Allied Defense (ADG) 10-Q/A 2005 Q1 Quarterly report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q/A

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the period ended March 31, 2005

Commission File Number: 1-11376

The Allied Defense Group, Inc.

(Exact name of Registrant as specified in its charter)

Delaware	04-2281015
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Number)

8000 Towers Crescent Drive, Suite 260
Vienna, Virginia 22182
(Address of principal executive offices, including zip code)

(703) 847-5268
(Registrant’s telephone number, including area code)

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.

Yesþ Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yesþ Noo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yeso Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of March 31, 2005: 5,623,030.

EXPLANATORY NOTE

This Form 10-Q/A is being filed to amend The Allied Defense Group, Inc. (the “Company”) Quarterly Report on Form 10-Q for the period ended March 31, 2005 in order to reflect the restatement of the Company’s Consolidated Financial Statements and amendments to related disclosures as of March 31, 2005 and for the three months ended March 31, 2005 and 2004. The restatement arose from management’s determination that the Company erroneously valued MECAR’s U.S. Dollar accounts receivable at the hedged rate instead of the end of period spot rate. See the more complete discussion set forth in the Annual Report on Form 10-K/A for the period ended December 31, 2004.

Generally, no attempt has been made in this Form 10-Q/A to modify or update other disclosures presented in the original report on Form 10-Q except as required to reflect the effects of the restatement. This Form 10-Q/A does not reflect events occurring after the filing of the original Form 10-Q or modify or update those disclosures. Information not affected by the restatement is unchanged and reflects the disclosure made at the time of the original filing of the Form 10-Q with the Securities and Exchange Commission on May 10, 2005. The following items have been amended as a result of the restatement:

• Part I — Item 1 — Financial Statements

• Part I — Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

• Part I — Item 3 — Quantitative and Qualitative Market Risk Disclosure

• Part I — Item 4 — Disclosure Controls and Procedures; and

• Part II — Item 6 — Exhibits and Reports on Form 8-K

THE ALLIED DEFENSE GROUP, INC.
INDEX

	PAGE
	NUMBER
PART I. FINANCIAL INFORMATION — UNAUDITED
Item 1. Financial Statements
Condensed Consolidated Balance Sheets March 31, 2005 and December 31, 2004		2
Condensed Consolidated Statements of Operations Three months ended March 31, 2005 and 2004		3
Condensed Consolidated Statements of Cash Flows Three months ended March 31, 2005 and 2004		4
Notes to Condensed Consolidated Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Market Risk Disclosure		22
Item 4. Disclosure Controls and Procedures		22
PART II. OTHER INFORMATION
Item 6. Exhibits		23
Signatures		25

The Allied Defense Group, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands of Dollars, except per share data)

	March 31, 2005		December 31, 2004
	Unaudited
ASSET
CURRENT ASSETS
Cash and cash equivalents	$	26,947	$	27,940
Restricted cash		11,042		9,757
Accounts receivable		17,877		28,241
Costs and accrued earnings on uncompleted contracts		32,328		54,877
Inventories		14,513		17,161
Deferred tax asset		2,263		1,058
Fair value of foreign exchange contracts		—		1,195
Prepaid and other current assets		4,235		4,123
Total current assets		109,205		144,352
PROPERTY, PLANT AND EQUIPMENT —net of accumulated depreciation		28,637		30,294
OTHER ASSETS
Restricted Cash		2,000		2,000
Intangibles, net of accumulated amortization		3,627		3,723
Goodwill		14,156		14,401
Deferred tax asset, non-current		1,044		1,020
Other assets		1,555		528
		22,382		21,672
	$	160,224	$	196,318
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Notes payable	$	50	$	54
Current maturities of long-term debt		2,387		2,733
Convertible subordinated debenture, current, less unamortized discount		—		2,231
Accounts payable		10,150		34,933
Accrued liabilities		8,576		9,374
Customer deposits		10,140		8,708
Deferred compensation		—		1,612
Foreign exchange contracts		393		—
Income taxes		91		811
Total current liabilities		31,787		60,456
LONG-TERM OBLIGATIONS
Long-term debt, less current maturities and unamortized discount		5,766		6,440
Deferred compensation		397		377
		6,163		6,817
STOCKHOLDERS’ EQUITY
Preferred stock, no par value; authorized, 1,000,000 shares; none issued		—		—
Common stock, par value, $.10 per share; authorized 30,000,000 shares;
issued and outstanding 5,623,030 in 2005 and 5,601,101 in 2004		562		560
Additional paid-in capital		26,975		26,669
Retained earnings		75,698		77,605
Accumulated other comprehensive income		19,039		24,211
		122,274		129,045
	$	160,224	$	196,318

The accompanying notes are an integral part of these consolidated financial statements.

2 

The Allied Defense Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Thousands of Dollars, except per share data)

(Unaudited)

	Three months ended
	March 31,
	2005			2004
	Restated			Restated
Revenue	$	21,056		$	33,090
Cost and expenses
Cost of sales		14,998			24,068
Selling and administrative		7,472			6,646
Research and development		1,527			1,561
Operating income (loss)		(2,941	)		815
Other income (expense)
Interest income		189			101
Interest expense		(537	)		(479	)
Other-net		189			(349	)
		(159	)		(727	)
Income (loss) before income taxes		(3,100	)		88
Income tax expense ( benefit)		(1,193	)		94
NET LOSS	$	(1,907	)	$	(6	)
Loss per share
Basic	$	(0.34	)	$	(0.01	)
Diluted	$	(0.34	)	$	(0.01	)
Weighted average number of common shares:
Basic		5,609,351			5,551,399
Diluted		5,609,351			5,551,399

The accompanying notes are an integral part of these consolidated financial statements.

3

The Allied Defense Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of Dollars)

(Unaudited)

	Three months ended March 31
	2005			2004
	Restated			Restated
Cash flows from operating activities
Net loss	$	(1,907	)	$	(6	)
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities
Depreciation and amortization		1,265			1,141
Unrealized losses on forward contracts		1,448			3,826
Debt issue costs		63			19
Provision for estimated losses on contracts		67			45
Deferred taxes		(1,039	)		2,201
Common stock award		33			—
Changes in assets and liabilities
Restricted cash and restricted deposits		(1,834	)		10,843
Accounts receivable		9,271			(782	)
Costs and accrued earnings on uncompleted contracts		20,082			(7,150	)
Inventories		2,043			(1,351	)
Prepaid and other assets		(1,369	)		(954	)
Accounts payable, accrued liabilities and customer deposits		(23,591	)		(9,655	)
Deferred compensation		20			451
Income taxes		(479	)		882
Net cash provided by (used in) operating activities		4,073			(490	)
Cash flows from investing activities
Capital expenditures		(1,003	)		(888	)
Net cash used in investing activities		(1,003	)		(888	)
Cash flows from financing activities
Principal payments on long-term borrowing		(2,968	)		(570	)
Repayment on capital lease obligations		(659	)		(530	)
Proceeds from issuance of long-term debt		728			—
Net decrease in short-term borrowings		(4	)		(14,046	)
Proceeds from employee stock purchases		21			39
Option exercises		154			—
Net cash used in financing activities		(2,728	)		(15,107	)
Net increase (decrease) in cash and cash equivalents		342			(16,485	)
Effects of exchange rate changes on cash and cash equivalents		(1,335	)		(455	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(993	)		(16,940	)
Cash and cash equivalents at beginning of year		27,940			43,377
Cash and cash equivalents at end of period	$	26,947		$	26,437
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for
Interest	$	183		$	148
Taxes		561			1
Supplemental Non-Cash Investing and Financing Activities:
Capital Leases		—			51

The accompanying notes are an integral part of these consolidated financial statements.

4

The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

NOTE 1 — CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements have been prepared by the Company without audit. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all necessary adjustments and reclassifications (all of which are of a normal, recurring nature) that are necessary for fair presentation for the periods presented.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes included in the Company’s December 31, 2004, Form 10-K/A filed with the Securities and Exchange Commission. The results of operations for the periods ended March 31, 2005 and 2004 are not necessarily indicative of the operating results for the full year.

Restatements

In February 2005, management had concluded that Allied did not qualify for the use of hedge accounting due to the fact that Allied did not have the appropriate policies, procedures or documentation to support the use of hedge accounting for its foreign currency contracts. At December 31, 2004, the Company did not have the necessary controls over financial reporting in place to properly identify the lack of documentation, which is necessary to properly evaluate a derivative instrument to determine if hedge accounting is appropriate, or to perform the required computation and evaluation of hedge effectiveness. This resulted in the Annual Report on Form 10-K for the period ended December 31, 2004 containing a restatement of amounts previously reported in the Company’s consolidated balance sheet at December 31, 2003 and the related consolidated statements of earnings, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2003 and for the first nine months of 2004. In addition, certain disclosures in other notes to the consolidated financial statements were restated to reflect the restatement adjustments.

During the second quarter of 2005, in connection with a continued evaluation of the impact of the above, management determined that it was necessary to file a Form 10-K/A to amend the Company’s 2004 Annual Report on Form 10-K in order to restate the Company’s consolidated balance sheets as of December 31, 2004 and 2003 and the related consolidated statements of earnings, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2004. This restatement arose from management’s determination that the Company, as a result of the completion by MECAR (a wholly-owned Belgian subsidiary) of its $130 million FMS Contract, had not correctly accounted for its U.S. Dollar receivables at December 31, 2004, 2003 and 2002. The Company determined that the U.S. Dollar denominated receivables at MECAR were valued at the hedged rate rather than at the period end spot rate resulting in an error upon the translation of the amounts from MECAR’s functional currency, the Euro, back into U.S. Dollars which is Allied’s reporting currency. In addition, the Company has determined to restate its Consolidated Statements of Cash Flows to reclassify for proper presentation purposes certain matters. This included reclassifying repayments of capital leases to financing activities from investing activities and reclassifying a portion of the changes in restricted cash to cash flows from operating activities from financing activities.

The Company filed a Form 8-K/A on August 10, 2005, announcing that it has determined to restate its financial statements for 2004, 2003 and 2002 and the first quarter of 2005 due to the above errors. On October 5, 2005, the Company filed its Form 10-K/A for the period ended December 31, 2004.

5

The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

This restatement results in the following adjustments to the Consolidated Financial Statements for the relevant periods:

Selected Consolidated Statements of Earnings Data:

				Impact from using
				Incorrect Rate			As Previously
Period Ended March 31, 2005	As Restated			(1)			Reported
Revenues	$	21,056		$	(3,157	)	$	17,899
Cost of sales		14,998			(577	)		14,421
Operating loss		(2,941	)		(2,580	)		(5,521	)
Loss before taxes		(3,100	)		(2,580	)		(5,680	)
Income tax benefit		(1,193	)		(1,094	)		(2,287	)
Net Loss	$	(1,907	)	$	(1,486	)	$	(3,393	)
Loss per share
Basic	$	(0.34	)	$	(0.26	)	$	(0.60	)
Diluted	$	(0.34	)	$	(0.26	)	$	(0.60	)

				Impact from using
				Incorrect Rate			As Previously
Period Ended March 31, 2004	As Restated			(1)			Reported
Revenues	$	33,090		$	(6,226	)	$	26,864
Cost of sales		24,068			(1,893	)		22,175
Operating income (loss)		815			(4,333	)		(3,518	)
Income (loss) before taxes		88			(4,333	)		(4,245	)
Income tax expense (benefit)		94			(1,474	)		(1,380	)
Net Loss	$	(6	)	$	(2,859	)	$	(2,865	)
Loss per share
Basic	$	(0.01	)	$	(0.51	)	$	(0.52	)
Diluted	$	(0.01	)	$	(0.51	)	$	(0.52	)

Consolidated Balance Sheet Data: March 31, 2005

			As
	As Restated		Previously Reported
Accounts receivable	$	17,877	$	13,482
Costs and accrued earnings on uncompleted contracts		32,328		35,919
Total current assets		109,205		110,372
Total assets		160,224		159,766
Accrued liabilities		8,576		8,576
Foreign exchange contracts		393		538
Total current liabilities		31,787		32,066
Total liabilities		37,950		38,229
Accumulated other comprehensive income		19,039		19,480
Total liabilities and stockholder’s equity	$	160,224	$	159,766

In addition, in this restatement, Allied has amended its Condensed Consolidated Statements of Cash Flow to reclassify a portion of the changes in restricted cash (related to MECAR’s performance guarantees and other operating activities) to cash from operating activities, reclassify amounts incurred for the acquisition of property, plant and equipment under capital lease obligations as non-cash investing and financing activities, and, capital lease payments previously included as principal payments on long term debt as repayment on capital lease obligations (both financing activities).

6

The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

The tables below show the impact of the above restatements on the three months ended March 31, 2005 and 2004. The following table shows the impact of the restricted cash reclassification followed by a table which shows the impact of the capital leases reclassification.

TABLE #1:Selected Consolidated Statements of Cash Flows Data (Reclassification of Restricted Cash):

							As previously
	As restated			Adjustment			reported
Period Ended March 31, 2005
Cash flows from operating activities
Restricted cash and restricted deposits		(1,834	)		1,834			—
Cash flows used in financing activities
Restricted cash and restricted deposits		—			(1,834	)		(1,834	)
Net Impact on Cash		(1,834	)		—			(1,834	)
Period Ended March 31, 2004
Cash flows from operating activities			��
Restricted cash and restricted deposits		10,843			(10,843	)		—
Cash flows used in financing activities
Restricted cash and restricted deposits		—			10,843			10,843
Net Impact on Cash		10,843			—			10,843

TABLE #2: Selected Consolidated Statements of Cash Flows Data (Reclassification of Capital Leases):

							As previously
	As restated			Adjustment			reported
Period Ended March 31, 2005
Cash flows from investing activities
Capital expenditures		(1,003	)		—			(1,003	)
Cash flows used in financing activities
Repayment on capital lease obligations		(659	)		659			—
Principal payments on long term debt and debenture		(2,968	)		(659	)		(3,627	)
Proceeds from issuance of long term debt		728			—			728
Net Impact on Cash		(3,902	)		—			(3,902	)
Period Ended March 31, 2004
Cash flows from investing activities
Capital expenditures		(888	)		—			(888	)
Cash flows used in financing activities
Repayment on capital lease obligations		(530	)		530			—
Principal payments on long term debt and debenture		(570	)		(530	)		(1,100	)
Proceeds from issuance of long term debt		—			—			—
Net Impact on Cash		(1,988	)		—			(1,988	)

NOTE 2 — PRINCIPLES OF CONSOLIDATION

The condensed consolidated financial statements include the accounts of The Allied Defense Group, Inc. (“Allied” or the “Company”), a Delaware corporation, and its wholly-owned subsidiaries as follows:

• ARC Europe, S.A. (“ARC Europe”), a Belgian company,

• Allied Research Corporation Limited (“Limited”), an inactive United Kingdom company,

• News/Sports Microwave Rental, Inc. (“NS Microwave”), a California corporation,

• Titan Dynamics Systems, Inc. (“Titan Dynamics”), a Texas corporation,

7

The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

• SeaSpace Corporation (“SeaSpace”), a California corporation,

• MECAR USA, Inc. (“MECAR USA”), a Delaware corporation, and

• Allied Technology, LLC (“Allied Technology”), a Maryland corporation

ARC Europe includes its wholly-owned subsidiaries MECAR S.A. (“MECAR”), Sedachim S.I. S.A., Hendrickx S.A., and the VSK Group. The VSK Group is comprised of VSK Electronics N.V. and its wholly-owned subsidiaries, Télé Technique Générale S.A., Intelligent Data Capturing Systems (IDCS) N.V., VIGITEC S.A. and Control Monitor Systems.

The Company operates in four (4) segments, which are outlined below:

• Ordnance & Manufacturingsegment consists of MECAR and MECAR USA. MECAR develops and produces medium caliber tank, mortar and other ammunition. MECAR USA will initially pursue contracts from the U.S. government and others for ammunition and pyrotechnics devices. MECAR USA is expected to be operational in the third quarter of 2005.

• Electronic Securitysegment consists of The VSK Group and NS Microwave. VSK Electronics N.V. manufactures access control, intrusion protection, fire detection and video systems; Télé Technique Générale S.A. installs security systems; Intelligent Data Capturing Systems N.V. manufactures integrated video systems; VIGITEC S.A. installs networked video surveillance systems; and Control Monitor Systems manufactures access control systems. NS Microwave designs, manufactures, distributes and services industrial and law enforcement security products and systems.

• Environmental Safety & Securitysegment consists of SeaSpace, which designs, manufactures, distributes and services weather and environmental satellite ground reception systems, as well as a line of antennas.

• Software, Training & Simulationsegment consists of Titan Dynamics, which designs, manufactures and sells battlefield effects simulators, minor pyrotechnics, and other training devices. Allied Technology was formed in anticipation of the Battlefield Effects Simulator (BES) proposal and will subcontract the work to Titan Dynamics.

Allied, the parent company, provides management services to its subsidiaries and has no operating activities. Significant intercompany transactions have been eliminated in consolidation.

NOTE 3 — DERIVATIVE FINANCIAL INSTRUMENTS

The Company uses derivative financial instruments to manage foreign currency exposure. As a matter of policy, the Company does not enter into speculative hedge contracts or use other derivative financial instruments.

Fair value hedges

During 2004, in connection with the acquisition of Control Monitoring Systems, the Company entered into a foreign currency contract designated by the Company as a fair value hedge to minimize the foreign currency exposures with debt, which is payable in U.S. dollars, rather than the Euro, which is the VSK Group’s functional currency. At March 31, 2005 and December 31, 2004, the contract’s notional amount was $300 and the fair value of the contract was $23 and $38, respectively. The contract was entered into on August 1, 2004 and expires July 31, 2005. Gains and losses from settlements of derivative contracts are reported as a component of other income (expense). There were no net gains or losses realized during the periods ended March 31, 2005 and December 31, 2004 from hedge ineffectiveness or from firm commitments that no longer qualify as fair value hedges.

Cash flow hedges

The Company uses foreign currency futures contracts to minimize the foreign currency exposures that arise from sales contracts with certain foreign customers. Under the terms of these sales contracts, the selling price, net of certain costs, is receivable in U.S. dollars rather than the Euro, which is MECAR’s functional currency. At March 31, 2005, MECAR designated foreign currency futures contracts with a notional amount of $33,000 as cash flow hedges. These contracts had a negative fair value totaling $393 which is recorded in the accompanying balance sheet as a liability and a reduction in other comprehensive income, net of income taxes. Gains and losses from settlements of these contracts are reported as a component of revenues. There were no net gains or losses realized during the three months ended March 31, 2005 from hedge ineffectiveness.

8

The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

Derivatives not designated as hedges

As described in further detail in the Company Form 10-K at December 31, 2004, management concluded that Allied did not qualify for the use of hedge accounting for hedges entered into prior than December 31, 2004 due to the fact that Allied did not have the appropriate policies, procedures or documentation to support the use of hedge accounting for its foreign currency contracts. As such, gains/losses from settlements of the derivative contracts were recorded to the statement of earnings. For the three months ended March 31, 2005 and 2004, the Company recorded after-tax earnings (loss) of $21 and $(750) from derivative adjustments, respectively. The Company has taken the steps to comply with the accounting guidelines for future contracts.

NOTE 4 — RESTRICTED CASH

Restricted Cash at March 31, 2005 and December 31, 2004 is comprised as follows:

	2005		2004
Collateralized performance bonds and advance payment guarantees	$	11,024	$	9,745
Senior secured facility deposit		2,000		2,000
Other		18		12
	$	13,042	$	11,757
Less non-current portion		2,000		2,000
	$	11,042	$	9,757

MECAR is generally required under the terms of its contracts with foreign governments and its distributor to provide performance bonds and advance payment guarantees. The credit facility agreements used to provide these financial guarantees place restrictions on cash deposits and other liens on MECAR’s assets. $11,024 and $9,745 at March 31, 2005 and December 31, 2004, respectively, was restricted or pledged as collateral for these agreements.

The Company made a security deposit in connection with the senior secured facility as further described in Note 10. This balance is classified as a non-current asset.

NOTE 5 — ACCOUNTS RECEIVABLE

Accounts receivable at March 31, 2005 and December 31, 2004 are comprised as follows:

	2005		2004
	Restated
Direct and indirect receivables from foreign governments	$	4,729	$	15,585
Commercial and other receivables, less allowance for doubtful receivables of $154 in 2005 and $143 in 2004		13,148		12,656
	$	17,877	$	28,241

Receivables from foreign government and government agencies are generally due within 30 days of shipment, less a 10% hold back provision which is generally due within 90 days. Since these receivables are supported by letters of credit or other guarantees, no provision for doubtful accounts is deemed necessary. The Company evaluates its allowance for doubtful accounts on commercial receivables on an ongoing basis and provides for losses as deemed necessary.

9

The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

NOTE 6 — COSTS AND ACCRUED EARNINGS ON UNCOMPLETED CONTRACTS

Costs and accrued earnings on uncompleted contracts are recognized by MECAR, NS Microwave and SeaSpace for their fixed priced sales contracts in accordance with the percentage of completion method of accounting. Under this method, revenue is recognized as work progresses, based on the relationship between actual costs incurred during the period and total estimated cost to be incurred for the total contract. The Company allocates its overhead based on total annual normal production. Management reviews these estimates as work progresses and the effect of any change in cost estimates is reflected in cost of sales in the period in which the change is identified. The revenue recognized on the contracts in progress for the three months ended March 31, 2005 and 2004 were $12,712 and $25,316, respectively.

NOTE 7 — INVENTORIES

Inventories at March 31, 2005 and December 31, 2004 are comprised as follows:

	2005		2004
	Restated
Raw materials	$	8,905	$	15,701
Work in process		4,485		686
Finished goods, less reserve for obsolescence of $641 in 2005 and $668 in 2004		1,123		774
	$	14,513	$	17,161

NOTE 8 — INTANGIBLE ASSETS AND GOODWILL

	March 31, 2005						December 31, 2004
Intangible assets	Gross		Accumulated				Gross		Accumulated
subject to amortization:	Amount		Amortization		Net		Amount		Amortization		Net
Capitalized Software	$	1,184	$	499	$	685	$	1,184	$	477	$	707
Customer Lists		2,297		590		1,707		2,297		540		1,757
Patents		1,494		259		1,235		1,494		235		1,259
Total	$	4,975	$	1,348	$	3,627	$	4,975	$	1,252	$	3,723

Consolidated amortization expense related to intangible assets, excluding goodwill, for each of the three months ended March 31, 2005 and 2004 were $96 and $111. Estimated future aggregate annual amortization for intangible assets is as follows:

Period	Amount
Nine months ended December 31, 2005	$	405
Year ended December 31, 2006		379
Year ended December 31, 2007		297
Year ended December 31, 2008		225
Year ended December 31, 2009		225

The $14,156 of goodwill at March 31, 2005 is comprised of $8,314 related to the Electronic Security Segment, $4,447 related to the Environmental Safety & Security Segment and $1,395 related to the Software, Training & Simulation Segment. The change in goodwill during the three month period ended March 31, 2005 was due to the currency translation adjustment.

Consistent with prior years, the Company conducted its annual impairment test of goodwill during the fourth quarter of 2004 and recently reviewed this issue. The fair value of the reporting units was estimated using the expected present value of future cash flows. Based on the applicable valuations, management determined that no impairment of goodwill exists.

10

The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

NOTE 9 — NOTES PAYABLE AND CREDIT FACILITY

Notes Payable —At March 31, 2005 and December 31, 2004 NS Microwave had a note of $50 and $54, respectively, for machinery and vehicles. The weighted average interest rate for Notes Payable as of March 31, 2005 and December 31, 2004 was 3%.

Credit Facility —MECAR is obligated under an agreement (the Agreement), executed March 2002, with its foreign banking syndicate that provides credit facilities primarily for bank guarantees including performance bonds, letters of credit and similar instruments required for specific sales contracts as well as a line-of-credit for tax prepayments and working capital. The Agreement provides for certain bank charges and fees as the facility is used, plus fees of 2% of guarantees issued and quarterly fees at an annual rate of 1.25% of guarantees outstanding. These fees are charged to interest expense. As of March 31, 2005 and December 31, 2004, guarantees and performance bonds of approximately $25,076 and $25,779 respectively, were outstanding.

Advances under the Agreement are secured by restricted cash at March 31, 2005 and December 31, 2004 of approximately $11,024 and $9,745, respectively. Amounts outstanding are also collateralized by a pledge of approximately $44,486 of MECAR’s net assets. The Agreement requires that MECAR maintain net worth and working capital covenants.

NOTE 10 — LONG-TERM DEBT

Long-term obligations consist of the following as of March 31, 2005 and December 31, 2004, respectively:

	2005		2004
Notes payable, less unamortized discount and debt issue costs	$	1,220	$	1,176
Mortgage loan agreements		255		284
Loan for Control Monitor Systems acquisition		300		300
Capital leases and other		6,378		7,413
Total Long-Term Debt	$	8,153	$	9,173
Less current maturities		2,387		2,733
Long-Term Debt, less current maturities and unamortized discount	$	5,766	$	6,440

Notes payable.On May 28, 2004 the Company obtained a senior loan facility from an accredited lender under which the Company may borrow up to $18,000 for acquisitions and working capital. At closing, the Company borrowed $2,000 and deposited $2,000 in a restricted account to secure the repayment. The facility allows the Company to make additional draws under the facility under certain conditions through November 28, 2005. All loans under the facility bear interest at the rate of 11.5% per year payable monthly. Principal is paid in sixty equal monthly payments commencing in late December 2005. The Company pays a fee on the unused portion of the facility. Warrants (exercisable at $0.01 per share) to purchase 4,000 shares of the Company’s common stock were issued at closing and were valued at $68. Additional warrants (at the rate of 2,000 for each $1 million loan) will be issued with future loan advances. The facility includes certain financial and other covenants. The Company obtained a waiver for the requirement set forth in Section 7.6(a) of the Loan Agreement requiring the Company to maintain at the end of such fiscal quarter for the then preceding four fiscal quarters Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) of not less than $15,000.

Mortgage loan agreements.The VSK Group is obligated on a mortgage on its building, which has a balance of approximately $255 at March 31, 2005. The mortgage is payable in annual installments of approximately $64 plus interest.

11

The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

Loan for Control Monitor Systems acquisition.The VSK Group entered into a $300 loan to fund the acquisition of Control Monitor Systems. The loan is payable in equal installments on August 1, 2005, 2006 and 2007.

Capital leases and other.The Company and its subsidiaries are also obligated on various vehicle, equipment, capital lease obligations and other loans. The notes and leases are generally secured by the assets acquired, bear interest at rates ranging from 3.5% to 8.0% and mature at various dates through 2010.

Scheduled annual maturities of long-term obligations as of March 31, 2005 are approximately as follows:

Year	Amount
2006	$	2,387
2007		3,009
2008		1,067
2009		334
2010		1,356

NOTE 11 — CONVERTIBLE SUBORDINATED DEBENTURE

On June 28, 2002 the Company sold to an accredited investor for $7,500 (i) an 8% subordinated debenture that is convertible into shares of the Company’s common stock at $25.00 per share and (ii) warrants to purchase 15,000 shares of the Company’s common stock at an exercise price of $28.75 per share in cash. The warrants to purchase 15,000 shares of the Company’s common stock were valued at $140. The Company has registered the shares of common stock that could be issued in the event the holder elects to convert the debenture and exercise the warrants. The final payment on the debenture was made in late March 2005.

NOTE 12 — EARNINGS (LOSS) PER SHARE

Basic earnings per share exclude dilution and are computed by dividing net earnings by the weighted average number of common shares outstanding for the period. The computation of diluted earnings per share includes the effects of stock options, warrants and convertible debenture, if such effect is dilutive. The table below shows the calculation of basic and diluted earnings (loss) per share for the three months ended March 31, 2005 and March 31, 2004, respectively:

	Three months ended
	March 31,
	2005			2004
	Restated			Restated
Net loss	$	(1,907	)	$	(6	)
Weighted average number of basic shares		5,609,351			5,551,399
Common stock equivalents		—			—
Weighted average number of diluted shares		5,609,351			5,551,399
Basic loss per share	$	(0.34	)	$	(0.01	)
Diluted loss per share	$	(0.34	)	$	(0.01	)

At March 31, 2005 and 2004, the Company has excluded common stock equivalents for 288,590 and 192,764, respectively, since their effect would be anti-dilutive.

12

The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

NOTE 13 — COMPREHENSIVE LOSS

A summary of the components of Comprehensive Loss for the three months ended March 31, 2005 and 2004 are as follows:

				Accumulated other
				comprehensive income
				Currency
				translation			Cash flow
	Retained Earnings			adjustment			hedges			Total
Three months ended
March 31, 2005 and 2004
December 31, 2003	$	73,671		$	15,636		$	—		$	89,307
Comprehensive loss
Net loss		(6	)		—			—
Currency translation adjustment		—			(2,161	)		—
Comprehensive loss		—			—			—			(2,167	)
Three months ended
March 31, 2004, restated	$	73,665		$	13,475		$	—		$	87,140
December 31, 2004	$	77,605		$	24,211		$	—		$	101,816
Comprehensive loss
Net income		(1,907	)		—			—
Currency translation adjustment		—			(4,913	)		—
Change in fair value of FX contracts		—			—			(259	)
Comprehensive loss		—			—			—			(7,079	)
Three months ended
March 31, 2005, (restated)	$	75,698		$	19,298		$	(259	)	$	94,737

The currency translation adjustment for the three months ended March 31, 2005 and 2004 resulted from the change in the Euro during the respective periods.

NOTE 14 — STOCK BASED COMPENSATION

The Company currently accounts for stock options using the intrinsic value method and is applying APB Opinion No. 25,“Accounting for Stock Issued to Employees.”Accordingly, compensation costs for stock options is measured and recorded as the excess, if any, of the quoted market price of the Company’s stock at the date of grant over the amount an employee must pay to acquire the stock. Compensation cost for stock awards is recorded based on the quoted market value of the Company’s stock at the time of grant. No compensation cost has been recognized for the granting of stock options to employees in the three months ended March 31, 2005 and 2004.

13

The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

The following table presents the pro forma decrease in income for the three months ended March 31, 2005 and 2004, that would have been recorded had the fair values of options granted been recognized as compensation expense on a straight-line basis over the vesting period of the grant:

	Three Months Ended
	March 31,
(Dollars in thousands, except per share amounts)	2005			2004
	Restated			Restated
Reported net loss	$	(1,907	)	$	(6	)
Stock-based compensation costs that would have been included in the determination of reported net earnings, if the fair value method was applied to all awards, net of tax		(72	)		(154	)
Pro forma net loss	$	(1,979	)	$	(160	)
Basic loss per share:
Reported loss per share	$	(0.34	)	$	(0.01	)
Compensation costs, net of tax		(0.01	)		(0.03	)
Pro forma basic loss per share	$	(0.35	)	$	(0.04	)
Diluted loss per share:
Reported loss per share	$	(0.34	)	$	(0.01	)
Compensation costs, net of tax		(0.01	)		(0.03	)
Pro forma diluted loss per share	$	(0.35	)	$	(0.04	)

Options granted during the three months ended March 31, 2005, and 2004 were 40,000 and 0, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes options pricing model. The weighted-average fair value of each option at the date of grant for the three months ended March 31, 2005 was $7.68. The weighted average assumptions used in the model and the weighted-average fair values of each option at the date of grant were as follows:

	Three Months Ended March 31
	2005			2004
Risk free interest rate		3.63	%		2.86	%
Expected volatility rate		33.90	%		47.00	%
Expected lives — years		3			3
Divided yield		—			—

The pro forma amounts may not be representative of future amounts since the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future periods.

14

The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

NOTE 15 — INDUSTRY SEGMENTS

	Three months ended
	March 31,
	2005			2004
	Restated			Restated
Revenues from external customers
Ordnance & Manufacturing	$	8,931			21,700
Electronic Security		10,328			9,330
Environmental Safety & Security		1,519			2,024
Software, Training & Simulation		278			36
	$	21,056		$	33,090
Segment profit (loss) before taxes
Ordnance & Manufacturing	$	(2,670	)	$	143
Electronic Security		663			820
Environmental Safety & Security		(511	)		(136	)
Software, Training & Simulation		(86	)		(179	)
Corporate and Other		(496	)		(560	)
	$	(3,100	)	$	88

NOTE 16 — COMMITMENTS AND CONTINGENCIES

A suit has been filed against one of the VSK subsidiaries in the Belgian courts alleging a breach of a non-compete clause within a teaming agreement executed with a claimant in prior years. This suit was settled in mid-2005

A suit was filed against SeaSpace in the Japanese courts. The proceeding related to SeaSpace’s termination of its distributor in Japan and its designation of a new distributor. The suit was settled in March 2005.

NOTE 17 — SUBSEQUENT EVENT

On April 19, 2005, Allied was awarded a $10,992 firm-fixed price, indefinite-delivery/indefinite quantity (IDIQ) contract for the procurement of 700 launchers and 1,000,000 cartridges and associated support for the Battlefield Effects Simulator (BES) training system for the United States Army. The contract will provide BES in support of target systems for Digital Multi-Purpose Range Complexes, Digital Multi-Purpose Training Range, and Battlefield Area Complex. Work on the initial delivery order of $1,500 will be performed in Marshall, Texas, and is expected to be completed in March 2006. The potential maximum value on this contract is $500 million over its potential 8 year life.

15

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

The following is intended to update the information contained in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2004 and presumes that readers have access to, and will have read, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in those reports.

Overview

Allied is a strategic portfolio of defense and security businesses, with presence in worldwide markets, offering both government and commercial customers leading edge products and services. Allied operates in four (4) segments:

• Ordnance & Manufacturingsegment consists of MECAR, located in Belgium, and MECAR USA, located in Marshall, TX. MECAR develops and produces medium caliber tank, mortar and other ammunition. MECAR USA will pursue contracts from U.S. and foreign governments for ammunition and pyrotechnics devices. MECAR USA is expected to be operational in the third quarter of 2005.

• Electronic Securitysegment consists of The VSK Group, located in Belgium and California, and NS Microwave, located in San Diego, CA. The VSK Group consists of VSK Electronics N.V. which manufactures access control, intrusion protection, fire detection and video systems; Télé Technique Générale S.A. which installs security systems; Intelligent Data Capturing Systems N.V. which manufactures integrated video systems; VIGITEC S.A. which installs networked video surveillance systems; and Control Monitor Systems which manufactures access control systems. NS Microwave designs, manufactures, distributes and services industrial and law enforcement surveillance products and systems.

• Environmental Safety & Securitysegment consists of SeaSpace, located in San Diego, CA, which designs, manufactures, distributes and services weather and environmental satellite ground reception systems.

• Software, Training & Simulationsegment consists of Titan Dynamics, located in Marshall, TX, which designs, manufactures and sells battlefield effects simulators, minor pyrotechnics and other training devices. Allied Technology, a wholly owned subsidiary was formed in anticipation of the Battlefield Effects Simulator (BES) proposal and will subcontract the work to Titan Dynamics. See additional discussion of BES contract award in Note 17.

The parent company provides management services to its subsidiaries and has no operating activities. Allied incurred a net loss of $1,907 for the three months ended March 31, 2005 compared to a net loss of $6 for the comparable period of 2004. The increased net loss for the three months ended March 31, 2005 resulted from reduced revenues.

Allied entered 2005 with substantial cash reserves and anticipates no liquidity concerns in 2005. Allied has secured a senior domestic lending facility for working capital and acquisitions.

Restatements

As set forth in the Form 8-K filed on March 16, 2005 and in the Form 10-K filed on March 31, 2005, Allied restated its financial statements for 2002 and 2003 and for the first three quarters of 2004 due to its not qualifying for the use of hedge accounting under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” for foreign currency exchange contracts (“FX contracts”). The restatements were contained in the annual report on Form 10-K for the period ended December 31, 2004 filed on March 31, 2005.

MECAR’s functional currency is the Euro and certain of its sales contracts are priced in U.S. Dollars. To offset the fluctuations that occur between the U.S. Dollar and the Euro, MECAR enters into FX contracts and had accounted for these contracts as fair value hedges using hedge accounting. In 2004, management determined that the Company could not support the use of hedge accounting for the FX contracts entered into by MECAR.

16

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

During periods of currency fluctuations, there will be changes in the fair value of an FX contract. Hedge accounting generally allows changes in the fair value of an FX contract to be offset against corresponding changes in the fair value of the hedged asset until the FX contract is closed at which time a gain or loss is then recognized. Non-hedge accounting requires that all changes in the fair value of an FX contract be recognized as a gain or loss in each reporting period without a corresponding offset. This difference between hedge and non-hedge accounting results in timing differences in the reporting of operating results. Such timing differences should offset over the life of the contract.

At the conclusion of the US dollar contract and related FX contracts, the Company’s financial results for the first quarter of 2005 were reported to have been adversely impacted when changing from hedge accounting to non-hedge accounting by $1,525. The Company continued to analyze this during the second quarter of 2005 and determined that most of the previously reported impact to the first quarter of 2005 was computed in error and should have been recognized in prior periods. In further examining the impact to the first quarter of 2005, the Company determined that in the restatement of the 2004, 2003 and 2002 financial statements the Company’s U.S. Dollar receivables were valued at the hedged rate rather than at the period end spot rate. In addition, the Company determined that it had been inappropriately showing the changes in its restricted cash exclusively as financing transactions.

The Company filed a Form 8-K/A on August 10, 2005, announcing that it has determined to restate its financial statements for 2004, 2003, 2002 and the first quarter of 2005, due to the above errors. On October 5, 2005, the Company filed its Form 10-K/A for the period ended December 31, 2004.

This restatement resulted in the following adjustments to net earnings (loss) for the relevant periods:

Net Loss
Period Ended	As Restated			As Previously Reported
	(in the 2ndRestatement)			(in the 1st restatement)
March 31, 2005	$	(1,907	)	$	(3,393	)
March 31, 2004		(6	)		(2,865	)

The cumulative impact of these adjustments (both the change to non-hedge accounting and the correction of the errors thereof) is presented below.

Selected Consolidated Statement of Earnings Data:

				Impact From		Impact from Euro			Pro-Forma
	Actual			Derivative Gains (1)		Fluctuations (2)			(Unaudited)
Period Ended March 31, 2005
Revenues	$	21,056		$	1,330	$	(1,572	)	$	20,814
Cost of Sales		14,998			—		(210	)		14,788
Operating loss		(2,941	)		1,330		(1,362	)		(2,973	)
Loss before income taxes		(3,100	)		1,330		(1,362	)		(3,132	)
Income taxes (benefit)		(1,193	)		452		(463	)		(1,204	)
Net Loss	$	(1,907	)	$	878	$	(899	)	$	(1,928	)

17

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

				Impact From		Impact from Euro		As Initially
	Actual			Derivative Gains (1)		Fluctuations (2)		Reported
Period Ended March 31, 2004
Revenues	$	33,090		$	745	$	633	$	34,468
Cost of Sales		24,068			—		242		24,310
Operating income		815			745		391		1,951
Earnings before income taxes		88			745		391		1,224
Income taxes		94			253		133		480
Net Earnings (loss)	$	(6	)	$	492	$	258	$	744

(1)	Unrealized gains on FX contracts and related tax effects.
(2)	Impact of revising the euro-based based revenues at the spot rates and related tax effects.

In addition, in this second restatement, Allied has amended its Consolidated Statements of Cash Flow to reclassify two items.

• The first item is to reclassify a portion of the changes in restricted cash (related to MECAR’s performance guarantees and other operating activities) to cash from operating activities.

• The second item is the classification of capital leases as a non-cash item. The capital lease acquisitions and payments were previously included in investing activities (as capital expenditures) and financing activities (as principal payments on long term debt).

There was no impact on the Company’s cash balance as a result of the above mentioned restatements on the Consolidated Statements of Cash Flow.

In 2005, the Company has returned to the use of hedge accounting pursuant to SFAS No. 133.

Management continues to believe that the financial results determined using hedge accounting better describe the underlying economics of the Company than the results determined under non-hedge accounting.

Since hedge accounting permits us to give effect to the FX contracts in direct proportion to work on the customer contract, management believes that it yields a more representative reflection of our operations. These hedge contracts actually did provide us the currency risk protection we sought during a period when the Euro appreciated over 30% versus the U. S. Dollar.

Management uses the results generated by hedge accounting for its internal purposes. These purposes include measurement of performance versus budget/plan, analysis of variances from budget/plan, satisfaction of management performance objectives for bonus compensation consideration, etc. As noted above, management has already taken the steps necessary to return to hedge accounting for all future FX contracts.

18

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

Results of Operations for the Three Months Ended March 31, 2005 and 2004

The table below shows, for the three months ended March 31, 2005 and 2004, certain items from Allied’s condensed consolidated statements of earnings expressed as a percentage of revenue:

	Three months ended March 31,
	2005					2004
	Restated					Restated
Revenue	$	21,056		100.0	%	$	33,090		100.0	%
Cost and expenses
Cost of sales		14,998		71.2			24,068		72.7
Selling and administrative		7,472		35.5			6,646		20.1
Research and development		1,527		7.3			1,561		4.7
Operating income (loss)		(2,941	)	(14.0	)		815		2.5
Other income (expense)
Interest income		189		0.9			101		0.3
Interest expense		(537	)	(2.6	)		(479	)	(1.4	)
Other – net		189		0.9			(349	)	(1.1	)
Earnings (Loss) before income taxes		(3,100	)	(14.8	)		88		0.3
Income tax (benefit)		(1,193	)	(5.7	)		94		0.3
Net loss	$	(1,907	)	(9.1	)%	$	(6	)	—	%

Revenue.Allied had revenue of $21,056 in the three months ended March 31, 2005, which was 36.4% lower than its revenue in the same period of 2004. This decrease was principally attributable to lower sales at MECAR.

	Revenue by Segment
	Three Months Ended					Three Months Ended
	March 31, 2005					March 31, 2004
	Restated					Restated
			Percentage					Percentage
	Amount		of total			Amount		of total
Ordnance & Manufacturing	$	8,931		42	%	$	21,700		66	%
Electronic Security		10,328		50	%		9,330		28	%
Environmental Safety & Security		1,519		7	%		2,024		6	%
Software, Training & Simulation		278		1	%		36		—	%
	$	21,056		100	%	$	33,090		100	%

Ordnance & Manufacturing Segment revenue for the first quarter of 2005 decreased by 59% from the comparable 2004 period. The entire decrease occurred at MECAR and resulted primarily from two factors. First, MECAR incurred decreased sales activity during the quarter due to the approximately $130,000 Foreign Military Sales (FMS) contract which was completed during the first quarter of 2005. The 2004 period benefited by substantial work under the FMS contract. Second, MECAR’s revenue was negatively impacted by derivative losses which amounted to $1,330 and $745 for the three months ended March 31, 2005 and 2004, respectively. MECAR anticipates receiving substantial orders in the second quarter which should benefit its results from operations in the balance of 2005 and beyond. Further, the Company believes that the first quarter of 2005 should be the last quarter for any substantial adverse impacts from derivative accounting.

Electronic Security Segment revenue for the first quarter of 2005 increased by 11% over the comparable 2004 period due to increases at both NS Microwave and the VSK Group. A substantial portion of NS Microwave’s increased revenue was attributable to new U.S. government contracts received in 2004. Further government orders are expected which should benefit the balance of 2005. The increase at the VSK Group was due primarily to the increase in the value of the Euro.

19

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

Environmental Safety & Security Segment revenues for the first quarter of 2005 decreased 25% from the comparable 2004 period. SeaSpace continues to face pricing pressures.

Software, Training & Simulation Segment revenues for the first quarter of 2005 increased from the comparable 2004 period. Titan Dynamics’ revenue is largely comprised of cartridge sales for previously sold simulators and new E-pyro products used for military and law enforcement training. On April 19, 2005, Allied Technology was awarded a $10,992 firm-fixed price, indefinite-delivery/indefinite quantity (IDIQ) contract for the procurement of 700 launchers and 1,000,000 cartridges and associated support for the Battlefield Effects Simulator (BES) training system for the United States Army. The contract will provide BES in support of target systems for Digital Multi-Purpose Range Complexes, Digital Multi-Purpose Training Range, and Battlefield Area Complex. Work on the initial delivery order of $1,500 will be performed in Marshall, Texas, and is expected to be completed in March 2006. The potential maximum value on this contract is $500 million over its potential 8 year life. This contract was awarded in a very competitive bid against an incumbent contractor. This demonstrates the strength of the Company’s technology and production in this business segment. This contract has significant growth potential depending on future Army requirements.

Cost of Sales.Cost of sales as a percentage of sales for the three months ended March 31, 2005 was 71% compared with 73% for the same period in 2004.

Cost of Sales as Percentage of Sales by Segment

	Three months ended
	March 31
	2005			2004
	Restated			Restated
Ordnance & Manufacturing		92	%		80	%
Electronic Security		56	%		58	%
Environmental Safety & Security		57	%		57	%
Software, Training & Simulation		60	%		66	%
Total		71	%		73	%

Ordnance & Manufacturing Segment cost of sales as a percentage of sales for the three months ended March 31, 2005 increased from the same period of 2004, primarily from reduced revenue, derivative losses and customer mix as the majority of the production was for lower-margin products. In addition, MECAR incurred higher material and labor costs on the products.

Electronic Security Segment cost of sales as a percentage of sales for the three months ended March 31, 2005 decreased from the same period in 2004 due to lower NS Microwave material costs associated with its product components to fulfill customer requirements.

Environmental Safety & Security Segment cost of sales as a percentage of sales for the three months ended March 31, 2005 remained constant with the percentage for the comparable period in 2004.

Software, Training & Simulation Segment cost of sales as a percentage of sales for the three months ended March 31, 2005 decreased from 2004 as a result of the change in product mix and production efficiencies.

20

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

Selling and Administrative Expenses.Selling and administrative expenses as a percentage of sales for the three months ended March 31, 2005 was higher than 2004 levels due to several factors. The VSK Group, NS Microwave, Titan Dynamics and Corporate incurred higher compensation costs for administrative personnel.

Research and Development.Research and development costs decreased for the three months ended March 31, 2005 by 2% from 2004 levels. The decrease was attributed to lower research and product development being conducted at SeaSpace and Titan Dynamics.

Interest Income.Interest income increased for the three months ended March 31, 2005 by 87% from 2004 levels. The increase resulted primarily from interest on the parent company’s cash account. As part of the senior loan facility obtained on May 28, 2004, the Company borrowed $2,000 and deposited that amount in a restricted account to serve as collateral under the entire $18,000 commitment.

Interest Expense.Interest expense for the three months ended March 31, 2005 increased by 12% over 2004 levels due to the amortization of debt issue costs associated with the senior loan facility obtained by the Company on May 28, 2004.

Other-Net.Other-net primarily represents currency gains/losses, resulting from foreign currency transactions at MECAR and the VSK Group, as well as bank charges related to MECAR’s performance bonds and advance payment guarantees, which are generally required under the terms of MECAR’s contracts with foreign governments and its distributor. The Company had other-net income for the three months ended March 31, 2005 of $189 compared to expense of $349 for the three months ended March 31, 2004.

Pre-Tax Profit (Loss)

Pre-Tax Profit (Loss) by Segment

	Three months ended
	March 31,
	2005			2004
	Restated			Restated
Ordnance & Manufacturing	$	(2,670	)	$	143
Electronic Security		663			820
Environmental Safety & Security		(511	)		(136	)
Software, Training & Simulation		(86	)		(179	)
Corporate and other		(496	)		(560	)
	$	(3,100	)	$	88

Ordnance & Manufacturing Segment incurred a pre-tax loss of $2,670 for the three months ended March 31, 2005, versus pre-tax earnings of $143 for the comparable period in 2004. The pre-tax loss in 2005 was principally due to delayed orders. MECAR expects to obtain substantial orders in the balance of the second quarter which will substantially benefit future periods.

Electronic Security Segment pre-tax profit for the three months ended March 31, 2005 decreased from the comparable period in 2004. The decrease stemmed from lower VSK Group’s profits, largely due to higher selling and administrative and R&D costs. NS Microwave’s pre-tax loss was slightly less than in the first quarter 2004.

Environmental Safety & Security Segment pre-tax loss resulted from less business activity in its core ground-station business and higher development costs associated with new antenna products expected to be available for sale later in 2005. SeaSpace continues to make efforts to right-size its organization in light of the competitive environment.

21

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

Software, Training & Simulation Segment pre-tax loss in 2005 results from Titan Dynamics’ principal product lacking U.S. Government safety certification. Titan Dynamics anticipates receipt of Navy/Marine Corp certification in mid 2005.

Corporate and other Segment pre-tax loss for the three months ended March 31, 2005 decreased slightly from the 2004 level.

Income Taxes.The effective income tax rate for the three months ended March 31, 2005 was a benefit of 38% compared to an expense of 106% in the same period of 2004.

Net Earnings.The Company incurred a $1,907 net loss for the three months ended March 31, 2005 compared with $6 net loss in the same period of 2004. The higher loss in 2005 resulted principally from the activities at MECAR and SeaSpace. While the Company also anticipates a weak second quarter, it anticipates that the third and fourth quarters should be materially higher.

Backlog.As of March 31, 2005, the Company’s backlog was $73,009 compared to $106,775 at March 31, 2004. The March 31, 2005 and March 31, 2004 amounts included unfunded portion from an indefinite delivery, indefinite quantity (IDIQ) federal contract.

	Backlog by Segment
	March 31, 2005					March 31, 2004
			Percentage					Percentage
	Amount		of total			Amount		Of total
Ordnance & Manufacturing	$	49,856		68	%	$	80,641		76	%
Electronic Security		22,324		31	%		23,971		22	%
Environmental Safety & Security		755		1	%		1,644		2	%
Software, Training & Simulation		74		—			519		—	%
	$	73,009		100	%	$	106,775		100	%

The decrease in backlog is primarily the result of MECAR’s work on the approximately $130,000 FMS multi-year contract awarded in February 2002. The backlog associated with this particular contract was fulfilled in the first quarter of 2005. Electronic Security backlog includes an unfunded portion of approximately $8,323 and $12,000 at March 31, 2005 and March 31, 2004, respectively, from an IDIQ federal contract.

Liquidity and Capital Resources

Balance Sheet

The Company’s March 31, 2005 condensed consolidated balance sheet was affected by the value of the Euro. All European values were converted at the March 31, 2005 and December 31, 2004 conversion ratios of 1.2916 and 1.3644, respectively.

Historically, the Company’s positive cash flow from operations and available credit facilities have provided adequate liquidity and working capital to fully fund the Company’s operational needs. Working capital, which includes restricted cash, was $77,418 at March 31, 2005, which is a decrease of $6,478 from the December 31, 2004, level.

Cash at March 31, 2005 decreased slightly from December 31, 2004 as cash was expended in the first three months of 2005 to repay the convertible debenture as well as current liabilities. Restricted cash increased in the first three months of 2005 due to the requirements of certain contracts at MECAR.

22

The Allied Defense Group, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

Accounts receivable at March 31, 2005 decreased from December 31, 2004, due to the cash received on the final delivery of the FMS contract. Costs and accrued earnings on uncompleted contracts decreased from year-end 2004 primarily as a result of the completion of the FMS contract. Inventories decreased primarily from lower raw material purchases as well as a reclass of MECAR’s slow-moving inventory to other non-current assets. Fair value of foreign exchange contracts was a liability of $393 at March 31, 2005, compared to an asset of $1,195 at December 31, 2004. MECAR uses foreign currency derivative contracts to minimize the foreign currency exposures that arise from sales contracts with certain foreign customers. Prepaid and other current assets were materially consistent between the two periods.

Property, Plant & Equipment, net of accumulated depreciation, decreased primarily from depreciation in excess of capital expenditures at the business units during the first three months of 2005. Intangibles decreased primarily from the amortization of capitalized software, customer lists and patents.

Notes Payable was materially consistent between the two periods. Accounts payable and accrued liabilities decreased as a result of lower production costs at the business units. Customer deposits increased primarily at MECAR as a result of new contracts in 2005 requiring deposits. Deferred compensation decreased due to payment of a post-employment obligation to a Company employee during the first quarter of 2005. Income taxes decreased due to the tax benefit associated with the new loss for the quarter.

Convertible-subordinated debenture, decreased from December 31, 2004 to March 31, 2005 as the Company made its final payment in March 2005.

Stockholders’ equity as of March 31, 2005, was negatively affected by the reduction in the value of the Euro versus the U.S. dollar during the first three months of 2005, resulting in a decrease in accumulated other comprehensive income as well as a $259 reduction in the fair market value of MECAR’s cash flow hedges. The Euro depreciated by approximately 5% since the beginning of the year.

Cash Flows

The table below provides the summary cash flow data for the periods presented.

	Three months ended March 31
	2005			2004
	Restated			Restated
Net cash provided by (used in) operating activities	$	4,073		$	(490	)
Net cash used in investing activities		(1,003	)		(888	)
Net cash used in financing activities		(2,728	)		(15,107	)

Operating Activities.The Company provided $4,073 of cash in its operating activities during the three months ended March 31, 2005 whereas it used $490 of cash during the same period of 2004. This is attributed primarily to cash received from the final delivery of the FMS contract at MECAR. Cash paid for interest was $183 and $148 for the three months ended March 31, 2005 and 2004, respectively. Cash paid for income taxes was $561 and $1 for the three months ended March 31, 2005 and 2004, respectively, and includes federal, international and state taxes.

Investing Activities.Net cash used in investing activities increased between the two periods. This stemmed from higher capital expenditures for production equipment and leasehold improvements at the Belgian business units. The Company anticipates that cash generated from operations will be sufficient to support any further capital expenditures over the remainder of the year. Future expenditures for the remainder of the year will be primarily incurred for machinery and equipment.

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The Allied Defense Group, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

Financing Activities.The Company used $2,728 of net cash in its financing activities during the three months ended March 31, 2005, compared to $15,107 of cash during the same period of 2004. The 2004 amount reflected an amendment to the Consolidated Statement of Cash Flows. The change in restricted cash related to MECAR’s banking agreement, which was reclassed from financing activities to operating activities.

Allied.The parent company continues to operate based on management fees and dividends received from its subsidiaries. In the first quarter of 2005, Allied has made cash infusions to MECAR USA, Titan Dynamics and SeaSpace to support working capital requirements. The Company has a senior loan facility that contains both affirmative and negative financial covenants. The Company obtained a waiver for the requirement set forth in Section 7.6(a) of the Loan Agreement requiring the Company to maintain at the end of such fiscal quarter for the then preceding four fiscal quarters Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) of not less than $15,000.

MECAR.MECAR continues to operate from internally generated cash and funds provided by its bank syndicate and financing from capital leases. The bank syndicate agreement provides (i) lines of credit for tax prepayments and working capital and (ii) a facility for guarantees/bonds to support customer contracts. The financial lending terms and fees are denominated in Euros and the dollar equivalents will fluctuate according to global economic conditions. The bank agreement imposes two financial covenants requiring MECAR to maintain minimum net worth and working capital levels. As of March 31, 2005, MECAR was in compliance with both of these bank covenants. MECAR’s obligations under the bank syndicate agreement continue to be collateralized by a pledge of MECAR’s assets. The agreement includes Allied’s pledge to support MECAR so that it remains in compliance with its total borrowing obligations.

VSK Group.The VSK Group operated solely from cash generated from business operations. The VSK Group is obligated on several mortgages and other long-term obligations.

Other Subsidiaries.NS Microwave, Titan Dynamics, SeaSpace and MECAR, USA operated from cash generated from operations and cash infusions by Allied.

Stock Repurchases.The Company did not repurchase any shares of its common stock during the three months ended March 31, 2005 and does not anticipate repurchasing shares of Company stock during the remainder of 2005.

Future Liquidity.The Company is exploring additional financing in light of its repayment of the convertible debenture. At times, the Company has utilized the services of an investment banker in an attempt to secure appropriate financing.

Funds for the build-out of the initial MECAR USA infrastructure are being provided by the Marshall Economic Development Corporation of Marshall, Texas. This is a state funded organization with the initial proceeds directed at creating roads and a manufacturing plant on the grounds.

The Company’s ability to cover its anticipated future operating and capital requirements is dependent upon its continued ability to generate positive cash flow from the operations of its subsidiaries, particularly the operations of MECAR and the VSK Group, and its ability to successfully integrate its acquisitions. The Company expects its acquisitions to be accretive to operations over a period of not longer than 24 months, although this cannot be assured. This will depend upon many factors including the successful release of new product offerings, successful research and development efforts, and increased market share.

Off-Balance Sheet Arrangements.As part of our ongoing business, the Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the

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The Allied Defense Group, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of March 31, 2005, the Company is not involved in any material unconsolidated SPE transactions. MECAR is required to provide performance bonds and advance payment guarantees for certain contracts, which are provided by MECAR’s bank syndicate. MECAR is obligated to repay the bank syndicate any amounts it pays as a result of any demands on the bonds or guarantees. To date, there have been no such demands.

Critical Accounting Policies

Our significant accounting policies are described in Note A to the consolidated financial statements included in Item 7 of the Form 10-K for the year ended December 31, 2004, and are outlined below:

• Revenue recognition via the percentage of completion method.The percentage of completion method is used by MECAR, NS Microwave and SeaSpace for their fixed price sales contracts. Approximately 60% and 77% of condensed consolidated revenue was recognized under the percentage of completion method during the three months ended March 31, 2005 and 2004, respectively.

• Goodwill and intangible asset valuation.The Company completed a goodwill impairment analysis in the fourth quarter of 2004 and determined that an impairment charge to earnings was not required. The 2004 goodwill analysis for the Environmental Safety & Security segment included a multi-year discounted cash flow projection for SeaSpace. The projection included both SeaSpace’s traditional groundstation business as well as its newly initiated antenna business. The projection called for a break-even year in 2005, but substantial profits in 2006-2009, largely as a result of the newly-added antenna product line. As a result of the substantial losses incurred by SeaSpace in the first six months of 2005, in early August, 2005, management and the Audit Committee revisited the 2004 goodwill analysis and reconsidered the projections which formed the basis of this analysis. In the course of this review, it was noted that (i) several projects initially forecast for the first half of 2005 had slipped into the second half of the year; (ii) SeaSpace reported positive results for July and August and several new contract awards and (iii) since year-end, SeaSpace has acquired additional antenna technology which adds to the product line which formed the basis of the year-end projections. As a result, management and the Audit Committee concluded SeaSpace was on track to achieve its original forecast to break-even in 2005. Further, management and the Audit Committee concluded that SeaSpace is poised to earn meaningful profits in the upcoming years sufficient to support the reported goodwill attributable to the Environmental Safety & Security segment. Accordingly, management and the Audit Committee determined in early August that there has been no impairment to the goodwill attributable to the Environmental Safety & Security segment.

• Inventory reserves and allowance for doubtful accounts.The Company reviews its recorded inventory and estimates a write-down for obsolete or slow-moving items to their net realizable value. Allowances for doubtful accounts are evaluated based upon detailed analysis and assessment of receivables that may not be collected in the normal course of operations. The inventory reserves and allowance for doubtful accounts are deemed reasonable.

• Derivative instruments.The Company designates its derivatives based upon the criteria established by Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133, as amended by SFAS 138 and SFAS 149, requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for the changes in the fair value of the derivative depends on the intended use of the derivative and the resulting designation. For a derivative designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the risk being hedged. For a derivative designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of accumulated

25

The Allied Defense Group, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

	other comprehensive income (loss) and is subsequently reclassified to earnings when the hedge exposure effects earnings. The ineffective portion of the hedge is reported in earnings immediately. For a derivative that does not qualify as a fair value hedge or cash flow hedge, the change in fair value is recognized currently in net income.
•	Valuation of deferred income taxes and income tax reserves.The Company is subject to taxation by federal, state and international jurisdictions. The Company reviews the balances on a quarterly basis and believes the balances are adequate.

Recent Accounting Pronouncements

In March 2005, the FASB issued Interpretation No. (FIN) 47,Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143. FIN 47 clarifies the term “conditional asset retirement obligation” as used in FAS 143,Accounting for Asset Retirement Obligations,and requires that a liability and a corresponding increase in the value of the underlying asset be recorded if the fair value of the obligation can be reasonably estimated. The types of asset retirement obligations that are covered by FIN 47 are those for which an entity has a legal obligation to perform an asset retirement activity, even though the timing and/or method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Interpretation is effective for fiscal years ending after December 15, 2005. We are currently evaluating the impact of FIN 47 on our results of operations and financial position, but have not as yet reached any conclusions.

In December 2004, the FASB issued revised SFAS No. 123R,Share-Based Payment. SFAS No. 123R sets accounting requirements for share-based compensation to employees and requires companies to recognize, in the income statement, the grant-date fair value of stock options and other equity-based compensation. SFAS No. 123R is effective in annual periods beginning after January 1, 2006. The Company will be required to adopt SFAS No. 123R in 2006. The Company is currently evaluating the impact of the adoption of SFAS 123R on its financial position and results of operations, including the valuation methods and support for the assumptions that underlie the valuation of the awards.

In, November 2004, the FASB issued SFAS 151,Inventory Costs – An Amendment of ARB No. 43, Chapter 4.This Statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that. under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is to be applied prospectively for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company’s adoption of SFAS No. 151 is not expected to have a material impact on its financial position or results of operations.

Also in December 2004, the FASB issued SFAS No. 153,Exchanges of Non-monetary Assets–An Amendment of APB Opinion No. 29. SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. SFAS No. 153 is to be applied prospectively for non-monetary exchanges occurring in fiscal periods beginning after June 15, 2005. The Company’s adoption of SFAS No. 153 is not expected to have a material impact on its financial position or results of operations.

26

The Allied Defense Group, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2005
(Thousands of Dollars)
(Unaudited)

Forward-Looking Statements

This Management’s Discussion and Analysis contains forward-looking statements that are based on current expectations, estimates and projections about the Company and the industries in which it operates. In addition, other written or oral statements which constitute forward-looking statements may be made by or on behalf of the Company. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”) which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Future Factors include the following:

• substantial reliance on MECAR’s principal customers to continue to acquire products on a regular basis;

• the cyclical nature of the Company’s military business;

• rapid technological developments and changes and the Company’s ability to continue to introduce competitive new products and services on a timely, cost effective basis;

• the ability of the Company to successfully continue to expand its business base;

• the ability of the Company’s acquired businesses to mature and meet performance expectations;

• the mix of products/services;

• domestic and foreign governmental fiscal affairs and public policy changes which may affect the level of purchases made by customers;

• changes in environmental and other domestic and foreign governmental regulations;

• general risks associated with doing business outside the United States, including, without limitation, import duties, tariffs, quotas and political and economic instability;

• the effects of terrorist actions on business activities, customer orders and cancellations, and the United States and international governments’ responses to these terrorist actions;

• changes in government regulations;

• liability and other claims asserted against us;

• the ability to attract and retain qualified personnel; and

• continued availability of financing, financial instruments and financial resources in the amounts, at the times, and on the terms required to support the Company’s future business.

We operate in a very competitive and rapidly changing environment. New risk factors can arise and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

27

The Allied Defense Group, Inc.

March 31, 2005

QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE

Allied is exposed to market risk from foreign currency fluctuations and interest rate changes. Allied uses derivatives to manage some portion of these risks. Additional information regarding the derivatives is contained in Note 3. As of March 31, 2005 and December 31, 2004, all of the derivatives were related to actual or anticipated exposures of the Company’s transactions.

Approximately 81% and 89% of the Company’s revenue for the three months ended March 31, 2005 and 2004, respectively, was derived from operations outside the U.S. Accordingly, exposure exists to potentially adverse movement in foreign currency rates. It is estimated that a 10% change in the value of the Euro would impact reported net losses for the three months ended March 31, 2005 and 2004 by approximately $0.01 million and $0.1 million, respectively.

At March 31, 2005, Allied had $40 million of cash (including restricted cash). Assuming all the cash was available for investment, a 1% change in interest rates would impact interest income for the three months ended March 31, 2005 and 2004 by $0.1 million and $0.08 million, respectively.

DISCLOSURE CONTROLS AND PROCEDURES

1.	Evaluation of disclosure controls and procedures
	The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in its Exchange Act reports is accumulated and communicated to the Company’s management including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. Under the direction and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by the report. Subsequent to March 31, 2005, the Company identified two material weaknesses in its internal control over financial reporting as outlined below. As a result, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures were not effective as of March 31, 2005. As set forth below, we have taken the steps necessary to remediate the material weaknesses.
2.	Changes in internal controls
	Subsequent to March 31, 2005 we became aware of two additional material weaknesses in our internal control over financial reporting. The Public Company Accounting Oversight Board’s Auditing Standard No. 2 defines a material weakness as a significant deficiency, or a combination of significant deficiencies, that results in there being a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The first additional material weakness concerned the accounting for the Company’s U.S. Dollar denominated receivables at MECAR which historically have been valued at the hedged rate rather than at the period end spot rate. This resulted in an error upon the translation of the amounts from MECAR’s functional currency (the Euro) into U.S. Dollars which is Allied’s reporting currency. The correct accounting for our U.S. Dollar denominated receivables at MECAR was subsequently determined and corrected prior to the public release of our financial information for the second quarter of 2005 and, in accordance with the corrected accounting the related account balances were restated. The second additional material weakness concerned the proper classification of certain matters for proper presentation purposes in the Consolidated Statements of Cash Flows. This included reclassifying repayments of capital leases to financing activities from investing activities and reclassifying a portion of the changes in restricted cash (related to MECAR’s performance guarantees and other operating activities) to operating activities from financing activities.

28

The Allied Defense Group, Inc.

March 31, 2005

Prior to the filing of this March 10-Q/A, we took the steps necessary to remediate the material weaknesses which led to the restatement of our consolidated financial statements included in this Form 10-Q/A. We have modified our procedures to ensure that we properly value the U.S. Dollar receivables at our foreign subsidiaries at the proper period-end currency rate. We have also modified our procedures to ensure that we properly prepare our Consolidated Statements of Cash Flows. We have included more stringent review procedures on transactions that affect our Consolidated Statements of Cash Flows in accordance with FAS 95. Specifically, we have taken the steps necessary to ensure that capital leases are accounted for as financing activities and to ensure that restricted cash attributed to MECAR’s performance guarantees and other operating activities are accounted for as operating activities.

Except as set forth above, there have been no significant changes in our internal controls over financial reporting or, to our knowledge, in other factors that occurred during the last quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

29

The Allied Defense Group, Inc.

PART II — OTHER INFORMATION
March 31, 2005

Item 6 Exhibits and Reports on Form 8-K

(a) Reports on Form 8-K

On March 15, 2005, the Company filed a Form 8-K announcing that it was restating its financial statements for 2002 and 2003 and for the first three quarters of 2004 due to it not qualifying for the use of hedge accounting under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” for foreign currency exchange contracts.

(b) Exhibit No.		Description of Exhibits
	10.1	Employment Agreement between Allied and John J. Marcello (Incorporated by reference from Form 8-K filed in August 2005).
	31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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The Allied Defense Group, Inc.

SIGNATURE

Pursuant to the requirements 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.

	THE ALLIED DEFENSE GROUP, INC.
	/s/ Robert P. Dowski
Date: October 21, 2005	Robert P. Dowski,
	Chief Financial Officer and Treasurer

31