, the Company has 
    met its customers' needs by dividing operations into two areas: Catalog 
    Sales and Distribution ("Catalog Operations") and Manufacturing and 
    Subcontracting ("Manufacturing Services"). These two areas of the Company 
    have been defined solely for internal operating effectiveness. Both areas 
    serve the same markets and customer base and do not represent separate 
    business segments.
 
        CATALOG OPERATIONS
 
    The majority of product sold through Catalog Operations is either 
    manufactured by Catalog Operations or procured from the Manufacturing 
    Services operations of the Company. The product mix includes standard 
    products (as listed in the Company's catalog) and customized or 
    non-standard products manufactured to the specific requirements of a 
    given customer. What is not manufactured internally is purchased from a 
    broad variety of reliable sources under distributorship agreements or 
    similar arrangements. This operation includes telephone sales, inventory 
    and shipping, gear-making, assembly and light manufacturing operations. 
    This part of the Company also sells certain of its standard catalog 
    products to its major competitors on a wholesale basis. In the aggregate, 
    revenues for the Catalog Operations were approximately as follows for the 
    last five years ended September 30th. 


                                       2


<PAGE>

ITEM 1--BUSINESS (continued)

                          1997............. $13,604,000
                          1996............. $15,145,000
                          1995............. $13,363,000
                          1994............. $10,509,000
                          1993............. $9,175,000
 
    The decrease in revenues for 1997 was the result of a sharp downturn 
    in one sector of the U.S. economy (semiconductor manufacturing 
    equipment). While such severe downturns are abnormal for the industries 
    served by Allied, they are not unprecedented. In this instance, it was 
    caused by excess inventory accumulation and overcapacity, and the 
    duration of the slowdown appears to have been one year.
 
        CATALOG INDUSTRY COMPETITION
 
    The Company competes directly with W.M. Berg Co., a subsidiary of BTR 
    Ltd.; PIC Design, a subsidiary of Wells Benrus; Nordex Inc.; and Sterling 
    Instrument, a division of Designatronics. Each of these companies 
    publishes a catalog similar to that issued by the Company, offering a 
    wide range of mechanical instrument components adhering to a single set 
    of standards. In addition, there are many other companies offering a 
    limited selection of materials or "single product" catalogs, most often 
    not adhering to any widely accepted standards. This marketplace is highly 
    competitive, yet management believes, based upon feedback from vendors 
    and customers, that the Company's operating principles of immediate 
    product availability, excellent quality control, competitive pricing and 
    responsive customer service and technical support have permitted the 
    Company to maintain and improve its market position.
 
        MANUFACTURING SERVICE OPERATIONS
 
    The Company's strategy has called for manufacturing the majority of 
    the products that it sells. Management believes that such vertical 
    integration ensures quality control, timely deliveries, control of 
    priorities and cost efficiencies. As a result, the Company has several 
    manufacturing divisions, each with specialized capabilities. In order to 
    promote maximum utilization of productive equipment, each manufacturing 
    operation markets its surplus machine time independently. The following 
    operations comprise Manufacturing Services:
 

     Absolute Precision Co.            A sophisticated computer numerically 
     Ronkonkoma, New York              controlled ("CNC") machine shop 
                                       specializing in close tolerance, 
                                       intricate machining of complex parts 
                                       that are sold direct to end users and 
                                       through Catalog Operations. 


                                       3


<PAGE>

     Adco Devices Co.                  A screw-machine house manufacturing 
     Freeport, New York                instrument quality shoulder screws, 
                                       thumb screws, nuts, shafting, pins, 
                                       knobs and washers. Standard stock and 
                                       custom components are sold to numerous 
                                       jobbers, distributors and wholesalers. 

     Astro Instrument Co.              A general machine shop with 
     Joplin, Missouri                  diversified CNC and conventional 
                                       capabilities, dealing principally with 
                                       an established customer base in 
                                       several industries. 

    Each of the support operations in Manufacturing Services contributes 
    to the Company's line of standard components and sells them to Catalog 
    Operations and to other catalog houses at uniform list prices. In 
    addition, each operation bids for specialized custom manufacturing work 
    in the open market, taking on machining jobs on fixed price contracts. 
    While long runs are periodically accepted, the structure of Manufacturing 
    Services' organization and production facilities favors shorter runs with 
    higher margins. Pricing is based on combined material cost and standard 
    hourly shop rates for labor and overhead. 

    Approximate revenues for Manufacturing Services were as follows for 
    the last three years:

                                              YEAR ENDED SEPTEMBER 30,
                                      ----------------------------------------
                                          1997          1996          1995
                                      ------------  ------------  ------------
     Sales to Catalog Operations *..  $  2,360,000  $  2,812,000  $  2,319,000
     Sales to Outside Customers.....     2,612,000     2,648,000     2,158,000
                                      ------------  ------------  ------------
     Total Revenues.................  $  4,972,000  $  5,460,000  $  4,477,000
                                      ------------  ------------  ------------
                                      ------------  ------------  ------------

     ------------------------
     *   These revenue figures for Catalog Operations represent interdivisional 
         sales that are eliminated in consolidation.
 
    The Company does not report results for Catalog Operations and 
    Manufacturing Services separately, but management believes that both 
    divisions make a positive contribution to operations. While the Company 
    has stepped up efforts to market its Manufacturing Services, management 
    believes that existing capacity will support a substantial increase in 
    volume without significant additions to current production facilities. 
    Operations are now primarily single shift, representing an estimated 70% 
    of capacity, giving the Company the flexibility to respond to increases 
    in sales volume. 


                                       4

<PAGE>

     MANUFACTURING SERVICES COMPETITION
 
    Each of the divisions in Manufacturing Services faces intense 
    competition from the many thousands of machine shops and screw machine 
    houses throughout the United States. Each division endeavors to 
    differentiate itself from its competition on the basis of: i) accepting 
    short-run work; ii) offering short lead times; iii) providing exceptional 
    responsiveness to customer requirements; and iv) conforming consistently 
    to unbending quality standards. 

    QUALITY ASSURANCE
 
    Although not legally required to do so in order to conduct its 
    current business, the Company has emphasized rigorous standards of high 
    quality in its products and in its manufacturing methods. This has led to 
    the development of an internal quality control manual that sets forth 
    both policy and procedures used throughout the Company. This manual meets 
    or exceeds the requirements of MIL-STD-45208A, which defines acceptable 
    standards for small business suppliers to the U.S. Government. In 
    management's opinion, loss of qualification under MIL-STD-45208A would 
    not have a material impact on the Company's ability to do business; 
    likewise, in management's opinion, such qualification provides an 
    indication to customers and potential customers of the degree of 
    diligence that the Company exercises in adhering to acceptable procedures 
    in pursuit of consistent quality. The Company's measuring instruments are 
    calibrated to standards traceable to the National Bureau of Standards.

    To ensure consistent awareness and application of quality procedures, 
    management has established an on-going program of meetings, lessons and 
    training sessions through its quality assurance manager, disseminating 
    information on basic skills, policies, procedures and new developments. 
    Under the auspices of the New York State Industrial Effectiveness 
    Program, the Company has begun to develop and implement a program of 
    continuous improvement in pursuit of qualification under "Total Quality 
    Management" and ISO-9000 (a voluntary set of standards and guidelines 
    provided by the International Standards Organization), which program is 
    in its early stages. The Company intends to complete the program and 
    apply for ISO certification during its fiscal year 1998. 

    EXPANSION PLANS

    Management has developed a plan to expand the size of the Company. 
    Basically, the plan has four elements: (1) expand the core business 
    through more intensive marketing efforts; (2) add products within the 
    existing line of business; (3) expand beyond the Company's core business 
    into related lines of business through an acquisition program that will 
    not only add volume but provide marketing, operating and administrative 
    synergies; and (4) raise additional equity capital as required to reduce 
    the Company's indebtedness, thereby lowering financial leverage while 
    expansion plans were being implemented. Certain elements of management's 
    marketing plans have commenced (principally an advertising campaign and 
    publication of an expanded catalog), while others are in development. 
    Management is pursuing its acquisition strategy but has not yet 


                                       5


<PAGE>

    entered into any binding agreements with any potential acquisition 
    candidates. During fiscal 1994, the Company raised approximately 
    $1,298,000 (net) of new equity capital through the private placement of 
    Common Stock, applying virtually all of the funds raised to reduction of 
    indebtedness. During fiscal 1995, the Company raised approximately 
    $81,000 (net) of new equity capital from the exercise of 62,500 Class B 
    Warrants, applying such funds to working capital. Likewise, in fiscal 
    1996 and fiscal 1997, the Company raised approximately $56,000 and 
    $157,000, respectively, from the exercise of warrants and options, which 
    funds were applied to working capital. Additional funds, if and when 
    raised, will also be applied, at management's discretion, to working 
    capital, thus being available for use in routine operations or for 
    carrying out the Company's expansion plans.

    MARKETING PROGRAMS
 
    The Company has developed a program to stimulate substantial growth 
    within its existing line of business. Feedback from customers and 
    informal market research indicate that Allied Devices does not yet have a 
    widespread customer awareness in the markets it serves. Thus the 
    principal thrust of the Company's plan is to make its target markets more 
    aware of the Company's range of capabilities and the usefulness of 
    standardized components in general. The program is divided into modules 
    and is being implemented as management deems appropriate.
 
    The plan includes expansion of the Company's advertising campaign, 
    begun on a restricted budget in 1993. As part of the program, management 
    has undertaken to improve, on a continuous basis, the standards of 
    service and support provided to the Company's customers. Phasing in of 
    expanded engineering support, assembly capabilities, new products, and 
    electronic accessibility for customers are also important elements of the 
    Company's program. Management believes that implementation of its plan 
    will result in accelerated growth of sales and profits.
 
    ACQUISITION PROGRAM
 
    As part of its plans for growth, management intends to carry out an 
    acquisition program. By its own assessment, management views the market 
    in which it competes as large (over $1 billion), highly fragmented, and 
    poised for consolidation. Strategically, management intends to focus on 
    acquiring businesses with the following characteristics: (a) significant 
    potential for sales growth; (b) high prospects for synergy and/or 
    consolidation in marketing, manufacturing and administrative support 
    functions; (c) relatively high gross margins (30% or more); (d) effective 
    operating management in place; (e) a reputation for quality in its 
    products; and (f) represents lateral or vertical integration. Management 
    has begun the process of assessing prospective candidates.

    OTHER FACTORS
 
    Raw materials for the Company's operations are readily available from 
    multiple sources, such as bar stock of stainless steel and aircraft grade 
    aluminum from metal distributors. Management expects no change to this 
    situation in the 


                                       6


<PAGE>

    foreseeable future. The technological maturity of the Company's product 
    line has resulted in general stability of demand in its markets and of 
    availability of raw materials at stable prices. No material portion of 
    the Company's business is subject to renegotiation of profits or 
    termination of contracts at the election of the United States government 
    or its prime contractors. Procurement of patents is not material to the 
    Company's present marketing program.
 
    REGULATION
 
    The Company is not subject to any particular form of regulatory 
    control. The Company does not expect that continued compliance with 
    existing federal, state or local environmental regulations will have a 
    material effect on its capital expenditures, earnings or competitive 
    position. 
 
    EMPLOYEES
 
    The Company currently employs 50 salaried and 113 hourly personnel. 
    Wage rates and benefits are competitive in the labor markets from which 
    the Company draws. Thirty-two of its hourly employees are represented by 
    two local unions (22 by the National Organization of Industrial Trade 
    Unions ("NOITU") and 10 by Local 999 of the Teamsters). The contract with 
    Local 999 was renewed for three years in August 1997, and the contract 
    with NOITU was renewed in November 1997, also for three years. The 
    Company has had no strikes, walkouts or other forms of business 
    disruption attributable to poor labor relations. Relations with employees 
    and the unions are open and constructive. 

    CAPITAL EQUIPMENT
 
    The Company uses a wide variety of machinery and equipment in 
    manufacturing and assembly of its product line. While most of the 
    equipment is owned by the Company or its subsidiaries, certain key pieces 
    of equipment are leased. Eight leases, covering eight CNC machines, have 
    original lease terms ranging from three to five years, with purchase 
    options at the end of each lease. Rates vary from 8.5% to 9.9%, and 
    expiration dates range from 1998 to 2001. The aggregate value of these 
    leases was $278,000 as of September 30, 1997. 


                                       7


<PAGE>

ITEM 2--PROPERTIES

        Listed below are the principal plants and offices of the Company.  
    All property occupied by the Company is leased except as otherwise noted.


     LOCATION         SQUARE FEET  LEASE EXPIRATION    PRINCIPAL ACTIVITIES
     --------        -----------  ----------------  ------------------------
     Baldwin, NY         16,000    December 1999     Catalog Manufacturing 
                                                     and Distribution 
                                                     Operations

     Freeport, NY        10,000    November 1996*    Screw Machine Operations 

     Freeport, NY         5,200    February 1998     Catalog Manufacturing 
                                                     Operations

     Ronkonkoma, NY       7,200    June 1998         CNC Machine Shop

     Joplin, MO           13,000   (Owned)           CNC and Conventional 
                                                     Machine Shop

     ------------------------
     *   At the mutual convenience of landlord and the Company, this building
         facility is leased on a month-to-month basis.


ITEM 3--LEGAL PROCEEDINGS
 
        The Company knows of no litigation pending, threatened, or 
    contemplated, or unsatisfied judgements, or any proceedings in which it 
    or any of its officers or directors in their capacity as such is a party. 


ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
        Not applicable.


                                       8


<PAGE>
                                    PART II
 
ITEM 5--MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS
 
    There was only sporadic trading in the Company's common stock until it 
was listed on National Association of Securities Dealers Automated SmallCap 
Market ("NASDAQ") as of November 17, 1994. Trading in the Company's stock has 
been active and regular since then. A total of 1,954 trades representing 
approximately 4,270,000 shares (as reported by NASDAQ in their monthly 
statistical summaries) were completed during fiscal 1997. As of September 30, 
1997, the Company had 451 holders of record of its common stock. The Company 
has 12 listed market-makers, and the trading ranges by quarter for the year 
were as follows:
 
<TABLE>
<CAPTION>
                                                                                FISCAL 1997           FISCAL 1996
                                                                            --------------------  --------------------
<S>                                                                         <C>        <C>        <C>        <C>
                                                                              HIGH        LOW       HIGH        LOW
                                                                            ---------  ---------  ---------  ---------
    First Quarter.........................................................  $  3.0625  $  1.9375  $    4.00  $    1.75
    Second Quarter........................................................  $   3.375  $   2.125  $    4.25  $    2.812
    Third Quarter.........................................................  $   3.0625 $   2.375  $    4.50  $    2.75
    Fourth Quarter........................................................  $   2.875  $  2.0625  $    4.00  $    2.75
</TABLE>
 
ITEM 6--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS
 
    The following selected consolidated financial data have been derived from 
the audited financial statements of Allied Devices Corporation. The selected 
financial data should be read in conjunction with the consolidated financial 
statements and related notes included elsewhere in this Form 10-KSB.
 
<TABLE>
<CAPTION>
                                                                               YEAR ENDED SEPTEMBER 30,
                                                                      -------------------------------------------
<S>                                                                   <C>            <C>            <C>
                                                                          1997           1996           1995
                                                                      -------------  -------------  -------------
STATEMENT OF 
OPERATIONS 
DATA:
Net sales...........................................................  $  16,215,931  $  17,793,072  $  15,521,373

Net income..........................................................  $   1,061,883  $   1,001,029  $     787,302
Earnings per 
 share..............................................................  $         .21  $         .20  $         .15
Weighted average
 number of shares
 outstanding........................................................      5,667,718      5,785,085      5,654,858


                                       9

<PAGE>

BALANCE SHEET 
DATA:
Total assets........................................................  $  10,976,983  $  10,376,703  $   9,403,535
Working capital.....................................................  $   7,307,751  $   6,505,676  $   3,428,117
Long-term debt......................................................  $   2,084,239  $   2,642,401  $     497,541
Stockholders' equity................................................  $   7,025,928  $   5,807,364  $   4,749,963
</TABLE>
 
RESULTS OF OPERATIONS: YEAR ENDED SEPTEMBER 30, 1997, COMPARED WITH YEAR ENDED
    SEPTEMBER 30, 1996.
 
    All statements contained herein that are not historical facts, including, 
but not limited to, statements regarding the Company's current business 
strategy, the Company's projected sources and uses of cash, and the Company's 
plans for future development and operations, are based upon current 
expectations. These statements are forward-looking in nature and involve a 
number of risks and uncertainties. Actual results may differ materially. 
Among the factors that could cause actual results to differ materially are 
the following: the availability of sufficient capital to finance the 
Company's business plans on terms satisfactory to the Company; competitive 
factors; changes in labor, equipment and capital costs; changes in 
regulations affecting the Company's business; future acquisitions or 
strategic partnerships; general business and economic conditions; and factors 
described from time to time in the reports filed by the Company with the 
Securities and Exchange Commission. The Company cautions readers not to place 
undue reliance on any such forward-looking statements, which statements are 
made pursuant to the Private Litigation Reform Act of 1995 and, as a result, 
are pertinent only as of the date made.
 
    Net sales for fiscal 1997 were $16,216,000 as compared to $17,793,000 in 
fiscal 1996. This decrease of 8.9% was principally the result of a sharp 
downturn in the semiconductor equipment sector of the U.S. economy. The 
impact of this was evident in the Company's shipments from July, 1996 through 
August, 1997, during which time the Company's customers in that industry 
virtually stopped all shipments of materials for production requirements. 
Collectively, all other sectors showed continued growth, materializing in 
both Catalog Operations and Manufacturing Services. Management continues to 
attribute such growth to a combination of factors: (1) a continuing series of 
advertisements in various industry/trade magazines, which appear to be 
gradually creating more wide-spread awareness of the Company and its products 
and services; (2) carrying out of a series of programs of continuous 
improvement, particularly in the areas of customer service and support; (3) a 
program to expand the range of support services provided to the Company's 
larger customers; and (4) continued strength in certain sectors of the U.S. 

                                       10

<PAGE>

economy serviced by the Company. In particular, the aerospace 
instrumentation, medical equipment, robotics and scientific instrumentation 
sectors remained healthy throughout the year.
 
    The Company's gross margin was 36.49% of net sales in fiscal 1997, up 
from 33.60% in fiscal 1996. The lower level of sales activity permitted the 
Company to manufacture more and purchase less, resulting in the following 
changes from fiscal 1996: (1) net materials expense decreased as a percentage 
of sales, increasing gross margins by 4.75%; and (2) the Company shipped a 
lower volume of product on relatively stable costs of factory operations, 
decreasing gross margins by 1.86%. The Company did not increase prices 
materially in fiscal 1997.
 
    Selling, general and administrative expenses as a percentage of net sales 
were 24.8% in fiscal 1997, as compared to 23.2% in fiscal 1996. While actual 
expenditures in fiscal 1997 were $98,000 lower than in fiscal 1996, such 
costs did not decrease as much as sales volume. The following factors account 
for these changes: (1) selling and shipping expenses and commissions 
increased as a percentage of net sales by approximately 0.4% as shipping 
volume decreased more than spending on the Company's marketing strategy; (2) 
administrative payroll, benefits, and expenses increased by $133,000, 
resulting in an increase of such expenses of 1.8% as a percentage of net 
sales; and (3) other administrative expenses (collectively) decreased as a 
percentage of net sales by approximately 0.6%.
 
    Interest expense decreased by $60,000 in fiscal 1997, as the Company 
lowered its borrowings and enjoyed more favorable rates as a result of its 
new credit agreement.
 
    Provision for income taxes in fiscal 1997 was $629,000, or 37.2% of 
pre-tax income. See the notes to the consolidated financial statements for a 
reconciliation to the federal statutory rate.
 
RESULTS OF OPERATIONS: YEAR ENDED SEPTEMBER 30, 1996, COMPARED WITH YEAR
    ENDED SEPTEMBER 30, 1995
 
    Net sales for fiscal 1996 were $17,793,000 as compared to $15,521,000 in 
fiscal 1995, an increase of 14.6%, with continuing growth materializing in 
both Catalog Operations and Manufacturing Services. Management continues to 
attribute this strength to a combination of factors: (1) the cumulative 
effect of a continuing series of advertisements running regularly in various 
industry/trade magazines, helping to create more wide-spread awareness of the 
Company and its products and services; (2) the carrying out of various 
programs of continuous

                                       11

<PAGE>

improvement, particularly in the areas of customer service and support; (3) a 
program to expand the range of support services provided to the Company's 
larger customers; and (4) continued strength in certain sectors of the U.S. 
economy serviced by the Company. In particular, the aerospace 
instrumentation, medical equipment, robotics and scientific instrumentation 
sectors remained strong throughout the year. This was partially offset during 
the fourth quarter of fiscal 1996 by a downturn in the semiconductor 
equipment sector.
 
    The Company's gross margin was 33.60% of net sales in fiscal 1996, up 
from 32.87% in fiscal 1995. This improvement is accounted for by the 
following factors: (1) the Company shipped a higher volume of product on 
relatively stable costs of factory operations, increasing gross margins by 
2.10%; and (2) net materials expense increased as a percentage of sales, 
reducing gross margins by 1.37%. The Company did not increase prices 
materially in fiscal 1996.
 
    Selling, general and administrative expenses as a percentage of net sales 
were 23.2% in fiscal 1996, as compared to 23.3% in fiscal 1995. This 
improvement is attributable to the following factors: (1) selling and 
shipping expenses and commissions decreased as a percentage of net sales by 
approximately 0.2% as shipping volume rose at a greater rate than spending on 
implementation of the Company's marketing strategy; (2) administrative 
payroll, benefits, and expenses rose, but not at the same rate as shipping 
volume, resulting in a decrease of such expenses of 0.2% as a percentage of 
net sales; and (3) other administrative expenses (collectively) increased as 
a percentage of net sales by approximately 0.3%.
 
    Interest expense decreased by $50,000 in fiscal 1996, as the Company 
lowered its borrowings and negotiated more favorable rates with its lending 
institutions.
 
    Provision for income taxes in fiscal 1996 was $593,000, or 37% of pre-tax 
income. See the notes to the consolidated financial statements for a 
reconciliation to the federal statutory rate. The Company adopted Statement 
of Financial Accounting Standards No. 109 (SFAS 109) in the first quarter of 
fiscal 1994. The adoption of SFAS 109 did not have a material impact on the 
Company's financial statements.

                                       12

<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES
 
    The Company's financial condition remained strong during fiscal 1997 as 
operations generated net cash of $818,000 over the course of the year. In 
addition, $157,000 of new equity capital was raised from the exercise of 
certain warrants and employee stock options issued by the Company. These 
funds were used for capital expenditures (net) of $309,000 and reduction of 
debt of $559,000, with the remainder being added to cash on hand. Net working 
capital increased by $802,000 to $7,308,000 during the year. The following 
are changes in current assets and current liabilities for the year ended 
September 30, 1997:
 
    - Accounts receivable (net of reserve for doubtful accounts) increased by
      $133,000 during the year. This increase was a function of higher shipping
      volume at year end ($82,000) and an increase in the average collection
      period from 45 days at the end of fiscal 1996 to 47 days at the end of
      fiscal 1997 ($51,000).
 
    - Inventories increased 8.8%, or $520,000, during the fiscal year, with the
      turnover rate decreasing from 2.0 times in fiscal 1996 to 1.6 times at the
      end of fiscal 1997. Of this increase, a portion ($250,000) was planned as
      part of a strategy to increase sales of the Company's line of screw
      machine products. The balance ($270,000) built up as an unplanned
      accumulation of inventory, the result of rescheduling orders from
      prominent customers in the semiconductor equipment industry. Management
      expects that most of such inventory will be shipped during fiscal 1998 as
      that industry continues to recover. As a general rule, prompt service,
      product availability and quick turnaround of production orders are key
      factors in gaining a strong competitive position in the Company's markets.
      Substantial inventories are, in management's judgment, a necessity in
      responding to demanding delivery requirements imposed by the Company's
      customers. As the Company's growth continues, management expects to see
      improvement in the inventory turnover rate.
 
    - Prepaid expenses and other current assets increased by $26,000, and
      deferred income taxes (asset) increased by $2,000.
 
    - Current liabilities, exclusive of current portions of long-term debt and
      capital lease obligations, decreased by $13,000 (net), as the Company's
      average payment period on accounts payable and accrued expenses remained
      at 36 days from fiscal 1996 through fiscal 1997 (decrease of $103,000) and
      the Company's income taxes payable increased by $90,000.

    - Current portions of long-term debt and capital lease obligations decreased
      by $1,000 (net).

    - Cash balances increased by $107,000.
 
    Management believes that the Company's working capital as now constituted 
will be adequate for the needs of the on-going core business. During fiscal 
1995, management had concluded that its banking agreements would become a

                                       13

<PAGE>

financial constraint as growth in sales volume continued at or above the 
rates of fiscal 1995. Thus, in September, 1996, the Company closed on a new 
three-year committed revolving credit agreement, providing for a credit line 
of $4 million and an equipment line of $2.0 million, with rates 1/2 to 1-1/2 
points lower and fewer and less restrictive covenants than in its prior 
asset-based line. The Company, at the end of fiscal 1997, was using 
approximately $1.9 million of the line.
 
    Management believes that, in light of the Company's expansion objectives, 
the Company's working capital will not be adequate to provide for all of the 
on-going cash needs of the business. In particular, management expects to 
require additional financing to carry out its acquisition objectives. Success 
in this part of the Company's growth program will rely, in large measure, 
upon success in completing such additional financing. The Company is not 
relying on receipt of such funds in its operating budgets or projections. It 
is important to note that, absent new capital, the Company will not be in a 
position to undertake some of the most promising elements of management's 
plans for expansion. In the event that new equity funds are raised, 
management intends to implement its plans and will do so in keeping with its 
judgment at that time as to how best to deploy any such capital.
 
    Outlay for capital expenditures in fiscal 1997 amounted to $309,000 
($328,000 in new equipment, net of $19,000 in equipment dispositions; no new 
equipment leases), as compared to $310,000 ($574,000 including capital lease) 
in fiscal 1996. These expenditures represent two facets of the Company's 
capital spending program: (1) a continuation of management's program of 
continuous improvement through modernization and automation of facilities 
($185,000), and (2) support and installation of a comprehensive new computer 
system ($143,000). Capital spending plans for fiscal 1998 call for additional 
investment in software and hardware for the Company's computer system and a 
somewhat increased level of additions to high-efficiency production 
machinery. Management expects to fund such spending plans out of working 
capital.
 
VULNERABILITY TO RECESSION
 
    The Company's cost structure is largely made up of "fixed costs", with 
"variable costs" accounting for less than 40% of net sales. The Company 
could, therefore, experience materially adverse effects on profitability from 
any marked downturn in sales volume until management was able to reduce fixed 
costs. Because the Company's delivery lead-times are relatively short, there 
is, as a result, little backlog at any given time, and the effect of a 
downturn in sales volume would be felt almost immediately.

                                       14

<PAGE>
 
EXPANSION PLANS
 
    Management has developed and is implementing a plan to expand the size of 
the Company. Basically, the plan has four elements: (1) expand the core 
business through more intensive marketing efforts; (2) add products within 
the existing line of business; (3) expand beyond the Company's core business 
into related lines of business through an acquisition program that will not 
only add volume but provide marketing, operating and administrative 
synergies; and (4) raise additional equity capital to reduce the Company's 
indebtedness, thereby lowering financial leverage while expansion plans are 
being implemented. Certain elements of management's marketing plans have been 
implemented (principally an advertising campaign and publication of a new and 
expanded catalog), while others are in development. Management is currently 
pursuing its acquisition strategy but has not yet entered into any binding 
agreements with any potential acquisition candidates.
 
IMPACT OF INFLATION AND OTHER BUSINESS CONDITIONS
 
    Management believes that inflation has no material impact on the 
operations of the business. The Company has been able to react to increases 
in material and labor costs through a combination of greater productivity and 
selective price increases. The Company has no exposure to long-term fixed 
price contracts.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
    The Financial Accounting Standards Board (FASB) has issued Statement of 
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS No. 
128 is effective for financial statements issued for periods ending after 
December 15, 1997. SFAS No. 128 simplifies the computation of earnings per 
share by replacing the presentation of primary earnings per share with a 
presentation of basic earnings per share, as defined. The statement requires 
dual presentation of basic and diluted earnings per share by entities with 
complex capital structures. Basic earnings per share includes no dilution and 
is computed by dividing income available to common shareholders by the 
weighted average number of shares outstanding for the period. Diluted 
earnings per share reflects the potential dilution of securities that could 
share in the earnings of an entity similar to fully diluted earnings per 
share. SFAS No. 128 is not expected to have a significant impact on the 
Company's financial statements.
 
    In June, 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS 
No. 131, "Disclosure about Segments of an Enterprise and Related 
Information", were issued. SFAS No. 130 addresses standards for reporting and 
display of comprehensive income and its components and SFAS N0. 131 requires 
disclosure of reportable operating segments. Both statements are effective 
for the Company's 1998 fiscal year. The Company will be reviewing these 
pronouncements to determine their applicability, if any.

                                       15

<PAGE>
 
ITEM 7--FINANCIAL STATEMENTS
----------------------------
    (1) Financial Statements
 
        See index to Financial Statements on Page F-2.
 
ITEM 8--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
        ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------------------------- 
NONE
 







                                       16

<PAGE>

                                   PART III

ITEM 9--DIRECTORS AND EXECUTIVE OFFICERS

The Executive Officers and Directors of the Company are as follows:

NAME                                 AGE    POSITION(S) HELD WITH COMPANY
-------------------------------      ---   -----------------------------------
Mark Hopkinson                        50   Chairman of the Board of Directors,
                                           Chief Executive Officer
P.K. Bartow                           49   President and Director
Salvator Baldi                        75   Executive Vice President and Director
Andrew J. Beck                        49   Assistant Secretary
Gail F. Lieberman                     54   Director
Christopher T. Linen                  50   Director
Michael Michaelson                    75   Director
Robert J. Smallacombe                 64   Director


                                      17

<PAGE>

ITEM 9--DIRECTORS AND EXECUTIVE OFFICERS (Continued)
 
    Brief biographies of the Executive Officers and Directors of the Company 
are set forth below. All Directors hold office until the next Annual 
Stockholders' Meeting or until their death, resignation, retirement, removal, 
disqualification or until their successors have been elected and qualified. 
Vacancies in the existing Board may be filled by majority vote of the 
remaining Directors. Officers of the Company serve at the will of the Board 
of Directors. There are no written employment contracts outstanding.
 
    Mark Hopkinson, age 50, has been Chairman of the Board since 1981, when 
he and Mr. Bartow organized the acquisition of the Company. He also served as 
President of the Company from 1981 until March 1994. He is a graduate of the 
University of Pennsylvania and of the Harvard Graduate School of Business 
Administration. Prior to acquiring Allied Devices, he was a management 
consultant, working originally with Theodore Barry & Associates from 1977 to 
1978 and later as an independent and with the Nicholson Group from 1978 to 
1981. The focus of his work in the period leading up to 1981 was development 
of emerging growth companies, both in the United States and in lesser 
developed countries. He served as an officer in the United States Navy from 
1969 to 1972.
 
    P.K. Bartow, age 49, has been President of the Company since March 1994. 
He also served as Vice President of the Company from when he and Mr. 
Hopkinson organized its acquisition in 1981 until March 1994. Prior to 
acquiring Allied Devices, Mr. Bartow had joined the Nicholson Group in 1978, 
and performed facility and feasibility studies for emerging growth companies. 
While at Allied Devices, he has been the Director of Marketing from 1981 
onwards, and in that capacity has set up a network of independent 
manufacturers' representatives across the United States and in the United 
Kingdom, Israel and selected regions in Canada. He has also organized and 
published Allied Devices' 650+ page catalog. Mr. Bartow received a B.A. 
degree from Williams College in 1970, and a M.Arch degree from the University 
of Pennsylvania in 1974.
 
    Salvator Baldi, age 75, was one of the original founders of the Company 
in 1947. He has been a Director of the Company since February 1994. The 
business was started as a general machine shop and developed through the 
years as a supplier to certain principal competitors of the Company in the 
market for standardized precision mechanical parts. By the late 1970's, the 
Company had become a competitor, offering its own catalog of components. He 
and his partners sold the Company to the investor group assembled by Mr. 
Hopkinson and Mr. Bartow in October 1981, with Mr. Baldi remaining with the 
Company under an employment contract. By the time his contract expired two 
years later, Mr. Baldi had negotiated to repurchase an interest in the 
Company. He currently works on an abbreviated work schedule.

                                      18

<PAGE>

ITEM 9--DIRECTORS AND EXECUTIVE OFFICERS (Continued)

    Andrew J. Beck, age 49, has been a partner with the law firm of Haythe & 
Curley since prior to 1989. He became Assistant Treasurer of the Company in 
March 1994. Mr. Beck holds a B.A. in economics from Carleton College and a 
J.D. from Stanford University Law School.
 
    Gail F. Lieberman, age 54, is currently Chief Financial Officer of The 
Thompson Corp. Financial & Professional Publishing Group. She became a 
director of the Company in February 1994. Prior to her current association, 
Ms. Lieberman was Vice President-Chief Financial Officer and Managing 
Director of Moody's Investors Service, where she was employed from January, 
1994 to December, 1996. Prior to that, she was Executive Vice President and 
Chief Financial Officer at Scali, McCabe, Sloves, Inc. since 1982. She holds 
a B.A. in Mathematics and Physics and an M.B.A. in Finance from Temple 
University.
 
    Christopher T. Linen, age 50, became a Director of the Company during 
fiscal 1997. He is currently principal of Christopher Linen & Company, 
through which he has invested in a series of early stage, internet and 
technology-related enterprises. Prior to this, from 1975 until 1996, he was 
an executive with Time Inc. (later Time Warner Inc.) where he managed a 
series of six subsidiaries or divisions in Asia, Latin America, the United 
States, and worldwide. Prior to that, he was Assistant Financial Director of 
the Italhai Holding Company, Ltd. (Bangkok), during which tenure he was 
Publisher of the Bangkok World, an English language daily newspaper. He is a 
director of Starmedia Networks Inc., Chairman of NirvanaSoft Inc., and a 
Trustee of The Family Academy, an experimental public school. He holds a B.A. 
from Williams College and attended the Graduate School of Business 
Administration at New York University.
 
    Michael Michaelson, age 75, has been a Director of the Company since 
1990. He has been President and sole stockholder of Rainwater Enterprises, 
Ltd. since 1979, providing management and marketing consultation services to 
clients principally in publishing and related industries. He is also on the 
boards of directors of the following companies: Metro Tel Corp., a publicly 
held company in the telecommunications field; and Starlog Franchise Corp., a 
public company. From 1986 to 1989, he was Chairman of the Council on 
Economic Priorities. From 1977 to 1979, he was co-founder and Chairman of the 
Board of Games Magazine, which was sold to Playboy magazine in 1979. From 
1970 to 1978, Mr, Michaelson worked for Publishers Clearing House, where he 
was Senior Vice President. From 1968 to 1970, he was President and Founder of 
Campus Subscriptions, Inc. Mr. Michaelson served in the United States Army in 
the South Pacific during World War II, where he was a Company Commander in 
the 35th infantry, 25th division and received the Bronze Star and the Purple 
Heart. He received a B.S. degree from New York University in 1948.
 
    Robert J. Smallacombe, age 64, has been a Director of the Company since 
August, 1996. For more than ten years, he has been the principal of Executive 
Advisory Group, a management consulting firm. In the capacity of consultant, 
he

                                      19

<PAGE>

served as a Director of Northstar Health Services Inc. from May, 1996 through 
May, 1997. From 1994 until May, 1996, as consultant, he served as President 
of O'Brien Environmental Energy and O'Brien Energy Services. From February, 
1993 until July, 1994, as consultant, he served as CEO of Cardinal Publishing 
Co. Prior to that, he was working as a management consultant and business 
broker. He has over 25 years' experience as a company president of public and 
private companies. He currently serves as a Director of Emons Transportation 
Company.

ITEM 10--EXECUTIVE COMPENSATION
 
    The following table sets forth the salary and bonus compensation paid 
during the fiscal years ended September 30, 1997, 1996 and 1995 to the 
Chairman and Chief Executive Officer of the Company. No other Executive 
Officer of the Company received fiscal 1997 salary and bonus compensation 
which exceeded $100,000. The Company's Directors receive $1,250 per meeting 
for their services as such and reimbursement for any expenses they may incur 
in connection with their services as Directors.
 
<TABLE>
<CAPTION>
                                              "SUMMARY COMPENSATION TABLE"
------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>            <C>        <C>                <C>
NAME AND PRINCIPAL                                                              OTHER ANNUAL     LONG TERM COMPENSATION
  POSITION                                           FISCAL YEAR    SALARY      COMPENSATION      AWARDS-OPTIONS SAR'S
--------------------------------------------------  -------------  ---------  -----------------  -----------------------
Mark Hopkinson, Chairman and Chief Executive
  Officer                                                  1997    $  97,221      $       0                27,400
                                                           1996    $  98,098      $       0                29,000
                                                           1995    $  90,116      $       0                 4,600
</TABLE>
 
    Under the terms of the Company's 1993 Incentive Stock Option Plan, the
following options were granted to the Chief Executive Officer of the Company
during fiscal year 1997.
 
<TABLE>
<CAPTION>
                                        "OPTION/SAR GRANTS IN LAST FISCAL YEAR"
-----------------------------------------------------------------------------------------------------------------------
<S>                                          <C>                  <C>                        <C>            <C>
                                                  NUMBER OF
                                                 SECURITIES          % OF TOTAL OPTIONS       EXERCISE OR
                                             UNDERLYING OPTIONS    GRANTED TO EMPLOYEES IN    BASE PRICE    EXPIRATION
NAME                                               GRANTED               FISCAL YEAR            ($/SH)         DATE
-------------------------------------------  -------------------  -------------------------  -------------  -----------
Mark Hopkinson                                       10,250                     9.8%           $    0.70       12/1/06
                                                      5,150                     4.9%           $    0.67       2/15/07
                                                     12,000                    11.5%           $    0.70       7/31/07
</TABLE>


                                      20

<PAGE>

    Aggregated Options/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values.
 
<TABLE>
<CAPTION>
                                                                                   NUMBER OF
                                                                                  SECURITIES        VALUE OF
                                                                                  UNDERLYING       UNEXERCISED
                                                                                  UNEXERCISED     IN-THE-MONEY
                                                                                OPTIONS/SARS AT  OPTIONS/SARS AT
                                                                                  FY-END (#)       FY-END ($)
                                                                     VALUE
                                                SHARES ACQUIRED    REALIZED      EXERCISABLE/     EXERCISABLE/
NAME                                            ON EXERCISE (#)       ($)        UNEXERCISABLE    UNEXERCISABLE
----------------------------------------------  ---------------  -------------  ---------------  ---------------
<S>                                             <C>              <C>            <C>              <C>
Mark Hopkinson................................        --          $   --            257,000/0     $   99,585/$0
</TABLE>
 
------------------------
 
(1) In-the-money options are those for which the fair market value of the
    underlying Common Stock exceeds the exercise price of the option. The 
    value of the in-the-money options is determined in accordance with 
    regulations of the Securities and Exchange Commission by subtracting 
    the aggregate exercise price of the option from the aggregate year-end 
    value of the underlying Common Stock.
 
    No compensation to management has been waived or accrued to date.
 
    Under the terms of its employee stock option plan (adopted in October, 
1993 and amended in December, 1995), the Board of Directors is empowered at 
its discretion to award options to purchase an aggregate of 1,250,000 shares 
of the Company's common stock to key employees. Prior to fiscal 1997, the 
Company had granted options to purchase an aggregate of 1,087,600 shares to 
key employees and Directors, with exercise prices ranging from $0.35 to $3.25 
per share. During fiscal 1997, the Company granted options to purchase 
104,400 shares of the Company's common stock, at exercise prices ranging from 
$0.35 to $2.44 to 11 individuals (one non-management member of the Board of 
Directors, one executive, and nine non-executive managers).

                                      21

<PAGE>

ITEM 11--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT
 
    The following table sets forth the number and percentage of the Company's 
shares of Common Stock owned of record and beneficially by each person or 
entity owning more than 5% of such shares and by all executive officers and 
directors, as a group at September 30, 1997:

NAME                               NUMBER OF SHARES OWNED   CURRENT PERCENTAGE
---------------------              -----------------------  -------------------
Mark Hopkinson                            1,012,571                 20.78%
(1) (3) (8)
2365 Milburn Avenue
P.O. Box 502
Baldwin, NY 11510

P.K. Bartow                                 850,688                 17.59%
(1) (4) (8)
2365 Milburn Ave.
P.O. Box 502
Baldwin, NY 11510

Salvator Baldi                              767,807                 15.88%
(1) (5) (8)
2365 Milburn Ave.
P.O. Box 502
Baldwin, NY 11510

Michael Michaelson                          250,084                  5.24%
(2)(6)(8)
2365 Milburn Ave.
P.O. Box 502
Baldwin, NY 11510

Gail F. Lieberman                           120,000                  2.54%
(2) (7)
175 E. 79th Street
New York, NY 10021

Robert J. Smallacombe                       43,000                  0.92%
(2)(11)
8246 S.E. Sanctuary Drive
Hobe Sound, FL 33455

Christopher T. Linen                        25,000                  0.54%
(2)(12)
203 Poverty Hollow Road
Redding, CT 06896

Andrew J. Beck                              10,000                  0.22%
(9)(10)
71 Willow Street, Apt. 1
Brooklyn, NY 11201

All Executive Officers and               3,079,150                 54.25%
Directors as a Group (8 persons)

                                      22

<PAGE>

ITEM 11--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT (CONTINUED)
 
        (1) Officer and Director
        (2) Director only.
        (3) Mark Hopkinson is General Partner of the Hopkinson Family 
            Partnership (in which he has exclusive management rights), which 
            owns 700,000 of the shares included herein. Mr. Hopkinson owns 
            33,500 shares in his own name. Also included in Mr. Hopkinson's
            shareholdings are 5,660 shares represented by warrants exercisable 
            by Mr. Hopkinson until December 31, 1999 and 257,000 shares 
            represented by currently exercisable options. Mr. Hopkinson 
            disclaims beneficial ownership of 15,700 shares owned by his wife. 
        (4) Included in Mr. Bartow's shareholdings are 1,722 shares represented
            by warrants exercisable by Mr. Bartow until December 31, 1999
            and 225,000 shares represented by currently exercisable options. 
            Mr. Bartow disclaims ownership of 15,000 shares owned by members 
            of his immediate family.
        (5) Included in Mr. Baldi's shareholdings are 898 shares represented 
            by warrants exercisable by Mr. Baldi until December 31, 1999 and 
            225,000 shares represented by currently exercisable options. 
        (6) Included in Mr. Michaelson's shareholdings are 52,584 shares 
            represented by warrants exercisable by Mr. Michaelson until
            December 31, 1999 and 110,000 shares represented by currently 
            exercisable options. Mr. Michaelson disclaims ownership of 97,500
            shares owned by his wife.
        (7) Included in Ms. Lieberman's shareholdings are 110,000 shares 
            represented by currently exercisable options.
        (8) As consideration for various services rendered to the Company 
            in the period 1983 until 1990, the Company issued certain 
            stockholders warrants to purchase up to 340,000 shares of common 
            stock at prices ranging from $0.30 per share to $0.70 per share. 
            Certain of those warrants were exercised in fiscal 1996 and fiscal
            1997, prior to their expiration. 60,864 of those warrants remained
            exercisable at September 30, 1997.
        (9) Officer only.
       (10) Consists of 10,000 shares represented by currently exercisable 
            options.

                                      23

<PAGE>

ITEM 11--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT (CONTINUED)
 
        (11) Consists of 43,000 shares represented by currently exercisable 
             options.
        (12) Consists of 25,000 shares represented by currently exercisable 
             options.
 
ITEM 12--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
    In April 1990, Allied Devices granted Michael Michaelson, a Director, 
50,000 warrants to purchase Allied Devices shares in return for uncompensated 
service to the Company. Each warrant is exercisable at a price of $.30 per 
warrant into one share of Common Stock until April 15, 1998.
 
    In August 1987, certain officers and stockholders purchased unsecured 10% 
promissory notes from Allied Devices in the aggregate amount of $157,680: 
Mark Hopkinson, $75,000; P.K. Bartow; $25,000; Salvator Baldi, $7,680; 
Michael Michaelson, $25,000; and Edward G. Lord, $25,000. In December 1994, 
all such notes were retired by paying 10% of the principal amount due in 
cash, the balance in the form of new 10% unsecured promissory notes due 
December 31, 1995, and granting warrants to purchase Common Stock at the rate 
of one warrant per $20 of principal on the notes being retired, as follows:
 
                                             PRINCIPAL
                                              VALUE OF           NUMBER OF
                         CASH PAID            NEW NOTES           WARRANTS
                        ------------        -------------       -----------
Salvator Baldi......... $   1,796.59        $   16,169.32               898
P.K. Bartow............ $   3,445.14        $   31,006.25             1,722
Mark Hopkinson......... $  11,319.74        $  101,877.69             5,660
Michael Michaelson..... $   5,167.71        $   46,509.37             2,584
 
    Each warrant is exercisable at a price of $2.00 per warrant into one share
of Common Stock until December 31, 1999. The notes were retired during fiscal
1996.

                                      24

<PAGE>

ITEM 13--EXHIBITS AND REPORTS ON FORM 8-K
 
    (a) Exhibits
 
    The exhibits required to be filed as a part of the form are listed in the
attached Index to Exhibits.
 
    (b) Reports on Form 8-K
 
    No reports on Form 8-K were filed during the last quarter of fiscal 1997.





                                      25

<PAGE>
                                       
                                   SIGNATURES
 
    In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
                            ALLIED DEVICES CORPORATION
 

                            --------------------------
                            Mark Hopkinson 
                            Chairman of the Board

    In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant in the capacities and on the
dates indicated.
 
<TABLE>
<CAPTION>
SIGNATURES                   TITLE                                         DATE
---------                    -----                                         ----
<S>                          <C>                                           <C>


-----------------------
Mark Hopkinson               Chairman of the Board, 
                             Principal Executive Officer, 
                             and Director


-----------------------
Philip Key Bartow            President and Director


-----------------------
Salvator Baldi               Executive Vice President 
                             and Director


-----------------------
Michael Michaelson           Director


-----------------------
Christopher T. Linen         Director


-----------------------
Gail F. Lieberman            Director


-----------------------
Robert J. Smallacombe        Director


-----------------------
Paul M. Cervino              Principal Financial Officer, 
                             Principal Accounting Officer, Treasurer

</TABLE>


                                       26

<PAGE>

                                                    Allied Devices Corporation
                                                              and Subsidiaries

                                             Consolidated Financial Statements
                                       Years Ended September 30, 1997 and 1996














                                                                           F-1

<PAGE>

                                                    Allied Devices Corporation
                                                              and Subsidiaries

                                                                     INDEX

Report of independent certified public accountants............        F-3
Consolidated financial statements
  Balance sheets..............................................        F-4
  Statements of income........................................        F-5
  Statements of stockholders' equity..........................        F-6
  Statements of cash flows....................................        F-7
  Notes to financial statements...............................  F-8--F-20

                                                                           F-2

<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Allied Devices Corporation
Baldwin, New York

We have audited the accompanying consolidated balance sheets of Allied 
Devices Corporation and subsidiaries as of September 30, 1997 and 1996 and 
the related consolidated statements of income, stockholders' equity, and cash 
flows for the years then ended. These financial statements are the 
responsibility of the Company's management. Our responsibility is to express 
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing 
standards. 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 
Devices Corporation and subsidiaries at September 30, 1997 and 1996, and the 
results of their operations and their cash flows for the years then ended in 
conformity with generally accepted accounting principles.

BDO SEIDMAN, LLP

Mitchel Field, New York
December 18, 1997
                                                                           F-3

<PAGE>

                                                    Allied Devices Corporation
                                                              and Subsidiaries
                                                                              
                                                                Balance Sheets

<TABLE>
<CAPTION>
                                                                                            SEPTEMBER 30,        
                                                                                     ----------------------------
<S>                                                                                  <C>            <C>
                                                                                         1997           1996
                                                                                     -------------  -------------
Assets (Note 4)
Current:
  Cash.............................................................................  $     162,094  $      54,919
  Accounts receivable, net of allowance for doubtful accounts of $47,876 and $58,080,
    respectively (Notes 4 and 6)...................................................      2,326,179      2,193,606
  Inventories (Notes 2, 4 and 6)...................................................      6,402,688      5,882,556
  Prepaid expenses and other current assets........................................         67,606         41,619
  Deferred income taxes (Note 9)...................................................         41,000         38,863
                                                                                     -------------  -------------
    Total current assets...........................................................      8,999,567      8,211,563
Property, plant and equipment, at cost, net of accumulated depreciation and
  amortization (Notes 3, 4 and 6)..................................................      1,837,225      1,965,746
Excess of cost over fair value of net assets acquired, net of accumulated
  amortization of $349,661 and $327,748............................................         88,664        110,577
Other assets.......................................................................         51,527         88,817
                                                                                     -------------  -------------
                                                                                     $  10,976,983  $  10,376,703
                                                                                     -------------  -------------
                                                                                     -------------  -------------
Liabilities and Stockholders' Equity
Current:
  Accounts payable.................................................................  $   1,186,291  $   1,092,758
  Income taxes payable (Note 9)....................................................        145,263         55,693
  Accrued expenses and other (Note 5)..............................................        241,781        438,035
  Current portion of long-term debt and capital lease obligations (Note 6).........        118,481        119,401
                                                                                     -------------  -------------
    Total current liabilities......................................................      1,691,816      1,705,887
Long-term debt and capital lease obligations (Notes 4 and 6).......................      2,084,239      2,642,401
Deferred income taxes (Note 9).....................................................        175,000        221,051
                                                                                     -------------  -------------
    Total liabilities..............................................................      3,951,055      4,569,339
                                                                                     -------------  -------------
Commitments (Notes 7 and 8)
Stockholders' equity (Note 8)
  Common stock, $.001 par value, authorized 25,000,000 shares, issued and outstanding
    4,609,942 and 4,401,842........................................................          4,610          4,402
  Additional paid-in capital.......................................................      2,565,559      2,409,086
  Retained earnings................................................................      4,455,759      3,393,876
                                                                                     -------------  -------------
    Total stockholders' equity.....................................................      7,025,928      5,807,364
                                                                                     -------------  -------------
                                                                                     $  10,976,983  $  10,376,703
                                                                                     -------------  -------------
                                                                                     -------------  -------------
</TABLE>

                  See accompanying notes to consolidated financial statements.

                                                                           F-4

<PAGE>

                                                    Allied Devices Corporation
                                                              and Subsidiaries
                                                                              
                                                          Statements of Income

<TABLE>
<CAPTION>
                                                                                       YEAR ENDED SEPTEMBER 30,
                                                                                     ----------------------------
<S>                                                                                  <C>            <C>
                                                                                         1997           1996
                                                                                     -------------  -------------
Net sales..........................................................................  $  16,215,931  $  17,793,072
Cost of sales......................................................................     10,298,766     11,815,271
                                                                                     -------------  -------------
  Gross profit.....................................................................      5,917,165      5,977,801
Selling, general and administrative expenses.......................................      4,022,326      4,120,136
                                                                                     -------------  -------------
  Income from operations...........................................................      1,894,839      1,857,665
Interest expense, net..............................................................        203,956        263,568
                                                                                     -------------  -------------
Income before provision for taxes on income........................................      1,690,883      1,594,097
Taxes on income (Note 9)...........................................................        629,000        593,068
                                                                                     -------------  -------------
Net income.........................................................................  $   1,061,883  $   1,001,029
                                                                                     -------------  -------------
                                                                                     -------------  -------------
Net income per share                                                                 $         .21           $.20
                                                                                     -------------  -------------
                                                                                     -------------  -------------
Weighted average number of shares outstanding......................................      5,667,718      5,785,085
                                                                                     -------------  -------------
                                                                                     -------------  -------------
</TABLE>

                  See accompanying notes to consolidated financial statements.

                                                                           F-5

<PAGE>

                                                    Allied Devices Corporation
                                                              and Subsidiaries
                                                                              
                                            Statements of Stockholders' Equity

<TABLE>
<CAPTION>
                                                    COMMON STOCK $0.001
                                                            PAR
                                                           VALUE
                                                   ---------------------
<S>                                                <C>         <C>        <C>           <C>           <C>
                                                                           ADDITIONAL                    TOTAL
                                                   NUMBER OF                PAID-IN       RETAINED    STOCKHOLDERS'
                                                     SHARES     AMOUNT      CAPITAL       EARNINGS       EQUITY
                                                   ----------  ---------  ------------  ------------  ------------
Balance, September 30, 1995......................   4,296,842  $   4,297  $  2,352,819  $  2,392,847   $4,749,963
  Net income.....................................      --         --           --          1,001,029    1,001,029
  Proceeds from the exercise of options and
    warrants to purchase common stock (Note 8)...     105,000        105        56,267       --            56,372
                                                   ----------  ---------  ------------  ------------  -----------
Balance, September 30, 1996......................   4,401,842      4,402     2,409,086     3,393,876    5,807,364
  Net income.....................................      --         --           --          1,061,883    1,061,883
  Proceeds from the exercise of options and
    warrants to purchase common stock (Note 8)...     208,100        208       156,473       --           156,681
                                                   ----------  ---------  ------------  ------------  -----------
Balance,September 30, 1997.......................   4,609,942  $   4,610  $  2,565,559  $  4,455,759   $7,025,928
                                                   ----------  ---------  ------------  ------------  -----------
                                                   ----------  ---------  ------------  ------------  -----------
</TABLE>

                  See accompanying notes to consolidated financial statements.


                                                                           F-6


<PAGE>
                                                     Allied Devices Corporation
                                                               and Subsidiaries
 
                                                       Statements of CASH FLOWS
 
<TABLE>
<CAPTION>

YEAR ENDED SEPTEMBER 30,                                                                    1997          1996
--------------------------------------------------------------------------------------  ------------  ------------
<S>                                                                                     <C>           <C>
Cash flows from operating activities:
  Net income..........................................................................  $  1,061,883  $  1,001,029
                                                                                        ------------  ------------
  Adjustments to reconcile net income to net cash provided by (used in) operating
   activities:
   Reserve on note receivable.........................................................        (7,500)      --
   Provision for doubtful accounts....................................................         1,899         8,458
   Depreciation and amortization......................................................       485,550       387,009
   Deferred income taxes..............................................................       (48,188)      --
   Gain on sale of equipment..........................................................       (12,428)      --
  (Increase) decrease in:
   Accounts receivable................................................................      (134,472)      (19,953)
   Inventories........................................................................      (520,132)     (914,186)
   Prepaid expenses and other current assets..........................................       (25,987)       11,374
   Other assets.......................................................................        30,820        23,869
  Increase (decrease) in:
   Accounts payable and accrued expenses..............................................      (102,721)     (228,735)
   Income taxes payable...............................................................        89,570      (230,812)
                                                                                        ------------  ------------
   Total adjustments..................................................................      (243,589)     (962,976)
                                                                                        ------------  ------------
   Net cash provided by (used in) operating activities................................       818,294        38,053
                                                                                        ------------  ------------
Cash flows from investing activities:
  Capital expenditures................................................................      (328,468)     (309,806)
  Proceeds from sale of equipment.....................................................        19,750       --
                                                                                        ------------  ------------
   Net cash used in investing activities..............................................      (308,718)     (309,806)
                                                                                        ------------  ------------
Cash flows from financing activities:
  Net proceeds from sale of common stock, options and warrants........................       156,681        56,372
  Repayment of revolving loan and term loan...........................................       --         (2,275,500)
  Proceeds from long-term debt........................................................       --          2,366,338
  Principal payments on long-term debt and capital lease obligations..................      (559,082)     (232,888)
  Proceeds from additional financing under old bank agreement and term loan...........       --            356,462
  Payment on related party debt.......................................................       --           (142,598)
                                                                                        ------------  ------------
   Net cash (used in) provided by financing activities................................      (402,401)      128,186
                                                                                        ------------  ------------
Net increase (decrease) in cash.......................................................       107,175      (143,567)
Cash, beginning of period.............................................................        54,919       198,486
                                                                                        ------------  ------------
Cash, at end of period................................................................  $    162,094  $     54,919
                                                                                        ------------  ------------
                                                                                        ------------  ------------
</TABLE>
 
                   See accompanying notes to consolidated financial statements.

                                                                            F-7
<PAGE>

                                                    ALLIED DEVICES CORPORATION
                                                              AND SUBSIDIARIES
 
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. Summary of Accounting Policies 

    (a) Business
 
    The Company is comprised of Allied Devices Corporation ("ADCO"), and its
wholly-owned subsidiary, Empire Tyler Company ("Empire" and collectively the
"Company").
 
    The Company is engaged primarily in the manufacture and distribution of
standard precision mechanical components and a line of screw machine products.
The Company sells all its products to the same base of customers located
throughout the United States. Because the Company's product line comprises a
comparable group of precision manufactured parts sold to a similar customer
base, it considers itself to be engaged in a single business segment.
 
    (b) Basis of Presentation
 
    The consolidated financial statements include the accounts of ADCO and its
subsidiary. All significant intercompany balances and transactions have been
eliminated.
 
    (c) Inventories
 
    Inventories are valued at the lower of cost (last-in, first-out (LIFO)
method) or market. Management periodically analyzes inventories for obsolescence
and records writeoffs as required. Such writeoffs have historically been
immaterial.
 
    (d) Depreciation and Amortization
 
    Property, plant and equipment is stated at cost. Depreciation and
amortization of property, plant and equipment is computed using the
straight-line method over the estimated useful lives of the assets. The
estimated useful lives are as follows:
 
<TABLE>
<S>                                            <C>
Buildings and mprovements....................  30 years
Machinery and equipment......................  10 years
Furniture, fixtures and office equipment.....  5-7 years
Tools, molds and dies........................  8 years
Leasehold improvements.......................  Lease term
</TABLE>

                                                                            F-8
<PAGE>

                                                    ALLIED DEVICES CORPORATION
                                                              AND SUBSIDIARIES
 
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
    (e) Income taxes
 
    The Company and its subsidiary file a consolidated federal income tax return
and separate state income tax returns.
 
    Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rate is recognized in income in the period that includes the
enactment date.
 
    (f) Earnings per share
 
    Earnings per share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during each period.
Earnings per share is computed using the treasury stock method, modified for
options and warrants outstanding in excess of 20% of the outstanding shares of
the Company's common stock. Under the treasury stock method the number of shares
outstanding reflects the use of the proceeds from the assumed exercise of stock
options and warrants to repurchase shares of the Company's common stock at the
average market value during the period. The proceeds generated from the assumed
exercise of options and warrants in excess of 20% of the outstanding shares of
common stock are applied to the assumed repayment of company debt with the
assumed related interest expense savings being included in the Company's results
of operations for earnings per share computations.
 
    (g) Intangible assets
 
    The excess of cost over the fair value of net assets acquired is being
amortized over a period of 20 years.

                                                                            F-9
<PAGE>
                                                    ALLIED DEVICES CORPORATION
                                                              AND SUBSIDIARIES
 
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
    (h) Revenue Recognition
 
    Sales are recognized upon shipment of products. All sales are shipped F.O.B.
shipping point and are not sold subject to a right of return unless the products
are defective. The Company's level of returns arising from defective products
has historically been immaterial. The Company provides an allowance for
estimated returns when sales are recorded. Such allowances are not material.
 
    (i) Use of Estimates
 
    In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities. Actual results could differ from those
estimates.
 
    (j) Fair Value Financial Instruments
 
    The carrying amounts of financial instruments, including cash and short-term
debt, approximated fair value as of September 30, 1997 and 1996. The carrying
value of long-term debt and obligations under capital leases, including the
current portion, approximates fair value as of September 30, 1997 and 1996 based
upon the borrowing rates currently available to the Company for bank loans with
similar terms and average maturities.
 
    (k) Concentrations of credit risk
 
    The Company extends credit based on an evaluation of the customer's
financial condition, generally without requiring collateral. Exposure to losses
on receivables is principally dependent on each customer's financial condition.
The Company monitors its exposure for credit losses and maintains allowances for
anticipated losses. No individual customer is considered to be significant.

                                                                           F-10
<PAGE>
                                                    ALLIED DEVICES CORPORATION
                                                              AND SUBSIDIARIES
 
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
    (l) Recent Accounting Pronouncements
 
    In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 established a fair value method for
accounting for stock-based compensation plans either through recognition or
disclosure. Effective October 1, 1996, the Company adopted the employee
stock-based compensation provisions of SFAS No. 123 by disclosing the pro forma
net income and pro forma net income per share amounts, assuming the fair value
method was adopted October 1, 1995.
 
    In March, 1995, the FASB issued SFAS No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121
requires, among other things, an impairment loss on assets to be held and gains
or losses from assets that are expected to be disposed of to be included as a
component of income from continuing operations before taxes on income. The
Company has adopted SFAS No. 121 in fiscal 1997, and its implementation did not
have a material effect on the consolidated financial statements.
 
    The FASB has issued SFAS No. 128, "Earnings Per Share". SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997. SFAS No. 128 simplifies the computation of earnings per share by replacing
the presentation of primary earnings per share with a presentation of basic
earnings per share, as defined. The statement requires dual presentation of
basic and diluted earnings per share by entities with complex capital
structures. Basic earnings per share includes no dilution and is computed by
dividing income available to common stockholders by the weighted average number
of shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an entity
similar to fully diluted earnings per share. SFAS No. 128 is not expected to
have a significant impact on the Company's financial statements.

                                                                           F-11
<PAGE>
                                                    ALLIED DEVICES CORPORATION
                                                              AND SUBSIDIARIES
 
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

    In June, 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information," were
issued. SFAS No. 130 addresses standards for reporting and display of
comprehensive income and its components and SFAS No. 131 requires disclosure of
reportable operating segments. Both statements are effective for the Company's
1999 fiscal year. The Company will be reviewing these pronouncements to
determine their applicability, if any.
 
    (m) Reclassifications
 
    Certain 1996 balances were reclassified to conform with the 1997
presentation.
 
2. Inventories 

   Inventories are summarized as follows:
 
<TABLE>
<CAPTION>
SEPTEMBER 30,                                                                               1997          1996
--------------------------------------------------------------------------------------  ------------  ------------
<S>                                                                                     <C>           <C>
Raw materials.........................................................................  $    310,260  $    238,325
Work-in-process.......................................................................       514,437       512,527
Finished goods........................................................................     6,888,412     6,404,976
                                                                                        ------------  ------------
                                                                                           7,713,109     7,155,828
Less: adjustment to LIFO..............................................................     1,310,421     1,273,272
                                                                                        ------------  ------------
                                                                                        $  6,402,688  $  5,882,556
                                                                                        ------------  ------------
                                                                                        ------------  ------------
</TABLE>

    The adjustment to LIFO represents the excess of current cost (valued at
first-in, first-out FIFO) over the LIFO value of the inventories. 

                                                                           F-12
<PAGE>
                                                    ALLIED DEVICES CORPORATION
                                                              AND SUBSIDIARIES
 
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3. Property, Plant and Equipment 

    Property, plant and equipment consists of the following:
 
<TABLE>
<CAPTION>
SEPTEMBER 30,                                                                               1997          1996
--------------------------------------------------------------------------------------  ------------  ------------
<S>                                                                                     <C>           <C>
Machinery and equipment...............................................................  $  4,656,948  $  4,552,650
Tools, molds and dies.................................................................     1,553,884     1,502,276
Furniture, fixtures and office equipment..............................................       453,205       402,730
Leasehold improvements................................................................       169,749       167,180
Building and improvements.............................................................        94,520        93,530
Land..................................................................................         5,000         5,000
                                                                                        ------------  ------------
                                                                                           6,933,306     6,723,366
Less: accumulated depreciation and amortization.......................................     5,096,081     4,757,620
                                                                                        ------------  ------------
                                                                                        $  1,837,225  $  1,965,746
                                                                                        ------------  ------------
                                                                                        ------------  ------------
</TABLE>
 
    Included in machinery and equipment and office equipment at September 30,
1997 and 1996 is approximately $560,000 of equipment under capital lease
agreements (see Note 6) with related accumulated amortization amounts of
approximately $165,000 and $93,000, respectively. Depreciation expense for the
years ended September 30, 1997 and 1996 was approximately $447,000 and
$365,000, respectively.

4. Revolving Credit Agreement 

    In September, 1996, the Company entered into a credit agreement with a 
bank and repaid all amounts outstanding under agreements with its prior 
lender. Under the terms of its new three-year committed revolving credit 
agreement, the Company may borrow up to the lesser of $4,000,000 or 85% of 
eligible receivables and 30% of eligible inventory up to a maximum of 
$2,000,000, and interest is computed at the bank's prime lending rate (8.50% 
at September 30, 1997) or at 1.25% to 1.75% over the London InterBank 
Over-night Rate ("LIBOR"), at the Company's option, as defined in the 
agreement. As part of the same credit package, the Company may borrow 
additional funds, secured by the Company's machinery and equipment, with up 
to $1,000,000 available against existing assets and up to $1,000,000 
available for new acquisitions of machinery and equipment. The credit 
facility is secured by a first priority security interest in the Company's 
assets. In addition, the Company must meet certain financial covenants. As of 
the end of September 30, 1997, borrowings under this credit agreement were 
$1,925,000.
 
                                                                           F-13
<PAGE>
                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
5. ACCRUED EXPENSES AND OTHER
 
   Accrued expenses consist of the following:
 
<TABLE>
<CAPTION>
SEPTEMBER 30,                                                              1997        1996
----------------------------------------------------------------------  ----------  ----------
<S>                                                                     <C>         <C>
Commissions...........................................................  $   93,285  $  232,712
Payroll and related...................................................      83,548      45,000
Other.................................................................      64,948     160,323
                                                                        ----------  ----------
                                                                        $  241,781  $  438,035
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>
 
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
 
    Long term debt consists of the following:
 
<TABLE>
<CAPTION>
SEPTEMBER 30,                                                           1997          1996
------------------------------------------------------------------  ------------  ------------
<S>                                                                 <C>           <C>
Revolving credit facility, due September, 1999 
(Note 4)..........................................................  $  1,925,000  $  2,366,338
Capital lease obligations with varying monthly payments 
  and interest rates ranging from 8.5% to 9.9% per annum 
  maturing 1998 through 2001; secured by an interest in 
  machinery and equipment (Note 3)................................       277,720       395,464
                                                                    ------------  ------------
    Subtotal......................................................     2,202,720     2,761,802
Less:  current maturities.........................................       118,481       119,401
                                                                    ------------  ------------
Long-term debt and capital lease obligations......................  $  2,084,239  $  2,642,401
                                                                    ------------  ------------
                                                                    ------------  ------------
</TABLE>

                                                                          F-14

<PAGE>
                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The following is a schedule by years of future minimum lease payments under
capital leases, together with the present value of the net minimum lease
payments as of September 30, 1997:
 
<TABLE>
<S>                                                 <C>
  1998                                              $ 138,991
  1999                                                104,988
  2000                                                 64,916
  2001                                                  3,451
                                                    ---------
Total minimum lease payments.......................   312,346
Less: amount representing interest.................    34,626
                                                    ---------
Present value of net minimum lease payments........ $ 277,720
                                                    ---------
                                                    ---------
</TABLE>
 
    The following is a schedule of long term debt maturities (including capital
lease obligations) as of September 30, 1997:
 
<TABLE>
<S>                                                 <C>
  1998............................................  $ 118,481
  1999............................................  2,018,909
  2000............................................     61,911
  2001............................................      3,419
                                                    ---------
                                                   $2,202,720
                                                    ---------
                                                    ---------
</TABLE>



7. LEASES
 
The Company rents facilities in Baldwin, Ronkonkoma and Freeport, New York
under various operating lease agreements expiring through December 1999.In
addition, the Company also leases certain machinery and equipment and office
equipment under various capital lease agreements expiring through 2001 (see 
Note 6).

                                                                          F-15

<PAGE>
                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Most of the Company's operating leases are on a month to month basis. Rent
expense amounted to approximately $277,000 and $256,000 for the fiscal years
ended September 30, 1997 and 1996, respectively.
 
8. STOCKHOLDERS' EQUITY
 
    (a) Warrants
 
    At September 30, 1997 and 1996, the Company had 120,864 and 1,275,414 stock
warrants outstanding, respectively.The warrants to purchase the Company's common
stock were held by the following parties:
 
<TABLE>
<S>                                                                                  <C>
Officers/stockholders/consultants (1)..............................................     60,864
Public (1).........................................................................     60,000
                                                                                     ---------
                                                                                       120,864
                                                                                     ---------
                                                                                     ---------
</TABLE>
 
------------------------
 
(1) Each warrant held by members of management and certain stockholders grant
    them the right to purchase one share of common stock at various prices
    between $.30 and $2.00 per share.These warrants have a weighted average
    exercise price of $.60 per share and a weighted average remaining
    contractual life of approximately 10 months. 


    During fiscal 1996 the Company issued warrants to purchase 60,000 shares of
    common stock, at prices ranging from $3.00 to $4.25 per share to financial 
    consultants to the Company.The Company did not issue warrants during fiscal 
    1997.The weighted average exercise price of these warrants is $3.75 per 
    share, with a term that expires in October, 1998.
 

                                                                          F-16

<PAGE>
                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(b) Incentive Stock Option Plan

    In October 1993, the Board of Directors adopted an incentive stock option
    plan.The Plan, as amended on December 11, 1995, allows the Board of
    Directors to issue options to purchase an aggregate of 1,250,000 shares of
    the Company's common stock to key employees.
 
    As of September 30, 1997, the Company had issued options to purchase an 
    aggregate of 1,176,400 shares of the Company's common stock to members of 
    the Company's Board of Directors and employees.The Company estimates the 
    fair value of each stock option at the grant date by using the 
    Black-Scholes option-pricing model with the following weighted average 
    assumptions used for grants in 1996 and 1997; no dividend yield, expected 
    volatility of 46.5%, risk free interest rates of 5.68% to 6.89%, with an 
    expected life of 7.5 years.If compensation cost for the Company's stock 
    option plan had been determined in accordance with SFAS No. 123, net 
    income would have been reduced in 1996 and 1997 by approximately $133,000 
    and $54,000, respectively, and earnings per share would have been $.15 
    and $.18, respectively.
 
8. STOCKHOLDERS' EQUITY (CONTINUED)

The following table summarizes information about stock options outstanding
at September 30, 1997:
 
<TABLE>
<CAPTION>
                                                                  OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
                                                       -----------------------------------------  -----------------------
                                                                       WEIGHTED
                                                                        AVERAGE       WEIGHTED                 WEIGHTED
                                                                       REMAINING       AVERAGE                  AVERAGE
                                                         NUMBER       CONTRACTUAL     EXERCISE      NUMBER     EXERCISE
                                                       OUTSTANDING   LIFE (YEARS)       PRICE     EXERCISABLE    PRICE
                                                       -----------  ---------------  -----------  ----------  -----------
<S>                                                    <C>          <C>              <C>          <C>         <C>
Exercise Prices:
$1.00--2.35..........................................     895,000            5.4      $    2.32      895,000   $  2.32
  .35--3.00..........................................      34,600            7.1           2.65       34,600      2.65
 2.00--3.00..........................................     127,400            8.6           2.61      114,900      2.62
  .35--2.44..........................................     119,400            9.4           1.92       86,400      1.74
                                                       -----------           ---          -----   ----------      -----
                                                        1,176,400            6.2      $    2.32    1,130,900   $  2.32
                                                       -----------           ---          -----   ----------       -----
                                                       -----------           ---          -----   ----------       -----
</TABLE>
 
                                                                          F-17

<PAGE>
                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Changes in qualified and non-qualified options and warrants outstanding are
summarized as follows:
 
<TABLE>
<CAPTION>
                                                          WARRANTS                          OPTIONS
                                                  ------------------------  ---------------------------------------
<S>                                               <C>         <C>           <C>           <C>           <C>
                                                                                                         WEIGHTED
                                                                                                          AVERAGE
                                                                EXERCISE                  OPTION PRICE   EXERCISE
                                                    SHARES       PRICE         SHARES      PER SHARE       PRICE
                                                  ----------  ------------  ------------  ------------  -----------
Outstanding September 30, 1995..................  1,313,764   $.30--$2.50      939,600    $ .35--$3.00     $2.32
  Granted.......................................     60,000    3.25--4.25      183,000     2.00-- 3.25      2.74
  Cancelled.....................................     (3,350)          .35           --            --
  Exercised.....................................    (80,000)    .35--2.50      (10,000)           1.00      1.00
  Warrants converted to options.................    (15,000)          .70       15,000             .70       .70
  Expired.......................................         --            --      (50,000)    2.00-- 3.25      3.13
                                                  ----------  ------------  ------------  ------------      ----
                                                  ----------  ------------  ------------  ------------      ----

Outstanding September 30, 1996..................  1,275,414   $.30--$4.25    1,077,600    $ .35--$3.00      2.34
  Granted.......................................         --                     92,000     2.25-- 2.44      2.28
  Cancelled.....................................         --                         --
  Exercised.....................................   (414,150)   .35 -- .70       (5,600)           2.25      2.25
  Warrants converted to options.................    (12,400)   .35 -- .70       12,400      .35--  .70       .69
  Expired.......................................   (728,000)         2.50           --
                                                  ----------  ------------  ------------  ------------      ----
Outstanding September 30, 1997..................    120,864                  1,176,400                      2.32
                                                  ----------  ------------  ------------  ------------      ----
                                                  ----------  ------------  ------------  ------------      ----
</TABLE>
 
At September 30, 1997, there were 1,130,900 options exercisable at a weighted 
average exercise price of $2.32.The weighted average fair value of options 
granted during fiscal 1996 and 1997 was $1.61 and $1.40, respectively.
 
                                                                          F-18
<PAGE>

                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. TAXES ON INCOME
 
Provisions for income taxes (benefit) on income in the consolidated
statement of operations consist of the following:
 
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,                                                   1997        1996
----------------------------------------------------------------------  ----------  ----------
<S>                                                                     <C>         <C>
Current:
  Federal.............................................................  $  570,192  $  546,143
  State...............................................................     106,996      46,925
                                                                        ----------  ----------
Total current.........................................................     677,188     593,068
                                                                        ----------  ----------
Deferred:
  Federal.............................................................     (40,574)         --
  State...............................................................      (7,614)         --
                                                                        ----------  ----------
                                                                           (48,188)         --
                                                                        ----------  ----------
Total taxes on income.................................................  $  629,000  $  593,068
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>
 
    Deferred tax (assets) liabilities consist of the following:
 
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,                                                   1997        1996
----------------------------------------------------------------------  ----------  ----------
<S>                                                                     <C>         <C>
Tax depreciation in excess of book....................................  $  385,000  $  254,463
Provision for bad debts...............................................     (18,000)    (19,863)
Inventory capitalization..............................................     (23,000)    (19,000)
Provision on note receivable (included in other assets)...............     (38,000)    (34,000)
Investment tax credit carryforward....................................    (187,000)    (15,000)
                                                                        ----------  ----------
Deferred tax liabilities..............................................     119,000     166,600
Valuation allowance...................................................      15,000      15,588
                                                                        ----------  ----------
Net deferred tax liabilities..........................................  $  134,000  $  182,188
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>
 


                                                                          F-19
<PAGE>
                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The provision for income taxes on income before taxes differs from the
amounts computed applying the applicable Federal statutory rates due to the
following:
 
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,                                                   1997        1996
----------------------------------------------------------------------  ----------  ----------
<S>                                                                     <C>         <C>
Provision for Federal income taxes at the statutory rate..............  $  574,900  $  541,993
Increase (decrease):
  State taxes, net of Federal tax benefit.............................      65,600      30,970
  Other...............................................................     (11,500)     20,105
                                                                        ----------  ----------
Provision for taxes on income.........................................  $  629,000  $  593,068
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>

10. CASH FLOWS
 
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,                                                                       1997        1996
------------------------------------------------------------------------------------------  ----------  ----------
<S>                                                                                         <C>         <C>
Supplemental disclosure of cash flow information
  Cash paid during the year:
    Interest..............................................................................  $  221,265  $  249,168
                                                                                            ----------  ----------
                                                                                            ----------  ----------
    Income taxes..........................................................................  $  637,521  $  551,408
                                                                                            ----------  ----------
                                                                                            ----------  ----------
Supplemental schedule of non-cash investing and financing:
  Equipment acquired under capital lease..................................................  $   --      $  264,637
                                                                                            ----------  ----------
                                                                                            ----------  ----------
</TABLE>
 
                                                                          F-20