Summary of ALLIED HEALTHCARE PRODUCTS INC

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

Three months ended March 31, 2009 compared to three months ended March 31, 2008

Allied had net sales of $12.4 million for the three months ended March 31, 2009, down $1.5 million, or 10.8%, from net sales of $13.9 million in the prior year same quarter. Customer orders were $0.8 million lower than the prior year same quarter. Purchase order releases were $1.9 million lower than in the prior year same quarter. Purchase order release times depend on the scheduling practices of individual customers, and do vary over time. Releases for the quarter are also impacted by year to date orders which are $2.1 million lower than in the prior year. At this time, the Company believes this decrease in orders and releases is due to broad economic conditions and does not represent a decrease in the Company's market share.

Sales were also down from the prior year due to a $122,000 decrease in sales recognized as a result of product development activities to pursue development of a new carbon dioxide absorption product. Sales for the three months ended March 31, 2008 include $122,000 as a result of product development activities to pursue development of a new carbon dioxide absorption product. While the Company continues to pursue development of a new product, reimbursement of those activities by Abbott was completed during the quarter ended September 30, 2008. Additional cost to develop the new product during the third quarter of fiscal 2009 was not reimbursed.

Sales for the three months ended March 31, 2009 include $171,600 for the recognition into income of payments resulting from the agreement with Abbott Laboratories to cease the production and distribution of Baralyme®. Sales for the three months ended March 31, 2008 include $116,250 for the recognition into income of payments resulting from the agreement with Abbott Laboratories to cease the production and distribution of Baralyme®. Income from the agreement will continue to be recognized at $57,350 per month until the expiration of the agreement in August 2012. Allied continues to sell Carbolime®, a carbon dioxide absorbent with a different formulation than Baralyme®. The Company ceased the sale of Baralyme® on August 27th, 2004.

Domestic sales were down 13.4% from the prior year same quarter, while international business, which represented 22.2% of third quarter sales, was down 2.0%. Orders for the Company's products for the three months ended March 31, 2009 of $12.5 million were $0.8 million or 6.3% lower than orders for the prior year same quarter of $13.4 million. Domestic orders are down 7.3% over the prior year same quarter while international orders, which represented 20.2% of third quarter orders, were 2.2 % lower than orders for the prior year same quarter. At this time, the Company believes this decrease in domestic orders is due to market conditions, and does not represent a decrease in the Company's market share.

Gross profit for the three months ended March 31, 2009 was $2.5 million, or 20.2% of net sales, compared to $3.2 million, or 23.0% of net sales, for the three months ended March 31, 2008. Gross profit during the third quarter was negatively impacted by the lower level of sales and low production volume, resulting in less effective utilization of the Company's manufacturing capacity and the fixed expenses associated with that capacity.

Selling, general and administrative expenses for the three months ended March 31, 2009 were $3.2 million compared to selling, general and administrative expenses of $3.0 million for the three months ended March 31 2008. Salaries and benefits increased approximately $0.2 million. This increase is primarily due to open employee positions in the third quarter of the prior fiscal year and normal increases in the cost of fringe benefits. There have not been changes in staffing levels compared to the same quarter of the prior fiscal year. Selling, general and administrative expenses also include approximately $24,000 in product development cost for the new carbon dioxide absorption product being developed. In the prior year all development cost for this product were reimbursed. These development costs will continue for the remainder of the fiscal year and are estimated to be an additional $300,000.

Loss from operations was $0.7 million for the three months ended March 31, 2009 compared to income from operations of $0.2 million for the three months ended March 31, 2008. Interest income was $5,041 for the three months ended March 31, 2009 compared to interest income of $13,928 for the three months ended March 31, 2008. Allied had loss before benefit from income taxes in the third quarter of fiscal 2009 of $0.7 million, compared to income before provision for income taxes in the third quarter of fiscal 2008 of $0.2 million. The Company recorded a tax benefit of $0.3 million for the three-months ended March 31, 2009 compared to a tax provision of $0.1 million for the three months ended March 31, 2008.

Net loss for the third quarter of fiscal 2009 was $0.5 million or $0.06 per basic and diluted share compared to net income of $0.1 million or $0.01 per basic and diluted share for the third quarter of fiscal 2008. The weighted average number of common shares outstanding, used in the calculation of basic earnings per share for the third quarters of fiscal 2009 and 2008 were 7,901,327 and 7,883,577 shares, respectively. The weighted average number of common shares outstanding used in the calculation of diluted earnings per share for the third quarters of fiscal 2009 and fiscal 2008 were 7,901,327 and 8,122,888 shares, respectively.

Nine months ended March 31, 2009 compared to nine months ended March 31, 2008

Allied had net sales of $39.4 million for the nine months ended March 31, 2009, down $2.3 million, or 5.5%, from net sales of $41.7 million in the prior year same period. Customer orders were $2.1 million lower than in the prior year same period, and customer purchase order releases were $2.7 million lower than in the prior year same period. Purchase order release times depend on the scheduling practices of individual customers and do vary over time. At this time, the Company believes this decrease in orders and releases is due to broad economic conditions and does not represent a decrease in market share.

Sales were also down from the prior year due to a $671,000 decrease in sales recognized as a result of product development activities to pursue development of a new carbon dioxide absorption product. While the Company continues to pursue development of a new product, reimbursement of those activities was limited to $99,000 during the nine months ended March 31, 2009. Additional cost to develop the new product will not be reimbursed.

Sales for the nine months ended March 31, 2009 include $516,150 for the recognition into income of payments resulting from the agreement with Abbott Laboratories to cease the production and distribution of Baralyme®. Sales for the nine months ended March 31, 2009 also include $99,000 as a result of product development activities to pursue development of a new carbon dioxide absorption product. The agreement with Abbott provides for Abbott to pay Allied up to $2,150,000 in product development cost to pursue development of a new carbon dioxide absorption product for use in connection with inhalation anesthetics that does not contain potassium hydroxide and does not produce a significant exothermic reaction with currently available inhalation agents. As of March 31, 2009; $2,150,000 has been received as a result of product development activities. The Company ceased the sale of Baralyme® on August 27th, 2004.

Sales for the nine months ended March 31, 2008 include $348,750 for the recognition into income of payments resulting from the agreement with Abbott Laboratories to cease the production and distribution of Baralyme®. Sales for the nine months ended March 31, 2008 also include $671,000 as a result of product development activities to pursue development of a new carbon dioxide absorption product. Income from the agreement will continue to be recognized at $57,350 per month until the expiration of the agreement in August 2012. Allied continues to sell Carbolime®, a carbon dioxide absorbent with a different formulation than Baralyme®.

Domestic sales were down 4.8% from the first nine months of the prior year, while international business, which represented 19.3% of the first nine months of sales, was down 8.6%. Orders for the Company's products for the nine months ended March 31, 2009 of $38.1 million were $2.2 million or 5.5% lower than orders for the prior year same period of $40.3 million. International orders, which represented 20.3% of the first nine months of orders, are up 6.9% over the prior year same period while domestic orders are down 8.0% over the prior year same period. At this time, the Company believes this decrease is due to market conditions and does not represent a decrease in the Company's market share.

Gross profit for the nine months ended March 31, 2009 was $8.7 million, or 22.1% of net sales, compared to $9.2 million, or 22.1% of net sales, for the nine months ended March 31, 2008. Cost of sales for the nine months ended March 31, 2009 also include $94,000 as a result of product development of a new carbon dioxide absorption product.

Selling, general and administrative expenses for the nine months ended March 31, 2009 were $9.8 million, a net increase of $0.8 million, or 8.9%, from $9.0 million for the nine months ended March 31, 2008. Salaries and benefits increased by $0.6 million from the prior year primarily due to open employee positions in the prior fiscal year and normal increases in the cost of fringe benefits. There have not been changes in staffing levels over the prior year. Also, outside services increased approximately $139,000 primarily for the testing of the Company's new EPV100 and MCV ventilators designed to meet the needs of the mass casualty and pandemic markets. Additionally, legal expenses increased by approximately $0.1 million, as a result of product liability claims. Selling, general and administrative expenses also include approximately $92,000 in product development cost for the new carbon dioxide absorption product being developed. In the prior year all development cost for this product were reimbursed. These development costs will continue for the remainder of the fiscal year and are estimated to be an additional $300,000.

Loss from operations was $1.1 million for the nine months ended March 31, 2009 compared to income from operations of $0.3 million for the nine months ended March 31, 2008. Interest income was $54,155 for the nine months ended March 31, 2009 compared to interest income of $92,874 for the nine months ended March 31, 2008. Allied had loss before benefit for income taxes for the first nine months of fiscal 2009 of $1.1 million, compared to income before provision for income taxes for the first nine months of fiscal 2008 of $0.3 million. The Company recorded a tax benefit of $0.4 million for the nine-month period ended March 31, 2009, versus a tax provision of $0.1 million for the nine-month period ended March 31, 2008.

In fiscal 2009, the net loss for the first nine months was $0.7 million or $0.09 per basic and diluted share compared to net income of $0.2 million or $0.02 per basic and diluted share for the first nine months of fiscal 2008. The weighted average number of common shares outstanding, used in the calculation of basic earnings per share for the first nine months of fiscal 2009 and 2008 were 7,897,937 and 7,883,577 shares, respectively. The weighted average number of common shares outstanding used in the calculation of diluted earnings per share for the first nine months of fiscal 2009 and fiscal 2008 were 7,897,937 and 8,117,684 shares, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company believes that available resources and anticipated cash flows from operations are sufficient to meet operating requirements in the coming year.

The Company's working capital was $16.9 million at March 31, 2009 compared to $18.3 million at June 30, 2008. Accrued liabilities decreased $1.4 million and accounts payable decreased $0.3 million. Inventory increased $1.6 million, and other current assets increased $0.1 million. At March 31, 2009 these increases in working capital were more than offset by a decrease in Cash and cash equivalents of $4.1 million and a decrease of $0.7 million in accounts receivable to $5.8 million at March 31, 2009. Accounts receivable as measured in days of sales outstanding ("DSO") increased to 39 DSO at March 31, 2009; up from 34 DSO at June 30, 2008.

The increase in inventory is primarily due to the decrease in sales during the second and third quarters of fiscal 2009. The Company does believe that inventory will decline as a result of reductions in purchases and production to adjust for the lower demand during the year. However, approximately $620,000 of the $1.6 million increase in inventory is due to finished goods and components for the Company's new mass casualty ventilators and is permanent in nature. Also, approximately $800,000 of the $4.1 million decrease in Cash and cash equivalents is due to investment in capital expenditures for cost reduction projects. Additionally, approximately $550,000 of the decrease in Cash and cash equivalents is due to investment in capital expenditures for the Company's new product introductions and maintenance of plant capacity.

On September 30, 2008, the Bank and the Company agreed to an amendment of the credit facility. In conjunction with the amendment to the Company's credit facility, the Bank extended the maturity on the Company's revolving credit facility to September 1, 2010, with automatic renewals. The amendment also increased the capital expenditure limitation to $4,000,000, from $2,000,000, for the fiscal year ended June 30, 2009. The entire credit facility continues to accrue interest at the Bank's prime rate. The prime rate was 3.25% on March 31, 2009. The interest rate on prime rate loans may increase from prime to prime plus 0.75% if the ratio of the Company's funded debt to EBITDA exceeds 2.5. The amended credit facility continues to provide the Company with a rate of LIBOR plus 1.75%, at the Company's option. The optional LIBOR rate may increase from LIBOR plus 1.75% to LIBOR plus 2.75% based on the Company's fixed charge coverage ratio. The 90-day LIBOR rate was 1.21% at March 31, 2009.

At March 31, 2009 the Company had no aggregate indebtedness, including capital lease obligations, short-term debt and long term debt.

The Company was in compliance with all of the financial covenants associated with its credit facility at March 31, 2009.

In the event that economic conditions were to severely worsen for a protracted period of time, we believe that our borrowing capacity under our credit facilities will provide sufficient financial flexibility. The Company would have options available to ensure liquidity in addition to increased borrowing. Capital expenditures, which are budgeted at $3.4 million for the fiscal year ended June 30, 2009, could be postponed. At March 31, 2009, the Company had no bank debt. Based on the Company's current level of debt, and performance, debt would bear interest at the Bank's prime rate. The Company's agreement with the Bank does include provisions for higher interest rates at higher debt levels and different levels of Company performance.

Inflation has not had a material effect on the Company's business or results of operations.

Litigation and Contingencies

The Company becomes, from time to time, a party to personal injury litigation arising out of incidents involving the use of its products. The Company believes that any potential judgments resulting from these claims over its self-insured retention will be covered by the Company's product liability insurance.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (FAS 141(R)). FAS 141(R) requires that the fair value of the purchase price of an acquisition including the issuance of equity securities be determined on the acquisition date; requires that all assets, liabilities, noncontrolling interests, contingent consideration, contingencies, and in-process research and development costs of an acquired business be recorded at fair value at the acquisition date; requires that acquisition costs generally be expensed as incurred; requires that restructuring costs generally be expensed in periods subsequent to the acquisition date; and requires that changes in deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. FAS 141(R) also broadens the definition of a business combination and expands disclosures related to business combinations. FAS 141(R) will be applied prospectively to business combinations occurring after the beginning of the Company's fiscal year 2010, except that business combinations consummated prior to the effective date must apply FAS 141(R) income tax requirements immediately upon adoption. The Company is currently evaluating the impact of FAS 141(R) on its financial position, results of operations, and cash flows, and does not anticipate any material effect on the Company's consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements", which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement was effective for the Company beginning July 1, 2008. Adoption of SFAS No. 157 did not have a material impact on the Company's results of operations, financial position or cash flows.