ALLIED HEALTHCARE PRODUCTS INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR JUNE 30, 2004

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-19266
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ALLIED HEALTHCARE PRODUCTS, INC.
[Exact name of registrant as specified in its charter]

DELAWARE 25-1370721
(State or other jurisdiction of (I.R.S. employer
Incorporation or organization) identification no.)

1720 SUBLETTE AVENUE 63110
ST. LOUIS, MISSOURI (zip code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(314) 771-2400
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock
Preferred Stock
Preferred Stock Purchase Rights
(Title of class)
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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. [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. Yes. [X] No. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12 b-2). Yes. [ ] No. [X]

As of December 31, 2003, the last business day of the registrant's most
recently completed second fiscal quarter, the aggregate market value of the
voting stock held by non-affiliates of the Registrant was approximately
$12,828,750.

As of September 25, 2004, there were 7,818,432 shares of common stock,
$0.01 par value (the "Common Stock"), outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement dated October 11, 2004 (portion) (Part III)
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ALLIED HEALTHCARE PRODUCTS, INC.

INDEX TO FORM 10-K

1

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995

Statements contained in this Report, which are not historical facts or
information, are "forward-looking statements." Words such as "believe,"
"expect," "intend," "will," "should," and other expressions that indicate future
events and trends identify such forward-looking statements. These
forward-looking statements involve risks and uncertainties, which could cause
the outcome and future results of operations and financial condition to be
materially different than stated or anticipated based on the forward-looking
statements. Such risks and uncertainties include both general economic risks and
uncertainties, risks and uncertainties affecting the demand for and economic
factors affecting the delivery of health care services, and specific matters
which relate directly to the Company's operations and properties as discussed in
Items 1, 3 and 7 in this Report. The Company cautions that any forward-looking
statements contained in this report reflect only the belief of the Company or
its management at the time the statement was made. Although the Company believes
such forward-looking statements are based upon reasonable assumptions, such
assumptions may ultimately prove inaccurate or incomplete. The Company
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement was made.

PART I

ITEM 1. BUSINESS

GENERAL

Allied Healthcare Products, Inc. ("Allied" or the "Company") manufactures a
variety of respiratory products used in the health care industry in a wide range
of hospital and alternate site settings, including sub-acute care facilities,
home health care and emergency medical care. The Company's product lines include
respiratory care products, medical gas equipment and emergency medical products.
The Company believes that it maintains significant market shares in selected
product lines.

The Company's products are marketed under well-recognized and respected
brand names to hospitals, hospital equipment dealers, hospital construction
contractors, home health care dealers, emergency medical products dealers and
others. Allied's product lines include:

RESPIRATORY CARE PRODUCTS

- respiratory care/anesthesia products

- home respiratory care products

MEDICAL GAS EQUIPMENT

- medical gas system construction products

- medical gas system regulation devices

- disposable oxygen and specialty gas cylinders

- portable suction equipment

EMERGENCY MEDICAL PRODUCTS

- respiratory/resuscitation products

- trauma and patient handling products

The Company's principal executive offices are located at 1720 Sublette
Avenue, St. Louis, Missouri 63110, and its telephone number is (314) 771-2400.

2

MARKETS AND PRODUCTS

In fiscal 2004, respiratory care products, medical gas equipment and
emergency medical products represented approximately 26%, 57% and 17%,
respectively, of the Company's net sales. In fiscal 2003, respiratory care
products, medical gas equipment and emergency medical products represented
approximately 27%, 57%, and 16%, respectively, of the Company's net sales. The
Company operates in a single industry segment and its principal products are
described in the following table:

RESPIRATORY CARE PRODUCTS

MARKET. Respiratory care products are used in the treatment of acute and
chronic respiratory disorders such as asthma, emphysema, bronchitis and
pneumonia. Respiratory care products are used in both hospitals and alternate
care settings. Sales of respiratory care products are made through distribution
channels focusing on hospitals and other sub-acute facilities. Sales of home
respiratory care products are made through durable medical equipment dealers
through telemarketing, and by contract sales with national chains.

RESPIRATORY CARE/ANESTHESIA PRODUCTS. The Company manufactures and sells a
broad range of products for use in respiratory care and anesthesia delivery.
These products include large volume air compressors, calibration equipment,
humidifiers, croup tents, equipment dryers and a complete line of respiratory
disposable products such as oxygen tubing, facemasks, cannulas and ventilator
circuits. These products include CO(2) absorbents, including Baralyme(R).

On August 27, 2004, Allied Healthcare Products, Inc. ("Allied") entered
into an agreement with Abbott Laboratories ("Abbott") pursuant to which Allied
will cease production of its product Baralyme(R), will, within sixty days,
effect the withdrawal of Baralyme(R) product held by distributors and will
pursue the development of a new carbon dioxide absorbent product. Baralyme(R), a
carbon dioxide absorbent product, has been used safely
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and effectively in connection with inhalation anesthetics since its introduction
in the 1920s. In recent years, the number of inhalation anesthetics has
increased, giving rise to concerns regarding the use of Baralyme(R) in
conjunction with these newer inhalation anesthetics when Baralyme(R) has been
allowed, contrary to recommended practice, to become desiccated. The agreement
also provides that, for a period of eight years, Allied will not manufacture,
distribute, promote, market, sell, commercialize or donate any Baralyme(R)
product or similar product based upon potassium hydroxide and will not develop
or license any new carbon dioxide absorbent product containing potassium
hydroxide. More detailed information concerning this agreement is included in
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations.

HOME RESPIRATORY CARE PRODUCTS. Home respiratory care products represent
one of Allied's potential growth areas. Allied's broad line of home respiratory
care products include aluminum oxygen cylinders, oxygen regulators, pneumatic
nebulizers, portable suction equipment and the full line of respiratory
disposable products.

MEDICAL GAS EQUIPMENT

MARKET. The market for medical gas equipment consists of hospitals,
alternate care settings and surgery centers. The medical gas equipment group is
broken down into three separate categories: construction products, regulation
devices and suction equipment, and disposable cylinders.

CONSTRUCTION PRODUCTS. Allied's medical gas system construction products
consist of in-wall medical system components, central station pumps and
compressors, and headwalls. These products are typically installed during
construction or renovation of a health care facility and are built in as an
integral part of the facility's physical plant. Typically, the contractor for
the facility's construction or renovation purchases medical gas system
components from manufacturers and ensures that the design specifications of the
health care facility are met.

Allied's in-wall components, including outlets, manifolds, alarms, ceiling
columns and zone valves, serve a fundamental role in medical gas delivery
systems.

Central station pumps and compressors are individually engineered systems
consisting of compressors, reservoirs, valves and controls designed to drive a
hospital's medical gas and suction systems. Each system is designed specifically
for a given hospital or facility, which purchases pumps and compressors from
suppliers. The Company's sales of pumps and compressors are driven, in large
part, by its share of the in-wall components market.

The Company's construction products are sold primarily to hospitals,
alternate care settings and hospital construction contractors. The Company
believes that it holds a major share of the U.S. market for its construction
products, that these products are installed in more than three thousand
hospitals in the United States and that its installed base of equipment in this
market will continue to generate follow-on sales. The Company believes that most
hospitals and sub-acute care facility construction spending is for expansion or
renovation of existing facilities. Many hospital systems and individual
hospitals undertake major renovations to upgrade their operations to improve the
quality of care they provide, reduce costs and attract patients and personnel.

REGULATION DEVICES AND SUCTION EQUIPMENT. The Company's medical gas system
regulation products include flowmeters, vacuum regulators and pressure
regulators, as well as related adapters, fittings and hoses which measure,
regulate, monitor and help transfer medical gases from walled piping or
equipment to patients in hospital rooms, operating theaters or intensive care
areas. The Company's leadership position in the in-wall components market
provides a competitive advantage in marketing medical gas system regulation
devices that are compatible with those components.

Portable suction equipment is typically used when in-wall suction is not
available or when medical protocol specifically requires portable suction. The
Company also manufactures disposable suction canisters, which are clear
containers used to collect the fluids suctioned by in-wall or portable suction
systems. The containers have volume calibrations, which allow the medical
practitioner to measure the volume of fluids suctioned.
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The market for regulation devices and suction equipment includes hospital
and sub-acute care facilities. Sales of these products are made through the same
distribution channel as our respiratory care products. The Company believes that
it holds a significant share of the U.S. market in both regulation devices and
suction equipment.

DISPOSABLE CYLINDERS. Disposable oxygen cylinders are designed to provide
oxygen for short periods of time in emergency situations. Since they are not
subjected to the same pressurization as standard containers, they are much
lighter and less expensive than standard gas cylinders. The Company markets
filled disposable oxygen cylinders through industrial safety distributors and
similar customers, principally to first aid providers, restaurants, industrial
plants and other customers that require oxygen for infrequent emergencies.

EMERGENCY MEDICAL PRODUCTS

MARKET. Emergency medical products are used in the treatment of
trauma-induced injuries. The Company's emergency medical products provide
patient resuscitation or ventilation during cardiopulmonary resuscitation or
respiratory distress as well as immobilization and treatment for burns. The
Company believes that the trauma care venue for health care services is
positioned for growth in light of the continuing trend towards providing health
care outside the traditional hospital setting. The Company also expects that
other countries will develop trauma care systems in the future, although no
assurance can be given that such systems will develop or that they will have a
favorable impact on the Company. Sales of emergency medical products are made
through specialized emergency medical products distributors to ambulance
companies, fire departments and emergency medical systems volunteer
organizations.

The emergency medical products are broken down into two categories:
respiratory/resuscitator products and trauma patient handling products.

RESPIRATORY/RESUSCITATION PRODUCTS. The Company's
respiratory/resuscitation products include demand resuscitation valves, portable
resuscitation systems, bag masks and related products, emergency transport
ventilators, precision oxygen regulators, minilators, multilators and
humidifiers.

Demand resuscitation valves are designed to provide 100% oxygen to
breathing or non-breathing patients. In an emergency situation, they can be used
with a mask or tracheotomy tubes and operate from a standard regulated oxygen
system. The Company's portable resuscitation systems provide fast, simple and
effective means of ventilating a non-breathing patient during cardiopulmonary
resuscitation and 100% oxygen to breathing patients on demand with minimal
inspiratory effort. The Company also markets a full line of disposable and
reusable bag mask resuscitators, which are available in a variety of adult and
child-size configurations. Disposable mouth-to-mask resuscitation systems have
the added advantage of reducing the risk of transmission of communicable
diseases.

The Company's autovent transport ventilator can meet a variety of needs in
different applications ranging from typical emergency medical situations to more
sophisticated air and ground transport. Each autovent is accompanied by a
patient valve, which provides effective ventilation during cardiopulmonary
resuscitation or respiratory distress. When administration of oxygen is required
at the scene of a disaster, in military field hospitals or in a multiple-victim
incident, Allied's minilators and multilators are capable of providing oxygen to
one or a large number of patients.

To complement the family of respiratory/resuscitation products, the Company
offers a full line of oxygen product accessories. This line of accessory
products includes reusable aspirators, tru-fit masks, disposable cuffed masks
and related accessories.

TRAUMA AND PATIENT HANDLING PRODUCTS. The Company's trauma and patient
handling products include spine immobilization products, pneumatic anti-shock
garments and trauma burn kits. Spine immobilization products include a backboard
that is designed for safe immobilization of injury victims and provides a
durable and cost effective means of emergency patient transportation and
extrication. The infant/pediatric immobilization board is durable and scaled for
children. The half back extractor/rescue vest is useful for both suspected
cervical/spinal injuries and for mountain and air rescues. The Company's
pneumatic anti-shock

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garments are used to treat victims experiencing hypovolemic shock. Allied's
trauma burn kits contain a comprehensive line of products for the treatment of
trauma and burns.

SALES AND MARKETING

Allied sells its products primarily to respiratory care/anesthesia product
distributors, hospital construction contractors, emergency medical equipment
dealers and directly to hospitals. The Company maintains a sales force of 33
sales professionals, all of whom are full-time employees of the Company.

The sales force includes 24 medical gas specialists, 3 emergency
specialists and 6 international sales representatives. Two product managers are
responsible for the marketing activities of our product lines.

The 24 medical gas specialists are responsible for sales of all Allied
products with the exception of emergency products within their territory. Sales
of products are accomplished through respiratory care/ anesthesia distributors
for the regulation devices, suction equipment, respiratory care/anesthesia
products and disposable cylinders. The homecare products are sold primarily
through our own in house telemarketing. Construction products are sold direct to
hospital construction contractors and through distributors.

Emergency medical specialists are responsible for sales of
respiratory/resuscitation products, trauma and patient handling products. These
products are principally sold to ambulance companies, fire departments and
emergency medical systems volunteer organizations through specialized emergency
medical products distributors.

Allied's international business represents a potential growth area that the
Company has been pursuing. Allied's net sales to foreign markets totaled 17% of
the Company's net sales in fiscal 2004, 17% of the Company's net sales in fiscal
2003, and 16% of the Company's net sales in fiscal 2002. International sales are
made through a network of dealers, agents and U.S. exporters who distribute the
Company's products throughout the world. Allied has market presence in Canada,
Mexico, Central and South America, Europe, the Middle East and the Far East.

MANUFACTURING

Allied's manufacturing processes include fabrication, electro-mechanical
assembly operations and plastics manufacturing. A significant part of Allied's
manufacturing operations involves electro-mechanical assembly of proprietary
products and the Company is vertically integrated in most elements of metal
machining and fabrication. Most of Allied's hourly employees are involved in
machining, metal fabrication, plastics manufacturing and product assembly.

Allied manufactures small metal components from bar stock in a machine
shop, which includes automatic screw machines, horizontal lathes and drill
presses and computer controlled machining centers. The Company makes larger
metal components from sheet metal using computerized punch presses, brake
presses and shears. In its plastics manufacturing processes, the Company
utilizes both extrusion and injection molding. The Company believes that its
production facilities and equipment are in good condition and sufficient to meet
planned increases in volume over the next few years and that the conditions in
local labor markets should permit the implementation of additional shifts and
days operated.

RESEARCH AND DEVELOPMENT

Allied's research and development group is responsible for the development
of new products. This group is staffed with mechanical and electrical engineers.

During fiscal year 2004 the research and development group completed the
design and released to manufacturing a new suction pump for the emergency market
and a cost reduced regulator design.

The new suction pump provides the EMS market with a rugged suction pump
that is battery operated. This suction pump also includes a docking station for
mounting in an emergency vehicle. The docking station is capable of recharging
the battery or running the unit if the battery is low.

6

The research and development group has also completed the design of an
additional product. Manufacturing is in the process of preparing to produce this
product. This product is expected to be released for sale during the second
quarter of fiscal year 2005.

As part of the agreement relating to the withdrawal of the Baralyme(R)
product, Abbott has agreed to pay to Allied up to $2,150,000 in product
development costs 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. It is Allied's intention to pursue
development of a new carbon dioxide absorption product. More detailed
information concerning this agreement is included in Item 7,Management's
Discussion and Analysis of Financial Condition and Results of Operations.

GOVERNMENT REGULATION

The Company's products and its manufacturing activities are subject to
extensive and rigorous government regulation by federal and state authorities in
the United States and other countries. In the United States, medical devices for
human use are subject to comprehensive review by the United States Food and Drug
Administration (the "FDA"). The Federal Food, Drug, and Cosmetic Act ("FDC
Act"), and other federal statutes and regulations, govern or influence the
research, testing, manufacture, safety, labeling, storage, record keeping,
approval, advertising and promotion of such products. Noncompliance with
applicable requirements can result in warning letters, fines, recall or seizure
of products, injunction, refusal to permit products to be imported into or
exported out of the United States, refusal of the government to clear or approve
marketing applications or to allow the Company to enter into government supply
contracts, or withdrawal of previously approved marketing applications and
criminal prosecution.

The Company is required to file a premarket notification in the form of a
premarket approval ("PMA") with the FDA before it begins marketing a new medical
device that offers new technology that is currently not on the market. The
Company also must file a premarket notification in the form of a 510(k) with the
FDA before it begins marketing a new medical device that utilizes existing
technology for devices that are currently on the market. The 510(k) submission
process is also required when the Company makes a change or modifies an existing
device in a manner that could significantly affect the device's safety or
effectiveness.

Compliance with the regulatory approval process in order to market a new or
modified medical device can be uncertain, lengthy and, in some cases, expensive.
There can be no assurance that necessary regulatory approvals will be obtained
on a timely basis, or at all. Delays in receipt or failure to receive such
approvals, the loss of previously received approvals, or failure to comply with
existing or future regulatory requirements could have a material adverse effect
on the Company's business, financial condition and results of operations.

The Company manufactures and distributes a broad spectrum of respiratory
therapy equipment, emergency medical equipment and medical gas equipment. To
date, all of the Company's FDA clearances have been obtained through the 510(k)
clearance process. These determinations are very fact specific and the FDA has
stated that, initially, the manufacturer is best qualified to make these
determinations, which should be based on adequate supporting data and
documentation. The FDA however, may disagree with a manufacturer's determination
not to file a 510(k) and require the submission of a new 510(k) notification for
the changed or modified device. Where the FDA believes that the change or
modification raises significant new questions of safety or effectiveness, the
agency may require a manufacturer to cease distribution of the device pending
clearance of a new 510(k) notification. Certain of the Company's medical devices
have been changed or modified subsequent to 510(k) marketing clearance of the
original device by the FDA. Certain of the Company's medical devices, which were
first marketed prior to May 28, 1976, and therefore, grandfathered and exempt
from the 510(k) notification process, also have been subsequently changed or
modified. The Company believes that these changes or modifications do not
significantly affect the devices' safety or effectiveness, or make a major
change or modification in the devices' intended uses and, accordingly,
submission of new 510(k) notification to the FDA is not required. There can be
no assurance, however, that the FDA would agree with the Company's
determinations.

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In addition, commercial distribution in certain foreign countries is
subject to additional regulatory requirements and receipt of approvals that vary
widely from country to country. The Company believes it is in compliance with
regulatory requirements of the countries in which it sells its products.

The Medical Device Reporting regulation requires that the Company provide
information to the FDA on deaths or serious injuries alleged to have been
associated with the use of its devices, as well as product malfunctions that
would likely cause or contribute to death or serious injury if the malfunction
were to recur. The Medical Device Tracking regulation requires the Company to
adopt a method of device tracking of certain devices, such as ventilators, which
are life-supporting or life-sustaining devices used outside of a device user
facility, some of which are permanently implantable devices. The regulation
requires that the method adopted by the Company will ensure that the tracked
device can be traced from the device manufacturer to the person for whom the
device is indicated (i.e., the patient). In addition, the FDA prohibits a
company from promoting an approved device for unapproved applications and
reviews a company's labeling for accuracy. Labeling and promotional activities
also are in certain instances, subject to scrutiny by the Federal Trade
Commission.

The Company's medical device manufacturing facilities are registered with
the FDA, and have received ISO 9001 Certification for the St. Louis facility and
certification per the Medical Device Directive (MDD -- European) for certain
products in 1998. As such, the Company will be audited by the FDA, ISO, and
European auditors for compliance with the Good Manufacturing Practices ("GMP"),
the ISO and MDD regulations for medical devices. These regulations require the
Company to manufacture its products and maintain its products and documentation
in a prescribed manner with respect to design, manufacturing, testing and
control activities. The Company also is subject to the registration and
inspection requirements of state regulatory agencies.

There can be no assurance that any required FDA or other governmental
approval will be granted, or, if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the marketing of the Company's
proposed products and cause the Company to undertake costly procedures. In
addition, the extent of potentially adverse government regulation that might
arise from future administrative action or legislation cannot be predicted. Any
failure to obtain, or delay in obtaining, such approvals could adversely affect
the Company's ability to market its proposed products.

Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. Medical
products shipped to the European Community require CE certification. Whether or
not FDA approval has been obtained, approval of a device by a comparable
regulatory authority of a foreign country generally must be obtained prior to
the commencement of marketing in those countries. The time required to obtain
such approvals may be longer or shorter than that required for FDA approval. In
addition, FDA approval may be required under certain circumstances to export
certain medical devices.

The Company is also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protections, fire hazard control and disposal of hazardous or
potentially hazardous substances.

THIRD PARTY REIMBURSEMENT

The cost of a majority of medical care in the United States is funded by
the U.S. Government through the Medicare and Medicaid programs and by private
insurance programs, such as corporate health insurance plans. Although the
Company does not receive payments for its products directly from these programs,
home respiratory care providers and durable medical equipment suppliers, who are
the primary customers for several of the Company's products, depend heavily on
payments from Medicare, Medicaid and private insurers as a major source of
revenues. In addition, sales of certain of the Company's products are affected
by the extent of hospital and health care facility construction and renovation
at any given time. The federal government indirectly funds a significant
percentage of such construction and renovation costs through Medicare and
Medicaid reimbursements. In recent years, governmentally imposed limits on
reimbursement to hospitals and other health care providers have impacted
spending for services, consumables and capital goods. A material
8

decrease from current reimbursement levels or a material change in the method or
basis of reimbursing health care providers is likely to adversely affect future
sales of the Company's products.

PATENTS, TRADEMARKS AND PROPRIETARY TECHNOLOGY

The company owns and maintains patents on several products it believes are
useful to the business and provides the company with an advantage over its
competitors. During fiscal 2004 the company was granted a patent on the SurgeX
post valve and continues to pursue several more on the SurgeX product. The
company also applied for a patent on the XTRA backboard design.

The Company owns and maintains U.S. trademark registrations for Chemetron,
Gomco, Oxequip, Lif-O-Gen, Life Support Products, Timeter, Vacutron and Schuco,
its principal trademarks. Registrations for these trademarks are also owned and
maintained in countries where such products are sold and such registrations are
considered necessary to preserve the Company's proprietary rights therein.

COMPETITION

The Company has different competitors within each of its product lines.
Many of the Company's principal competitors are larger than Allied and the
Company believes that most of these competitors have greater financial and other
resources. The Company competes primarily on the basis of price, quality and
service. The Company believes that it is well positioned with respect to product
cost, brand recognition, product reliability, and customer service to compete
effectively in each of its markets.

EMPLOYEES

At June 30, 2004, the Company had approximately 438 full-time employees.
Approximately 285 employees in the Company's principal manufacturing facility
located in St. Louis, Missouri, are covered by a collective bargaining agreement
that will expire on May 31, 2006. Approximately 12 employees at the Company's
facility in Stuyvesant Falls, New York are also covered by a collective
bargaining agreement scheduled to expire on April 15, 2007.

On August 27, 2004, Allied Healthcare Products, Inc. ("Allied") entered
into an agreement with Abbott Laboratories ("Abbott") pursuant to which Allied
will cease production of its product Baralyme(R), will, within sixty days,
effect the withdrawal of Baralyme(R) product held by distributors and will
pursue the development of a new carbon dioxide absorbent product. Baralyme(R), a
carbon dioxide absorbent product, has been used safely and effectively in
connection with inhalation anesthetics since its introduction in the 1920s. In
recent years, the number of inhalation anesthetics has increased, giving rise to
concerns regarding the use of Baralyme(R) in conjunction with these newer
inhalation anesthetics when Baralyme(R) has been allowed, contrary to
recommended practice, to become desiccated. The agreement also provides that,
for a period of eight years, Allied will not manufacture, distribute, promote,
market, sell, commercialize or donate any Baralyme(R) product or similar product
based upon potassium hydroxide and will not develop or license any new carbon
dioxide absorbent product containing potassium hydroxide. More detailed
information concerning this agreement is included in Item 7., Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Baralyme(R) was produced at Allied's Stuyvesant Falls, New York facility.

On September 9th, 2004, Allied entered into a Closedown Agreement with the
International Chemical Union representing the employees at the Stuyvesant Falls,
New York facility. The Company has advised the Union that the plant will be
closed and all bargaining unit employees related to such operation will be
permanently laid off , no later than October 15, 2004. The collective bargaining
agreement shall expire and be terminated as of the closing date. The Company
will pay severance pay to those 12 bargaining unit employees on the active
payroll as of August 27, 2004. Severance payments will total approximately
$138,000.

ENVIRONMENTAL AND SAFETY REGULATION

The Company is subject to federal, state and local environmental laws and
regulations that impose limitations on the discharge of pollutants into the
environment and establish standards for the treatment,

9

storage and disposal of toxic and hazardous wastes. The Company is also subject
to the federal Occupational Safety and Health Act and similar state statutes.
From time to time the Company has been involved in environmental proceedings
involving clean up of hazardous waste. There are no such material proceedings
currently pending. Costs of compliance with environmental, health and safety
requirements have not been material to the Company. The Company believes it is
in material compliance with all applicable environmental laws and regulations.

ITEM 2. PROPERTIES

The Company's headquarters are located in St. Louis, Missouri and the
Company maintains manufacturing facilities in Missouri and New York. Set forth
below is certain information with respect to the Company's manufacturing
facilities at June 30, 2004.

In addition, the Company owns a 16.8-acre parcel of undeveloped land in
Stuyvesant Falls, New York.

ITEM 3. LEGAL PROCEEDINGS

Product liability lawsuits are filed against the Company from time to time
for various injuries alleged to have resulted from defects in the manufacture
and/or design of the Company's products. Several such proceedings are currently
pending, which are not expected to have a material adverse effect on the
Company. The Company maintains comprehensive general liability insurance
coverage which it believes to be adequate for the continued operation of its
business, including coverage of product liability claims.

In addition, from time to time the Company's products may be subject to
product recalls in order to correct design or manufacturing flaws in such
products. The Company intends to continue to conduct business in such a manner
as to avert any FDA action seeking to interrupt or suspend manufacturing or
require any recall or modification of products.

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

None

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Allied Healthcare Products, Inc. trades on the NASDAQ National market under
the symbol AHPI. As of August 24, 2004, there were 211 record owners of the
Company's Common Stock. The following tables summarize information with respect
to the high and low closing prices for the Company's Common Stock as listed on
the NASDAQ National market for each quarter of fiscal 2004 and 2003,
respectively. The Company currently does not pay any dividend on its Common
Stock.

COMMON STOCK INFORMATION

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

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(1) Impairment loss on goodwill. See Note 3 to the June 30, 2004 Consolidated
Financial Statements for further discussion.

(2) See Note 6 to the June 30, 2004 Consolidated Financial Statements for
further discussion of the Company's effective tax rate.

(3) See Note 4 to the June 30, 2004 Consolidated Financial Statements for
further discussion.

(4) During fiscal 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". Prior to
the adoption of this standard, goodwill amortization of $815 was recorded in
2001 and 2000, which is included above in selling, general and
administrative expenses.

12

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Certain statements contained herein are forward-looking statements. Actual
results could differ materially from those anticipated as a result of various
factors, including cyclical and other industry downturns, the effects of federal
and state legislation on health care reform, including Medicare and Medicaid
financing, the inability to realize the full benefit of recent capital
expenditures or consolidation and rationalization activities, difficulties or
delays in the introduction of new products or disruptions in selling,
manufacturing and/or shipping efforts

The following discussion summarizes the significant factors affecting the
consolidated operating results and financial condition of the Company for the
three fiscal years ended June 30, 2004. This discussion should be read in
conjunction with the consolidated financial statements, notes to the
consolidated financial statements and selected consolidated financial data
included elsewhere herein.

CRITICAL ACCOUNTING POLICIES

In preparing financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company evaluates estimates and judgments on an ongoing
basis, including those related to bad debts, inventory valuations, property,
plant and equipment, intangible assets, income taxes, and contingencies and
litigation. Estimates and judgments are based on historical experience and on
various other factors that may be reasonable under the circumstances. Actual
results may differ from these estimates. The following areas are considered to
be the Company's most significant accounting policies:

REVENUE RECOGNITION:

Revenue is recognized for all sales, including sales to agents and
distributors, at the time products are shipped and title has transferred to the
customer, provided that a purchase order has been received or a contract has
been executed, there are no uncertainties regarding customer acceptance, the
sales price has been fixed and determinable and collectibility is deemed
probable. The Company's standard shipping terms are FOB shipping point. Sales
discounts, returns and allowances are included in net sales, and the provision
for doubtful accounts is included in selling, general and administrative
expenses. Additionally, it is the Company's practice to include revenues
generated from freight billed to customers in net sales with corresponding
freight expense included in cost of sales in the consolidated statement of
operations.

INVENTORY RESERVE FOR OBSOLETE AND EXCESS INVENTORY:

Inventory is recorded net of a reserve for obsolete and excess inventory
which is determined based on an analysis of inventory items with no usage in the
preceding year and for inventory items for which there is greater than two
year's usage on hand. This analysis considers those identified inventory items
to determine, in management's best estimate, if parts can be used beyond one
year, if there are alternate uses or at what values such parts may be disposed
for. During the fiscal year ended June 30, 2002, the Company implemented this
detailed analysis of inventory in conjunction with its long-term product
planning process. This review indicated that due to changes in product mix,
other manufacturing changes to the Company's products, and declines in sales, a
large number of component parts were deemed to be obsolete, resulting in a $3.2
million charge to increase the Company's reserve for obsolete and excess
inventory. At June 30, 2004 and 2003, inventory is recorded net of a reserve for
obsolete and excess inventory of $1.7 million and $2.3 million, respectively.

ACCOUNTS RECEIVABLE ALLOWANCE FOR DOUBTFUL ACCOUNTS:

Accounts receivable are recorded net of an allowance for doubtful accounts
which is determined based on an analysis of past due accounts and accounts
placed with collection agencies. At June 30, 2004 and 2003, accounts receivable
is recorded net of an allowance for doubtful accounts of $0.5 million.

13

GOODWILL:

At June 30, 2004 and 2003, the Company has goodwill of $15,979,830,
resulting from the excess of the purchase price over the fair value of net
assets acquired in business combinations. During fiscal 2002, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets", which establishes new accounting and reporting
standards for purchase business combinations and goodwill. As provided by SFAS
No. 142, the Company ceased amortizing goodwill on July 1, 2001. During the
first half of fiscal 2002, the Company performed the transitional impairment
analysis of its goodwill as of the implementation date, following which the
Company concluded that there was no impairment of goodwill at July 1, 2001. The
Company completed the required initial annual impairment review of its goodwill
at June 30, 2002, which due to declining sales and profitability, resulted in a
goodwill impairment loss of $9,600,000.

The Company conducts a formal impairment test of goodwill on an annual
basis and between its annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of the Company below its
carrying value. The annual impairment test did not indicate a further impairment
of goodwill at June 30, 2003 or June 30, 2004.

The results of these annual impairment reviews are highly dependent on
management's projection of future results of the Company and there can be no
assurance that at the time such reviews are completed a material impairment
charge will not be recorded. See Note 3 to the Consolidated Financial Statements
for additional disclosure.

SIGNIFICANT FACTORS AFFECTING PAST AND FUTURE OPERATING RESULTS

The results of operations for fiscal 2002 were affected by several unusual
items, which are discussed further below. During the first half of fiscal 2002
the Company transferred production of its B&F line of disposable homecare
products to its St. Louis manufacturing facility. Inefficiencies associated with
the transfer significantly reduced gross margins. As a result of the Company's
annual impairment analysis of goodwill, the Company recorded a $9.6 million
goodwill impairment charge in the fourth quarter of fiscal 2002. The goodwill
impairment charge was primarily attributable to the declining results in the
disposable home care products line. In addition, during the fourth quarter the
Company recorded a pre-tax charge of $3.2 million to increase its reserve for
slow-moving and obsolete inventory. During the fourth quarter of fiscal 2002, a
detailed review of inventory was performed. This review indicated that due to
changes in product mix, other manufacturing changes to the Company's products,
and declines in sales levels, a large number of component parts were deemed to
be obsolete.

On August 27, 2004, Allied Healthcare Products, Inc. ("Allied") entered
into an agreement with Abbott Laboratories ("Abbott") pursuant to which Allied
will cease production of its product Baralyme(R), will, within sixty days,
effect the withdrawal of Baralyme(R) product held by distributors and will
pursue the development of a new carbon dioxide absorbent product. Baralyme(R), a
carbon dioxide absorbent product, has been used safely and effectively in
connection with inhalation anesthetics since its introduction in the 1920s. In
recent years, the number of inhalation anesthetics has increased, giving rise to
concerns regarding the use of Baralyme(R) in conjunction with these newer
inhalation anesthetics when Baralyme(R) has been allowed, contrary to
recommended practice, to become desiccated. The agreement also provides that,
for a period of eight years, Allied will not manufacture, distribute, promote,
market, sell, commercialize or donate any Baralyme(R) product or similar product
based upon potassium hydroxide and will not develop or license any new carbon
dioxide absorbent product containing potassium hydroxide.

In consideration of the foregoing, Abbott has agreed to pay Allied an
aggregate of $5,250,000 of which $1,530,000 is currently due and the remainder
payable in 4 equal annual installments of $930,000 due on July 1, 2005 through
July 1, 2008. Allied has agreed with Abbott that in the event that it receives
approval from the U.S. Food & Drug Administration for the commercial sale of a
new carbon dioxide absorbent product not based upon potassium hydroxide prior to
January 1, 2008, that Abbott will be relieved of any obligation to fund the
$930,000 installment due July 1, 2008. Allied expects to suspend manufacturing
operations at its Stuyvesant Falls, New York, facility and anticipates that
costs associated with the withdrawal
14

and suspension of operations at that location, including severance and benefit
payments due union employees, will be approximately $600,000.

In addition to the provisions of the agreement relating to the withdrawal
of the Baralyme(R) product, Abbott has agreed to pay to Allied up to $2,150,000
in product development costs 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.

In 2004, Allied's sales of Baralyme(R) were approximately $1.9 million and
contributed approximately $670,000 in pre-tax earnings and cash flow from
operations. The majority of the $5,250,000 Allied is to receive from Abbott will
be recognized into income over the eight-year term of the agreement. The net
cash flow expected to be realized by Allied under the agreement with Abbott is
projected be substantially equivalent to the net cash flow Allied would have
expected to realize from continued manufacture and sales of Baralyme(R) during
the initial five years of the period.

RESULTS OF OPERATIONS

Allied manufactures and markets respiratory products, including respiratory
care products, medical gas equipment and emergency medical products. Set forth
below is certain information with respect to amounts and percentages of net
sales attributable to respiratory care products, medical gas equipment and
emergency medical products for the fiscal years ended June 30, 2004, 2003, and
2002.

15

The following table sets forth, for the fiscal periods indicated, the
percentage of net sales represented by the various income and expense categories
reflected in the Company's consolidated statement of operations.

FISCAL 2004 COMPARED TO FISCAL 2003

Net sales for fiscal 2004 of $59.1 million were $1.8 million, or 3.0% less
than net sales of $60.9 million in fiscal 2003. Domestically, sales decreased by
$1.1 million dollars. Domestically, sales increased in all regions of the
country except in the Company's Eastern Region. The Company has reorganized its
sales organization to better serve that market. Internationally, sales decreased
by $0.7 million dollars. International business is dependent upon hospital
construction projects, and the development of medical facilities in those
regions in which the Company operates. The $0.7 million dollar decrease in
international shipments includes a $0.4 million dollar decrease in sales to
Latin America, where economic progress has been uneven over the last several
years.

Respiratory care products sales in fiscal 2004 of $15.7 million were $0.7
million, or 4.3% less than sales of $16.4 million in the prior year. This
decrease is attributable to a decline in the sales of the Company's B&F line of
homecare products. The Company has not been able to regain market share lost
from delivery problems in prior years. These delivery problems are now
rectified, and the Company continues to pursue this market.

Medical gas equipment sales of $33.5 million in fiscal 2004 were $1.0
million, or 2.9% less than prior year levels of $34.5 million. Of this decrease
$0.4 million came from a decrease in international business. As discussed above,
International business is dependent upon hospital construction projects and the
development of medical facilities in those regions in which the Company
operates. Domestic sales of Medical gas equipment decreased by $0.6 million, or
2.1%.

Emergency medical product sales in fiscal 2004 of $9.9 million were $0.1
million or 1.0% less than fiscal 2003 sales of $10.0 million. International
sales of Emergency medical products declined by $0.2 million, while domestic
sales increased by $0.1 million.

International sales, which are included in the product lines discussed
above, decreased $0.7 million, or 6.6%, to $9.9 million in fiscal 2004 compared
to sales of $10.6 million in fiscal 2003. As discussed above, the Company's
international shipments are dependent on hospital construction projects and the
expansion of medical care in those regions. In fiscal 2004, international
shipments of medical gas equipment decreased by $0.4 million dollars. In
addition, sales of Respiratory care products decreased by $0.1 million dollars,
and Emergency medical products decreased by $0.2 million dollars.

Gross profit in fiscal 2004 was $16.4 million, or 27.7% of sales, compared
to a gross profit of $14.1 million, or 23.1% of sales in fiscal 2003. In fiscal
2004 the Company continued to improve production efficiency and automation. The
Company invested $3.7 million in capital expenditures during fiscal 2002, $0.5
million in

16

fiscal 2003, and $0.6 million in fiscal 2004 for manufacturing equipment, which
continues to decrease production costs and improve efficiencies for several
product lines. In addition, gross profit improved $0.2 million as a result of a
distribution representing the Company's membership interest in the liquidation
of the General American Mutual Holding Company, the Company's health care
benefit provider. These savings were partially offset by an approximately $0.2
million increase in Worker's Compensation insurance, and the decreases to gross
margins attributable to lower sales volumes.

Selling, General, and Administrative ("SG&A") expenses for fiscal 2004 were
$12.7 million, a decrease of $0.9 million over SG&A expenses of $13.6 million in
fiscal 2003. This decrease is the result of two main factors. On July 28th, 2003
the Company announced an immediate workforce reduction of 14 positions from its
managerial and administrative staff. SG&A expenses decreased $0.8 million during
fiscal 2004 primarily from this staff reduction. The Company's SG&A expenses
decreased by $0.3 million as a result of a decrease in the cost of property and
casualty insurance. These decreases were partially offset by increases in other
SG&A expenses, including a $0.1 million increase in bad debt expense.

Interest expense decreased by $0.2 million, or 25.0%, to $0.6 million in
fiscal 2004 from $0.8 million in fiscal 2003. Interest expense has been reduced
due to reductions in debt.

The Company had income of $3.1 million before taxes for fiscal 2004,
compared to a loss of $0.4 million before taxes for fiscal 2003. The Company
recorded an income tax provision of $1.3 million in fiscal 2004, compared to tax
benefit of $0.2 million in fiscal 2003.

Net income in fiscal 2004 was $1.9 million or $0.24 per basic and $0.23 per
diluted earnings per share, an increase of $2.1 million from net loss of $0.2
million, or $0.02 per basic and diluted earnings per share in fiscal 2003. In
2004, the weighted number of shares used in the calculation of basic earnings
per share was 7,816,416 and the weighted number of shares used in the
calculation of diluted earnings per share was 7,984,761. In 2003, the weighted
number of shares used in the calculation of basic and diluted earnings per share
was 7,813,932.

FISCAL 2003 COMPARED TO FISCAL 2002

Net sales for fiscal 2003 of $60.9 million were $0.5 million, or 0.8% more
than net sales of $60.4 million in fiscal 2002. The $0.5 million increase in
product sales is discussed below.

Respiratory care products sales in fiscal 2003 of $16.4 million were $0.5
million, or 3.0% less than sales of $16.9 million in the prior year. This
decline is the result of domestic market share losses with our B&F disposable
product line. In fiscal 2002 and in prior years, production delays with the
Company's vendor resulted in delayed shipments and customer service issues. The
Company moved production to its St. Louis facility in fiscal 2002 and these
delivery problems are now rectified.

Medical gas equipment sales of $34.5 million in fiscal 2003 were $1.1
million, or 3.3% above prior year levels of $33.4 million. The majority of this
increase came from international business. International business increased by
$0.9 million in fiscal 2003 from 2002 levels. International business is
dependent upon hospital construction projects and the development of medical
facilities in those regions in which the Company operates. Poor economic
conditions in those regions have slowed development and have resulted in lower
shipments to those regions for the preceding two years. Domestically, the
construction market was stronger in fiscal 2003 than in fiscal 2002, resulting
in higher shipments of the Company's products, and contributing to the remaining
increase in medical gas equipment sales.

Emergency medical product sales in fiscal 2003 of $10.0 million were $0.2
million or 2.0% less than fiscal 2002 sales of $10.2 million. This decrease is
attributable to a $0.2 million decrease in international shipments, almost all
attributable to our Japanese market, as we continued to experience negative
impacts of the aluminum oxygen regulator recall.

International sales, which are included in the product lines discussed
above, increased $0.8 million, or 8.2%, to $10.6 million in fiscal 2003 compared
to sales of $9.8 million in fiscal 2002. As discussed above, the Company's
international shipments are dependent on hospital construction projects and the
expansion of

17

medical care in those regions. In fiscal 2003, international shipments of
medical gas equipment did increase by $0.9 million dollars. This increase was
partially offset by $0.1 million decrease in shipments to international markets
of emergency medical products and respiratory care products. Poor economic
conditions, which slow that development, have adversely affected the Company's
sales internationally over the past two years.

Gross profit in fiscal 2003 was $14.1 million, or 23.1% of sales, compared
to a gross profit of $10.4 million, or 17.2% of sales in fiscal 2002. As
discussed in the proceeding Overview section, fiscal 2002 gross profit was
adversely affected by a $3.2 million charge to reserve for excess and slow
moving inventory purchased in prior years. During the fourth quarter of fiscal
2002, a detailed review of inventory was performed in conjunction with the
Company's long-term product planning process. This review indicated that due to
changes in product mix, other manufacturing changes to the Company's products,
and declines in sales levels, a large number of component parts were deemed to
be obsolete. In addition, gross profit was adversely affected during fiscal 2002
by inefficiencies related to the transfer of the B&F line of disposable products
to St. Louis. This transfer of production was undertaken to improve customer
service and reduce manufacturing cost. In fiscal 2003 efficiencies in the B&F
line were improved, through automation and management initiatives. In 2003,
these improvements were offset by $0.2 million in higher cost for property and
casualty insurance, and a $0.7 million increase in health benefits. The Company
invested $3.7 million in capital expenditures during fiscal 2002 and $0.5
million in fiscal 2003 for manufacturing equipment, which is expected to further
decrease production costs and improve efficiencies for several product lines.

Selling, General, and Administrative ("SG&A") expenses for fiscal 2003 were
$13.6 million, an increase of $0.8 million over SG&A expenses of $12.8 million
in fiscal 2002. This increase is the result of two main factors. SG&A expenses
increased $0.6 million during fiscal 2003 due to an increase in expense for
property and casualty insurance. This increase is due to both the market
conditions for property and casualty insurance, and the Company's negative
experience resulting from the litigation associated with aluminum oxygen
regulators. An additional $0.2 million increase in SG&A expenses was the result
of increased health insurance expenses. Increases in health insurance cost
resulted from increases in the underlying cost of medical services and
utilization by Company employees.

As discussed in the preceding Overview section, financial results for
fiscal 2002 were adversely impacted by the write down of $9.6 million in
goodwill. During fiscal 2002, the Company adopted SFAS 142, which establishes
new accounting and reporting standards for purchase business combinations and
goodwill. As provided by SFAS 142, the Company ceased amortizing goodwill on
July 1, 2001. During the first half of fiscal 2002, the Company performed the
transitional impairment analysis of its goodwill as of the implementation date,
following which the Company concluded that there was no impairment of goodwill
at July 1, 2001. The Company completed the required annual impairment review of
its goodwill at June 30, 2002, which due to negative events and declining sales
and profitability, resulted in a goodwill impairment charge of $9.6 million. The
Company's fiscal 2003 annual impairment analysis showed that no further goodwill
impairment was required at June 30, 2003.

Interest expense decreased by $0.3 million, or 27.3%, to $0.8 million in
fiscal 2003 from $1.1 million in fiscal 2002. Interest expense has been reduced
due to reductions in debt and a reduction in interest rates.

The Company had a loss of $0.4 million before taxes for fiscal 2003,
compared to a loss of $13.0 million before taxes for fiscal 2002. The Company
recorded an income tax benefit of $0.2 million in fiscal 2003, compared to tax
benefit of $1.3 million in fiscal 2002. The 2002 tax benefit was negatively
impacted due to the non-deductibility of the goodwill impairment charge for
federal income tax purposes. For further discussion of the Company's income
taxes please refer to the "Notes to Consolidated Financial Statements" section
included in this Form 10-K.

Net loss in fiscal 2003 was $0.2 million, or $0.02 per basic and diluted
earnings per share, a decrease of $11.5 million from net loss of $11.7 million,
or $1.50 per basic and diluted earnings per share in fiscal 2002. The weighted
number of shares used in the calculation of the basic and diluted earnings per
share was 7,813,932 in fiscal 2003 and 7,809,266 in fiscal 2002.

18

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The following table sets forth selected information concerning Allied's
financial condition at June 30:

The Company's working capital was $11.0 million at June 30, 2004 compared
to $9.5 million at June 30, 2003. Inventory declined by $1.2 million as a result
of the Company's inventory reduction programs. Accounts receivable decreased to
$7.7 million at June 30, 2004, down $0.1 million from $7.8 million at June 30,
2003. This decrease in accounts receivable is a result of improvements in
collection performance and a decrease in sales. Accounts receivable as measured
in days sales outstanding ("DSO") decreased to 46 DSO from 48 DSO the prior
year. Income taxes receivable was reduced by $0.3 million as the Company
received a federal tax refund resulting from the carry back of prior year
losses. Accounts payable increased by $0.9 million during fiscal 2004, as a
result of decreased purchases during the fourth quarter of fiscal 2003, from the
Company's inventory reduction programs. These reductions in working capital were
offset by a reduction in the current portion of long-term debt. The current
portion of long-term debt decreased by $4.2 million reflecting the reduction in
the Company's revolver debt.

The Company's working capital was $9.5 million at June 30, 2003 compared to
$9.4 million at June 30, 2002. Inventory declined by $0.9 million as a result of
the Company's inventory reduction programs. Accounts receivable decreased to
$7.8 million at June 30, 2003, down $1.0 million from $8.8 million at June 30,
2002. This decrease in accounts receivable is a result of improvements in
collection performance. Accounts receivable as measured in days sales
outstanding ("DSO") decreased to 48 DSO from 51 DSO at June 30, 2002. Income
taxes receivable was reduced by $0.4 million as the Company received a federal
tax refund resulting from the carry back of the fiscal 2002 loss of $0.8 million
which was offset by the $0.4 million receivable established for the carry back
of the fiscal 2003 loss. The current deferred income tax asset was reduced by
$0.7 million and the current deferred tax liability was increased by $0.4
million. The net change in current deferred income taxes, $1.1 million, is a
result of the disposal of slow-moving and obsolete inventory during fiscal 2003
which had been reserved during fiscal 2002. The disposal of inventory generated
net operating loss carry forwards which are presented as long-term deferred tax
assets at June 30, 2003. Accrued liabilities decreased by $0.3 million,
reflecting the timing of customer orders and payments. The working capital
reductions are partially offset by the following changes in working capital
during fiscal 2003. Accounts payable decreased by $1.2 million during fiscal
2003, as a result of decreased purchases during the fourth quarter of the fiscal
year from the Company's inventory reduction programs. The current portion of
long-term debt decreased by $2.6 million reflecting the reduction in the
Company's revolver debt.

The net decrease in cash for the fiscal year ended June 30, 2004 was
$3,760. The net increase in cash for the fiscal year ended June 30, 2003 was
$11,216. The net decrease in cash for the fiscal year ended June 30, 2002 was
$19,565. Net cash provided by operating activities was $7.0 million, $2.6
million, and $3.8 million for the same periods.

Cash flows provided by operating activities for the fiscal year ended June
30, 2004 consisted of a net income of $1.9 million, supplemented by $1.3 million
in non-cash charges to operations for amortization and depreciation. Changes in
working capital and deferred tax accounts favorably impacted cash flow from
operations by $3.8 million. Cash flow was used to reduce debt and capital lease
obligations by $6.4 million and make capital expenditures of $0.6 million.

Cash flows provided by operating activities for the fiscal year ended June
30, 2003 consisted of a net loss $0.2 million, which was offset by $1.2 million
in non-cash charges to operations for amortization and depreciation. Changes in
working capital and deferred tax accounts favorably impacted cash flow from

19

operations by $1.6 million. Cash flow was used to reduce debt and capital lease
obligations by $2.1 million and make capital expenditures of $0.5 million.

Cash flows provided by operating activities for the fiscal year ended June
30, 2002 consisted of a net loss of $11.7 million, which was offset by $1.4
million in non-cash charges to operations for amortization and depreciation. The
net loss was also offset by a $9.6 million non-cash charge to operations for the
impairment of goodwill. Changes in the provision for product recall resulted in
a $0.1 million reduction. Changes in working capital and deferred tax accounts
favorably impacted cash flow from operations by $4.7 million. Cash flow was used
to reduce debt and capital lease obligations by $0.1 million and make capital
expenditures of $3.7 million.

At June 30, 2004 the Company had aggregate indebtedness, including capital
lease obligations, of $3.6 million, including $1.2 million of short-term debt
and $2.4 million of long-term debt. At June 30, 2003 the Company had aggregate
indebtedness including capital lease obligations of $10.0 million, $7.9 million
of short-term debt and $2.1 million of long-term debt.

On April 24, 2002, the Company entered into a credit facility arrangement
with LaSalle Bank National Association (the "Bank"), which was subsequently
amended on September 26, 2002. The credit facility provided for total borrowings
up to $19.0 million; consisting of up to $15.0 million through a revolving
credit facility and up to $4.0 million under a term loan. The entire credit
facility accrued interest at prime plus 0.75%. The term loan may be drawn
against for capital expenditures during the first six months of the term of the
credit facility. Repayment of the term loan began on October 24, 2002, with
principal and interest due in equal monthly installments over five years
(subject to payment in full at the maturity of the credit facility if that
facility is not renewed or extended). The credit facility is collateralized by
substantially all of the assets of the Company. The original maturity date of
the new facility was April 24, 2005. The credit facility was further amended on
September 26, 2003 and August 25, 2004, as described below.

The revolving credit facility provided 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. At June 30, 2004,
$8.0 million was available under the revolving credit facility for additional
borrowings. The credit facility calls for a 0.25% commitment fee payable
quarterly based on the average daily unused portion of the revolving credit
facility. 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 June 30, 2004 and 2003, the Company
had no letters of credit outstanding. Any outstanding letters of credit
decreases the amount available for borrowing under the revolving credit
facility. The weighted average interest rate on the revolving credit facility
was 4.95% and 4.82% for the years ended June 30, 2004 and 2003, respectively.

Under the terms of the amended credit facility, the Company is required to
be in compliance with certain financial covenants pertaining to stockholders'
equity, capital expenditures and net income. At June 30, 2003, the Company was
in violation of its EBITDA (net income after taxes, plus interest expense,
income tax expense, and depreciation and amortization) covenant which were
waived by the bank in a letter dated on September 26, 2003. On September 26,
2003, the Bank further amended the Company's credit facility (the amended credit
facility). The Bank amended various financial covenants in conjunction with the
amended credit facility including a reduction in the required fixed coverage
charge ratio and the elimination of the EBITDA covenant. The Bank amended the
borrowing base to include 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. In addition, the outstanding loans under the amended credit facility
will bear interest at an annual interest rate of 1.00% plus the Bank's prime
rate. In conjunction with these amendments to the Company's credit facility, the
Bank extended the maturity on the Company's term loan on real estate from August
1, 2003 to April 24, 2005. Amortization on the real estate term loan shall
continue on a five-year schedule with equal monthly payments of $49,685. The
real estate term loan will bear interest at an annual interest rate of 1.00%
plus the Bank's prime rate. The Company also received a waiver from the Bank for
its covenant violations pertaining to its EBITDA covenant, which the Company was
in default of on June 30, 2003. Additionally, the terms of the new credit
facility restrict the Company from the payment of dividends on any class of its
stock.

The credit facility requires lockbox arrangement, which provide for all
receipts to be swept daily to reduce borrowings outstanding under the credit
facility. This arrangement, combined with the existence of a Material
20

Adverse Effect (MAE) clause in the credit facility, cause the revolving credit
facility to be classified as a current liability, per guidance in the FASB's
Emerging Issues Task Force Issue 95-22, "Balance Sheet Classification of
Borrowings Outstanding under Revolving Credit Agreements that Include Both a
Subjective Acceleration Clause and a Lock-Box Arrangement." However, the Company
does not expect to repay, or be required to repay, within one year, the balance
of the revolving credit facility classified as a current liability. The MAE
clause, which is a typical requirement in commercial credit agreements, allows
the lender to require the loan to become due if it determines there has been a
material adverse effect on the Company's operations, business, properties,
assets, liabilities, condition or prospects. The classification of the revolving
credit facility as a current liability is a result only of the combination of
the two aforementioned factors: the lockbox arrangement and the MAE clause.
However, the revolving credit facility does not expire or have a maturity date
within one year. Additionally, the Bank has not notified the Company of any
indication of a MAE at June 30, 2004.

The Company was in compliance with all of the financial covenants
associated with its credit facility at June 30, 2004. On August 27, 2004, the
Bank and the Company agreed to a further amendment of the credit facility (the
amended credit facility). In conjunction with these amendments to the Company's
credit facility, the Bank extended the maturity on the Company's term loan on
real estate, the Company's revolving credit facility, and term loan on capital
expenditures from April 24, 2005 to April 24, 2007. The entire credit facility
was amended to accrue interest at the Bank's prime rate. The Prime rate was 4.5%
on August 27, 2004. 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 1.5. The amended credit facility also provides the Company with a rate
of LIBOR plus 2.25%, at the Company's option. The optional LIBOR rate may
increase from LIBOR plus 2.25% to LIBOR plus 3.00% based on the Company's fixed
charge coverage ratio. The 90-day LIBOR rate was 1.79% at August 27, 2004.
Amortization on the real estate term loan shall continue on a five-year schedule
with equal monthly payments of $49,685. Amortization on the capital expenditure
term loan shall continue on a five-year schedule with equal monthly payments of
$50,772.

The following table summarizes the Company's cash obligations at June 30,
2004:

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

(1) Assumes the Company's revolving credit agreement currently classified as a
current liability subject to the provisions of EITF 95-22 will be paid at
maturity.

Capital expenditures, net of capital leases, were $0.6 million, $0.5
million and $3.7 million in fiscal 2004, 2003, and 2002, respectively. The
Company believes that cash flows from operations and available borrowings under
its credit facilities will be sufficient to finance fixed payments and planned
capital expenditures of $1.2 million in 2005. Cash flows from operations may be
negatively impacted by decreases in sales, market conditions, and adverse
changes in working capital.

Inflation has not had a material effect on the Company's business or
results of operations. The Company makes its foreign sales in dollars and,
accordingly, sales proceeds are not affected by exchange rate fluctuations,
although the effect on its customers does impact the pace of incoming orders.

21

SEASONALITY AND QUARTERLY RESULTS

In past fiscal years, the Company has experienced moderate seasonal
increases in net sales during its second and third fiscal quarters (October 1
through March 31) which in turn have affected net income. Such seasonal
variations were likely attributable to an increase in hospital equipment
purchases at the beginning of each calendar year (which coincides with many
hospitals' fiscal years) and an increase in the severity of influenza during
winter months.

The following table sets forth selected operating results for the eight
quarters ended June 30, 2004. The information for each of these quarters is
unaudited, but includes all normal recurring adjustments which the Company
considers necessary for a fair presentation thereof. These operating results,
however, are not necessarily indicative of results for any future period.
Further, operating results may fluctuate as a result of the timing of orders,
the Company's product and customer mix, the introduction of new products by the
Company and its competitors, and overall trends in the health care industry and
the economy. While these patterns have an impact on the Company's quarterly
operations, the Company is unable to predict the extent of this impact in any
particular period.

Earnings (loss) per share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly amounts will not
necessarily equal the total for the year.

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. More
specifically, there have been a number of lawsuits filed against the Company
alleging that its aluminum oxygen pressure regulator, marketed under its Life
Support Products label, has caused fires that have led to personal injury. The
Company believes, based on preliminary findings, that its products did not cause
the fires. The Company intends to defend these claims in cooperation with its
insurers. Based on the progression of certain cases the Company recorded
additional charges to operations during fiscal 2001 for amounts estimated to be
payable by the Company under its self-insurance retention for legal costs
associated with defending these claims. 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.

OFF BALANCE SHEET ARRANGEMENTS

Allied does not have any off balance sheet arrangements.

RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets", which supersedes Statement of Financial Accounting Standards No. 121
(SFAS 121), "Accounting for the Impairment of Long-Lived Assets to be Disposed
Of" and the accounting and reporting provisions of APB No. 30, "Reporting the
Results of

22

Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for
the disposal of a business. SFAS 144 provides a single accounting model for
long-lived assets to be disposed of. Although retaining many of the fundamental
recognition and measurement provisions of SFAS 121, the new rules change the
criteria to be met to classify an asset as held-for-sale. The new rules also
broaden the criteria regarding classification of a discontinued operation. The
Company adopted the provisions of SFAS 144 effective July 1, 2002. Adoption of
SFAS 144 did not have a material impact on the Company's results of operations,
financial position or cash flows.

In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or Disposal
Activities" which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost
was recognized at the date of an entity's commitment to an exit plan. The
provisions of SFAS 146 are effective for exit or disposal activities initiated
after December 31, 2002. Adoption of SFAS 146 has not had a material impact on
the Company's results of operations, financial position or cash flows.

In November 2002, the FASB issued Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". This interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The Company does not have any commitments that are within the scope
of FIN No. 45.

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (SFAS 148), "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FAS 123," which
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
Additionally, SFAS 148 amends the disclosure requirements of Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
provisions of SFAS 148 are effective for financial statements issued for fiscal
years ending after December 15, 2002 and for financial reports containing
condensed financial statements for interim periods beginning after December 15,
2002. Adoption of SFAS 148 did not have a material impact on the Company's
results of operations, financial position or cash flows.

In January 2003, the FASB released FIN No. 46, "Consolidation of Variable
Interest Entities -- an Interpretation of ARB No. 51", which was subsequently
revised in December 2003 (collectively referred to as "FIN 46" or the
"Interpretation"). The Interpretation, as revised, clarifies issues regarding
the consolidation of entities which may have features that make it unclear
whether consolidation or equity method accounting is appropriate. FIN 46 is
generally effective in 2003. Adoption of FIN 46 had no impact on the Company, as
it is not the beneficiary of any variable interest entities.

In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 (SFAS 150), "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity." SFAS 150 provides guidance on
distinguishing between liability and equity instruments and accounting for
instruments that have characteristics of both. SFAS 150 requires specific types
of freestanding financial instruments to be classified as liabilities including
mandatory redeemable financial instruments, obligations to repurchase the
issuer's equity shares by transferring assets and certain obligations to issue a
variable number of shares. The provisions of SFAS 150 are effective for
financial instruments entered into or modified after May 31, 2003. For all other
instruments, SFAS 150 is effective July 1, 2003. Adoption of SFAS 150 did not
have a material impact on the Company's results of operations, financial
position or cash flows.

23

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At June 30, 2004, the Company had $3.6 million in debt outstanding. This
balance represents amounts outstanding under the Company's revolving credit
facility of $40,000, the Company's capital expenditure loan for $2.1 million,
and the Company's real estate for $1.4 million. The revolving credit facility,
capital expenditure and real estate loan bear an interest rate using the
commercial bank's "floating reference rate" or LIBOR as the basis, as defined in
the loan agreement, and therefore is subject to additional expense should there
be an increase in market interest rates.

The Company had no holdings of derivative financial or commodity
instruments at June 30, 2004. Allied Healthcare Products has international
sales, however these sales are denominated in U.S. dollars, mitigating foreign
exchange rate fluctuation risk.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following described consolidated financial statements of Allied
Healthcare Products, Inc. are included in response to this item:

Reports of Independent Registered Public Accounting Firms.

Consolidated Statement of Operations for the fiscal years ended June
30, 2004, 2003 and 2002.

Consolidated Balance Sheet for the fiscal years ended June 30, 2004
and 2003.

Consolidated Statement of Changes in Stockholders' Equity for the
fiscal years ended June 30, 2004, 2003 and 2002.

Consolidated Statement of Cash Flows for the fiscal years ended June
30, 2004, 2003 and 2002.

Notes to Consolidated Financial Statements.

Schedule of Valuation and Qualifying Accounts and Reserves for the
years ended June 30, 2004, 2003 and 2002.

All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.

24

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Allied Healthcare Products, Inc.

We have audited the accompanying consolidated balance sheet of Allied
Healthcare Products, Inc. and subsidiaries as of June 30, 2004 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. In connection with our audit of the consolidated
financial statements, we also have audited the related financial statement
schedule of valuation and qualifying accounts and reserves for the year ended
June 30, 2004. These consolidated financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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
audit provides 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
Healthcare Products, Inc. and subsidiaries as of June 30, 2004 and the results
of their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
Also in our opinion, the related financial statement schedule referred to above,
when considered in relation to the consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.

/s/ RUBIN, BROWN, GORNSTEIN & CO. LLP
- ---------------------------------------------------------
Rubin, Brown, Gornstein & Co. LLP

Saint Louis, Missouri
August 13, 2004, except for Notes 4 and 14, as to
which the date is August 27, 2004

25

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Allied Healthcare Products, Inc.

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Allied Healthcare Products, Inc. and its subsidiaries at June 30,
2003 and the results of their operations and their cash flows for each of the
two years in the period ended June 30, 2003 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
represents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States),
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

As discussed in Note 2 of the consolidated financial statements, the
Company changed its method of accounting for goodwill in 2002 to conform with
Statement of Financial Accounting Standards No. 142.

/s/ PRICEWATERHOUSECOOPERS LLP
St. Louis, Missouri
September 26, 2003

26

ALLIED HEALTHCARE PRODUCTS, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

See accompanying Notes to Consolidated Financial Statements.
27

ALLIED HEALTHCARE PRODUCTS, INC.

CONSOLIDATED BALANCE SHEET

See accompanying Notes to Consolidated Financial Statements.
28

ALLIED HEALTHCARE PRODUCTS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

See accompanying Notes to Consolidated Financial Statements.
29

ALLIED HEALTHCARE PRODUCTS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

See accompanying Notes to Consolidated Financial Statements.
30

ALLIED HEALTHCARE PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

Allied Healthcare Products, Inc. (the "Company" or "Allied") is a
manufacturer of respiratory products used in the health care industry in a wide
range of hospital and alternate site settings, including post-acute care
facilities, home health care and trauma care. The Company's product lines
include respiratory care products, medical gas equipment and emergency medical
products.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies followed by Allied are described below.

USE OF ESTIMATES

The policies utilized by the Company in the preparation of the consolidated
financial statements conform to accounting principles generally accepted in the
United States of America, and require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual amounts could differ
from those estimates.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions and
intercompany balances are eliminated.

RECLASSIFICATIONS

Certain financial statement amounts have been reclassified to conform to
the current year presentation.

REVENUE RECOGNITION

Revenue is recognized for all sales, including sales to agents and
distributors, at the time products are shipped and title has transferred to the
customer, provided that a purchase order has been received or a contract has
been executed, there are no uncertainties regarding customer acceptance, the
sales price is fixed and determinable and collectibility is deemed probable. The
Company's standard shipping terms are FOB shipping point. Sales discounts,
returns and allowances are included in net sales, and the provision for doubtful
accounts is included in selling, general and administrative expenses.
Additionally, it is the Company's practice to include revenues generated from
freight billed to customers in net sales with corresponding freight expense
included in cost of sales in the consolidated statement of operations.

CASH AND CASH EQUIVALENTS

For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less when acquired
to be cash equivalents. Book cash overdrafts on the Company's disbursement
accounts totaling $639,403 and $523,955 at June 30, 2004 and 2003, respectively,
are included in accounts payable.

FOREIGN CURRENCY TRANSACTIONS

Allied has international sales which are denominated in U.S. dollars, the
functional currency for these transactions.

31

ALLIED HEALTHCARE PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ACCOUNTS RECEIVABLE AND CONCENTRATIONS OF CREDIT RISK

Accounts receivable are recorded at the invoiced amount. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. The Company maintains reserves for potential credit losses
based on past experience and an analysis of current amounts due, and
historically such losses have been within management's expectations. The
Company's customers can be grouped into three main categories: medical equipment
distributors, construction contractors and health care institutions. At June 30,
2004 the Company believes that it has no significant concentration of credit
risk.

INVENTORIES

Inventories are stated at the lower of cost, determined using the last-in,
first-out ("LIFO") method, or market. If the first-in, first-out method (which
approximates replacement cost) had been used in determining cost, inventories
would have been $1,087,952 and $421,902 higher at June 30, 2004 and 2003,
respectively. Changes in the LIFO reserve are included in cost of sales. Cost of
sales were reduced by $319,742 and $270,226 in fiscal 2004 and 2003,
respectively, as a result of LIFO liquidations. Costs in inventory include raw
materials, direct labor and manufacturing overhead.

Inventory is recorded net of a reserve for obsolete and excess inventory
which is determined based on an analysis of inventory items with no usage in the
preceding year and for inventory items for which there is greater than two
year's usage on hand. The reserve for obsolete and excess inventory was
$1,742,490 and $2,324,258 at June 30, 2004 and 2003, respectively.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost and are depreciated
using the straight-line method over the estimated useful lives of the assets,
which range from 5 to 35 years. Properties held under capital leases are
recorded at the present value of the non-cancelable lease payments over the term
of the lease and are amortized over the shorter of the lease term or the
estimated useful lives of the assets. Expenditures for repairs, maintenance and
renewals are charged to income as incurred. Expenditures, which improve an asset
or extend its estimated useful life, are capitalized. When properties are
retired or otherwise disposed of, the related cost and accumulated depreciation
are removed from the accounts and any gain or loss is included in income.

GOODWILL

At June 30, 2004 and 2003, the Company has goodwill of $15,979,830,
resulting from the excess of the purchase price over the fair value of net
assets acquired in business combinations. During fiscal 2002, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets", which establishes new accounting and reporting
standards for purchase business combinations and goodwill. As provided by SFAS
No. 142, the Company ceased amortizing goodwill on July 1, 2001. During the
first half of fiscal 2002, the Company performed the transitional impairment
analysis of its goodwill as of the implementation date, following which the
Company concluded that there was no impairment of goodwill at July 1, 2001. The
Company completed the required initial annual impairment review of its goodwill
at June 30, 2002, which due to declining sales and profitability, resulted in a
goodwill impairment loss of $9,600,000.

The Company conducts a formal impairment test of goodwill on an annual
basis and between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of the Company below it's
carrying value. The annual impairment test did not indicate a further impairment
of goodwill at June 30, 2004 or June 30, 2003.

32

ALLIED HEALTHCARE PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The results of these annual impairment reviews are highly dependent on
management's projection of future results of the Company and there can be no
assurance that at the time such future reviews are completed a material
impairment charge will not be recorded.

OTHER ASSETS

Other assets are primarily comprised of debt issuance costs. These costs
are amortized using the effective interest rate method over the life of the
related obligations.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company evaluates impairment of long-lived assets under the provisions
of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". SFAS No. 144 provides a single accounting model for long-lived assets
to be disposed of and reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. Under SFAS No. 144, if the sum of the expected future cash flows
(undiscounted and without interest charges) of the long-lived assets is less
than the carrying amount of such assets, an impairment loss will be recognized.
No impairment losses of long-lived assets or identifiable intangibles were
recorded by the Company for fiscal years ended June 30, 2004 and 2003.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist of cash, accounts receivable,
accounts payable and debt. The carrying amounts for cash, accounts receivable
and accounts payable approximate their fair value due to the short maturity of
these instruments. The carrying amount of long-term debt approximates fair value
due to the notes bearing interest at a variable rate.

INCOME TAXES

The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes". Under SFAS No. 109, the deferred tax provision is determined
using the liability method, whereby deferred tax assets and liabilities are
recognized based upon temporary differences between the financial statement and
income tax bases of assets and liabilities using presently enacted tax rates.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are expensed as incurred and are included in
selling, general and administrative expenses. Research and development expenses
for the years ended June 30, 2004, 2003 and 2002 were $627,822, $577,278 and
$622,793, respectively.

EARNINGS PER SHARE

Basic earnings per share are based on the weighted average number of shares
of common stock outstanding during the year. Diluted earnings per share are
based on the sum of the weighted averaged number of shares of common stock and
common stock equivalents outstanding during the year. The weighted average
number of basic shares outstanding for the years ended June 30, 2004, 2003 and
2002 was 7,816,416, 7,813,932, and 7,809,266 shares, respectively. The weighted
average number of diluted shares outstanding for the years ended June 30, 2004,
2003 and 2002 was 7,984,761, 7,813,932, and 7,809,266 shares, respectively. The
dilutive effect of Company's employee and director stock option plans are
determined by use of the treasury stock method. Employee and director stock
option plans are not included as common stock

33

ALLIED HEALTHCARE PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

equivalents for earnings per share purposes in fiscal 2003 and 2002 as the
impact on the number of shares outstanding would have been anti-dilutive.

EMPLOYEE STOCK-BASED COMPENSATION

The Company accounts for employee stock options and variable stock awards
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and its related interpretations. Under APB
25, the Company applies the intrinsic value method of accounting. For employee
stock options accounted for using the intrinsic value method, no compensation
expense is recognized because the options are granted with an exercise price
equal to the market value of the stock on the date of grant.

SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
prescribes the recognition of compensation expense based on the fair value of
options or stock awards determined on the date of grant. Companies that elect to
account for stock-based compensation plans in accordance with APB 25 are
required to make certain pro forma disclosures as if the fair value method had
been utilized. The fair value of options granted (which is amortized over the
option vesting period in determining the pro forma impact) is estimated on the
date of grant using the Black-Scholes multiple option-pricing model. For options
granted during the fiscal years ended June 30, 2004, 2003 and 2002, the
assumptions utilized in the Black-Scholes multiple option-pricing model included
an expected option life of 10 years, risk-free interest rates ranging from 2.43%
to 5.95%, volatility ranging from 46% to 49% and no dividend yield. The
following table shows stock-based compensation expense included in net income
and pro forma stock-based compensation expense, net income/(loss) and earnings
per share had the Company elected to record compensation expense based on the
fair value of options at the grant date for the fiscal years ended June 30,
2004, 2003, and 2002:

NEW ACCOUNTING STANDARDS

In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which supersedes Statement of Financial
Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions
of APB No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", for the disposal of a business. SFAS 144
provides a single accounting model for long-lived assets to be disposed of.
Although retaining many of the fundamental recognition and measurement
provisions of SFAS 121, the new

34

ALLIED HEALTHCARE PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

rules change the criteria to be met to classify an asset as held-for-sale. The
new rules also broaden the criteria regarding classification of a discontinued
operation. The Company adopted the provisions of SFAS 144 effective July 1,
2002. Adoption of SFAS 144 did not have a material impact on the Company's
results of operations, financial position or cash flows.

In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or Disposal
Activities" which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost
was recognized at the date of an entity's commitment to an exit plan. The
provisions of SFAS 146 are effective for exit or disposal activities initiated
after December 31, 2002. Adoption of SFAS 146 has not had a material impact on
the Company's results of operations, financial position or cash flows.

In November 2002, the FASB issued Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". This interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The Company does not have any commitments that are within the scope
of FIN No. 45.

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (SFAS 148), "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FAS 123," which
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
Additionally, SFAS 148 amends the disclosure requirements of Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
provisions of SFAS 148 are effective for financial statements issued for fiscal
years ending after December 15, 2002 and for financial reports containing
condensed financial statements for interim periods beginning after December 15,
2002. Adoption of SFAS 148 did not have a material impact on the Company's
results of operations, financial position or cash flows.

In January 2003, the FASB released FIN No. 46, "Consolidation of Variable
Interest Entities -- an Interpretation of ARB No. 51", which was subsequently
revised in December 2003 (collectively referred to as "FIN 46" or the
"Interpretation"). The Interpretation, as revised, clarifies issues regarding
the consolidation of entities which may have features that make it unclear
whether consolidation or equity method accounting is appropriate. FIN 46 is
generally effective in 2003. Adoption of FIN 46 had no impact on the Company, as
it is not the beneficiary of any variable interest entities.

In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 (SFAS 150), "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity." SFAS 150 provides guidance on
distinguishing between liability and equity instruments and accounting for
instruments that have characteristics of both. SFAS 150 requires specific types
of freestanding financial instruments to be classified as liabilities including
mandatory redeemable financial instruments, obligations to repurchase the
issuer's equity shares by transferring assets and certain obligations to issue a
variable number of shares. The provisions of SFAS 150 are effective for
financial instruments entered into or modified after May 31, 2003. For all other
instruments, SFAS 150 is effective July 1, 2003. Adoption of SFAS 150 did not
have a material impact on the Company's results of operations, financial
position or cash flows.

35

ALLIED HEALTHCARE PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. GOODWILL

For the fiscal year ending June 30, 2002, the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets" which establishes new accounting and
reporting standards for purchase business combinations and goodwill. As provided
by SFAS No. 142, the Company ceased amortizing goodwill on July 1, 2001.

As required by SFAS 142, the Company completed its transitional goodwill
impairment analysis as of July 1, 2001, for which it concluded that the carrying
value of its goodwill was not impaired. The fair value of the Company utilized
in the transitional goodwill impairment analysis was estimated using a
discounted cash flow approach incorporating the Company's fiscal 2002 plan.

The Company completed its initial annual goodwill impairment test during
the fourth quarter of the fiscal year ended June 30, 2002. Due to operating
inefficiencies, a general slow down in orders, and delivery issues, which led to
a drop in market share, operating profits and cash flows were lower than
expected during fiscal 2002. Based on that trend, management revised its
earnings forecast for fiscal 2003. During the fourth quarter of the fiscal year
ended June 30, 2002, the Company recognized a goodwill impairment loss of
$9,600,000. The annual impairment test did not indicate a further impairment of
goodwill at June 30, 2003 or June 30, 2004. The fair value of the Company was
estimated using a discounted cash flow approach incorporating its most recent
business plan forecasts in the performance of its annual analysis of goodwill
impairment.

4. FINANCING

Long-term debt consisted of the following at June 30:

On April 24, 2002, the Company entered into a credit facility arrangement
with LaSalle Bank National Association (the "Bank"), which was subsequently
amended on September 26, 2002. The credit facility provided for total borrowings
up to $19.0 million; consisting of up to $15.0 million through a revolving
credit facility and up to $4.0 million under a term loan. The entire credit
facility accrued interest at prime plus 0.75%. The term loan may be drawn
against for capital expenditures during the first six months of the term of the
credit facility. Repayment of the term loan began on October 24, 2002, with
principal and interest due in equal monthly installments over five years
(subject to payment in full at the maturity of the credit facility if that
facility is not renewed or extended). The credit facility is collateralized by
substantially all of the assets of the Company. The original maturity date of
the new facility was April 24, 2005. The credit facility was further amended on
September 26, 2003 and August 27, 2004, as described below.

The revolving credit facility provided 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. At June 30,

36

ALLIED HEALTHCARE PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2004, $8.0 million was available under the revolving credit facility for
additional borrowings. The credit facility calls for a 0.25% commitment fee
payable quarterly based on the average daily unused portion of the revolving
credit facility. 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 June 30, 2004 and 2003, the
Company had no letters of credit outstanding. Any outstanding letters of credit
decreases the amount available for borrowing under the revolving credit
facility. The weighted average interest rate on the revolving credit facility
was 4.95% and 4.82% for the years ended June 30, 2004 and 2003, respectively.

Under the terms of the amended credit facility, the Company is required to
be in compliance with certain financial covenants pertaining to stockholders'
equity, capital expenditures and net income. At June 30, 2003, the Company was
in violation of its EBITDA (net income after taxes, plus interest expense,
income tax expense, and depreciation and amortization) covenant which was waived
by the bank in a letter dated on September 26, 2003. On September 26, 2003, the
Bank further amended the Company's credit facility (the amended credit
facility). The Bank amended various financial covenants in conjunction with the
amended credit facility including a reduction in the required fixed coverage
charge ratio and the elimination of the EBITDA covenant. The Bank amended the
borrowing base to include 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. In addition, the outstanding loans under the amended credit facility
will bear interest at an annual interest rate of 1.00% plus the Bank's prime
rate. In conjunction with these amendments to the Company's credit facility, the
Bank extended the maturity on the Company's term loan on real estate from August
1, 2003 to April 24, 2005. Amortization on the real estate term loan shall
continue on a five-year schedule with equal monthly payments of $49,685. The
real estate term loan will bear interest at an annual interest rate of 1.00%
plus the Bank's prime rate. The Company also received a waiver from the Bank for
its covenant violations pertaining to its EBITDA covenant, which the Company was
in default of on June 30, 2003. Additionally, the terms of the new credit
facility restrict the Company from the payment of dividends on any class of its
stock.

The credit facility requires a lockbox arrangement, which provide for all
receipts to be swept daily to reduce borrowings outstanding under the credit
facility. This arrangement, combined with the existence of a Material Adverse
Effect (MAE) clause in the credit facility, cause the revolving credit facility
to be classified as a current liability, per guidance in the FASB's Emerging
Issues Task Force Issue 95-22, "Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements that Include Both a Subjective
Acceleration Clause and a Lock-Box Arrangement." However, the Company does not
expect to repay, or be required to repay, within one year, the balance of the
revolving credit facility classified as a current liability. The MAE clause,
which is a typical requirement in commercial credit agreements, allows the
lender to require the loan to become due if it determines there has been a
material adverse effect on the Company's operations, business, properties,
assets, liabilities, condition or prospects. The classification of the revolving
credit facility as a current liability is a result only of the combination of
the two aforementioned factors: the lockbox arrangement and the MAE clause.
However, the revolving credit facility does not expire or have a maturity date
within one year. Additionally, the Bank has not notified the Company of any
indication of a MAE at June 30, 2004.

The Company was in compliance with all of the financial covenants
associated with its credit facility at June 30, 2004. On August 27, 2004, the
Bank and the Company agreed to a further amendment of the credit facility (the
amended credit facility). In conjunction with these amendments to the Company's
credit facility, the Bank extended the maturity on the Company's term loan on
real estate, the Company's revolving credit facility, and term loan on capital
expenditures from April 24, 2005 to April 24, 2007. The entire credit facility
was amended to accrue interest at the Bank's prime rate. The Prime rate was 4.5%
on August 27, 2004. 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 1.5. The amended credit facility also provides the Company with a rate
of LIBOR plus 2.25%, at the Company's option. The optional LIBOR rate may
increase from LIBOR plus 2.25% to LIBOR plus 3.00% based on the Company's fixed
charge coverage ratio. The 90-day LIBOR rate
37

ALLIED HEALTHCARE PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

was 1.79% at August 27, 2004. Amortization on the real estate term loan shall
continue on a five-year schedule with equal monthly payments of $49,685.
Amortization on the capital expenditure term loan shall continue on a five-year
schedule with equal monthly payments of $50,772.

Aggregate maturities of long-term debt, reflecting the amendments made on
August 27, 2004, for each of the two fiscal years subsequent to June 30, 2004
are as follows, assuming that the Company's bank does not claim a MAE with
respect to the revolving credit facility. While the revolving credit facility is
classified as a current liability, it is not expected to mature until 2007.

5. LEASE COMMITMENTS

The Company leases certain of its equipment under non-cancelable operating
lease agreements. Minimum lease payments under operating leases at June 30, 2004
are as follows:

Rental expense incurred on operating leases in fiscal 2004, 2003, and 2002
totaled $397,702, $378,665 and $489,154 respectively.

6. INCOME TAXES

The provision (benefit) for income taxes consists of the following:

38

ALLIED HEALTHCARE PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Income taxes were 40.2%, 57.3%, and 9.9% of pre-tax earnings (losses) in
2004, 2003, and 2002, respectively. A reconciliation of income taxes, with the
amounts computed at the statutory federal rate is as follows:

The deferred tax assets and deferred tax liabilities recorded on the
balance sheet as of June 30, 2004 and 2003 are as follows:

7. RETIREMENT PLAN

The Company offers a retirement savings plan under Section 401(k) of the
Internal Revenue Code to certain eligible salaried employees. Each employee may
elect to enter a written salary deferral agreement under which a portion of such
employee's pre-tax earnings may be contributed to the plan.

During the fiscal years ended June 30, 2004, 2003 and 2002, the Company
made contributions of $233,288, $254,673, and $252,997, respectively.

8. STOCKHOLDERS' EQUITY

The Company has established a 1991 Employee Non-Qualified Stock Option
Plan, a 1994 Employee Stock Option Plan, and a 1999 Incentive Stock Plan
(collectively the "Employee Plans"). The Employee Plans provide for the granting
of options to the Company's executive officers and key employees to purchase
shares of common stock at prices equal to the fair market value of the stock on
the date of grant. Options to

39

ALLIED HEALTHCARE PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

purchase up to 1,800,000 shares of common stock may be granted under the
Employee Plans. Options generally become exercisable ratably over a four year
period or one-fourth of the shares covered thereby on each anniversary of the
date of grant, commencing on the first or second anniversary of the date
granted, except certain options granted under the 1994 Employee Stock Option
Plan which become exercisable when the fair market value of the common stock
exceeds required levels. The right to exercise the options expires in ten years,
from the date of grant, or earlier if an option holder ceases to be employed by
the Company.

In addition, the Company has established a 1991 Directors Non-Qualified
Stock Option Plan and a 1995 Directors Non-Qualified Stock Option Plan
(collectively the "Directors Plans"). The Directors Plans provide for the
granting of options to the Company's directors who are not employees of the
Company to purchase shares of common stock at prices equal to the fair market
value of the stock on the date of grant. Options to purchase up to 250,000
shares of common stock may be granted under the Directors Plans. Options shall
become exercisable with respect to one-fourth of the shares covered thereby on
each anniversary of the date of grant, commencing on the second anniversary of
the date granted, except for certain options granted under the 1995 Directors
Non-Qualified Stock Option Plan which become exercisable with respect to all of
the shares covered thereby one year after the grant date. The right to exercise
the options expires in ten years from the date of grant, or earlier if an option
holder ceases to be a director of the Company.

A summary of stock option transactions in 2004, 2003 and 2002,
respectively, pursuant to the Employee Plans and the Directors Plans is as
follows:

40

ALLIED HEALTHCARE PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table provides additional information for options outstanding
and exercisable at June 30, 2004.

OPTIONS OUTSTANDING

OPTIONS EXERCISABLE

See Note 2 for discussion of accounting for stock awards, and related fair
value and pro forma income disclosures.

STOCKHOLDER RIGHTS PLAN

The Board of Directors adopted a Stockholder Rights Plan in 1996 that would
permit stockholders to purchase common stock at prices substantially below
market value under certain change-in-control scenarios. At June 30, 2004, no
common stock has been purchased under this plan.

9. EXPORT SALES

Export sales for the years ended June 30, 2004, 2003, and 2002 are
approximately as follows (in thousands):

41

ALLIED HEALTHCARE PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. SUPPLEMENTAL BALANCE SHEET INFORMATION

11. COMMITMENTS AND CONTINGENCIES

The Company is subject to various investigations, claims and legal
proceedings covering a wide range of matters that arise in the ordinary course
of its business activities. The Company intends to continue to conduct business
in such a manner as to avert any FDA action seeking to interrupt or suspend
manufacturing or require any recall or modification of products.

The Company has recognized the costs and associated liabilities only for
those investigations, claims and legal proceedings for which, in its view, it is
probable that liabilities have been incurred and the related amounts are
estimable. Based upon information currently available, management believes that
existing accrued liabilities are sufficient and that it is not reasonably
possible at this time that any additional liabilities will result from the
resolution of these matters that would have a material adverse effect on the
Company's consolidated results of operations, financial position, or cash flows.

12. SEGMENT INFORMATION

The Company operates in one segment consisting of the manufacturing,
marketing and distribution of a variety of respiratory products used in the
health care industry to hospitals, hospital equipment dealers,

42

ALLIED HEALTHCARE PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

hospital construction contractors, home health care dealers and emergency
medical product dealers. The Company's product lines include respiratory care
products, medical gas equipment and emergency medical products. The Company does
not have any one single customer that represents more than 10 percent of total
sales.

13. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial data for fiscal 2004 and 2003 appears below
(all amounts in thousands):

Earnings (loss) per share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly amounts will not
necessarily equal the total for the year.

14. SUBSEQUENT EVENTS

On August 27, 2004, Allied Healthcare Products, Inc. ("Allied") entered
into an agreement with Abbott Laboratories ("Abbott") pursuant to which Allied
will cease production of its product Baralyme(R), will, within sixty days,
effect the withdrawal of Baralyme(R) product held by distributors and will
pursue the development of a new carbon dioxide absorbent product. Baralyme(R), a
carbon dioxide absorbent product, has been used safely and effectively in
connection with inhalation anesthetics since its introduction in the 1920s. In
recent years, the number of inhalation anesthetics has increased, giving rise to
concerns regarding the use of Baralyme(R) in conjunction with these newer
inhalation anesthetics when Baralyme(R) has been allowed, contrary to
recommended practice, to become desiccated. The agreement also provides that,
for a period of eight years, Allied will not manufacture, distribute, promote,
market, sell, commercialize or donate any Baralyme(R) product or similar product
based upon potassium hydroxide and will not develop or license any new carbon
dioxide absorbent product containing potassium hydroxide.

In consideration of the foregoing, Abbott has agreed to pay Allied an
aggregate of $5,250,000 of which $1,530,000 is currently due and the remainder
payable in 4 equal annual installments of $930,000 due on July 1, 2005 through
July 1, 2008. Allied has agreed with Abbott that in the event that it receives
approval from the U.S. Food & Drug Administration for the commercial sale of a
new carbon dioxide absorbent product not based upon potassium hydroxide prior to
January 1, 2008, that Abbott will be relieved of any obligation to fund the
$930,000 installment due July 1, 2008. Allied expects to suspend manufacturing
operations at its Stuyvesant Falls, New York, facility and anticipates that
costs associated with the withdrawal and suspension of operations at that
location, including severance and benefit payments due union employees, will be
approximately $600,000.

In addition to the provisions of the agreement relating to the withdrawal
of the Baralyme(R) product, Abbott has agreed to pay to Allied up to $2,150,000
in product development costs to pursue development of a new carbon dioxide
absorption product for use in connection with inhalation anesthetics that does
not contain

43

ALLIED HEALTHCARE PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

potassium hydroxide and does not produce a significant exothermic reaction with
currently available inhalation agents.

In 2004, Allied's sales of Baralyme(R) were approximately $1.9 million and
contributed approximately $670,000 in pre-tax earnings and cash flow from
operations. The majority of the $5,250,000 Allied is to receive from Abbott will
be recognized into income over the eight-year term of the agreement. The net
cash flow expected to be realized by Allied under the agreement with Abbott is
projected be substantially equivalent to the net cash flow Allied would have
expected to realize from continued manufacture and sales of Baralyme(R) during
the initial five years of the period.

As described in Note 4, the Company amended its credit facility on August
27, 2004.

44

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures.

As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of
1934, as of the end of the period covered by this report and under the
supervision and with the participation of management, including the Chief
Executive Officer and the Chief Financial Officer, the Company has evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures. Based on such evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that such disclosure controls and procedures
are effective in ensuring that material information relating to the Company,
including its consolidated subsidiaries, is made known to the certifying
officers by others within the Company and its consolidated subsidiaries during
the period covered by this report.

(b) Changes in Internal Controls.

There were no changes in the Company's internal controls for financial
reporting or other factors during the fourth quarter of the most recent fiscal
year that could significantly affect such internal controls. However, in
connection with the new rules, the Company has been engaged in the process of
further reviewing and documenting its disclosure controls and procedures,
including its internal accounting controls. The company may from time to time
make changes aimed at enhancing the effectiveness of its disclosure controls and
procedures, including its internal controls, to ensure that the Company's
systems evolve with its business.

ITEM 9B. OTHER INFORMATION

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

A definitive proxy statement is expected to be filed with the Securities
and Exchange Commission on or about October 11, 2004. The information required
by this item is set forth under the caption "Election of Directors", under the
caption "Executive Officers", and under the caption Section 16(a) Beneficial
Ownership Reporting Compliance in the definitive proxy statement, which
information is incorporated herein by reference thereto.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is set forth under the caption
"Executive Compensation" in the definitive proxy statement, which information is
incorporated herein by reference thereto.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
definitive proxy statement, which information is incorporated herein by
reference thereto.

45

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information by this item will appear in the section entitled "Audit
Fees" included in the Company's definitive Proxy Statement to be filed on or
about October 11, 2004, relating to the 2004 Annual Meeting of Shareowners, and
such information is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

1. FINANCIAL STATEMENTS

The following consolidated financial statements of the Company and its
subsidiaries are included in response to Item 8:

Consolidated Statement of Operations for the years ended June 30,
2004, 2003, and 2002

Consolidated Balance Sheet at June 30, 2004 and 2003

Consolidated Statement of Changes in Stockholders' Equity for the
years ended June 30, 2004, 2003 and 2002

Consolidated Statement of Cash Flows for the years ended June 30,
2004, 2003 and 2002

Notes to Consolidated Financial Statements

Reports of Independent Registered Public Accounting Firms

2. FINANCIAL STATEMENT SCHEDULE

Valuation and Qualifying Accounts and Reserves for the Years Ended
June 30, 2004, 2003 and 2002

All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.

3. EXHIBITS

The exhibits listed on the accompanying Index to Exhibits are filed as part
of this Report.

4. REPORTS ON FORM 8-K

None.

46

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

ALLIED HEALTHCARE PRODUCTS, INC.

By:

/s/ EARL R. REFSLAND
--------------------------------------
Earl R. Refsland
President and Chief Executive Officer

/s/ DANIEL C. DUNN
--------------------------------------
Daniel C. Dunn
Vice President, Chief Financial
Officer, and Secretary

Dated: September 27, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on September 25, 2004.

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

* Such signature has been affixed pursuant to the following Power of Attorney.

47

ALLIED HEALTHCARE PRODUCTS, INC.

RULE 12-09 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

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

(1) Decrease due to bad debt write-offs and recoveries.

(2) Decrease due to disposal of obsolete inventory.

(3) Increase due to inventory revaluation.

S-1

INDEX TO EXHIBITS

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

* Notwithstanding any incorporation of this Annual Report on Form 10-K in any
other filing by the Registrant, Exhibits designated with an asterisk (*) shall
not be deemed incorporated by reference to any other filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934 unless
specifically otherwise set forth therein.