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 September 30, 2009 compared to three months ended September 30, 2008

Allied had net sales of $11.3 million for the three months ended September 30, 2009, down $3.1 million, or 21.5%, from net sales of $14.4 million in the prior year same quarter. Customer orders of $11.6 million were $1.7 million lower than the prior year same quarter. Purchase order releases were $3.2 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.

$99,000 of the decrease in the Company's sales compared to the same quarter of last year are due to discontinuation of reimbursement from Abbott for product development activities to pursue development of a new carbon dioxide absorption product. Sales for the three months ended September 30, 2008 include $99,000 of such reimbursements. 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.

Sales for the three months ended September 30, 2009 include $172,050 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 September 30, 2008 include $172,500 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 19.8% from the prior year same quarter, while international business, which represented 14.8% of first quarter sales, was down 30.7%. Orders for the Company's products for the three months ended September 30, 2009 of $11.6 million were $1.7 million or 12.8% lower than orders for the prior year same quarter of $13.3 million. Domestic orders are down 10.1% over the prior year same quarter while international orders, which represented 16.2% of first quarter orders, were 25.7% lower than orders for the prior year same quarter.

Gross profit for the three months ended September 30, 2009 was $2.4 million, or 21.2% of net sales, compared to $3.5 million, or 24.3% of net sales, for the three months ended September 30, 2008. Gross profit during the first 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 September 30, 2009 were $3.6 million compared to selling, general and administrative expenses of $3.2 million for the three months ended September 30 2008. Stock option expense increased approximately $0.6 million due to the grant of immediately vested stock options to the Company's President and CEO. This increase was partially offset by a decrease of approximately $103,000 for compensation expense and a decrease of approximately $47,000 for recruiting expense compared to the same quarter of the prior year. Due to the low level of sales for the first quarter of fiscal 2010, sales commissions decreased $57,000 compared to the same quarter of the prior year.

Loss from operations was $1.2 million for the three months ended September 30, 2009 compared to income from operations of $0.3 million for the three months ended September 30, 2008. Interest income was $984 for the three months ended September 30, 2009 compared to interest income of $30,659 for the three months ended September 30, 2008. Allied had loss before benefit from income taxes in the first quarter of fiscal 2010 of $1.2 million, compared to income before provision for income taxes in the first quarter of fiscal 2009 of $0.3 million. The Company recorded a tax benefit of $0.5 million for the three-months ended September 30, 2009 compared to a tax provision of $0.1 million for the three months ended September 30, 2008.

Net loss for the first quarter of fiscal 2010 was $0.7 million or $0.09 per basic and diluted share compared to net income of $0.2 million or $0.03 per basic and diluted share for the first quarter of fiscal 2009. The weighted average number of common shares outstanding, used in the calculation of basic earnings per share for the first quarters of fiscal 2010 and 2009 were 7,988,321 and 7,891,232 shares, respectively. The weighted average number of common shares outstanding used in the calculation of diluted earnings per share for the first quarters of fiscal 2010 and fiscal 2009 were 7,988,321 and 8,132,931 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 $17.1 million at September 30, 2009 compared to $17.0 million at June 30, 2009. Income taxes receivable increased $0.7 million and cash increased $0.4 million. Deferred income taxes decreased $0.2 million and accrued liabilities decreased $0.1 million. At September 30, 2009 these increases in working capital were offset by a $0.5 million increase in accounts payable, and a $0.1 million decrease in inventories. Accounts receivable decreased $0.8 million to $5.3 million at September 30, 2009. Accounts receivable as measured in days of sales outstanding ("DSO") was 43 DSO at September 30, 2009; unchanged from June 30, 2009.

The Company has entered into a credit facility arrangement with Bank of America, the successor in interest to LaSalle Bank National Association (the "Bank"). The credit facility was amended on September 26, 2002, September 26, 2003, August 25, 2004, September 1, 2005, and September 30, 2008.

Under the terms of the credit facility, the Company is required to be in compliance with certain financial covenants pertaining to stockholders' equity, capital expenditures and net income. Additionally, the terms of the credit facility restrict the Company from the payment of dividends on any class of its stock. At September 30, 2009, the Company was in violation of its fixed charge coverage ratio covenant under the credit agreement and the Company had no outstanding amounts under the credit facility. The Company is negotiating with the Bank for an acceptable waiver and amendment of the credit agreement. The Company is also negotiating with other financial institutions to obtain a replacement credit facility. Based on such discussions, the Company believes it will be able to negotiate an acceptable waiver and amendment with the Bank or to procure a replacement credit facility with another lender. Even if this were not possible, the Company does not anticipate the technical default under the credit facility to materially impact its liquidity.

The revolving credit facility provides for a borrowing base of 80% of eligible accounts receivable plus the lesser of 50% of eligible inventory or $7.0 million, subject to reserves as established by the Bank. The maximum borrowing under the revolving credit facility is $10 million. At June 30, 2009, $10 million was available under the revolving credit facility. However, the Company does not have any availability under the revolving credit facility due to the financial covenant violations discussed above. As a result of an amendment made on September 30, 2008, the credit facility matures on September 1, 2010. Borrowings under the facility accrue interest at a variable rate equal to the Bank's prime rate. The credit facility calls for a commitment fee payable quarterly based on the average daily unused portion of the revolving credit facility. This commitment fee is 0.25% if the Company's ratio of funded debt to EBITDA is greater than or equal to 1.5. The commitment fee reduces to 0.20% if this ratio is less than 1.5 but greater than or equal to 1.0, and the fee reduces to 0.15% if this ratio is less than 1.0. The revolving credit facility also provides for a commitment guaranty of up to $5.0 million for letters of credit and requires a per annum fee of 2.50% on outstanding letters of credit. At September 30, 2009, the Company had no letters of credit outstanding. Any outstanding letters of credit decrease the amount available for borrowing under the revolving credit facility.

At September 30, 2009 the Company had no aggregate indebtedness, including capital lease obligations, short-term debt and long term debt.

In the event that economic conditions were to severely worsen for a protracted period of time, we believe that we will have borrowing capacity under credit facilities that 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 $1.2 million for the fiscal year ended June 30, 2010, could be postponed.

Inflation has not had a material effect on the Company's business or results of operations during the first quarter of fiscal 2010.

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.

Recently Issued Accounting Guidance

In April 2009, the FASB issued guidance ("Fair Value Determination Guidance") in the Fair Value Measurements and Disclosures Topic of the ASC regarding the determination of fair value in instances where market conditions result in either inactive markets for assets and liabilities or disorderly transactions within markets. The Fair Value Determination Guidance affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. The Fair Value Determination Guidance requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence and expands certain disclosure requirements. The Fair Value Determination Guidance became effective for Allied Healthcare Products, Inc. in the quarter ended September 30, 2009, and its adoption did not have a significant effect on the Company's financial position, results of operations, or cash flows.

In December 2007, the FASB issued the Business Combinations Topic of the ASC. The Business Combinations Topic replaces previously issued guidance regarding business combinations, and applies to all transactions and other events in which one entity obtains control over one or more other businesses. Departing from the cost-allocation process of previous guidance, the Business Combinations Topic requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquired entity at the acquisition date, measured at their fair values as of that date. Contingent consideration is recognized and measured at fair value at the acquisition date, and acquisition related costs are expensed as incurred. The Business Combinations Topic also distinguishes between assets acquired and liabilities assumed arising from contractual contingencies as of the acquisition date and assets or liabilities arising from all other contingencies, requiring different treatment for each type of contingency. The Business Combinations Topic is effective for Allied Healthcare Products, Inc. on July 1, 2009. To the extent business combinations occur on or after the effective date, the Company's accounting for those transactions will be significantly affected by the provisions of the Business Combinations Topic.

The Company has determined that all other recently issued accounting guidance will not have a material impact on its consolidated financial position, results of operations and cash flows, or do not apply to its operations.