ALLIED DEVICES CORP, 10KSB, 1997-12-29

ALLIED DEVICES CORP
10KSB, 1997-12-29
BOLTS, NUTS, SCREWS, RIVETS & WASHERS

Previous: DEAN WITTER MULTI STATE MUNICIPAL SERIES TRUST, 24F-2NT, 1997-12-29

Next: GOVETT FUNDS INC, 497, 1997-12-29

<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
FORM 10-KSB

ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended Commission file number
September 30, 1997 0-24012
--------------------------- -------------------------

ALLIED DEVICES CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)

Nevada 13-3087510
----------------------- -----------------------
(State of incorporation) (IRS Employer
Identification Number)

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

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

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

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

Number of Shares Outstanding
Title of Class as of December 5, 1997
- -------------- ----------------------------
Common Stock, $.001 par value 4,609,942

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

Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB X
---

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

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

<PAGE>

PART I

ITEM 1--BUSINESS

Allied Devices Corporation ("Allied Devices" or the "Company") is a
broad-line manufacturer and distributor of high precision mechanical
components used in the manufacture and maintenance of industrial and
commercial instruments and equipment. The Company has the capability of
producing close tolerance parts and intricate assemblies at competitive
costs and with short lead times. The Company's business strategy is to
provide prompt service and technical support in certain industrial and
high technology markets where customers generally expect extended lead
times, missed deadlines and otherwise poor customer service and support.

The Company's major product groups include precision servo and
drive-train assemblies, instrument related fasteners, gears and gear
products, and other components and sub-assemblies built to customer
specifications. Allied Devices' customers are primarily original
equipment manufacturers ("OEMs").

Allied Devices' principal marketing tool is its highly effective
technical manual of standardized instrument components available through
the Company. This catalog is in the hands of buyers and engineers
throughout the United States and generates sales nationwide. Management
estimates that the Company has distributed more than 85,000 copies of its
catalog over the last decade, of which approximately 35,000 copies were
distributed during the last three fiscal years. The current edition,
published in 1994, is over 650 pages in length. Management intends to
update and re-issue the catalog during fiscal 1998.

The breadth and standardized nature of the product line result in
multiple applications in many industries, stimulating demand at the level
of both OEMs and distributors. The Company sells to a wide range of
industries, such as medical and operating room equipment; laser
equipment; robotics; computer peripherals; aerospace instrumentation;
factory automation equipment and controls; machine tool builders;
research and development facilities; semiconductor equipment makers;
nuclear control devices; scientific instrumentation; and optics.

A typical customer is an OEM selling high ticket capital goods
equipment. The components supplied by Allied Devices going into such
equipment generally constitute a small percentage of the OEM's direct
cost of manufacturing, typically $200 to $500 per unit. Failure to
deliver reliable quality in a timely manner can have an impact far in
excess of the modest direct cost of the parts. As a result, the majority
of Allied Devices' customers deem it imperative that parts supplied be on
time and of reliably high quality. While these performance criteria are
not contractual requirements, they are critical determinants in the
placement of repeat business.

<PAGE>

ITEM 1--BUSINESS (continued)

Allied Devices has structured itself as far as possible to provide
the service of "one stop shopping" for mechanical instrument components.
Furthermore, the Company's organization and inventory policies are
designed to provide fast and timely response to customer orders, and to
support "just in time" methods of purchasing being used by more and more
companies. Because the Company's lead times in response to customer
orders are generally short (four weeks or less), backlog is not a
meaningful indicator of business trends; therefore, no effort is made to
monitor backlog accurately. Based on new orders, the Company is
projecting growth in revenues of approximately 12.5% and availability of
related incremental cash flow in planning for fiscal 1998.

Allied Devices' sales volume is not dependent on just a few large
customers. The Company draws from a customer list of over 6,000, thereby
minimizing its vulnerability to the fortunes of any one industry or group
of customers. In each of the past three years, the Company's twenty
largest customers have represented as many as ten different industries
and account collectively for only about 30% of shipments. Geographic
concentration is relatively low and fluctuates with conditions in each of
the regions served. Allied Devices uses independent multi-line
manufacturers' representatives to gain national coverage, thereby
fielding some 70 salespeople in virtually all significant territories in
the United States.

As the market for the Company's products has evolved, the Company has
met its customers' needs by dividing operations into two areas: Catalog
Sales and Distribution ("Catalog Operations") and Manufacturing and
Subcontracting ("Manufacturing Services"). These two areas of the Company
have been defined solely for internal operating effectiveness. Both areas
serve the same markets and customer base and do not represent separate
business segments.

CATALOG OPERATIONS

The majority of product sold through Catalog Operations is either
manufactured by Catalog Operations or procured from the Manufacturing
Services operations of the Company. The product mix includes standard
products (as listed in the Company's catalog) and customized or
non-standard products manufactured to the specific requirements of a
given customer. What is not manufactured internally is purchased from a
broad variety of reliable sources under distributorship agreements or
similar arrangements. This operation includes telephone sales, inventory
and shipping, gear-making, assembly and light manufacturing operations.
This part of the Company also sells certain of its standard catalog
products to its major competitors on a wholesale basis. In the aggregate,
revenues for the Catalog Operations were approximately as follows for the
last five years ended September 30th.

<PAGE>

ITEM 1--BUSINESS (continued)

1997............. $13,604,000
1996............. $15,145,000
1995............. $13,363,000
1994............. $10,509,000
1993............. $9,175,000

The decrease in revenues for 1997 was the result of a sharp downturn
in one sector of the U.S. economy (semiconductor manufacturing
equipment). While such severe downturns are abnormal for the industries
served by Allied, they are not unprecedented. In this instance, it was
caused by excess inventory accumulation and overcapacity, and the
duration of the slowdown appears to have been one year.

CATALOG INDUSTRY COMPETITION

The Company competes directly with W.M. Berg Co., a subsidiary of BTR
Ltd.; PIC Design, a subsidiary of Wells Benrus; Nordex Inc.; and Sterling
Instrument, a division of Designatronics. Each of these companies
publishes a catalog similar to that issued by the Company, offering a
wide range of mechanical instrument components adhering to a single set
of standards. In addition, there are many other companies offering a
limited selection of materials or "single product" catalogs, most often
not adhering to any widely accepted standards. This marketplace is highly
competitive, yet management believes, based upon feedback from vendors
and customers, that the Company's operating principles of immediate
product availability, excellent quality control, competitive pricing and
responsive customer service and technical support have permitted the
Company to maintain and improve its market position.

MANUFACTURING SERVICE OPERATIONS

The Company's strategy has called for manufacturing the majority of
the products that it sells. Management believes that such vertical
integration ensures quality control, timely deliveries, control of
priorities and cost efficiencies. As a result, the Company has several
manufacturing divisions, each with specialized capabilities. In order to
promote maximum utilization of productive equipment, each manufacturing
operation markets its surplus machine time independently. The following
operations comprise Manufacturing Services:

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

<PAGE>

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

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

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

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

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

------------------------
* These revenue figures for Catalog Operations represent interdivisional
sales that are eliminated in consolidation.

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

<PAGE>

MANUFACTURING SERVICES COMPETITION

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

QUALITY ASSURANCE

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

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

EXPANSION PLANS

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

<PAGE>

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

MARKETING PROGRAMS

The Company has developed a program to stimulate substantial growth
within its existing line of business. Feedback from customers and
informal market research indicate that Allied Devices does not yet have a
widespread customer awareness in the markets it serves. Thus the
principal thrust of the Company's plan is to make its target markets more
aware of the Company's range of capabilities and the usefulness of
standardized components in general. The program is divided into modules
and is being implemented as management deems appropriate.

The plan includes expansion of the Company's advertising campaign,
begun on a restricted budget in 1993. As part of the program, management
has undertaken to improve, on a continuous basis, the standards of
service and support provided to the Company's customers. Phasing in of
expanded engineering support, assembly capabilities, new products, and
electronic accessibility for customers are also important elements of the
Company's program. Management believes that implementation of its plan
will result in accelerated growth of sales and profits.

ACQUISITION PROGRAM

As part of its plans for growth, management intends to carry out an
acquisition program. By its own assessment, management views the market
in which it competes as large (over $1 billion), highly fragmented, and
poised for consolidation. Strategically, management intends to focus on
acquiring businesses with the following characteristics: (a) significant
potential for sales growth; (b) high prospects for synergy and/or
consolidation in marketing, manufacturing and administrative support
functions; (c) relatively high gross margins (30% or more); (d) effective
operating management in place; (e) a reputation for quality in its
products; and (f) represents lateral or vertical integration. Management
has begun the process of assessing prospective candidates.

OTHER FACTORS

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

<PAGE>

foreseeable future. The technological maturity of the Company's product
line has resulted in general stability of demand in its markets and of
availability of raw materials at stable prices. No material portion of
the Company's business is subject to renegotiation of profits or
termination of contracts at the election of the United States government
or its prime contractors. Procurement of patents is not material to the
Company's present marketing program.

REGULATION

The Company is not subject to any particular form of regulatory
control. The Company does not expect that continued compliance with
existing federal, state or local environmental regulations will have a
material effect on its capital expenditures, earnings or competitive
position.

EMPLOYEES

The Company currently employs 50 salaried and 113 hourly personnel.
Wage rates and benefits are competitive in the labor markets from which
the Company draws. Thirty-two of its hourly employees are represented by
two local unions (22 by the National Organization of Industrial Trade
Unions ("NOITU") and 10 by Local 999 of the Teamsters). The contract with
Local 999 was renewed for three years in August 1997, and the contract
with NOITU was renewed in November 1997, also for three years. The
Company has had no strikes, walkouts or other forms of business
disruption attributable to poor labor relations. Relations with employees
and the unions are open and constructive.

CAPITAL EQUIPMENT

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

<PAGE>

ITEM 2--PROPERTIES

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

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

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

Freeport, NY 5,200 February 1998 Catalog Manufacturing
Operations

Ronkonkoma, NY 7,200 June 1998 CNC Machine Shop

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

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

ITEM 3--LEGAL PROCEEDINGS

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

ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

<PAGE>
PART II

ITEM 5--MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

There was only sporadic trading in the Company's common stock until it
was listed on National Association of Securities Dealers Automated SmallCap
Market ("NASDAQ") as of November 17, 1994. Trading in the Company's stock has
been active and regular since then. A total of 1,954 trades representing
approximately 4,270,000 shares (as reported by NASDAQ in their monthly
statistical summaries) were completed during fiscal 1997. As of September 30,
1997, the Company had 451 holders of record of its common stock. The Company
has 12 listed market-makers, and the trading ranges by quarter for the year
were as follows:

<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
-------------------- --------------------
<S> <C> <C> <C> <C>
HIGH LOW HIGH LOW
--------- --------- --------- ---------
First Quarter......................................................... $ 3.0625 $ 1.9375 $ 4.00 $ 1.75
Second Quarter........................................................ $ 3.375 $ 2.125 $ 4.25 $ 2.812
Third Quarter......................................................... $ 3.0625 $ 2.375 $ 4.50 $ 2.75
Fourth Quarter........................................................ $ 2.875 $ 2.0625 $ 4.00 $ 2.75
</TABLE>

ITEM 6--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following selected consolidated financial data have been derived from
the audited financial statements of Allied Devices Corporation. The selected
financial data should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this Form 10-KSB.

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------- ------------- -------------
STATEMENT OF
OPERATIONS
DATA:
Net sales........................................................... $ 16,215,931 $ 17,793,072 $ 15,521,373

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

<PAGE>

BALANCE SHEET
DATA:
Total assets........................................................ $ 10,976,983 $ 10,376,703 $ 9,403,535
Working capital..................................................... $ 7,307,751 $ 6,505,676 $ 3,428,117
Long-term debt...................................................... $ 2,084,239 $ 2,642,401 $ 497,541
Stockholders' equity................................................ $ 7,025,928 $ 5,807,364 $ 4,749,963
</TABLE>

RESULTS OF OPERATIONS: YEAR ENDED SEPTEMBER 30, 1997, COMPARED WITH YEAR ENDED
SEPTEMBER 30, 1996.

All statements contained herein that are not historical facts, including,
but not limited to, statements regarding the Company's current business
strategy, the Company's projected sources and uses of cash, and the Company's
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially.
Among the factors that could cause actual results to differ materially are
the following: the availability of sufficient capital to finance the
Company's business plans on terms satisfactory to the Company; competitive
factors; changes in labor, equipment and capital costs; changes in
regulations affecting the Company's business; future acquisitions or
strategic partnerships; general business and economic conditions; and factors
described from time to time in the reports filed by the Company with the
Securities and Exchange Commission. The Company cautions readers not to place
undue reliance on any such forward-looking statements, which statements are
made pursuant to the Private Litigation Reform Act of 1995 and, as a result,
are pertinent only as of the date made.

Net sales for fiscal 1997 were $16,216,000 as compared to $17,793,000 in
fiscal 1996. This decrease of 8.9% was principally the result of a sharp
downturn in the semiconductor equipment sector of the U.S. economy. The
impact of this was evident in the Company's shipments from July, 1996 through
August, 1997, during which time the Company's customers in that industry
virtually stopped all shipments of materials for production requirements.
Collectively, all other sectors showed continued growth, materializing in
both Catalog Operations and Manufacturing Services. Management continues to
attribute such growth to a combination of factors: (1) a continuing series of
advertisements in various industry/trade magazines, which appear to be
gradually creating more wide-spread awareness of the Company and its products
and services; (2) carrying out of a series of programs of continuous
improvement, particularly in the areas of customer service and support; (3) a
program to expand the range of support services provided to the Company's
larger customers; and (4) continued strength in certain sectors of the U.S.

<PAGE>

economy serviced by the Company. In particular, the aerospace
instrumentation, medical equipment, robotics and scientific instrumentation
sectors remained healthy throughout the year.

The Company's gross margin was 36.49% of net sales in fiscal 1997, up
from 33.60% in fiscal 1996. The lower level of sales activity permitted the
Company to manufacture more and purchase less, resulting in the following
changes from fiscal 1996: (1) net materials expense decreased as a percentage
of sales, increasing gross margins by 4.75%; and (2) the Company shipped a
lower volume of product on relatively stable costs of factory operations,
decreasing gross margins by 1.86%. The Company did not increase prices
materially in fiscal 1997.

Selling, general and administrative expenses as a percentage of net sales
were 24.8% in fiscal 1997, as compared to 23.2% in fiscal 1996. While actual
expenditures in fiscal 1997 were $98,000 lower than in fiscal 1996, such
costs did not decrease as much as sales volume. The following factors account
for these changes: (1) selling and shipping expenses and commissions
increased as a percentage of net sales by approximately 0.4% as shipping
volume decreased more than spending on the Company's marketing strategy; (2)
administrative payroll, benefits, and expenses increased by $133,000,
resulting in an increase of such expenses of 1.8% as a percentage of net
sales; and (3) other administrative expenses (collectively) decreased as a
percentage of net sales by approximately 0.6%.

Interest expense decreased by $60,000 in fiscal 1997, as the Company
lowered its borrowings and enjoyed more favorable rates as a result of its
new credit agreement.

Provision for income taxes in fiscal 1997 was $629,000, or 37.2% of
pre-tax income. See the notes to the consolidated financial statements for a
reconciliation to the federal statutory rate.

RESULTS OF OPERATIONS: YEAR ENDED SEPTEMBER 30, 1996, COMPARED WITH YEAR
ENDED SEPTEMBER 30, 1995

Net sales for fiscal 1996 were $17,793,000 as compared to $15,521,000 in
fiscal 1995, an increase of 14.6%, with continuing growth materializing in
both Catalog Operations and Manufacturing Services. Management continues to
attribute this strength to a combination of factors: (1) the cumulative
effect of a continuing series of advertisements running regularly in various
industry/trade magazines, helping to create more wide-spread awareness of the
Company and its products and services; (2) the carrying out of various
programs of continuous

<PAGE>

improvement, particularly in the areas of customer service and support; (3) a
program to expand the range of support services provided to the Company's
larger customers; and (4) continued strength in certain sectors of the U.S.
economy serviced by the Company. In particular, the aerospace
instrumentation, medical equipment, robotics and scientific instrumentation
sectors remained strong throughout the year. This was partially offset during
the fourth quarter of fiscal 1996 by a downturn in the semiconductor
equipment sector.

The Company's gross margin was 33.60% of net sales in fiscal 1996, up
from 32.87% in fiscal 1995. This improvement is accounted for by the
following factors: (1) the Company shipped a higher volume of product on
relatively stable costs of factory operations, increasing gross margins by
2.10%; and (2) net materials expense increased as a percentage of sales,
reducing gross margins by 1.37%. The Company did not increase prices
materially in fiscal 1996.

Selling, general and administrative expenses as a percentage of net sales
were 23.2% in fiscal 1996, as compared to 23.3% in fiscal 1995. This
improvement is attributable to the following factors: (1) selling and
shipping expenses and commissions decreased as a percentage of net sales by
approximately 0.2% as shipping volume rose at a greater rate than spending on
implementation of the Company's marketing strategy; (2) administrative
payroll, benefits, and expenses rose, but not at the same rate as shipping
volume, resulting in a decrease of such expenses of 0.2% as a percentage of
net sales; and (3) other administrative expenses (collectively) increased as
a percentage of net sales by approximately 0.3%.

Interest expense decreased by $50,000 in fiscal 1996, as the Company
lowered its borrowings and negotiated more favorable rates with its lending
institutions.

Provision for income taxes in fiscal 1996 was $593,000, or 37% of pre-tax
income. See the notes to the consolidated financial statements for a
reconciliation to the federal statutory rate. The Company adopted Statement
of Financial Accounting Standards No. 109 (SFAS 109) in the first quarter of
fiscal 1994. The adoption of SFAS 109 did not have a material impact on the
Company's financial statements.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company's financial condition remained strong during fiscal 1997 as
operations generated net cash of $818,000 over the course of the year. In
addition, $157,000 of new equity capital was raised from the exercise of
certain warrants and employee stock options issued by the Company. These
funds were used for capital expenditures (net) of $309,000 and reduction of
debt of $559,000, with the remainder being added to cash on hand. Net working
capital increased by $802,000 to $7,308,000 during the year. The following
are changes in current assets and current liabilities for the year ended
September 30, 1997:

- Accounts receivable (net of reserve for doubtful accounts) increased by
$133,000 during the year. This increase was a function of higher shipping
volume at year end ($82,000) and an increase in the average collection
period from 45 days at the end of fiscal 1996 to 47 days at the end of
fiscal 1997 ($51,000).

- Inventories increased 8.8%, or $520,000, during the fiscal year, with the
turnover rate decreasing from 2.0 times in fiscal 1996 to 1.6 times at the
end of fiscal 1997. Of this increase, a portion ($250,000) was planned as
part of a strategy to increase sales of the Company's line of screw
machine products. The balance ($270,000) built up as an unplanned
accumulation of inventory, the result of rescheduling orders from
prominent customers in the semiconductor equipment industry. Management
expects that most of such inventory will be shipped during fiscal 1998 as
that industry continues to recover. As a general rule, prompt service,
product availability and quick turnaround of production orders are key
factors in gaining a strong competitive position in the Company's markets.
Substantial inventories are, in management's judgment, a necessity in
responding to demanding delivery requirements imposed by the Company's
customers. As the Company's growth continues, management expects to see
improvement in the inventory turnover rate.

- Prepaid expenses and other current assets increased by $26,000, and
deferred income taxes (asset) increased by $2,000.

- Current liabilities, exclusive of current portions of long-term debt and
capital lease obligations, decreased by $13,000 (net), as the Company's
average payment period on accounts payable and accrued expenses remained
at 36 days from fiscal 1996 through fiscal 1997 (decrease of $103,000) and
the Company's income taxes payable increased by $90,000.

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

- Cash balances increased by $107,000.

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

<PAGE>

financial constraint as growth in sales volume continued at or above the
rates of fiscal 1995. Thus, in September, 1996, the Company closed on a new
three-year committed revolving credit agreement, providing for a credit line
of $4 million and an equipment line of $2.0 million, with rates 1/2 to 1-1/2
points lower and fewer and less restrictive covenants than in its prior
asset-based line. The Company, at the end of fiscal 1997, was using
approximately $1.9 million of the line.

Management believes that, in light of the Company's expansion objectives,
the Company's working capital will not be adequate to provide for all of the
on-going cash needs of the business. In particular, management expects to
require additional financing to carry out its acquisition objectives. Success
in this part of the Company's growth program will rely, in large measure,
upon success in completing such additional financing. The Company is not
relying on receipt of such funds in its operating budgets or projections. It
is important to note that, absent new capital, the Company will not be in a
position to undertake some of the most promising elements of management's
plans for expansion. In the event that new equity funds are raised,
management intends to implement its plans and will do so in keeping with its
judgment at that time as to how best to deploy any such capital.

Outlay for capital expenditures in fiscal 1997 amounted to $309,000
($328,000 in new equipment, net of $19,000 in equipment dispositions; no new
equipment leases), as compared to $310,000 ($574,000 including capital lease)
in fiscal 1996. These expenditures represent two facets of the Company's
capital spending program: (1) a continuation of management's program of
continuous improvement through modernization and automation of facilities
($185,000), and (2) support and installation of a comprehensive new computer
system ($143,000). Capital spending plans for fiscal 1998 call for additional
investment in software and hardware for the Company's computer system and a
somewhat increased level of additions to high-efficiency production
machinery. Management expects to fund such spending plans out of working
capital.

VULNERABILITY TO RECESSION

The Company's cost structure is largely made up of "fixed costs", with
"variable costs" accounting for less than 40% of net sales. The Company
could, therefore, experience materially adverse effects on profitability from
any marked downturn in sales volume until management was able to reduce fixed
costs. Because the Company's delivery lead-times are relatively short, there
is, as a result, little backlog at any given time, and the effect of a
downturn in sales volume would be felt almost immediately.

<PAGE>

EXPANSION PLANS

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

IMPACT OF INFLATION AND OTHER BUSINESS CONDITIONS

Management believes that inflation has no material impact on the
operations of the business. The Company has been able to react to increases
in material and labor costs through a combination of greater productivity and
selective price increases. The Company has no exposure to long-term fixed
price contracts.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS No.
128 is effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 simplifies the computation of earnings per
share by replacing the presentation of primary earnings per share with a
presentation of basic earnings per share, as defined. The statement requires
dual presentation of basic and diluted earnings per share by entities with
complex capital structures. Basic earnings per share includes no dilution and
is computed by dividing income available to common shareholders by the
weighted average number of shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity similar to fully diluted earnings per
share. SFAS No. 128 is not expected to have a significant impact on the
Company's financial statements.

In June, 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related
Information", were issued. SFAS No. 130 addresses standards for reporting and
display of comprehensive income and its components and SFAS N0. 131 requires
disclosure of reportable operating segments. Both statements are effective
for the Company's 1998 fiscal year. The Company will be reviewing these
pronouncements to determine their applicability, if any.

<PAGE>

ITEM 7--FINANCIAL STATEMENTS
- ----------------------------
(1) Financial Statements

See index to Financial Statements on Page F-2.

ITEM 8--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- ---------------------------------------------------------
NONE

<PAGE>

PART III

ITEM 9--DIRECTORS AND EXECUTIVE OFFICERS

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

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

<PAGE>

ITEM 9--DIRECTORS AND EXECUTIVE OFFICERS (Continued)

Brief biographies of the Executive Officers and Directors of the Company
are set forth below. All Directors hold office until the next Annual
Stockholders' Meeting or until their death, resignation, retirement, removal,
disqualification or until their successors have been elected and qualified.
Vacancies in the existing Board may be filled by majority vote of the
remaining Directors. Officers of the Company serve at the will of the Board
of Directors. There are no written employment contracts outstanding.

Mark Hopkinson, age 50, has been Chairman of the Board since 1981, when
he and Mr. Bartow organized the acquisition of the Company. He also served as
President of the Company from 1981 until March 1994. He is a graduate of the
University of Pennsylvania and of the Harvard Graduate School of Business
Administration. Prior to acquiring Allied Devices, he was a management
consultant, working originally with Theodore Barry & Associates from 1977 to
1978 and later as an independent and with the Nicholson Group from 1978 to
1981. The focus of his work in the period leading up to 1981 was development
of emerging growth companies, both in the United States and in lesser
developed countries. He served as an officer in the United States Navy from
1969 to 1972.

P.K. Bartow, age 49, has been President of the Company since March 1994.
He also served as Vice President of the Company from when he and Mr.
Hopkinson organized its acquisition in 1981 until March 1994. Prior to
acquiring Allied Devices, Mr. Bartow had joined the Nicholson Group in 1978,
and performed facility and feasibility studies for emerging growth companies.
While at Allied Devices, he has been the Director of Marketing from 1981
onwards, and in that capacity has set up a network of independent
manufacturers' representatives across the United States and in the United
Kingdom, Israel and selected regions in Canada. He has also organized and
published Allied Devices' 650+ page catalog. Mr. Bartow received a B.A.
degree from Williams College in 1970, and a M.Arch degree from the University
of Pennsylvania in 1974.

Salvator Baldi, age 75, was one of the original founders of the Company
in 1947. He has been a Director of the Company since February 1994. The
business was started as a general machine shop and developed through the
years as a supplier to certain principal competitors of the Company in the
market for standardized precision mechanical parts. By the late 1970's, the
Company had become a competitor, offering its own catalog of components. He
and his partners sold the Company to the investor group assembled by Mr.
Hopkinson and Mr. Bartow in October 1981, with Mr. Baldi remaining with the
Company under an employment contract. By the time his contract expired two
years later, Mr. Baldi had negotiated to repurchase an interest in the
Company. He currently works on an abbreviated work schedule.

<PAGE>

ITEM 9--DIRECTORS AND EXECUTIVE OFFICERS (Continued)

Andrew J. Beck, age 49, has been a partner with the law firm of Haythe &
Curley since prior to 1989. He became Assistant Treasurer of the Company in
March 1994. Mr. Beck holds a B.A. in economics from Carleton College and a
J.D. from Stanford University Law School.

Gail F. Lieberman, age 54, is currently Chief Financial Officer of The
Thompson Corp. Financial & Professional Publishing Group. She became a
director of the Company in February 1994. Prior to her current association,
Ms. Lieberman was Vice President-Chief Financial Officer and Managing
Director of Moody's Investors Service, where she was employed from January,
1994 to December, 1996. Prior to that, she was Executive Vice President and
Chief Financial Officer at Scali, McCabe, Sloves, Inc. since 1982. She holds
a B.A. in Mathematics and Physics and an M.B.A. in Finance from Temple
University.

Christopher T. Linen, age 50, became a Director of the Company during
fiscal 1997. He is currently principal of Christopher Linen & Company,
through which he has invested in a series of early stage, internet and
technology-related enterprises. Prior to this, from 1975 until 1996, he was
an executive with Time Inc. (later Time Warner Inc.) where he managed a
series of six subsidiaries or divisions in Asia, Latin America, the United
States, and worldwide. Prior to that, he was Assistant Financial Director of
the Italhai Holding Company, Ltd. (Bangkok), during which tenure he was
Publisher of the Bangkok World, an English language daily newspaper. He is a
director of Starmedia Networks Inc., Chairman of NirvanaSoft Inc., and a
Trustee of The Family Academy, an experimental public school. He holds a B.A.
from Williams College and attended the Graduate School of Business
Administration at New York University.

Michael Michaelson, age 75, has been a Director of the Company since
1990. He has been President and sole stockholder of Rainwater Enterprises,
Ltd. since 1979, providing management and marketing consultation services to
clients principally in publishing and related industries. He is also on the
boards of directors of the following companies: Metro Tel Corp., a publicly
held company in the telecommunications field; and Starlog Franchise Corp., a
public company. From 1986 to 1989, he was Chairman of the Council on
Economic Priorities. From 1977 to 1979, he was co-founder and Chairman of the
Board of Games Magazine, which was sold to Playboy magazine in 1979. From
1970 to 1978, Mr, Michaelson worked for Publishers Clearing House, where he
was Senior Vice President. From 1968 to 1970, he was President and Founder of
Campus Subscriptions, Inc. Mr. Michaelson served in the United States Army in
the South Pacific during World War II, where he was a Company Commander in
the 35th infantry, 25th division and received the Bronze Star and the Purple
Heart. He received a B.S. degree from New York University in 1948.

Robert J. Smallacombe, age 64, has been a Director of the Company since
August, 1996. For more than ten years, he has been the principal of Executive
Advisory Group, a management consulting firm. In the capacity of consultant,
he

<PAGE>

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

ITEM 10--EXECUTIVE COMPENSATION

The following table sets forth the salary and bonus compensation paid
during the fiscal years ended September 30, 1997, 1996 and 1995 to the
Chairman and Chief Executive Officer of the Company. No other Executive
Officer of the Company received fiscal 1997 salary and bonus compensation
which exceeded $100,000. The Company's Directors receive $1,250 per meeting
for their services as such and reimbursement for any expenses they may incur
in connection with their services as Directors.

<TABLE>
<CAPTION>
"SUMMARY COMPENSATION TABLE"
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NAME AND PRINCIPAL OTHER ANNUAL LONG TERM COMPENSATION
POSITION FISCAL YEAR SALARY COMPENSATION AWARDS-OPTIONS SAR'S
- -------------------------------------------------- ------------- --------- ----------------- -----------------------
Mark Hopkinson, Chairman and Chief Executive
Officer 1997 $ 97,221 $ 0 27,400
1996 $ 98,098 $ 0 29,000
1995 $ 90,116 $ 0 4,600
</TABLE>

Under the terms of the Company's 1993 Incentive Stock Option Plan, the
following options were granted to the Chief Executive Officer of the Company
during fiscal year 1997.

<TABLE>
<CAPTION>
"OPTION/SAR GRANTS IN LAST FISCAL YEAR"
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NUMBER OF
SECURITIES % OF TOTAL OPTIONS EXERCISE OR
UNDERLYING OPTIONS GRANTED TO EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SH) DATE
- ------------------------------------------- ------------------- ------------------------- ------------- -----------
Mark Hopkinson 10,250 9.8% $ 0.70 12/1/06
5,150 4.9% $ 0.67 2/15/07
12,000 11.5% $ 0.70 7/31/07
</TABLE>

<PAGE>

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

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END (#) FY-END ($)
VALUE
SHARES ACQUIRED REALIZED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
- ---------------------------------------------- --------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Mark Hopkinson................................ -- $ -- 257,000/0 $ 99,585/$0
</TABLE>

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

(1) In-the-money options are those for which the fair market value of the
underlying Common Stock exceeds the exercise price of the option. The
value of the in-the-money options is determined in accordance with
regulations of the Securities and Exchange Commission by subtracting
the aggregate exercise price of the option from the aggregate year-end
value of the underlying Common Stock.

No compensation to management has been waived or accrued to date.

Under the terms of its employee stock option plan (adopted in October,
1993 and amended in December, 1995), the Board of Directors is empowered at
its discretion to award options to purchase an aggregate of 1,250,000 shares
of the Company's common stock to key employees. Prior to fiscal 1997, the
Company had granted options to purchase an aggregate of 1,087,600 shares to
key employees and Directors, with exercise prices ranging from $0.35 to $3.25
per share. During fiscal 1997, the Company granted options to purchase
104,400 shares of the Company's common stock, at exercise prices ranging from
$0.35 to $2.44 to 11 individuals (one non-management member of the Board of
Directors, one executive, and nine non-executive managers).

<PAGE>

ITEM 11--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The following table sets forth the number and percentage of the Company's
shares of Common Stock owned of record and beneficially by each person or
entity owning more than 5% of such shares and by all executive officers and
directors, as a group at September 30, 1997:

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

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

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

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

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

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

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

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

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

<PAGE>

ITEM 11--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT (CONTINUED)

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

<PAGE>

ITEM 11--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT (CONTINUED)

(11) Consists of 43,000 shares represented by currently exercisable
options.
(12) Consists of 25,000 shares represented by currently exercisable
options.

ITEM 12--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In April 1990, Allied Devices granted Michael Michaelson, a Director,
50,000 warrants to purchase Allied Devices shares in return for uncompensated
service to the Company. Each warrant is exercisable at a price of $.30 per
warrant into one share of Common Stock until April 15, 1998.

In August 1987, certain officers and stockholders purchased unsecured 10%
promissory notes from Allied Devices in the aggregate amount of $157,680:
Mark Hopkinson, $75,000; P.K. Bartow; $25,000; Salvator Baldi, $7,680;
Michael Michaelson, $25,000; and Edward G. Lord, $25,000. In December 1994,
all such notes were retired by paying 10% of the principal amount due in
cash, the balance in the form of new 10% unsecured promissory notes due
December 31, 1995, and granting warrants to purchase Common Stock at the rate
of one warrant per $20 of principal on the notes being retired, as follows:

PRINCIPAL
VALUE OF NUMBER OF
CASH PAID NEW NOTES WARRANTS
------------ ------------- -----------
Salvator Baldi......... $ 1,796.59 $ 16,169.32 898
P.K. Bartow............ $ 3,445.14 $ 31,006.25 1,722
Mark Hopkinson......... $ 11,319.74 $ 101,877.69 5,660
Michael Michaelson..... $ 5,167.71 $ 46,509.37 2,584

Each warrant is exercisable at a price of $2.00 per warrant into one share
of Common Stock until December 31, 1999. The notes were retired during fiscal
1996.

<PAGE>

ITEM 13--EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

The exhibits required to be filed as a part of the form are listed in the
attached Index to Exhibits.

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the last quarter of fiscal 1997.

<PAGE>

SIGNATURES

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

ALLIED DEVICES CORPORATION

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

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant in the capacities and on the
dates indicated.

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- --------- ----- ----
<S> <C> <C>

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

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

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

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

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

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

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

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

</TABLE>

<PAGE>

Allied Devices Corporation
and Subsidiaries

Consolidated Financial Statements
Years Ended September 30, 1997 and 1996

F-1

<PAGE>

Allied Devices Corporation
and Subsidiaries

INDEX

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

F-2

<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Allied Devices Corporation
Baldwin, New York

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

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Allied
Devices Corporation and subsidiaries at September 30, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.

BDO SEIDMAN, LLP

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

<PAGE>

Allied Devices Corporation
and Subsidiaries

Balance Sheets

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

See accompanying notes to consolidated financial statements.

F-4

<PAGE>

Allied Devices Corporation
and Subsidiaries

Statements of Income

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

See accompanying notes to consolidated financial statements.

F-5

<PAGE>

Allied Devices Corporation
and Subsidiaries

Statements of Stockholders' Equity

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

See accompanying notes to consolidated financial statements.

F-6

<PAGE>
Allied Devices Corporation
and Subsidiaries

Statements of CASH FLOWS

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

See accompanying notes to consolidated financial statements.

F-7
<PAGE>

ALLIED DEVICES CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Accounting Policies

(a) Business

The Company is comprised of Allied Devices Corporation ("ADCO"), and its
wholly-owned subsidiary, Empire Tyler Company ("Empire" and collectively the
"Company").

The Company is engaged primarily in the manufacture and distribution of
standard precision mechanical components and a line of screw machine products.
The Company sells all its products to the same base of customers located
throughout the United States. Because the Company's product line comprises a
comparable group of precision manufactured parts sold to a similar customer
base, it considers itself to be engaged in a single business segment.

(b) Basis of Presentation

The consolidated financial statements include the accounts of ADCO and its
subsidiary. All significant intercompany balances and transactions have been
eliminated.

Inventories are valued at the lower of cost (last-in, first-out (LIFO)
method) or market. Management periodically analyzes inventories for obsolescence
and records writeoffs as required. Such writeoffs have historically been
immaterial.

(d) Depreciation and Amortization

Property, plant and equipment is stated at cost. Depreciation and
amortization of property, plant and equipment is computed using the
straight-line method over the estimated useful lives of the assets. The
estimated useful lives are as follows:

<TABLE>
<S> <C>
Buildings and mprovements.................... 30 years
Machinery and equipment...................... 10 years
Furniture, fixtures and office equipment..... 5-7 years
Tools, molds and dies........................ 8 years
Leasehold improvements....................... Lease term
</TABLE>

F-8
<PAGE>

ALLIED DEVICES CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(e) Income taxes

The Company and its subsidiary file a consolidated federal income tax return
and separate state income tax returns.

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rate is recognized in income in the period that includes the
enactment date.

(f) Earnings per share

Earnings per share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during each period.
Earnings per share is computed using the treasury stock method, modified for
options and warrants outstanding in excess of 20% of the outstanding shares of
the Company's common stock. Under the treasury stock method the number of shares
outstanding reflects the use of the proceeds from the assumed exercise of stock
options and warrants to repurchase shares of the Company's common stock at the
average market value during the period. The proceeds generated from the assumed
exercise of options and warrants in excess of 20% of the outstanding shares of
common stock are applied to the assumed repayment of company debt with the
assumed related interest expense savings being included in the Company's results
of operations for earnings per share computations.

(g) Intangible assets

The excess of cost over the fair value of net assets acquired is being
amortized over a period of 20 years.

F-9
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(h) Revenue Recognition

Sales are recognized upon shipment of products. All sales are shipped F.O.B.
shipping point and are not sold subject to a right of return unless the products
are defective. The Company's level of returns arising from defective products
has historically been immaterial. The Company provides an allowance for
estimated returns when sales are recorded. Such allowances are not material.

(i) Use of Estimates

In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities. Actual results could differ from those
estimates.

(j) Fair Value Financial Instruments

The carrying amounts of financial instruments, including cash and short-term
debt, approximated fair value as of September 30, 1997 and 1996. The carrying
value of long-term debt and obligations under capital leases, including the
current portion, approximates fair value as of September 30, 1997 and 1996 based
upon the borrowing rates currently available to the Company for bank loans with
similar terms and average maturities.

(k) Concentrations of credit risk

The Company extends credit based on an evaluation of the customer's
financial condition, generally without requiring collateral. Exposure to losses
on receivables is principally dependent on each customer's financial condition.
The Company monitors its exposure for credit losses and maintains allowances for
anticipated losses. No individual customer is considered to be significant.

F-10
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(l) Recent Accounting Pronouncements

In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 established a fair value method for
accounting for stock-based compensation plans either through recognition or
disclosure. Effective October 1, 1996, the Company adopted the employee
stock-based compensation provisions of SFAS No. 123 by disclosing the pro forma
net income and pro forma net income per share amounts, assuming the fair value
method was adopted October 1, 1995.

In March, 1995, the FASB issued SFAS No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121
requires, among other things, an impairment loss on assets to be held and gains
or losses from assets that are expected to be disposed of to be included as a
component of income from continuing operations before taxes on income. The
Company has adopted SFAS No. 121 in fiscal 1997, and its implementation did not
have a material effect on the consolidated financial statements.

The FASB has issued SFAS No. 128, "Earnings Per Share". SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997. SFAS No. 128 simplifies the computation of earnings per share by replacing
the presentation of primary earnings per share with a presentation of basic
earnings per share, as defined. The statement requires dual presentation of
basic and diluted earnings per share by entities with complex capital
structures. Basic earnings per share includes no dilution and is computed by
dividing income available to common stockholders by the weighted average number
of shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an entity
similar to fully diluted earnings per share. SFAS No. 128 is not expected to
have a significant impact on the Company's financial statements.

F-11
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(m) Reclassifications

Certain 1996 balances were reclassified to conform with the 1997
presentation.

2. Inventories

Inventories are summarized as follows:

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

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

F-12
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Property, Plant and Equipment

Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 1996
- -------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Machinery and equipment............................................................... $ 4,656,948 $ 4,552,650
Tools, molds and dies................................................................. 1,553,884 1,502,276
Furniture, fixtures and office equipment.............................................. 453,205 402,730
Leasehold improvements................................................................ 169,749 167,180
Building and improvements............................................................. 94,520 93,530
Land.................................................................................. 5,000 5,000
------------ ------------
6,933,306 6,723,366
Less: accumulated depreciation and amortization....................................... 5,096,081 4,757,620
------------ ------------
$ 1,837,225 $ 1,965,746
------------ ------------
------------ ------------
</TABLE>

Included in machinery and equipment and office equipment at September 30,
1997 and 1996 is approximately $560,000 of equipment under capital lease
agreements (see Note 6) with related accumulated amortization amounts of
approximately $165,000 and $93,000, respectively. Depreciation expense for the
years ended September 30, 1997 and 1996 was approximately $447,000 and
$365,000, respectively.

4. Revolving Credit Agreement

In September, 1996, the Company entered into a credit agreement with a
bank and repaid all amounts outstanding under agreements with its prior
lender. Under the terms of its new three-year committed revolving credit
agreement, the Company may borrow up to the lesser of $4,000,000 or 85% of
eligible receivables and 30% of eligible inventory up to a maximum of
$2,000,000, and interest is computed at the bank's prime lending rate (8.50%
at September 30, 1997) or at 1.25% to 1.75% over the London InterBank
Over-night Rate ("LIBOR"), at the Company's option, as defined in the
agreement. As part of the same credit package, the Company may borrow
additional funds, secured by the Company's machinery and equipment, with up
to $1,000,000 available against existing assets and up to $1,000,000
available for new acquisitions of machinery and equipment. The credit
facility is secured by a first priority security interest in the Company's
assets. In addition, the Company must meet certain financial covenants. As of
the end of September 30, 1997, borrowings under this credit agreement were
$1,925,000.

F-13
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. ACCRUED EXPENSES AND OTHER

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 1996
- ---------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Commissions........................................................... $ 93,285 $ 232,712
Payroll and related................................................... 83,548 45,000
Other................................................................. 64,948 160,323
---------- ----------
$ 241,781 $ 438,035
---------- ----------
---------- ----------
</TABLE>

6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Long term debt consists of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 1996
- ------------------------------------------------------------------ ------------ ------------
<S> <C> <C>
Revolving credit facility, due September, 1999
(Note 4).......................................................... $ 1,925,000 $ 2,366,338
Capital lease obligations with varying monthly payments
and interest rates ranging from 8.5% to 9.9% per annum
maturing 1998 through 2001; secured by an interest in
machinery and equipment (Note 3)................................ 277,720 395,464
------------ ------------
Subtotal...................................................... 2,202,720 2,761,802
Less: current maturities......................................... 118,481 119,401
------------ ------------
Long-term debt and capital lease obligations...................... $ 2,084,239 $ 2,642,401
------------ ------------
------------ ------------
</TABLE>

F-14

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

The following is a schedule by years of future minimum lease payments under
capital leases, together with the present value of the net minimum lease
payments as of September 30, 1997:

<TABLE>
<S> <C>
1998 $ 138,991
1999 104,988
2000 64,916
2001 3,451
---------
Total minimum lease payments....................... 312,346
Less: amount representing interest................. 34,626
---------
Present value of net minimum lease payments........ $ 277,720
---------
---------
</TABLE>

The following is a schedule of long term debt maturities (including capital
lease obligations) as of September 30, 1997:

7. LEASES

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

F-15

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

Most of the Company's operating leases are on a month to month basis. Rent
expense amounted to approximately $277,000 and $256,000 for the fiscal years
ended September 30, 1997 and 1996, respectively.

8. STOCKHOLDERS' EQUITY

(a) Warrants

At September 30, 1997 and 1996, the Company had 120,864 and 1,275,414 stock
warrants outstanding, respectively.The warrants to purchase the Company's common
stock were held by the following parties:

<TABLE>
<S> <C>
Officers/stockholders/consultants (1).............................................. 60,864
Public (1)......................................................................... 60,000
---------
120,864
---------
---------
</TABLE>

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

(1) Each warrant held by members of management and certain stockholders grant
them the right to purchase one share of common stock at various prices
between $.30 and $2.00 per share.These warrants have a weighted average
exercise price of $.60 per share and a weighted average remaining
contractual life of approximately 10 months.

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

F-16

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

(b) Incentive Stock Option Plan

In October 1993, the Board of Directors adopted an incentive stock option
plan.The Plan, as amended on December 11, 1995, allows the Board of
Directors to issue options to purchase an aggregate of 1,250,000 shares of
the Company's common stock to key employees.

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

8. STOCKHOLDERS' EQUITY (CONTINUED)

The following table summarizes information about stock options outstanding
at September 30, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
----------- --------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Exercise Prices:
$1.00--2.35.......................................... 895,000 5.4 $ 2.32 895,000 $ 2.32
.35--3.00.......................................... 34,600 7.1 2.65 34,600 2.65
2.00--3.00.......................................... 127,400 8.6 2.61 114,900 2.62
.35--2.44.......................................... 119,400 9.4 1.92 86,400 1.74
----------- --- ----- ---------- -----
1,176,400 6.2 $ 2.32 1,130,900 $ 2.32
----------- --- ----- ---------- -----
----------- --- ----- ---------- -----
</TABLE>

F-17

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

Changes in qualified and non-qualified options and warrants outstanding are
summarized as follows:

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

Outstanding September 30, 1996.................. 1,275,414 $.30--$4.25 1,077,600 $ .35--$3.00 2.34
Granted....................................... -- 92,000 2.25-- 2.44 2.28
Cancelled..................................... -- --
Exercised..................................... (414,150) .35 -- .70 (5,600) 2.25 2.25
Warrants converted to options................. (12,400) .35 -- .70 12,400 .35-- .70 .69
Expired....................................... (728,000) 2.50 --
---------- ------------ ------------ ------------ ----
Outstanding September 30, 1997.................. 120,864 1,176,400 2.32
---------- ------------ ------------ ------------ ----
---------- ------------ ------------ ------------ ----
</TABLE>

At September 30, 1997, there were 1,130,900 options exercisable at a weighted
average exercise price of $2.32.The weighted average fair value of options
granted during fiscal 1996 and 1997 was $1.61 and $1.40, respectively.

F-18
<PAGE>

ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. TAXES ON INCOME

Provisions for income taxes (benefit) on income in the consolidated
statement of operations consist of the following:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1997 1996
- ---------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Current:
Federal............................................................. $ 570,192 $ 546,143
State............................................................... 106,996 46,925
---------- ----------
Total current......................................................... 677,188 593,068
---------- ----------
Deferred:
Federal............................................................. (40,574) --
State............................................................... (7,614) --
---------- ----------
(48,188) --
---------- ----------
Total taxes on income................................................. $ 629,000 $ 593,068
---------- ----------
---------- ----------
</TABLE>

Deferred tax (assets) liabilities consist of the following:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1997 1996
- ---------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Tax depreciation in excess of book.................................... $ 385,000 $ 254,463
Provision for bad debts............................................... (18,000) (19,863)
Inventory capitalization.............................................. (23,000) (19,000)
Provision on note receivable (included in other assets)............... (38,000) (34,000)
Investment tax credit carryforward.................................... (187,000) (15,000)
---------- ----------
Deferred tax liabilities.............................................. 119,000 166,600
Valuation allowance................................................... 15,000 15,588
---------- ----------
Net deferred tax liabilities.......................................... $ 134,000 $ 182,188
---------- ----------
---------- ----------
</TABLE>

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

The provision for income taxes on income before taxes differs from the
amounts computed applying the applicable Federal statutory rates due to the
following:

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

10. CASH FLOWS

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

F-20

<PAGE>

Exhibit 23.1

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 December 18, 1997
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, 1997.

BDO SEIDMAN, LLP

December 18, 1997

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
1997 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<CIK> 0000869495
<NAME> ALLIED DEVICES CORP

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 162,094
<SECURITIES> 0
<RECEIVABLES> 2,374,055
<ALLOWANCES> 47,876
<INVENTORY> 6,402,688
<CURRENT-ASSETS> 8,999,567
<PP&E> 6,933,306
<DEPRECIATION> 5,096,081
<TOTAL-ASSETS> 10,976,983
<CURRENT-LIABILITIES> 1,691,816
<BONDS> 0
0
0
<COMMON> 4,610
<OTHER-SE> 7,021,318
<TOTAL-LIABILITY-AND-EQUITY> 10,976,983
<SALES> 16,215,931
<TOTAL-REVENUES> 16,215,931
<CGS> 10,298,766
<TOTAL-COSTS> 10,298,766
<OTHER-EXPENSES> 4,022,326
<LOSS-PROVISION> 47,876
<INTEREST-EXPENSE> 203,956
<INCOME-PRETAX> 1,690,883
<INCOME-TAX> 629,000
<INCOME-CONTINUING> 1,061,883
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,061,883
<EPS-PRIMARY> .21
<EPS-DILUTED> .21

</TABLE>