Overview

Allied Motion designs, manufactures and sells motion products to a broad spectrum of customers throughout the world primarily for the commercial motor, industrial motion control, and aerospace and defense markets. Examples of the end products using Allied Motion's technology in the medical and health care industries include wheel chairs, scooters, stair climbers, vehicle lifts, patient handling tables, electric powered surgical hand pieces, programmable pumps to meter and administer infusions associated with chemotherapy, pain control and antibiotics; nuclear imaging systems, automated pharmacy dispensing equipment, kidney dialysis equipment, respiratory ventilators and heart pumps. In electronics, our products are used in the handling, inspection, and testing of components and in the automation and verification of final products such as PC's, game equipment and cell phones. Our motors are used in the HVAC systems of trucks, buses, RV's, boats and off-road construction/farming equipment. These motors operate a variety of actuation systems (e.g., lifts, slide-outs and covers), they provide improved fuel efficiency while the vehicles are idling and are used in drive by wire applications to electrically replace a variety of mechanical linkages. Our products are also utilized in high performance vehicles, vehicles using alternative fuel systems such as LPG, fuel cell and hybrid vehicles. Our geared motor products are utilized in commercial grade floor cleaners, polishers and material handling devices for factories and commercial buildings. Our products are also used in a variety of military/defense applications including inertia guided missiles, mid range munitions systems, weapons systems on armed personnel carriers and in security and access control in camera systems, door access control and in airport screening and scanning devices. Other end products utilizing our technology include high definition printers; tunable lasers and spectrum analyzers for the fiber optic industry; processing equipment for the semiconductor industry, as well as cash dispensing machines (ATM's).

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

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

Outlook

Allied Motion had a good year in 2008 despite the devastating fire that occurred at our Chatsworth, CA plant in October and the fall off of our business in the fourth quarter caused by the global economic downturn. In response to the economic downturn, we have and will continue to take

actions to mitigate its adverse effects including reductions in costs and expenses. While we cannot predict how long the current worldwide economic slowdown will last or how severely it will impact us and our customers, we will continue to monitor market conditions and allocate resources appropriately to meet our current needs and prepare for growth.

The Company has a strong balance sheet, with a cash position that exceeds outstanding debt. While we will continue to make necessary adjustments, we have not cut our resources in electro-magnetic, mechanical and electronic design capabilities to provide solutions that "raise the bar" with our customers and provide important differentiating factors against our competition. Our broad market diversification provides an opportunity to grow some markets even while some are flat or experiencing decline. As certain markets are more recession proof than others, we will continue to make investments in the markets we believe to be less affected in a recession than others.

One of the Company's major challenges is to maintain and improve price competitiveness. The Company's customers are continually being challenged by their markets and competitors to be price competitive and they are requiring their suppliers to deliver the highest quality product at the lowest price possible. Currently, the Company is producing some of its motor sub-assemblies and finished products at sub-contract manufacturing facilities in China and Slovakia. The Company will continue to identify opportunities where production in low cost regions can improve profitability while delivering the same high quality products.

The Company's products contain certain metals, and the Company experiences fluctuations in the costs of these metals, particularly copper, steel and zinc, which are all key materials in our products. The Company has reacted by aggressively sourcing material at lower costs from Asian markets and by passing on surcharges and price increases to our customers.

The Company continues to pursue aggressive motor and drive development plans for new products that leverage the combined technology base of the Allied Motion companies. The Company focuses on new product designs that design-out cost, provide higher level, value-added performance solutions and meet the needs of our served markets. Over the last few years, the Company announced several new motor designs targeted at various markets. It normally takes twelve months to get new products designed into new customer applications.

The Company is moving forward with a ONE TEAM sales force to more effectively leverage resources utilizing a company wide sales organization. With the ONE TEAM sales force selling all the Company's products, our expectation is that this capability provides opportunities to increase sales from existing customers and secure new business opportunities.

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

Operating Results

Year 2008 compared to 2007

                                          For the year ended
                                             December 31,          Increase (decrease)
  (in thousands)                           2008         2007           $            %
  Revenues                               $   85,967   $ 84,559    $      1,408         2 %
  Cost of products sold                      63,801     63,952            (151 )       0 %

  Gross margin                               22,166     20,607           1,559         8 %

  Gross margin percentage                        26 %       24 %             -         -

  Operating costs and expenses:
    Selling                                   4,256      3,611             645        18 %
    General and administrative                8,543      7,776             767        10 %
    Engineering and development               4,009      3,963              46         1 %
    Fire related losses                       1,200          -           1,200       100 %
    Insurance recoveries                     (1,357 )        -          (1,357 )     100 %
    Amortization of intangible assets         1,052      1,033              19         2 %

  Total operating costs and expenses         17,703     16,383           1,320         8 %

  Operating income                            4,463      4,224             238         6 %
  Interest expense                             (177 )     (699 )          (522 )     (75 )%
  Other income                                   30         58             (28 )     (48 )%

  Total other expenses, net                     147        641            (494 )     (77 )%

  Income before income taxes                  4,316      3,583             733        20 %
  Provision for income taxes                  1,407      1,187             220        19 %

  Net income                             $    2,909   $  2,396    $        513        21 %

NET INCOME The Company achieved net income of $2,909,000 or $.39 per diluted share for 2008 compared to $2,396,000 or $.33 per diluted share for 2007.

EBITDA EBITDA was $8,006,000 for 2008 compared to $7,754,000 for 2007. EBITDA is a non-GAAP measurement that consists of income before interest expense, provision for income taxes and depreciation and amortization. See information included in "Non-GAAP Measures" below for a reconciliation of net income to EBITDA.

REVENUES Revenues were $85,967,000 in 2008 compared to $84,559,000 in 2007. This 2% increase is primarily attributable to the weakness of the U.S. dollar against the Euro. The Company's revenues in 2008 reflect a significant change in sales mix from last year. During 2008, sales into our aerospace and defense, medical, distribution and certain markets in our industrial and electronics market segments such as pumps experienced growth, whereas sales into construction related markets such as industrial and machine tools, material handling and recreation related markets such as RVs and marine markets were down compared to 2007. The downturn in these markets reflects both the adverse effects of the economy and the effects of the competitive pressure of LCR competitors which are primarily Chinese competitors.

Sales to U.S. customers accounted for 56% of our sales in 2008, with the balance to customers primarily in Europe and Canada. Sales to U.S. customers were down 10% for 2008 and sales to customers outside the U.S. were up 20%.

BACKLOG The Company's backlog at December 31, 2008 consisted of sales orders totaling approximately $23,570,000 while backlog at December 31, 2007 was $32,060,000 reflecting a 26%

decrease from the same time last year. The economic downturn started to have an adverse effect on the Company earlier in the year in certain markets. In the fourth quarter, the downturn adversely affected most of our markets to varying degrees. Management has and will continue to take actions to mitigate the adverse effects the economic downturn has on the Company. In addition, management is diligently working to adjust costs and expenses to keep them in line with the changes in revenues.

GROSS MARGINS Gross margin as a percentage of revenues was 26% for 2008 and 24% for 2007. The margin improvement was driven by higher margins from most markets that experienced increased sales and by sales decreases in markets where we achieve lower margins, continuous improvement in efficiencies and reduction of costs, and higher quantity of production from our Asian contract manufacturing facility.

SELLING EXPENSES Selling expenses were $4,256,000 and $3,611,000 in 2008 and 2007, respectively. The 18% increase in selling expenses is primarily due to increased efforts to strengthen our sales capabilities with more sales personnel and sales incentive programs for our sales personnel. Selling expense as a percentage of revenues increased to 5.0% in 2008 compared to 4.3% last year.

GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were $8,543,000 in 2008 compared to $7,776,000 in 2007. The 10% increase is primarily due to hiring of additional key personnel, salary increases to existing personnel, incentive bonus programs for company employees that are based on the performance of the Company and each operating unit and additional expense recorded for the issuance of restricted stock that is amortized over the vesting period (generally three years).

ENGINEERING AND DEVELOPMENT EXPENSES Engineering and development expenses were $4,009,000 and $3,963,000 for 2008 and 2007, respectively. Costs incurred are primarily for strengthening our engineering capabilities to develop new products and new customer applications to meet the needs of our served markets.

FIRE RELATED LOSSES AND INSURANCE RECOVERIES On October 11, 2008, the manufacturing facility for Computer Optical Products (COPI), located in Chatsworth, California, sustained heavy damage from a fire. The damaged facility was being leased by COPI. The Company is fully insured for the replacement of the assets damaged in the fire and for loss of profits consequent to the business interruption due to the fire. The Company had insurance recoveries of $1,357,000, which represents the replacement cost of property and equipment damaged as a result of the fire, the cost of inventory damaged in the fire, and other cleanup costs that occurred as a result of the fire. The Company had fire related losses of $1,200,000, which include the writeoff of damaged property and equipment, damaged inventory, and other cleanup and business interruption costs that occurred as a result of the fire. Any additional gains or losses as a result of the fire and any business interruption recoveries will be recognized in subsequent periods as recoverable amounts are determined and finalized with the insurance company.

AMORTIZATION OF INTANGIBLE ASSETS Amortization of intangible assets was $1,052,000 in 2008 and $1,033,000 in 2007.

INTEREST EXPENSE Interest expense was $177,000 and $699,000 for 2008 and 2007, respectively. The 75% decrease in interest is directly attributed to the decrease in outstanding debt obligations and lower interest rates.

INCOME TAXES The provision for income taxes was $1,407,000 for year 2008 compared to $1,187,000 for 2007. The effective rate differs from the statutory amounts primarily due to the impact of differences in state and foreign tax rates. The effective income tax rate as a percentage of income before income taxes was 33% in 2008 and 2007.

Non-GAAP Measures

EBITDA is provided for information purposes only and is not a measure of financial performance under generally accepted accounting principles. The Company believes EBITDA is often a useful measure of a Company's operating performance and is a significant basis used by the Company's management to measure the operating performance of the Company's business because EBITDA excludes charges for depreciation, amortization and interest expense that have resulted from our debt financings, as well as our provision for income tax expense. Accordingly, the Company believes that EBITDA provides helpful information about the operating performance of its business, apart from the expenses associated with its physical assets or capital structure. EBITDA is frequently used as one of the bases for comparing businesses in the Company's industry. EBITDA does not represent and should not be considered as an alternative to net income, operating income, net cash provided by operating activities or any other measure for determining operating performance or liquidity that is calculated in accordance with generally accepted accounting principles.

The Company's calculation of EBITDA for the years ended December 31, 2008 and 2007 are as follows (in thousands):

                                                     For the year ended
                                                        December 31,
                                                     2008          2007
           Net income                                $ 2,909       $ 2,396
           Interest expense                              177           699
           Provision for income tax                    1,407         1,187
           Depreciation and amortization               3,513         3,472

           Income before interest expense,
           provision for income taxes and
           depreciation and amortization
           (EBITDA)                                  $ 8,006       $ 7,754

Liquidity and Capital Resources

The Company's liquidity position as measured by cash and cash equivalents increased $3,662,000 during 2008 to a balance of $4,196,000 at December 31, 2008. This increase compares to a decrease of $135,000 for the same period last year. During 2008, operations provided $6,640,000 in cash compared to $5,856,000 during 2007. The increase in cash provided from operations of $784,000 is primarily due to higher net income as a result of improved margins and lower inventory balances due to lower backlog of orders as a result of the recent softening of the economy.

Net cash used in investing activities was $2,078,000 and $1,284,000 for 2008 and 2007, respectively, which is all related to the purchase of property and equipment. Approximately $500,000 related to equipment purchased as a result of the fire which occurred at one of our operating facilities (See Note 9 of the Financial Statements).

Net cash used in financing activities was $824,000 for 2008 compared to $4,738,000 for the same period last year. The change is primarily due to lower paydown of debt in 2008 as a result of lower debt balances in 2008 and debt issuance costs paid in 2007 as part of the debt refinancing in the second quarter of 2007.

At December 31, 2008, the Company had $2,800,000 of debt obligations representing borrowings on the bank term loan.

The interest rates on the Company's credit facilities are variable rates based on one or more interest rate indices. The interest rates in effect as of December 31, 2008 were 2.61% on the term loan. Under the Company's credit agreement, which expires in May 2012, the interest rate on the Company's outstanding debt can be fixed for terms of one, three, or six months at specified amounts not to exceed

the total outstanding loan amount. Management monitors market interest rates in efforts to minimize interest expense of the Company. As of December 31, 2008, the interest rate for all of the Company's outstanding debt is on a one-month contract, with the option to change the term upon the renewal of each contract. As of December 31, 2008, the amount available under the lines-of-credit was approximately $15.2 million.

The Company's working capital, capital expenditure and debt service requirements are expected to be funded from cash provided by operations and amounts available under the Company's credit facilities.

The agreement contains certain financial covenants related to maximum leverage, minimum fixed charge coverage and minimum tangible net worth of the company. The Company was in compliance with all covenants at December 31, 2008.

The Company has a bank overdraft facility payable to a foreign bank with no monthly repayments required. The facility had no outstanding balance as of December 31, 2008. The amount available under the overdraft facility was € 300,000 ($423,000 at the December 31, 2008 exchange rate).

Price Levels and the Impact of Inflation

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

Recent Accounting Pronouncements

In December 2008 the FASB issued FSP No. FAS 132(R)-1, "Employers' Disclosures About Postretirement Benefit Plan Assets" (FSP No. FAS 132(R)-1). This guidance requires disclosure of how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies, the major categories of plan assets, significant concentrations of risk within plan assets, inputs and valuation techniques to measure fair value and the effect of significant unobservable inputs on changes in plan assets for the period. FSP No. FAS 132(R)-1 is effective for the fiscal year ending December 31, 2009. The Company is in the process of evaluating the impact this guidance will have on our consolidated financial statements.

In February 2007 the Financial Accounting Standards Board ("FASB") issued SFAS 159, "The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115," which permits companies to choose, at specified election dates, to measure certain financial instruments and other eligible items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are subsequently reported in earnings. The decision to elect the fair value option is generally irrevocable, is applied instrument by instrument and can only be applied to an entire instrument. The standard was effective for the Company as of January 1, 2008. The Company has not elected the fair value option for any eligible items.