<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, 1998                                             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:

       Title of Class                              Number of Shares Outstanding
-----------------------------                          as of December 28, 1998
Common Stock, $.001 par value                      -----------------------------
                                                             4,947,942

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: $18,448,483

The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the last sale price on December 31,1998 is approximately
$4,737,634.

<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 motion
                  control and servo 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 printed
                  catalog over the last decade, of which approximately 35,000
                  copies were distributed during the last three fiscal years.
                  The current edition was published in November, 1998, and is
                  over 650 pages in length. During 1998, the catalog was fully
                  digitized and formatted for inclusion in the Company's
                  Internet website, making it simple for users to download the
                  Company's standard technical data and drawings. Management
                  projects that the catalog and its search tools will be ready
                  for on-line interactive access on the Internet through a broad
                  range of website links in January, 1999.

                  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; high
                  vacuum and spectrometric devices; flow control and metering
                  equipment makers; seals and glands; 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 $250 to $800
                  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 

                                       1

<PAGE>

                  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.

                  Allied Devices has structured itself as far as possible to
                  provide the service of "one stop shopping" for mechanical
                  instrument assemblies and 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" ("JIT") methods of material sourcing
                  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 closely.

                  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 limiting its exposure 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 35% 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 catalogs) 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. 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.

<TABLE>
<CAPTION>

                        <S>                             <C>
                           1998                              $14,507,000
                           1997                              $13,604,000
                           1996                              $15,145,000
                           1995                              $13,363,000

</TABLE>

                                       2

<PAGE>

<TABLE>
<CAPTION>
                      <S>                              <C>
                           1994                              $10,509,000
</TABLE>

                  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 have
                  been 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. While a recovery
                  in this sector started in fiscal 1998, financial and economic
                  turmoil in Asia during the year caused yet another downturn
                  that appears to be continuing into fiscal 1999. The Company
                  has therefore undertaken to replace this lost business with
                  additional products and more intensive marketing. The return
                  to growth in fiscal 1998 is attributable to these efforts.


                  CATALOG INDUSTRY COMPETITION

                  The Company competes principally 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 superior quality control, timely deliveries, control of
priorities and cost efficiencies. During fiscal 1998, the Company added
significantly to its manufacturing capacity through acquisition of a
state-of-the-art machine shop facility. Thus, Allied now has four manufacturing
divisions, each with particular specialties and focus on its capabilities. In
order to promote maximum utilization of productive equipment, each manufacturing
operation markets and sells its capabilities direct to customers. 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 small complex
                                        parts that are sold both direct to end
                                        users in the 

                                       3

<PAGE>

                                        fluid power and instrument industries
                                        and through Catalog Operations.

                  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 diversified 
                  Joplin, Missouri      CNC and conventional capabilities, 
                                        producing the Kay Pneumatics product
                                        line and manufacturing components for an
                                        established customer base in several
                                        industries.

                  APPI, Inc.            A state-of-the-art CNC machining 
                 (Atlantic Precision    operation specializing in close 
                  Products)             tolerance,intricate machining of complex
                  Biddeford, Maine      parts made from exotic materials and 
                                        used in the medical, flow control,
                                        instrument, and seal/gland industries.

                  Each of the support operations in Manufacturing Services
                  produces components sold both through Catalog Operations and
                  to other catalog houses, generally 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 production runs are
                  periodically accepted, the structure of Manufacturing
                  Services' organization and facilities is oriented to 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:

<TABLE>
<CAPTION>
                                                                      Year Ended September 30,
                                                       -------------------------------------------------------
                                                             1998             1997               1996
                                                       -------------------------------------------------------
             <S>                                        <C>              <C>                  <C>       
                  Sales to Catalog Operations *              $2,422,000       $2,360,000           $2,812,000
                  Sales to Outside Customers                  3,841,000        2,612,000            2,648,000
                  --------------------------------------------------------------------------------------------
                  Total Revenues                             $6,263,000       $4,972,000           $5,460,000
                  --------------------------------------------------------------------------------------------
                  --------------------------------------------------------------------------------------------
</TABLE>
                  -----------
                  *    These revenue figures for Catalog Operations represent
                       interdivisional sales that are eliminated in
                       consolidation.

                                       4

<PAGE>

                  Sales to Catalog Operations increased commensurate with the
                  overall volume of shipments by Catalog Operations. The
                  increase in Sales to Outside Customers in fiscal 1998 was
                  attributable principally to the acquisition of Atlantic
                  Precision Products in July, 1998. 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 65% of capacity,
                  giving the Company the flexibility to respond to increases in
                  sales volume. Management intends, on a continuous basis, to
                  examine its manufacturing methods, equipment and tooling,
                  seeking ways to improve the quality and responsiveness of its
                  capacity while minimizing the labor content (and related cost)
                  in its product. The Company is prepared to commit capital to
                  making such improvements, consistent with internal and
                  confidential rate-of-return guidelines established by
                  management.


                  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; iv) supporting demand-pull and JIT requirements;
                  and v) 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. In the 1980s, this led to the
                  development of an internal quality control manual that sets
                  forth both policies 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 rigorously to high standards 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 

                                       5

<PAGE>

                  on basic skills, policies, procedures and new developments.
                  Under the auspices of the New York State Industrial
                  Effectiveness Program, the Company undertook in fiscal 1998 to
                  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). A certification audit
                  is scheduled for February, 1999, to register the Company's
                  first facilities as conforming to ISO-9002. Upon successful
                  completion of that audit, management intends to continue with
                  the process until all of the Company's facilities have been
                  certified, with the goal of Company-wide registration by the
                  end of fiscal 2000.

                  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 and capacity but also provide marketing, operating and
                  administrative synergies; and (4) raise additional equity
                  capital as required to reduce the Company's indebtedness,
                  thereby limiting financial leverage while expansion plans are
                  being implemented. Certain elements of management's marketing
                  plans have commenced (principally an on-going advertising
                  campaign and publication of an Internet catalog), while others
                  are in development. Management is pursuing its acquisition
                  strategy, having completed two acquisitions in fiscal 1998 and
                  having targeted a series of additional strategic candidates
                  for acquisition in fiscal 1999. Effectively all of the capital
                  deployed in these acquisitions was raised in the form of
                  senior debt. Management has raised (cumulatively) $2,163,000
                  in equity since the beginning of fiscal 1994, 60% in a private
                  placement and the balance through the exercise of warrants and
                  options. All such equity funds have been applied to working
                  capital. Additional equity 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 fully aware
                  of the Company's range of capabilities and of 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 

                                       6

<PAGE>

                  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
                  completed two acquisitions and is assessing additional
                  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 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 52 salaried and 209 hourly
                  personnel. Wage rates and benefits are competitive in the
                  labor markets from which the Company draws. Thirty of its
                  hourly employees are represented by two local unions (18 by
                  the National Organization of Industrial Trade Unions ("NOITU")
                  and 12 by Local 999 of the Teamsters). The contract with Local
                  999 expires in August 2000, and the contract with NOITU
                  expires in November 2000. 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.

                                       7

<PAGE>

                  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. Nine leases,
                  covering certain specific CNC machines, have original lease
                  terms ranging from four to five years, with purchase options
                  at the end of each lease. Rates vary from 7.785% to 10.288%,
                  and expiration dates range from 1999 to 2003. The aggregate
                  value of these leases was $2,518,000 as of September 30, 1998.




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.

<TABLE>
<CAPTION>
      Location             Square Feet       Lease Expiration            Principal Activities
----------------------    --------------    --------------------     -----------------------------
<S>                           <C>        <C>                       <C>
Baldwin, NY                      18,000     December 1999            Catalog Manufacturing and
                                                                     Distribution Operations

Freeport, NY                     10,000     December 1999            Screw Machine Operations

Freeport, NY                      5,200     January 1999*            Catalog Manufacturing
                                                                     Operations

Biddeford, ME                    30,000     June 2003                CNC Machine Shop

Windham, ME                      10,000     June 2003                CNC Machine Shop

Ronkonkoma, NY                    8,200     April 2004               CNC Machine Shop

Joplin, MO                       13,000     (Owned)                  CNC and Conventional
                                                                     Machine Shop
</TABLE>

---------------------
*At the mutual convenience of the landlord and the Company, this facility has 
been leased on a month-to-month basis. Management expects to execute a new 
3-year lease in January 1999.

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

                  The Company's common stock was originally 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 1,721
                  trades representing approximately 2,929,370 shares (as
                  reported by NASDAQ in their routine statistical summaries)
                  were completed during fiscal 1998. As of September 30, 1998,
                  the Company had 441 holders of record of its common stock. The
                  Company has 11 listed market-makers, and the trading ranges by
                  quarter for the year were as follows:
<TABLE>
<CAPTION>

                                                           Fiscal 1998                    Fiscal 1997
                                                      ---------------------           -----------------
                                                      High              Low           High          Low
                                                      ----              ---           ----          ---
                      <S>                         <C>               <C>          <C>           <C>    
                           First Quarter ........... $2.8125           $2.00        $3.0625       $1.9375
                           Second Quarter .......... $2.4375           $1.875       $3.375        $2.125
                           Third Quarter ........... $2.5625           $2.125       $3.0625       $2.375
                           Fourth Quarter .......... $3.00             $1.5312      $2.875        $2.0625
</TABLE>

                                       9

<PAGE>

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,

                                                     ---------------------------------------------
                                                              1998                     1997
                                                              ----                     ----
                          <S>                                  <C>                 <C>        
                               STATEMENT OF
                               OPERATIONS DATA:
                               Net sales .....................     $18,448,483        $16,215,931

                               Net income ....................     $ 1,030,673        $ 1,061,883

                               Earnings per share:
                                  Basic ......................     $       .22        $       .24
                                  Diluted ....................     $       .22        $       .22
                               Weighted average
                               number of shares
                               outstanding
                                  Basic ......................       4,699,526          4,472,141
                                  Diluted ....................       4,763,404          4,751,739


                               BALANCE SHEET DATA:
                               Total assets ..................     $22,973,619        $10,976,983
                               Working capital ...............     $ 9,594,752        $ 7,307,751
                               Long-term debt ................     $11,031,687        $ 2,084,239
                               Stockholders' equity ..........     $ 9,116,101        $ 7,025,928
</TABLE>

                                       10

<PAGE>

RESULTS OF OPERATIONS: YEAR ENDED SEPTEMBER 30, 1998 COMPARED WITH YEAR ENDED
   SEPTEMBER 30, 1997.

                  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.

                  During fiscal 1998, the Company successfully completed two
                  acquisitions as part of its plan for growth by acquisition.
                  The two companies acquired were as follows:
                  -   Kay Pneumatic Valves, Inc. ("Kay"), manufactures a line of
                      three-way and four-way direction control and power valves
                      with a reputation for exceptional durability and speed.
                      The standard, "off-the-shelf" product is described in a
                      set of detailed catalogs and appears to offer attractive
                      potential as a lateral addition to the Company's other
                      catalog offerings to its targeted markets. Kay's revenues
                      were somewhat over $800,000 in calendar 1997, and
                      management believes that, under the stewardship of prior
                      management, marketing efforts were ineffective and
                      production inefficient. The assets and operations of the
                      business were acquired for $850,000 in cash in January,
                      1998, and transferred from Long Island to the Company's
                      Astro Instrument facilities in Joplin, Missouri in
                      February, 1998. Management expects that, for the first
                      year, the revamped operation will be dedicated to gaining
                      a thorough understanding of production economies and the
                      existing marketing mix (product focus, pricing,
                      distribution strategy, competition, inventory balancing,
                      and customer service strategy). Thereafter, management
                      expects to be aggressive in promoting the Kay product
                      line, both through its Catalog Operations and under the
                      Kay trade name. 


                  -   Atlantic Precision Products, Inc. ("APPI" or "Atlantic")
                      is a state-of-the-art CNC machining operation with
                      locations in Biddeford and Windham, Maine. 

                                       11

<PAGE>

                      APPI sells intricate and complex custom machined
                      components to leading edge customers in the aircraft
                      instrument, flow metering/control, and seal/gland
                      industries, primarily in New England. Sales volume of $9.3
                      million in calendar 1997 was relatively concentrated in 5
                      customers, with four of those being on Kanban or other
                      dedicated sole-source supply arrangements. Management
                      believes that their manufacturing methods and know-how
                      will permit substantial growth in throughput at Atlantic
                      while, through technology interchange, enabling the
                      Company as a whole to manufacture more efficiently.
                      Consideration at closing for the business was $7.2 million
                      in cash and 250,000 shares of the Company's common stock.
                      Performance consideration is a negotiated percentage of
                      earnings for APPI for each of the first three years of its
                      operation as a division of Allied.

                  On the night of April 8, 1998, a fire broke out at the
                  Company's headquarters in Baldwin, New York, destroying all of
                  the Company's central computer and data communications
                  equipment and certain underlying records. The Company thus had
                  to reconstruct those portions of its records which were lost
                  from the remaining hard-copy records and back up files. The
                  result, during the succeeding four months, was a substantial
                  number of late deliveries and a low rate of responsiveness to
                  new business while records were being reconstructed and data
                  was being built into the new system. While it is impossible to
                  determine the exact impact of the fire, management estimates
                  that between $350,000 and $500,000 of business was lost during
                  the recovery period. While many of the Company's customers
                  were patient and tolerated the recovery process, others were
                  not and switched to competitors during this period. Management
                  has launched a program to recover those customers lost in the
                  aftermath of the fire.

                  Net sales for fiscal 1998 were $18,448,000 as compared to
                  $16,216,000 in fiscal 1997. This increase of 13.8% was
                  principally the result of four factors: (1) the added revenues
                  from Kay and Atlantic amounted to $2,225,000, mostly
                  concentrated in the fourth quarter; (2) the fire caused a loss
                  of sales estimated by management at between $350,000 and
                  $500,000; (3) the economic and financial turmoil in East Asia
                  induced a sharp downturn in several capital goods sectors of
                  the U.S. economy beginning in the third quarter of the fiscal
                  year, resulting in a commensurate slowdown for the Company
                  with customers in those industries estimated by management to
                  amount to over $1 million; and (4) on-going marketing
                  initiatives appear to have been effective in stimulating
                  continued growth in other sectors of approximately 10%. In
                  particular, the aerospace instrumentation, medical equipment,
                  robotics and scientific/analytical instrumentation sectors
                  exhibited strength throughout the year.

                  The Company's gross margin was 34.07% of net sales in fiscal
                  1998, down from 36.49% in fiscal 1997. This was principally
                  the result of two elements: (1) materials expense as a
                  percentage of sales decreased, increasing gross margins by
                  0.81%; and (2) factory payroll and overhead as a percentage of
                  sales increased, 

                                       12

<PAGE>

                  lowering gross margins by 3.23%. This decrease in margin is 
                  attributable to the following factors:


                  -   The consummation and assimilation of the two acquisitions
                      completed during the fiscal year resulted in temporary
                      operating diseconomies while integrating the acquired 
                      entities into the Company. Higher levels of payroll and 
                      duplication of overhead expenses are common at such 
                      times, and management expects the period of transition 
                      following each acquisition to be approximately six 
                      months. Following this, management projects a return to 
                      gross margins more in line with the Company's objectives.

                  -   The fire in April destroyed the Company's production
                      planning and control system. As a direct outcome, during
                      the ensuing five months, the normally orderly flow of
                      production work in Catalog Operations was regularly
                      disrupted by "emergency" production runs made to cover
                      late deliveries of materials. The resultant combination of
                      high levels of overtime and extremely short lot sizes
                      eroded margins during the recovery period (April through
                      September, 1998). Management made a conscious decision to
                      tolerate this temporary condition rather than risk further
                      deterioration of the Company's service performance to its
                      customers.

                  -   When signs of slowdown in certain sectors materialized at
                      the end of the third fiscal quarter, management made a
                      decision to delay taking cost cutting measures until after
                      the end of the fiscal year. This decision was also
                      prompted by management's asserting a higher priority on
                      maintaining service levels than on short term maintenance
                      of gross margins. The lower level of throughput to sales
                      and inventory on relatively fixed costs of factory
                      operations resulted in a decrease in gross margins during
                      the fourth quarter.

                  -   Atlantic's factory operations rely more heavily on
                      state-of-the-art equipment than do the Company's other
                      operations, displacing operating costs with depreciation
                      charges and increasing operating leverage. Atlantic's
                      productivity during the Company's fourth quarter of fiscal
                      1998 was lower than historic norms, as often happens in
                      the six months following an acquisition. Thus,
                      depreciation charges during this quarter were higher
                      without an offset of lower operating costs. Management
                      projects that this will come into line with the Company's 
                      objectives by the end of the first quarter of fiscal 1999.

                  The Company did not increase prices materially in fiscal 1998.

                  Selling, general and administrative expenses as a percentage
                  of net sales were 23.2% in fiscal 1998, as compared to 24.8%
                  in fiscal 1997. While actual expenditures in fiscal 1998 were
                  $260,000 higher than in fiscal 1997, such costs did not
                  increase as much as sales volume. The following factors
                  account for this change: (1) selling and shipping expenses and
                  commissions decreased as a percentage of net sales by
                  approximately 0.8% as shipping volume increased while spending
                  on the Company's marketing strategy remained effectively flat;

                                       13

<PAGE>

                 (2) administrative payroll, benefits and expenses increased by
                  $106,000 but decreased as a percentage of net sales by 0.8%;
                  and (3) other administrative expenses (collectively) remained
                  unchanged as a percentage of net sales. Included in
                  administrative expenses were certain non-recurring costs
                  incurred during the third and fourth quarters of fiscal 1998
                  related to recovery from the fire, as extraordinary hours put
                  in by Allied's employees, supplemented by some outside
                  professional help, minimized the potentially disastrous
                  effects of the fire, but at a cost. While the Company's
                  casualty and business interruption insurance reimbursed much
                  of this, management estimates that approximately $100,000 of
                  cost was not recovered from insurance. In addition, there were
                  approximately $70,000 of additional administrative expenses in
                  the fourth quarter that resulted from acquiring Atlantic.

                  Interest expense increased by $184,000 in fiscal 1998, as the
                  Company increased its borrowings to finance the acquisitions
                  of Kay and Atlantic.

                  Provision for income taxes in fiscal 1998 was $584,000, or
                  36.2% 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, 1997, COMPARED WITH YEAR ENDED
    SEPTEMBER 30, 1996

                  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.
                  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 

                                       14

<PAGE>

                  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.

YEAR 2000

                  Management believes that all of the Company's computer
                  systems, applications and operating software are Year 2000
                  compliant. The Company has also undertaken a review of the
                  major vendors and third party suppliers critical to its
                  operation to assess their Year 2000 readiness. Although the
                  Company is not aware that any such company's systems are
                  noncompliant in a way that will materially adversely affect
                  the Company, there can be no assurances that the computer
                  systems of other companies upon which the Company's systems
                  rely will be timely compliant, or that such failure to comply
                  by another company would not have a material adverse effect on
                  the Company's business.

                  The statements contained in this Year 2000 readiness
                  disclosure are subject to certain protection under the Year
                  2000 Information and Readiness Disclosure Act.


LIQUIDITY AND CAPITAL RESOURCES

                  The Company's financial condition remained healthy during
                  fiscal 1998 as operations generated net cash of $599,000. In
                  addition, financing activities (net) generated cash of
                  $8,212,000 over the course of the year. These funds were used

                                       15

<PAGE>

                  for capital expenditures (net) of $417,000 and acquisition
                  financing of $8,281,000, with the remaining $113,000 being
                  added to cash on hand. Net working capital increased by
                  $2,287,000 to $9,595,000 during the year. The following are
                  changes in current assets and current liabilities for the year
                  ended September 30, 1998:

                  -   Accounts receivable (net of reserve for doubtful accounts)
                      increased by $200,000 during the year. This increase was a
                      function of lower shipping rates at year end ($346,000);
                      the acquisition of $91,000 of Kay receivables; the
                      acquisition of $576,000 of Atlantic receivables; and a
                      decrease in the average collection period from 47 days at
                      the end of fiscal 1997 to 45 days at the end of fiscal
                      1998 ($121,000).

                  -   Inventories increased by $2,501,000 during the fiscal
                      year, with the turnover rate decreasing from 1.6 times in
                      fiscal 1997 to 1.4 times at the end of fiscal 1998. Of
                      this increase, a portion ($1,595,000) was acquired with
                      Kay and Atlantic. The balance ($906,000) built up from the
                      combined effects of losing the computer-based inventory
                      and production control systems and a sharp slowdown with
                      many of the Company's most important customers. Current
                      industrial procurement practices, Kanban and demand-pull
                      systems in particular, leave manufacturers vulnerable to
                      such temporary build-ups, since production builds on the
                      basis of forecasted needs as much as three months in
                      advance of actual demand. Management expects that most of
                      the inventory built up at year-end will be shipped during
                      fiscal 1999 as the industrial sectors impacted by Asia
                      recover. As an operating principle, management has made
                      prompt service, product availability and quick turnaround
                      of production orders key strategic factors in gaining a
                      strong competitive position in the Company's markets.
                      Substantial inventories are, in management's judgment, a
                      necessity in supporting this strategy and responding to
                      demanding delivery requirements imposed by the Company's
                      customers. As the Company's growth plan continues to
                      unfold, management expects to see improvement in the
                      inventory turnover rate.

                  -   Prepaid expenses and other current assets increased by
                      $298,000 as the Company capitalized certain prepaid
                      administrative expenses $32,000, and accrued for casualty
                      losses reimbursable from insurance of $266,000.

                  -   Current liabilities, exclusive of current portions of
                      long-term debt and capital lease obligations, decreased by
                      $43,000 (net), as the acquisitions completed during the
                      year added $314,000 to payables, acquired payables were
                      brought to standard terms (a decrease of $169,000), the
                      Company's average payment period on accounts payable and
                      accrued expenses was shortened from 36 days in fiscal 1997
                      to 35 days in fiscal 1998 (a decrease of $43,000), and the
                      Company's income taxes payable decreased by $145,000.

                  -   Current portions of long-term debt and capital lease
                      obligations increased by $868,000 (net) as a function of 
                      the terms of acquisition financings.

                  -   Cash balances increased by $113,000.

                                       16

<PAGE>

                  Management believes that the Company's working capital as now
                  constituted will be adequate for the needs of the on-going
                  core business (inclusive of acquired entities). During fiscal
                  1998, to finance acquisitions and to allow for on-going
                  working capital requirements, the Company entered into a new
                  credit facility with its bank consisting of a $6.25 million
                  term loan, a $10 million revolving credit facility, and an
                  increase to the existing equipment lease line from $2 million
                  to $3.2 million. The Company, at the end of fiscal 1998, was
                  using approximately $3,250,000 of its revolving credit
                  facility.

                  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 1998 amounted to
                  $637,000 ($869,000 including capital leases, net of equipment
                  dispositions), as compared to $309,000 ($328,000 in new 
                  equipment, net of $19,000 in equipment dispositions; no new 
                  equipment leases) in fiscal 1997. 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 ($709,000),
                  and (2) support and installation of a comprehensive new 
                  computer system ($168,000). Capital spending plans for fiscal
                  1999 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 and credit facilities.

                  During the second quarter, the Company acquired Kay Pneumatic
                  Valves, Inc. for $850,000 in cash. Additional expenditures
                  attendant to this acquisition amounted to approximately
                  $110,000, including legal fees, moving expenses, space
                  preparation, additions to tooling and inventories, training
                  costs, and certain marketing expenses. The acquisition price
                  was funded through new term debt of $1,000,000, provided by
                  the Company's bank and secured in the fixed assets of the
                  Company.


                  During the third quarter, the Company acquired effectively all
                  of the assets, properties, business and rights of, and assumed
                  specified liabilities of Atlantic. 

                                       17

<PAGE>

                  Consideration for the assets, net of liabilities, of Atlantic
                  consisted of the following: (i) $7,237,500 in cash, delivered
                  at Closing; (ii) 250,000 shares of the Company's common stock
                  delivered at Closing; and (iii) a commitment to make
                  additional payments to the seller based on the performance of
                  APPI during each of the first three one-year operating periods
                  following the Closing. $6,250,000 of the cash consideration at
                  closing was provided by the term loan and $987,500 was drawn
                  from the revolving credit facility. Refinancing of assumed
                  term debt in the amount of $1,233,000 was completed by drawing
                  against the Company's equipment lease line.



                  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.


                  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 and capacity but also provide marketing, operating and
                  administrative synergies; and (4) raise additional equity
                  capital as required to reduce the Company's indebtedness,
                  thereby limiting financial leverage while expansion plans are
                  being implemented. Certain elements of management's marketing
                  plans have commenced (principally an on-going advertising
                  campaign and publication of an Internet catalog), while others
                  are in development. Management is pursuing its acquisition
                  strategy, having completed two acquisitions in fiscal 1998 and
                  having targeted a series of additional strategic candidates
                  for acquisition in fiscal 1999. Plans to raise additional
                  equity will be carried out when management considers it
                  appropriate to do so and believes market conditions to be
                  favorable to existing stockholders.



                  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 

                                       18

<PAGE>

                  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

                  A.  Comprehensive Income

                  In June 1997, the Financial Accounting Standards Board issued
                  SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
                  which established standards for reporting and display of
                  comprehensive income, its components and accumulated balances.
                  Comprehensive income is defined to include all changes in
                  equity except those resulting from investments by owners and
                  distributions to owners. Among other disclosures, SFAS 130
                  requires that all items that are required to be recognized
                  under current accounting standards as components of
                  comprehensive income be reported in a financial statement that
                  is displayed with the same prominence as other financial
                  statements.

                  SFAS 130 is effective for financial statements for periods
                  beginning after December 15, 1997 and requires comparative
                  information for earlier years to be restated. SFAS 130 is not
                  expected to materially impact the Company's disclosures when
                  adopted.

                  B)  Reporting Segments of an Enterprise

                  In June 1997, the Financial Accounting Standards Board issued
                  SFAS No. 131, "Disclosures about Segments of an Enterprise and
                  Related Information" ("SFAS 131"), which supersedes SFAS 14,
                  "Financial Reporting for Segments of a Business Enterprise".
                  SFAS 131 establishes standards for the way public companies
                  report information about operating segments in annual
                  financial statements and requires reporting of selected
                  information about operating segments in interim financial
                  statements issued to the public. It also establishes standards
                  for disclosures regarding products and services, geographic
                  areas and major customers. SFAS 131 defines operating segments
                  as components of a company about which separate financial
                  information is available that is evaluated regularly by the
                  chief operating decision maker in deciding how to allocate
                  resources and in assessing performance.

                  SFAS 131 is effective for financial statements for periods
                  beginning after December 15, 1997 and requires comparative
                  information for earlier years to be restated. The Company
                  is currently evaluating the impact of the statement on its
                  financial reporting.

                                       19

<PAGE>

                  C)  Investment Derivatives and Hedging Activities Income

                  In June 1998, the Financial Accounting Standards Board issued
                  SFAS No. 133, "Accounting for Derivatives and Hedging
                  Activities Income" ("SFAS 133"), which requires the recording
                  of all derivative instruments as assets or liabilities
                  measured at fair value. Among other disclosures, SFAS 133
                  requires that all derivatives be recognized and measured at
                  fair value regardless of the purpose or intent of holding the
                  derivative.

                  SFAS 133 is effective for financial statements for periods
                  beginning after June 15, 1999. Because of the recent issuance
                  of this standard, management has been unable to fully evaluate
                  the impact, if any, the standard will have on future financial
                  statements.

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

                                       20

<PAGE>

                                    PART III


ITEM 9   -        DIRECTORS AND EXECUTIVE OFFICERS


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


<TABLE>
<CAPTION>
 NAME                                              AGE                 POSITION(S) HELD WITH COMPANY 
------                                           -------               -------------------------------
<S>                                            <C>                  <C>
Mark Hopkinson                                     51                  Chairman of the Board of Directors,
                                                                       Chief Executive Officer, Secretary

P.K. Bartow                                        50                  President, Director

Salvator Baldi                                     76                  Executive Vice President, Director

Andrew J. Beck                                     50                  Assistant Secretary

Christopher T. Linen                               51                  Director

Michael Michaelson                                 76                  Director

Paul M. Cervino                                    44                  Principal Financial Officer, Principal
                                                                       Operating Officer, Principal
                                                                       Accounting Officer, Treasurer
</TABLE>

                                       21

<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 51, 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 50, 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 76, 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.

                                       22

<PAGE>

ITEM 9   -        DIRECTORS AND EXECUTIVE OFFICERS (CONTINUED)



                  Andrew J. Beck, age 50, 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.


                  Christopher T. Linen, age 51, 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 Nirvana Soft 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 76, 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 board of
                  directors of Retail Entertainment Group, Inc., 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.

                  Paul M. Cervino, age 44, has been the Chief Operating Officer
                  of the Company since November 1998. From January 1995 until
                  October 1998, he served as Chief Financial Officer. Prior to
                  1995, he was employed by Sotheby's Holdings, Inc., an
                  international art auction house. From 1992 to 1995, he was a
                  member of the European Board of Directors and Chief Financial
                  Officer of Sotheby's Europe and Asia, operating in London.
                  From 1985 to 1992, he was a Director and Chief Financial and
                  Administrative Officer of Sotheby's North America. From 1976
                  to 1985, he worked for Sotheby's in various other financial
                  capacities.

                                       23

<PAGE>

ITEM 10  -        EXECUTIVE COMPENSATION

                  The following table sets forth the salary and bonus
                  compensation paid during the fiscal years ended September 30,
                  1998, 1997 and 1996 to the Chairman and Chief Executive
                  Officer of the Company. No other Executive Officer of the
                  Company received fiscal 1998 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"
--------------------------------------------------------------------------------------------------
Name and Principal      Fiscal Year       Salary            Other Annual   Long Term Compensation
Position                                                    Compensation    Awards-Options/ SAR's
--------------------------------------------------------------------------------------------------
<S>                      <C>          <C>                          <C>                       <C>
Mark Hopkinson,             1998         $110,005                     $0                        0
Chairman and Chief
Executive Officer
                            1997         $97,221                      $0                   27,400
                            1996         $98,098                      $0                   29,000
</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 1998.

<TABLE>
<CAPTION>
                             "Option/SAR Grants in Last Fiscal Year"
--------------------------------------------------------------------------------------------------
Name                           Number of       % of Total Options    Exercise or     Expiration
                               Securities          Granted to         Base Price        Date
                               Underlying     Employees in Fiscal       ($/Sh)
                            Options Granted           Year
--------------------------------------------------------------------------------------------------
<S>                            <C>                 <C>
Mark Hopkinson                     0                   0%
</TABLE>

                  Aggregated Options/SAR Exercises in Last Fiscal Year and
                  FY-End Option/SAR Values.

<TABLE>
<CAPTION>
Name                       Shares         Value                Number of                 Value of
                        Acquired on    Realized ($)           Securities              Unexercised
                        Exercise (#)                          Underlying             In-the-Money
                                                             Unexercised          Options/SARs at
                                                         Options/SARs at               FY-End ($)
                                                              FY-End (#)
                                                                                     Exercisable/
                                                            Exercisable/            Unexercisable
                                                           Unexercisable
--------------------------------------------------------------------------------------------------
<S>                      <C>            <C>               <C>                     <C>
Mark Hopkinson               -             $ -                 257,000/0               $43,706/$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.

                                       24

<PAGE>

                  Under the terms of its employee stock option plan (adopted in
                  October, 1993 and amended in December, 1995 and March, 1998),
                  the Board of Directors is empowered at its discretion to award
                  options to purchase an aggregate of 1,500,000 shares of the
                  Company's common stock to key employees. Prior to fiscal 1998,
                  the Company had granted options to purchase an aggregate of
                  1,192,000 shares to key employees and Directors, with exercise
                  prices ranging from $0.35 to $3.00 per share. During fiscal
                  1998, the Company granted options to purchase 50,000 shares of
                  the Company's common stock, at exercise prices ranging from
                  $1.88 to $2.25, to 13 individuals (one executive, and twelve
                  non-executive managers). Also in fiscal 1998, options to
                  purchase 135,000 shares expired unexercised with exercise
                  prices ranging from $2.35 to $ 3.00.


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, 1998:

<TABLE>
<CAPTION>
                                Name                                         Number of     Current
                                                                             Shares Owned  Percentage
                            -------------------------------------------------------------------------
                            <S>                                            <C>            <C>
                                Mark Hopkinson(1) (3) (7)
                                2365 Milburn Avenue                             1,012,571     19.76%
                                PO Box 502
                                Baldwin, NY  11510

                                P.K. Bartow (1) (4) (7)                           850,688     16.73%
                                2365 Milburn Ave.
                                PO Box 502
                                Baldwin, NY  11510

                                Salvator Baldi (1) (5) (7)                        756,473     14.62%
                                2365 Milburn Ave.
                                PO Box 502
                                Baldwin, NY  11510

                                Michael Michaelson (2)(6)(7)                      183,584     3.63%
                                2365 Milburn Ave.
                                PO Box 502
                                Baldwin, NY  11510

                                Christopher T. Linen (2)(10)
                                203 Poverty Hollow Road                           115,000     2.31%
                                Redding, CT 06896

                                Andrew J. Beck (8)(9)                              16,000     0.30%
                                71 Willow Street, Apt. 1
                                Brooklyn, NY  11201

                                Paul M. Cervino (8) (11)                          110,000     2.18%
                                2365 Milburn Ave.
                                PO Box 502
                                Baldwin, NY  11510

                                All Executive Officers and                      3,044,316     51.55%
                                Directors as a Group (7 persons)
</TABLE>

                                       25

<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 2,584
                           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 160,000 shares
                           owned by his wife.


                  (7)      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. 329,136 of
                           those warrants have been exercised, prior to their
                           expiration, and 10,864 of those warrants remained
                           exercisable at September 30, 1998.

                  (8)      Officer only.

                  (9)      Includes 10,000 shares represented by currently
                           exercisable options.

                  (10)     Includes 25,000 shares represented by currently
                           exercisable options.

                  (11)     Includes 94,400 shares represented by currently
                           exercisable options.

                                       26

<PAGE>

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
                  was exercisable at a price of $.30 per warrant into one share
                  of Common Stock until April 15, 1998. Mr. Michaelson exercised
                  these warrants in fiscal 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:
<TABLE>
<CAPTION>
                                                                                  Principal
                                                                                   Value of           Number of
                                                          Cash Paid               New Notes            Warrants
                                                          ---------               ---------           ---------
              <S>                                       <C>                    <C>                      <C>
                  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
</TABLE>



                  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.

                                       27

<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

                         A report on Form 8-K was filed with the Securities and
                         Exchange Commission in July, 1998. An amendment to that
                         report was filed on Form 8-K/A in September, 1998.

                                       28

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

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

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

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

                             
-------------------------    Director
Christopher T. Linen
                             
-------------------------    Principal Financial Officer, Principal Operating Officer,
Paul M. Cervino               Principal Accounting Officer, Treasurer
</TABLE>

                                       29

<PAGE>

                           CONSENT OF BDO SEIDMAN, LLP



Allied Devices Corporation
Baldwin, New York


We hereby consent to the incorporation by reference and inclusion in the 
Prospectuses constituting part of the Registration Statements filed on Form 
S-8 on April 6, 1994 and April 8, 1996 of our report dated January 8, 1999 
relating to the consolidated financial statements of Allied Devices 
Corporation and subsidiaries appearing in the Company's Annual Report on 
Form 10-KSB for the year ended September 30, 1998.



BDO SEIDMAN, LLP

January 13, 1999



<PAGE>


--------------------------------------------------------------------------------
--------------------------------------------------------------------------------



                        ALLIED DEVICES CORPORATION
                                  AND SUBSIDIARIES
                                    CONSOLIDATED FINANCIAL STATEMENTS
                                         YEARS ENDED SEPTEMBER 30, 1998 AND 1997







--------------------------------------------------------------------------------
--------------------------------------------------------------------------------





                                                                             F-1

<PAGE>


                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES

                                                                           INDEX

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<TABLE>

<S>                                                               <C>
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-24
</TABLE>



                                                                             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, 1998 and 1997 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 financial consolidated statements referred to above 
present fairly, in all material respects, the financial position of Allied 
Devices Corporation and subsidiaries at September 30, 1998 and 1997, 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


Melville, New York
January 8, 1999


                                                                             F-3

<PAGE>


                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES

                                                                  BALANCE SHEETS
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30,                                                                          1998                   1997
-------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                    <C>
ASSETS (NOTE 5)
cURRENT:
   Cash                                                                         $   275,238            $   162,094
   Accounts receivable, net of allowance for doubtful accounts of $42,706                                         
      and $47,876, respectively (Note 5)                                         2,526,068              2,326,179
   Inventories (Notes 3 and 5)                                                    8,903,220              6,402,688
   Prepaid expenses and other current assets                                        366,057                 67,606
   Deferred income taxes (Note 10)                                                   41,000                 41,000
-------------------------------------------------------------------------------------------------------------------
      TOTAL CURRENT ASSETS                                                       12,111,583              8,999,567
PROPERTY, PLANT AND EQUIPMENT, AT COST, NET OF ACCUMULATED                        
   DEPRECIATION AND AMORTIZATION (NOTES 4, 5 AND 7)                               7,607,246              1,837,225
                                                                                 ----------              ---------
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, NET OF ACCUMULATED        
   AMORTIZATION OF $412,569 AND $349,661 (NOTE 2)                                 2,880,523                 88,664
                                                                                 ----------              ---------
OTHER ASSETS                                                                        374,267                 51,527
-------------------------------------------------------------------------------------------------------------------
                                                                                $22,973,619            $10,976,983
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
   Accounts payable                                                             $ 1,243,306            $ 1,186,291
   Income taxes payable (Note 10)                                                         -                145,263
   Accrued expenses and other (Note 6)                                              286,900                241,781
   Current portion of long-term debt and capital lease obligations (Note 7)         986,625                118,481
-------------------------------------------------------------------------------------------------------------------
      TOTAL CURRENT LIABILITIES                                                   2,516,831              1,691,816
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (NOTES 5 AND 7)                     11,031,687              2,084,239
DEFERRED INCOME TAXES (NOTE 10)                                                     309,000                175,000
-------------------------------------------------------------------------------------------------------------------
      TOTAL LIABILITIES                                                          13,857,518              3,951,055
-------------------------------------------------------------------------------------------------------------------
COMMITMENTS (NOTES 2, 8 AND 9) 
STOCKHOLDERS' EQUITY (NOTES 2 AND 9)
   Common stock, $.001 par value, authorized 25,000,000 shares, issued                
      and outstanding 4,947,942 and 4,609,942                                         4,948                  4,610
   Additional paid-in capital                                                     3,624,721              2,565,559
   Retained earnings                                                              5,486,432              4,455,759
-------------------------------------------------------------------------------------------------------------------
      TOTAL STOCKHOLDERS' EQUITY                                                  9,116,101              7,025,928
-------------------------------------------------------------------------------------------------------------------
                                                                                $22,973,619            $10,976,983
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
</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,                                                       1998                     1997
------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                      <C>        
NET SALES                                                               $18,448,483              $16,215,931
COST OF SALES                                                            12,163,602               10,298,766
------------------------------------------------------------------------------------------------------------
      GROSS PROFIT                                                        6,284,881                5,917,165
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                              4,282,634                4,022,326
------------------------------------------------------------------------------------------------------------
      INCOME FROM OPERATIONS                                              2,002,247                1,894,839
INTEREST EXPENSE, NET                                                       387,574                  203,956
------------------------------------------------------------------------------------------------------------
      INCOME BEFORE PROVISION FOR TAXES ON INCOME                         1,614,673                1,690,883
TAXES ON INCOME (NOTE 10)                                                   584,000                  629,000
------------------------------------------------------------------------------------------------------------
NET INCOME                                                              $ 1,030,673              $ 1,061,883
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE - BASIC (NOTE 1)                                   $       .22              $       .24
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE - DILUTED ( NOTE 1)                                $       .22              $       .22
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
</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                     
                                       --------------------------------------     Additional                             Total
                                              Number of                             Paid-in         Retained         stockholders
                                               Shares                Amount         Capital         Earnings             equity
----------------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                 <C>            <C>           <C>                 <C>       
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 (NOTE 9)                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
   NET INCOME                                            -                -                  -     1,030,673           1,030,673
   STOCK ISSUED IN CONJUNCTION                                                                                                     
      WITH ACQUISITION (NOTE 2)                    250,000              250            891,250             -             891,500
   PROCEEDS FROM THE EXERCISE OF                                                                                                   
      OPTIONS AND WARRANTS AND                                                                                                     
      VALUE OF WARRANTS GRANTED                                                                                                    
      IN CONJUNCTION WITH BANK                                                                                                     
      FINANCING (NOTE 9)                            88,000               88            167,912             -             168,000
----------------------------------------------------------------------------------------------------------------------------------
BALANCE,  SEPTEMBER 30, 1998                     4,947,942           $4,948         $3,624,721    $5,486,432          $9,116,101
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                    See accompanying notes to consolidated financial statements.




                                                                             F-6

<PAGE>



                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES

                                                        STATEMENTS OF CASH FLOWS
                                                                       (NOTE 11)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,                                                               1998                     1997
---------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                      <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                                   $ 1,030,673              $ 1,061,883
---------------------------------------------------------------------------------------------------------------------
   Adjustments to reconcile net income to net cash provided by (used in)                                            
      operating activities:                                                                                         
      Depreciation and amortization                                                 701,362                  485,550
      Deferred income taxes                                                         134,000                  (48,188)
      Gain on sale and involuntary conversion of equipment                         (142,825)                 (12,428)
      Provision for doubtful accounts                                                     -                    1,899
   Changes in assets and liabilities, net of effects from acquisitions:
      (Increase) decrease in:
        Accounts receivable                                                         468,422                 (134,472)
        Inventories                                                                (906,249)                (520,132)
        Prepaid expenses and other current assets                                  (298,451)                 (25,987)
        Other assets                                                                (30,740)                  23,320
      Increase (decrease) in:
        Accounts payable and accrued expenses                                      (211,628)                (102,721)
        Income taxes payable                                                       (145,263)                  89,570
---------------------------------------------------------------------------------------------------------------------
      Total adjustments                                                            (431,372)                (243,589)
---------------------------------------------------------------------------------------------------------------------
      NET CASH PROVIDED BY OPERATING ACTIVITIES                                     599,301                  818,294
---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures                                                            (636,907)                (328,468)
   Business acquisitions, net of cash acquired                                   (8,280,674)                       -
   Proceeds from sale and involuntary conversion of equipment                       219,886                   19,750
---------------------------------------------------------------------------------------------------------------------
      NET CASH USED IN INVESTING ACTIVITIES                                      (8,697,695)                (308,718)
---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from term note                                                        6,250,000                        -
   Increase in revolving credit borrowings                                        1,325,000                        -
   Proceeds from financing of equipment                                           1,067,400                        -
   Principal payments on long-term debt and capital lease obligations              (291,408)                (559,082)
   Net proceeds from sale of common stock, options and warrants                      71,000                  156,681
   Deferred financing costs                                                        (210,454)                       -
---------------------------------------------------------------------------------------------------------------------
      NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                         8,211,538                 (402,401)
---------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH                                                                113,144                  107,175
CASH, BEGINNING OF PERIOD                                                           162,094                   54,919
---------------------------------------------------------------------------------------------------------------------
CASH, AT END OF PERIOD                                                          $   275,238              $   162,094
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
</TABLE>

                    See accompanying notes to consolidated financial statements.

                                                                             F-7


<PAGE>


                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 1.   SUMMARY OF                       (a)  BUSINESS
      ACCOUNTING POLICIES
                                            The Company is comprised of Allied
                                            Devices Corporation ("ADCO"), and
                                            its wholly-owned subsidiaries,
                                            Empire Tyler Company ("Empire") and
                                            APPI, Inc. ("APPI"), (collectively
                                            the "Company").
                                  
                                                                                
                                            The Company is engaged primarily in
                                            the manufacture and distribution of
                                            standard and custom precision 
                                            mechanical components and a line of 
                                            screw machine products. The Company 
                                            sells all of 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 subsidiaries. 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>
<CAPTION>

                       <S>                                         <C>     
                           Machinery and equipment                      10 years
                           Tools, molds and dies                         8 years
                           Furniture, fixtures and office                          
                              equipment                                5-7 years
                           Buildings and improvements                   30 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 subsidiaries
                                            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 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

                                            During 1997, the Financial
                                            Accounting Standards Board issued
                                            Statement of Financial Accounting
                                            Standards No. 128 ("SFAS 128")
                                            "Earnings Per Share". The
                                            statement, effective for financial
                                            statements issued after December
                                            15, 1997, provides for the
                                            calculation of "basic" and
                                            "diluted" net earnings per share.
                                            Basic earnings per share is
                                            computed by dividing income
                                            available to common shareholders by
                                            the weighted average shares
                                            outstanding for the period and
                                            reflect no dilution for the
                                            potential exercise of stock
                                            options and warrants. Diluted 
                                            earnings per share reflect, in 
                                            periods in which they have a 
                                            dilutive effect, the dilution 
                                            which would occur upon the
                                            exercise of stock options and 
                                            warrants. As required by this 
                                            statement, all periods presented 
                                            have been restated to comply with 
                                            the provisions of SFAS 128. A 
                                            reconciliation of the shares used
                                            in calculating basic and diluted 
                                            earnings per share follows:

<TABLE>
<CAPTION>

                 YEAR ENDED SEPTEMBER 30,                      1998         1997
                 ---------------------------------------------------------------
              <S>                                      <C>          <C>      
                 Weighted average shares outstanding -                          
                    basic                                 4,699,526    4,472,141
                 Dilutive effect of options and warrants     63,878      279,598
                 ---------------------------------------------------------------
                 Weighted average shares outstanding                            
                    diluted                               4,763,404    4,751,739
                 ---------------------------------------------------------------
                 ---------------------------------------------------------------
</TABLE>

Options and warrants totalling 988,500 and 331,500 at September 30, 1998 and 
1997, respectively, were antidilutive and accordingly, excluded from the 
diluted calculation.


                                                                             F-9

<PAGE>



                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------



                                        (g) INTANGIBLE ASSETS                  

                                            The excess of cost over the fair
                                            value of net assets acquired is
                                            being amortized over periods of 15
                                            years (for the 1998 acquisitions,
                                            see Note 2) and 20 years (for 
                                            prior acquisitions).
                                   
                                        (h) LONG-LIVED ASSETS
                                   
                                            The Company reviews the carrying
                                            values of its long-lived and
                                            identifiable intangible assets for
                                            possible impairment whenever events
                                            or changes in circumstances
                                            indicate that the carrying amount
                                            of the assets may not be
                                            recoverable. Any long-lived assets
                                            held for disposal are reported at
                                            the lower of their carrying amounts
                                            or fair value less cost to sell.
                                   
                                        (i) 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.
                                   
                                        (j) 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 at the dates of the 
                                            financial statements and the 
                                            reported amounts of revenues and
                                            expenses during the reported   
                                            periods. Actual results could
                                            differ from those estimates.
                                   
                                        (k) FAIR VALUE FINANCIAL INSTRUMENTS
                                   
                                            The carrying amounts of financial
                                            instruments, including cash and
                                            short-term debt, approximated fair
                                            value as of September 30, 1998 and
                                            1997. The carrying value of
                                            long-term debt and obligations
                                            under capital leases, including the
                                            current portion, approximates fair
                                            value as of September 30, 1998 and
                                            1997 based upon the borrowing rates
                                            currently available to the Company
                                            for bank loans with similar terms
                                            and average maturities.


                                                                            F-10

<PAGE>



                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------


                                        (l)  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.
                                   
                                        (m)  RECENT ACCOUNTING PRONOUNCEMENTS
                                   
                                             (i) COMPREHENSIVE INCOME
                                   
                                             In June, 1997, the Financial
                                             Accounting Standards Board issued
                                             SFAS No. 130, "Reporting
                                             Comprehensive Income" ("SFAS 130"),
                                             which addresses standards for
                                             reporting and display of
                                             comprehensive income, its
                                             components and accumulated
                                             balances. Comprehensive income is
                                             defined to include all changes in
                                             equity except those resulting from
                                             investments by owners and
                                             distributions to owners. Among
                                             other disclosures, SFAS 130
                                             requires that all items that are
                                             required to be recognized under
                                             current accounting standards as
                                             components of comprehensive income
                                             be reported in a financial
                                             statement that is displayed with
                                             the same prominence as other
                                             financial statements.
                                   
                                             SFAS 130 is effective for financial
                                             statements for periods beginning
                                             after December 15, 1997 and
                                             requires comparative information
                                             for earlier years to be restated.
                                             SFAS 130 is not expected to
                                             materially impact the Company's
                                             disclosures when adopted.
                                   

                                                                            F-11

<PAGE>

                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------


                                             (ii) REPORTING FOR SEGMENTS OF AN
                                             ENTERPRISE
                                   
                                              In June 1997, the Financial
                                             Accounting Standards Board issued
                                             SFAS No., 131, "Disclosures about
                                             Segments of an Enterprise and
                                             Related Information" ("SFAS 131"),
                                             which supersedes SFAS 14,
                                             "Financial Reporting for Segments
                                             of a Business Enterprise". SFAS 131
                                             establishes standards for the way
                                             public companies report information
                                             about operating segments in annual
                                             financial statements and requires
                                             reporting of selected information
                                             about operating segments in interim
                                             financial statements issued to the
                                             public. It also establishes
                                             standards for disclosures regarding
                                             products and services, geographic
                                             areas and major customers. SFAS 131
                                             defines operating segments as
                                             components of a company about which
                                             separate financial information is
                                             available that is evaluated
                                             regularly by the chief operating
                                             decision maker in deciding how to
                                             allocate resources and in assessing
                                             performance.
                                   
                                             SFAS 131 is effective for financial
                                             statements for periods beginning
                                             after December 15, 1997 and
                                             requires comparative information
                                             for earlier years to be restated.
                                             The Company is currently 
                                             evaluting the impact of the 
                                             statement on its financial
                                             reporting.
                                   
                                             (iii) INVESTMENT DERIVATIVES AND
                                             HEDGING ACTIVITIES
                                   
                                             In June 1998, the Financial
                                             Accounting Standards Board issued
                                             SFAS No. 133, "Accounting for
                                             Derivative Investments and Hedging
                                             Activities" ("SFAS 133"), 
                                             which requires the recording of all
                                             derivative instruments as assets or
                                             liabilities measured at fair value.
                                             Among other disclosures, SFAS 133
                                             requires that all derivatives be
                                             recognized and measured at fair
                                             value regardless of the purpose or
                                             intent of holding the derivative.
                                   
                                             SFAS 133 is effective for financial
                                             statements for periods beginning
                                             after June 15, 1999. Because of the
                                             recent issuance of this standard,
                                             management has been unable to
                                             evaluate fully, the impact if any,
                                             the standard will have on future
                                             financial statements.


                                                                            F-12

<PAGE>



                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                                        (n)  RECLASSIFICATION

                                             Certain 1997 balances were 
                                             reclassified to conform with the 
                                             1998 presentation.
                                                                         
2.   ACQUISITIONS                       (a)  On July 8, 1998 (effective as of 
                                             July 1, 1998), the Company 
                                             acquired the assets and business 
                                             of Atlantic Precision Products, 
                                             Inc., ("APPI"), a manufacturer 
                                             of high precision, machined 
                                             components for original 
                                             equipment manufacturers with 
                                             advanced engineering 
                                             requirements. The price of net 
                                             assets (including assumption of 
                                             specified liabilities) was made 
                                             up of cash, stock, and 
                                             performance consideration. The 
                                             tangible consideration was 
                                             $7,237,500 in cash and 250,000 
                                             shares of the Company's common 
                                             stock. The common stock portion 
                                             of the tangible consideration 
                                             was recorded at the value 
                                             guaranteed by the Company ($4 
                                             per share), discounted to its 
                                             present value. The Company also 
                                             capitalized approximately 
                                             $190,000 of costs related to the 
                                             acquisition. The tangible 
                                             portion of the purchase price 
                                             exceeded the fair value of the 
                                             net assets acquired (principally 
                                             machinery and equipment and 
                                             inventory) by $2,846,026. This 
                                             excess has been recorded as 
                                             goodwill which is being 
                                             amortized over a fifteen year 
                                             period.

                                             The Company financed this 
                                             acquisition with proceeds from 
                                             a new credit agreement with its 
                                             bank (see Note 5). 

                                             The performance consideration is a 
                                             stipulated percentage of the future
                                             earnings (as defined) for APPI for 
                                             three years. The Company's policy
                                             with respect to any such 
                                             contingent consideration is to 
                                             record a liability for such 
                                             amounts as the defined earnings 
                                             are achieved. As of September 30, 
                                             1998, no contingent consideration
                                             has been recorded. All such 
                                             contigent consideration is 
                                             subject to a subordination 
                                             agreement between the Seller and 
                                             the Lending Institution (note 5).

                                             The acquisition of APPI has been
                                             accounted for by the purchase
                                             method of accounting and,
                                             accordingly, the operating results
                                             of APPI have been included in the
                                             Company's results of operations
                                             from the effective date.

                                                                            F-13

<PAGE>


                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------


                                             The summarized unaudited pro forma 
                                             results set forth below assumes the
                                             acquisition occurred as of the
                                             beginning of each of these periods:



<TABLE>
<CAPTION>

                 YEAR ENDED SEPTEMBER 30,                  1998             1997   
               --------------------------------------------------------------------
               <S>                              <C>             <C>           
                 Net sales                        $  24,660,580   $   25,195,387
                 
                 Net income                           1,290,135        2,015,834
                 
                 Net income per share - basic     $         .26   $          .43
                 Net income per share - diluted   $         .26   $          .40
               --------------------------------------------------------------------
               --------------------------------------------------------------------
</TABLE>




                                        (b)  In January 1998, the Company       
                                             acquired Kay Pneumatic Valves Inc.
                                             ("Kay") for $850,000 in cash. Kay's
                                             assets were comprised principally
                                             of inventories and fixed assets.
                                             The operations of Kay prior to
                                             acquisition were not material and,
                                             accordingly, pro forma operational
                                             results have not been presented
                                             herein.
                                              


3.   INVENTORIES                   Inventories are summarized as follows:

<TABLE>
<CAPTION>

             SEPTEMBER 30,                            1998               1997
             ----------------------------------------------------------------
         <S>                                <C>                 <C>        
             Raw materials                    $  1,056,504        $   310,260
             
             Work-in-process                       964,563            514,437
             
             Finished goods                      8,392,905          6,888,412
             ----------------------------------------------------------------
                                                10,413,972          7,713,109
             
             Less: adjustment to LIFO            1,510,752          1,310,421
             ----------------------------------------------------------------
                                              $  8,903,220         $6,402,688
             ----------------------------------------------------------------
             ----------------------------------------------------------------
</TABLE>

                                                                            F-14
<PAGE>


                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

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


4.   PROPERTY, PLANT AND                    Property, plant and equipment
     EQUIPMENT                              consists of the following:  
                                                   
                                                   
                                                   
<TABLE>
<CAPTION>
             SEPTEMBER 30,                                     1998         1997
             -------------------------------------------------------------------
             <S>                                     <C>           <C>       
             Machinery and equipment                    $10,231,675   $4,656,948
             Tools, molds and dies                        1,913,027    1,553,884
             Furniture, fixtures and office equipment       607,312      453,205
             Leasehold improvements                         322,615      169,749
             Building and improvements                       94,520       94,520
             Land                                             5,000        5,000
             -------------------------------------------------------------------
                                                         13,174,149   $6,933,306
             Less: accumulated depreciation and                                 
                     amortization                         5,566,903    5,096,081
             -------------------------------------------------------------------
                                                        $ 7,607,246   $1,837,225
             -------------------------------------------------------------------
</TABLE>

                                             Included in machinery and equipment
                                             and office equipment at September
                                             30, 1998 and 1997 is approximately
                                             $2,922,000 and $560,000 of
                                             equipment under capital lease
                                             agreements (see Note 7) with
                                             related accumulated amortization
                                             amounts of approximately $326,000
                                             and $165,000, respectively.
                                             Depreciation expense for the years
                                             ended September 30, 1998 and 1997
                                             was approximately $625,000 and
                                             $447,000, respectively.

5.   CREDIT FACILITIES                       In July, 1998 the Company entered 
                                             into a new credit agreement with  
                                             its existing lender and repaid all
                                             amounts due with respect to its   
                                             previous credit facility. The new 
                                             credit agreement provided for a   
                                             revolving credit line and a term  
                                             note.                             

                                             Under the terms of the new three 
                                             year revolving credit loan, the 
                                             Company may borrow up to the lesser
                                             of (a) $10,000,000 or (b) 85% of 
                                             eligible receivables plus 60% of 
                                             eligible inventory (to an inventory
                                             maximum of $5,000,000). Interest 
                                             is computed at the higher of the 
                                             bank's prime lending rate (8.25% 
                                             at  September 30, 1998) or the 
                                             Federal Funds Rate plus 1/2%. The 
                                             Company is required to pay a 
                                             commitment fee on the average 
                                             unused portion of the revolving 
                                             credit commitment of 1/4% per 
                                             annum. Borrowings under the 
                                             revolving credit loan were 
                                             $3,250,000 at September 30, 1998. 
                                             The revolving credit loan matures 
                                             in July 2001.
                                   
                                             Under the terms of the five and 
                                             one half years (66 months) term 
                                             note, the Company borrowed

                                                                            F-15

<PAGE>




                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                                             $6,250,000, and interest thereon 
                                             is computed at the higher of the
                                             bank's prime rate plus 1/4% or the
                                             Federal Funds Rate plus 1/2%. The
                                             term note is payable in twenty
                                             quarterly installments of principal
                                             beginning in March 1999. The 
                                             quarterly principal installments 
                                             increase ratably from $150,000 per 
                                             quarter during the first year to 
                                             $400,000 per quarter for the last 
                                             year plus a final installment of 
                                             $950,000 on December 31, 2003. The
                                             proceeds of the term note and a 
                                             portion of the funds drawn against
                                             the revolving credit loan were used
                                             to finance the APPI acquisition 
                                             (see Note 2). In conjunction with 
                                             the issuance of the term note the 
                                             Company issued the lender warrants 
                                             to purchase 125,000 shares of its 
                                             common stock (see Note 9). The 
                                             value of the warrants totaled 
                                             $97,000 and was accounted for as 
                                             deferred financing costs (include 
                                             in other assets) and is being 
                                             amortized over the term of the 
                                             credit agreement.
                                   
                                             Borrowings under the credit
                                             facility are secured by a first
                                             priority security interest in the
                                             Company's assets. In addition, the
                                             Company must meet certain financial
                                             covenants.
                                   
                                             Under its previous three year
                                             credit facility, the Company had
                                             available a revolving credit
                                             agreement permitting it to borrow
                                             the lesser of $4,000,000 or
                                             stipulated percentages of eligible
                                             receivables and inventories.
                                             Borrowings were collateralized by a
                                             first priority security interest in
                                             the Company's assets. Borrowings
                                             under this credit agreement were
                                             $1,925,000 at September 30, 1997.



6.   ACCRUED EXPENSES                       Accrued expenses consist of the 
     AND OTHER                              following:                      
                                            
          
          
<TABLE>
<CAPTION>

                            SEPTEMBER 30,                1998               1997
                            ----------------------------------------------------
                        <S>                    <C>                <C>      
                            Commissions             $  69,603          $  93,285
                            
                            Payroll and related        63,531             83,548
                            
                            Other                     153,766             64,948
                            ----------------------------------------------------
                                                     $286,900           $241,781
                            ----------------------------------------------------
                            ----------------------------------------------------
</TABLE>

7.   LONG-TERM DEBT AND                     Long term debt consists of the
     CAPITAL LEASE                          following:
     OBLIGATIONS



                                                                            F-16

<PAGE>


                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------



<TABLE>
<CAPTION>

       SEPTEMBER 30,                                          1998          1997
       -------------------------------------------------------------------------
    <S>                                               <C>          <C>        
       Revolving credit loan (Note 5)                   $ 3,250,000   $1,925,000
       
       Term note (Note 5)                                 6,250,000            -
       
       Capital lease obligations with varying monthly                           
          payments and interest rates ranging from                              
          7.8% to 10.3% per annum maturing 1999                                 
          through 2003; secured by an interest in                               
          specific machinery and equipment (Note 4)       2,518,312      277,720
       -------------------------------------------------------------------------
             Subtotal                                   12,018,312     2,202,720
       
       Less: current maturities                            986,625       118,481
       -------------------------------------------------------------------------
       Long-term debt and capital lease obligations    $11,031,687    $2,084,239
       -------------------------------------------------------------------------
       -------------------------------------------------------------------------
</TABLE>



                                              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, 1998:
<TABLE>
<CAPTION>

           <S>                                                    <C>        
                 1999                                                $   722,016
                 2000                                                    681,945
                 2001                                                    620,476
                 2002                                                    617,028
                 2003                                                    364,654
           ---------------------------------------------------------------------
           Total minimum lease payments                                3,006,119
           Less:  amount representing interest                           487,807
           ---------------------------------------------------------------------
           Present value of net minimum lease                                   
              payments                                                $2,518,312
           ---------------------------------------------------------------------
           ---------------------------------------------------------------------
</TABLE>


                                                                            F-17

<PAGE>

                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------






                                             The following is a schedule of long
                                             term debt maturities (including
                                             capital lease obligations) as of
                                             September 30, 1998:

                  1999                                             $     986,625
                  2000                                                 1,441,665
                  2001                                                 4,773,311
                  2002                                                 1,750,891
                  2003                                                 1,953,320
                  2004                                                 1,112,500
            --------------------------------------------------------------------
                                                                     $12,018,312
            --------------------------------------------------------------------
            --------------------------------------------------------------------



8.   LEASES                             The Company rents facilities in Baldwin,
                                        Ronkonkoma and Freeport, New York and 
                                        in Biddeford and Windham, Maine under 
                                        various operating lease agreements 
                                        expiring through June 2003. In addition,
                                        the Company also leases certain 
                                        machinery and equipment and office 
                                        equipment under various capital lease 
                                        agreements expiring through 2004 (see 
                                        Note 7). Rent expense amounted to 
                                        approximately $325,000 and $277,000 
                                        for the fiscal years ended 
                                        September 30, 1998 and 1997, 
                                        respectively.



9.   STOCKHOLDERS' EQUITY               (a)  WARRANTS

                                             At September 30, 1998 and 1997, the
                                             Company had 195,864 and 120,864
                                             stock warrants outstanding,
                                             respectively. The warrants to
                                             purchase the Company's common stock
                                             were held by the following parties:

<TABLE>
<CAPTION>

                   <S>                                                 <C>   
                       Officers/stockholders/consultants (1)              10,864
                       
                       Public (1)                                         60,000
                       
                       Bank (2)                                          125,000
                       ---------------------------------------------------------
                                                                         195,864
                       ---------------------------------------------------------
                       ---------------------------------------------------------
</TABLE>

                                                                            F-18

<PAGE>


                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------


                                             (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 0.8 years.
                                   
                                                  During fiscal 1996 the Company
                                                  issued warrants to purchase
                                                  60,000 shares of common stock,
                                                  respectively, at prices
                                                  ranging from $3.00 to $4.25
                                                  per share to financial
                                                  consultants to the Company.
                                                  The weighted average exercise
                                                  price, of these warrants is
                                                  $3.75 per share, with a term
                                                  that expired in October, 1998.
                                                                      
                                             (2)  As discussed in Note 5, the
                                                  Company issued warrants to its
                                                  secured lender to purchase
                                                  125,000 shares of common stock
                                                  at an exercise price of $2.00
                                                  per share. These warrants
                                                  expire on July 7, 2003.
                                   
                                        (b)  INCENTIVE STOCK OPTION PLAN        
                                                                      
                                             In October 1993, the Board of
                                             Directors adopted an incentive
                                             stock option plan. The Plan, as
                                             amended in December 1995 and March
                                             1998 allows the Board of Directors
                                             to issue options to purchase an
                                             aggregate of 1,500,000 shares of
                                             the Company's common stock to key
                                             employees.
                                                                      
                                             As of September 30, 1998, the
                                             Company had issued options to
                                             purchase an aggregate of 1,053,400
                                             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 1997
                                             and 1998; no dividend yield,
                                             expected volatility of 46.10%, risk
                                             free interest rates of 5.50% to
                                             5.59%, 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 1997 and 1998 by
                                             approximately $54,000 and $18,000,
                                             respectively, and net income per
                                             share would have been $.21 for each
                                             year.
                                                                      
                                             The following table summarizes
                                             information about stock options
                                   
                                                                            F-19

<PAGE>


                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                                               
                                             outstanding at September 30, 1998:


<TABLE>
<CAPTION>

                               Options Outstanding              Options Exercisable      
                           --------------------------------------------------------------
                               Number        Weighted                                    
                            Outstanding       Average    Weighted                Weighted
                                             Remaining   Average                  Average
                                            Contractual  Exercise     Number     Exercise
                                           Life (years)   Price     Exercisable    Price
         --------------------------------------------------------------------------------
         Exercise Prices:
         
      <S>                    <C>              <C>      <C>         <C>           <C> 
             $1.00 - 2.35       775,000          4.4      2.35        775,000       2.35
         
               .35 - 3.00        24,600          6.2      2.50         24,600       2.50
         
              2.00 - 3.00        99,400          7.5      2.65         99,400       2.65
         
               .35 - 2.44       104,400          8.5      1.91         79,900       1.73
         
              1.88 - 2.25        50,000          9.3      1.94         22,000       1.91
         --------------------------------------------------------------------------------
                              1,053,400          5.4      2.32      1,000,900       2.33
         --------------------------------------------------------------------------------
         --------------------------------------------------------------------------------
</TABLE>


                                                                            F-20

<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                             
                               --------------------------------------------------------------------------------
                                                                                Option price   Weighted average
                                   Shares      Exercise Price      Shares        per share      exercise price
       --------------------------------------------------------------------------------------------------------
     <S>                       <C>             <C>                 <C>          <C>                     <C> 
       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                 (202,500)         .35 - .70       (5,600)           2.25               2.25
       
          Warrants converted                                                                                   
             to options              (12,400)         .35 - .70       12,400       .35 - .70                .69
       
          Expired                   (939,650)        2.50 - 3.00           -               -                  -
       --------------------------------------------------------------------------------------------------------
       Outstanding September                                                                                   
          30, 1997                   120,864        $2.00 - $4.25  1,176,400                               2.32
       
          Granted                    125,000               2.00       50,000     1.88 - 2.25               1.94
       
          Cancelled                        -                  -     (135,000)    2.35 - 3.00               2.43
       
          Exercised                  (50,000)               .30      (38,000)    1.00 - 2.00               1.47
       
          Warrants converted                                                                                   
             to options                    -                  -            -               -                  -
       
          Expired                          -                  -            -               -                  -
       --------------------------------------------------------------------------------------------------------
       Outstanding September                                                                                   
          30, 1998                   195,864                       1,053,400                               2.32
       --------------------------------------------------------------------------------------------------------
       --------------------------------------------------------------------------------------------------------
</TABLE>

                                             At September 30, 1998, there were  
                                             1,000,900 options exercisable at a
                                             weighted average exercise price of
                                             $2.33. The weighted average fair
                                             value of options granted during
                                             fiscal 1997 and 1998 were $1.40 and
                                             $1.94, respectively.



                                                                            F-21

<PAGE>



                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------


10.  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,             1998               1997
                    ------------------------------------------------------------
                    Current:
                 <S>                           <C>                <C>     
                       Federal                       $425,000           $570,192
                       State                           25,000            106,996
                    ------------------------------------------------------------
                    Total current                     450,000            677,188
                    ------------------------------------------------------------
                    Deferred:
                       Federal                        113,000            (40,574)
                       State                           21,000             (7,614)
                    ------------------------------------------------------------
                                                      134,000            (48,188)
                    ------------------------------------------------------------
                    Total taxes on income            $584,000           $629,000
                    ------------------------------------------------------------
                    ------------------------------------------------------------
</TABLE>



                                               Deferred tax (assets) liabilities
                                               consist of the following:


<TABLE>
<CAPTION>

        YEAR ENDED SEPTEMBER 30,                         1998              1997 
        ------------------------------------------------------------------------
       <S>                                       <C>               <C>       
        Tax depreciation in excess of book          $ 457,000         $ 385,000
        
        Investment tax credit carryforward           (198,000)         (222,000)
        
        Insurance recovery - IRC section 1136                                   
           adjustments)                                91,000                 -
        
        Provision on note receivable (included in                               
           other assets)                              (35,000)          (38,000)
        
        Inventory capitalization                      (30,000)          (23,000)
        
        Other temporary differences - net             (32,000)           17,000
        ------------------------------------------------------------------------
        Deferred tax liabilities                      253,000           119,000
        
        Valuation allowance                            15,000            15,000
        ------------------------------------------------------------------------
        Net deferred tax liabilities                $ 268,000        $  134,000
        ------------------------------------------------------------------------
        ------------------------------------------------------------------------
</TABLE>


                                                                            F-22

<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,                                       1998          1997
     ---------------------------------------------------------------------------------
<S>                                                             <C>           <C>     
     Provision for Federal income taxes at                                            
        the statutory rate                                      $549,000      $574,900
     
     Increase (decrease):
     
        State taxes, net of Federal tax benefit                   30,000        65,600
     
        Other                                                      5,000       (11,500)
     ---------------------------------------------------------------------------------
     Provision for taxes on income                              $584,000      $629,000
     ---------------------------------------------------------------------------------
     ---------------------------------------------------------------------------------

</TABLE>


11.   CASH FLOWS

<TABLE>
<CAPTION>

     YEAR ENDED SEPTEMBER 30,                                       1998          1997
     ---------------------------------------------------------------------------------
     <S>                                                        <C>           <C>


     Supplemental disclosure of cash flow                                             
        information                                                                   
     
        Cash paid during the year:
     
           Interest                                             $387,574      $221,265
     ---------------------------------------------------------------------------------
     ---------------------------------------------------------------------------------
     
           Income taxes                                         $561,575      $637,521
     ---------------------------------------------------------------------------------
     ---------------------------------------------------------------------------------
     
     Supplemental schedule of non-cash investing and financing:
     
        Equipment acquired under capital                      
           lease                                                $232,000  $         -
     
        Value of warrants issued in                            $  97,000  $         -
           connection with financing                                                 
</TABLE>

                                                                            F-23

<PAGE>


                                                      ALLIED DEVICES CORPORATION
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------



                                              In connection with the business   
                                              acquisitions (Note 2), the Company
                                              used cash as follows:

<TABLE>
<CAPTION>

                  SEPTEMBER 30                                              1998
                  --------------------------------------------------------------
                <S>                                                 <C>       
                  Fair value of assets acquired, excluding cash*      $9,827,036
                  
                  Less liabilities assumed**                           1,546,362
                  --------------------------------------------------------------

                     Net cash paid (including acquisition costs)      $8,280,674
                  --------------------------------------------------------------
                  --------------------------------------------------------------
</TABLE>

                  *excludes non-cash portion of     
                  purchase price relating to stock
                  issued totalling $891,500.

                  **the Company also refinanced
                  approximately $1,233,000 of the
                  assumed capitalized leases in
                  conjunction with this acquisition.



                                                                            F-24