UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

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

For the period ended September 30, 2004

Commission File Number: 001-11376

The Allied Defense Group, Inc.

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.

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of September 30, 2004: 5,599,617.

THE ALLIED DEFENSE GROUP, INC.

The Allied Defense Group, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands of Dollars, except per share data)

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

2

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

(Thousands of Dollars, except per share data)

(Unaudited)

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)

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

4

The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(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, 2003, Form 10-K filed with the Securities and Exchange Commission. The results of operations for the periods ended September 30, 2004 and 2003 are not necessarily indicative of the operating results for the full year.

Certain reclassifications have been made to the prior period’s financial statements to conform to the current presentation.

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,

•

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

•

MECAR USA, Inc. (“MECAR USA”), a Delaware 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 & Manufacturing segment 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 early 2005.

•

Electronic Security segment 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. manufacturers 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 & Security segment consists of SeaSpace, which designs, manufactures, distributes and services weather and environmental satellite ground reception systems.

•

Software, Training & Simulation segment consists of Titan Dynamics, which designs, manufactures and sells battlefield effects simulators.

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

5

The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

NOTE 3 — ACQUISITION

On August 1, 2004, the VSK Group acquired all the common stock of Control Monitor Systems in a transaction accounted for as a purchase. This acquisition was undertaken to provide the Company with a position in a high-growth segment of the North American Electronic Security market. The cost of acquisition was $400. The results of Control Monitor Systems have been consolidated since its acquisition on August 1, 2004. The acquired identifiable intangible asset in this transaction was a Customer List, which had a fair value of $50 and an indefinite life. Goodwill arising from this transaction was $449 and is not deductible for tax purposes.

NOTE 4 — DERIVATIVE FINANCIAL INSTRUMENTS

As of September 30, 2004 and December 31, 2003, futures contracts designated as fair value hedges with notional amounts of $50,200 and $50,000 were outstanding and the fair values of these contracts were $13,891 and $21,966, respectively. At September 30, 2004 and December 31, 2003, the total fair value was included in the following balance accounts:

Deferred gains on fair value hedges related to multi-year sales contracts are included in accrued liabilities.

NOTE 5 — RESTRICTED CASH

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. $8,928 and $15,812 at September 30, 2004 and December 31, 2003, respectively, was restricted or pledged as collateral for these agreements.

Restricted cash also included $2,000 at September 30, 2004 as a requirement of the senior secured facility which was completed on May 28, 2004.

Restricted cash also included $125 at December 31, 2003, as a result of a deposit which was a requirement of the SeaSpace acquisition agreement. In 2002, the Company issued a $250 promissory note which was paid in equal installments on July 31, 2003 and 2004. The payments were subject to certain conditions being met as defined in the acquisition agreement.

6

The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

NOTE 6 — ACCOUNTS RECEIVABLE

Accounts receivable at September 30, 2004 and December 31, 2003 are comprised as follows:

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.

NOTE 7 — 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. 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 and nine months ended September 30, 2004 and 2003 were $30,353 and $94,390, and $28,319 and $99,632, respectively.

NOTE 8 — INVENTORIES

Inventories at September 30, 2004 and December 31, 2003 are comprised as follows:

7

The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

NOTE 9 — INTANGIBLE ASSETS AND GOODWILL

Consolidated amortization expense related to intangible assets, excluding goodwill, for each of the three and nine months ended September 30, 2004 and 2003 were $111 and $334. Estimated future aggregate annual amortization for intangible assets is as follows:

The $14,226 of goodwill at September 30, 2004 is comprised of $8,123 related to the Electronic Security Segment, $4,447 related to the Environmental Safety & Security Segment and $1,656 related to the Software, Training & Simulation Segment. The change in goodwill during the nine month period ended September 30, 2004 was due to the acquisition of Control Monitor Systems on August 1, 2004 ($449), final payment of the promissory note to SeaSpace according to the acquisition agreement ($125), offset by the currency translation adjustment ($66).

NOTE 10 — NOTES PAYABLE AND CREDIT FACILITY

Notes Payable – At September 30, 2004, MECAR had borrowed $11,624 under its lines of credit with its lenders. NS Microwave had a note of $64 for machinery and vehicles. At December 31, 2003, MECAR had borrowed $4,322 under its lines of credit with its lenders. In addition, MECAR borrowed $9,878 under a short-term loan which was secured by a receivable of $9,878. The weighted average interest rate for Notes Payable as of September 30, 2004 and December 31, 2003 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 September 30, 2004 and December 31, 2003, guarantees and performance bonds of approximately $22,186 and $17,233 respectively, were outstanding.

Advances under the Agreement are secured by restricted cash at September 30, 2004 and December 31, 2003 of approximately $8,928 and $15,812, respectively. Amounts outstanding are also collateralized by a pledge of approximately $42,472 of MECAR’s net assets. The Agreement requires that MECAR maintain net worth and working capital covenants.

8

The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

NOTE 11 — LONG-TERM DEBT

Long-term obligations consist of the following as of September 30, 2004 and December 31, 2003, respectively:

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 is currently in compliance with those covenants.

Mortgage loan agreements. The VSK Group is obligated on a mortgage on its building, which has a balance of approximately $271 at September 30, 2004. The mortgage is payable in annual installments of approximately $54 plus interest.

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 2009.

Scheduled annual maturities of long-term obligations as of September 30, 2004 are approximately as follows:

NOTE 12 — 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 debenture bears interest at the rate of 8% per year, payable semi-annually. The Company may elect to pay the principal and/or the interest in cash or in registered shares of its common stock at a 10% discount to the then current market price. The warrants to purchase 15,000 shares of the Company’s common stock were valued at $140.

9

The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

NOTE 12 — CONVERTIBLE SUBORDINATED DEBENTURE — Continued

Monthly principal payments, in the amount of $750, began on June 28, 2004 and continue for a period of ten (10) months or until March 28, 2005. The holder of the debenture may choose to convert all or a portion of the principal amount outstanding into shares of the Company’s common stock at any time before maturity. 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.

NOTE 13 — EARNINGS 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 per share for the three and nine months ended September 30, 2004 and September 30, 2003, respectively:

NOTE 14 — COMPREHENSIVE INCOME

A summary of the components of Comprehensive Income for the three and nine months ended September 30, 2004 and 2003 are as follows:

The currency translation adjustment for the three months ended September 2004 and the three and nine months ended September 2003 resulted from the appreciation of the Euro during the respective periods. In contrast, the currency translation adjustment for the nine months ended September 2004 resulted from the depreciation of the Euro during that period.

10

The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

NOTE 15 — 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 and nine months ended September 30, 2004 and 2003.

The following table presents the pro forma decrease in income for the three and nine months ended September 30, 2004 and 2003, 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:

Options granted during the three and nine months ended September 30, 2004 were 0 and 40,000, respectively. Options granted during the three and nine months ended September 30, 2003 were 39,000 and 149,000, 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 and nine months ended September 30, 2004 was $0 and $7.59, respectively. The weighted-average fair value of each option at the date of grant for the three and nine months ended September 30, 2003 was $7.37 and $6.72, respectively. The weighted average assumptions used in the model were as follows:

11

The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

NOTE 15 — STOCK BASED COMPENSATION — Continued

The weighted average assumptions were consistent between 2003 and 2004 and will be evaluated prior to the publication of the next Form 10-K. We do not believe that the factors used above have changed materially over the past twelve months. 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.

NOTE 16 — INDUSTRY SEGMENTS

NOTE 17 — 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. Management intends to vigorously defend this suit and believes that it has meritorious defense to the claim.

SeaSpace is in litigation with a former distributor concerning certain aspects of the termination of the distributor relationship. The former distributor has filed to obtain a preliminary injunction action in Japan concerning the termination. SeaSpace has filed an action for monetary damages in California and the former distributor has filed a similar action for monetary damages in Japan. The California court has recently ruled that the matter should be resolved in an international arbitration proceeding. Management continues to vigorously defend these matters and believes that it has a meritorious position.

NOTE 18 — RECENT ACCOUNTING PRONOUNCEMENTS

There were no new accounting pronouncements during the nine months ended September 30, 2004 that would impact the Company’s financial reporting.

12

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

The following is intended to update the information contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 and the Company’s Quarterly Reports on Form 10-Q for the periods ended March 31, 2004 and June 30, 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 & Manufacturing segment 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 initially pursue contracts from U.S. and foreign governments for ammunition and pyrotechnics devices. MECAR USA is expected to be operational in early 2005.

•

Electronic Security segment 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 manufacturers 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 & Security segment consists of SeaSpace, located in San Diego, CA, which designs, manufactures, distributes and services weather and environmental satellite ground reception systems.

•

Software, Training & Simulation segment consists of Titan Dynamics, located in Marshall, TX, which designs, manufactures and sells battlefield effects simulators, minor pyrotechnics and other training devices.

The parent company provides management services to its subsidiaries and has no operating activities.

Allied earned net profits of $182 and $5,152 for the three and nine months ended September 30, 2004, respectively, compared to net profits of $863 and $7,099 for the comparable periods of 2003. The reduction in net profits for the nine months ended September 30, 2004 resulted from reduced revenues, Sarbanes Oxley compliance costs — primarily from consulting and associated costs, and substantial research and development initiatives to expand its product offerings, increase market share in existing markets, and penetrate new markets.

Allied entered 2004 with substantial cash reserves and anticipates no liquidity concerns in 2004. Allied has secured a senior domestic lending facility for working capital and acquisitions.

13

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

Results of Operations for the Three Months Ended September 30, 2004 and 2003

The table below shows, for the three months ended September 30, 2004 and 2003, certain items from Allied’s condensed consolidated statements of earnings expressed as a percentage of revenue:

Revenue. Allied had revenue of $37,142 in the three months ended September 30, 2004, which was 7% higher than its revenue in the same period of 2003. This increase was principally attributable to higher distribution sales and increased activities at the VSK Group and NS Microwave and the increase in the value of the Euro.

Ordnance & Manufacturing Segment revenue for the third quarter of 2004 decreased by 10% from the comparable 2003 period. The entire decrease occurred at MECAR and resulted primarily from two factors. First, MECAR experienced raw material delays, which was due in turn to unanticipated increases in order lead times. MECAR expects to make up the revenue in the fourth quarter. Second, the 2003 period was benefited by substantial activity under the approximately $130,000 Foreign Military Sales (FMS) contract which is in its final stages and did not provide as much revenue in the current period. While MECAR continues to meet the ammunition needs of its traditional customers, it is actively seeking to diversify its customer base.

14

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

Results of Operations for the Three Months Ended September 30, 2004 and 2003 - Continued

Electronic Security Segment revenue for the third quarter of 2004 increased by $4,749, or 61%, over the 2003 period due to increases at both NS Microwave and the VSK Group. Approximately $4,622 of the increase was from NS Microwave as it has begun to obtain long-awaited orders for its security products. A substantial portion of NS Microwave’s increased revenue was attributable to new U.S. government contracts received in 2004. The increase at the VSK Group stemmed from the continued expansion of its distribution network in Europe, as well as its strong marketing and business development efforts.

Environmental Safety & Security Segment revenues for the third quarter of 2004 decreased slightly from the comparable 2003 period. SeaSpace continues to suffer from increased competition by domestic and foreign competitors.

Software, Training & Simulation Segment revenues for the third quarter of 2004 increased from the comparable 2003 period. Titan Dynamics’ sales of its Battle Effects Simulators (BES) continue to be depressed pending safety certifications expected in late 2004 or early 2005 from the U.S. Navy/Marine Corps and the U.S. Army. Accordingly, Titan Dynamics’ revenue is now largely comprised of cartridge sales for previously sold simulators and new E-pyro products used for military and law enforcement training.

Cost of Sales. Cost of sales as a percentage of sales for the three months ended September 30, 2004 was 75% compared with 77% for the same period in 2003.

Cost of Sales as Percentage of Sales by Segment

Ordnance & Manufacturing Segment cost of sales as a percentage of sales for the three months ended September 30, 2004 was consistent with the same period of 2003.

Electronic Security Segment cost of sales as a percentage of sales for the three months ended September 30, 2004 increased over the same period in 2003 due to higher NS Microwave material costs associated with using new product components to fulfill customer requirements as well as replacing components which were discontinued by certain vendors. In contrast, the VSK Group had consistent cost of sales as a percentage of sales between 2003 and 2004 as it continues to experience production efficiencies while expanding its distribution channel throughout Europe.

Environmental Safety & Security Segment cost of sales as a percentage of sales increased from 2003 as a result of the change in product mix and higher labor costs.

Software, Training & Simulation Segment cost of sales as a percentage of sales for the three months ended September 30, 2004 decreased from 2003 as a result of the change in product mix and production efficiencies.

15

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

Results of Operations for the Three Months Ended September 30, 2004 and 2003 - Continued

Selling and Administrative Expenses. Selling and administrative expenses as a percentage of sales for the three months ended September 30, 2004 was slightly higher than 2003 levels due to several factors. The parent company’s selling and administrative expenses increased in 2004 primarily as a result of the Sarbanes Oxley implementation via consulting and associated costs. The Company will continue to incur Sarbanes Oxley compliance expenses for the remainder of 2004 and into 2005. SeaSpace incurred substantial legal expenses associated with an ongoing dispute with a former distributor. Management continues to vigorously defend these matters and believes that it has a meritorious position. The VSK Group incurred higher compensation costs for administrative personnel. MECAR, NS Microwave and Titan Dynamics incurred slightly lower costs in the third quarter of 2004 from the same period in 2003. In particular, NS Microwave’s administrative costs in 2003 were burdened with compensation charges associated with production personnel, which did not recur in 2004.

Research and Development. Research and development costs increased for the three months ended September 30, 2004 by 31% over 2003 levels. The increase was attributed to increased research and product development being conducted at SeaSpace and Titan Dynamics. SeaSpace has announced that it will begin to manufacture and sell antennas. This trend of increased research and development is expected to continue.

Interest Income. Interest income increased for the three months ended September 30, 2004 by 13% from 2003 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 secure the repayment.

Interest Expense. Interest expense for the three months ended September 30, 2004 increased by 31% over 2003 levels due to the amortization of debt discount and 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. Other-net expense for the three months ended September 30, 2004 increased over the comparable 2003 period primarily from currency losses at MECAR related to unhedged foreign contracts.

Pre-Tax Profit

Pre-Tax Profit (Loss) by Segment

16

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

Results of Operations for the Three Months Ended September 30, 2004 and 2003 - Continued

Ordnance & Manufacturing Segment incurred a pre-tax loss of $87 for the three months ended September 30, 2004 versus a pre-tax profit of $463 for the comparable period in 2003. The pre-tax loss was principally due to production delays which lowered third quarter revenues and margins. The lower margins did not cover the operating expenses, even though MECAR took actions to mitigate the production delays through some costs savings. MECAR expects to make up the revenues in the fourth quarter. Notwithstanding, MECAR’s profitability for 2004 is expected to be at lower levels than in prior years due to a lack of substantially higher margin contracts which benefited 2001-2003 results.

Electronic Security Segment pre-tax profit for the three months ended September 30, 2004 increased from the comparable period in 2003. The increase stemmed from NS Microwave’s higher business activity, largely from U.S. government contracts. The VSK Group’s pre-tax profit was materially consistent between third quarter 2003 and 2004.

Environmental Safety & Security Segment pre-tax loss resulted from increased development costs associated with new antenna products expected to be available for sale in 2005 and substantial legal expenses associated with an ongoing dispute with a former distributor. SeaSpace has taken efforts to right-size its organization in light of the competitive environment.

Software, Training & Simulation Segment pre-tax loss in 2004 results from Titan Dynamics’ principal product lacking U.S. Government safety certification. Titan Dynamics anticipates receipt of Navy/Marine Corp certification in the fourth quarter of 2004 or early 2005.

Corporate and other Segment pre-tax loss for the three months ended September 30, 2004 increased from the 2003 level due to Sarbanes Oxley implementation costs and reduced intercompany management fee adjustments.

Income Taxes. The tax benefit for the three months ended September 30, 2004 was substantially greater than the pre-tax loss.

Net Earnings. The Company earned a $182 net profit for the three months ended September 30, 2004 compared with $863 net profit in the same period of 2003. The decrease in 2004 resulted principally from the activities at MECAR, SeaSpace and Titan Dynamics.

17

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

Results of Operations for the Nine Months Ended September 30, 2004 and 2003

The table below shows, for the nine months ended September 30, 2004 and 2003, certain items from Allied’s condensed consolidated statements of earnings expressed as a percentage of revenue:

Revenue.

Allied had revenue of $116,837 in the nine months ended September 30, 2004, which was 3% lower than its revenue in the same period of 2003. This decrease was principally attributable to reduced production activities at MECAR, SeaSpace and Titan Dynamics, offset by the increase in the value of the Euro.

Ordnance & Manufacturing Segment revenue for the nine months ended September 30, 2004 decreased by 14% from the comparable period in 2003. The decrease was the result of reduced activity on the large FMS contract received in February 2002 and production delays encountered during the third quarter of 2004.

18

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

Results of Operations for the Nine Months Ended September 30, 2004 and 2003

Electronic Security Segment revenue for the nine months ended September 30, 2004 increased by $11,199 over the comparable period in 2003. The VSK Group and NS Microwave contributed $2,673 and $8,526 to this increase, respectively. The increase at the VSK Group is principally the result of continued expansion of its export sales via its European distribution network. NS Microwave’s business has improved due to receipt of some substantial U.S. government orders in 2004.

Environmental Safety & Security Segment revenues for the nine months ended September 30, 2004 decreased by $575 from the comparable period in 2003 as a result of increased competition and delayed projects as noted above.

Software, Training & Simulation Segment revenues for the nine month ended September 30, 2004 decreased by $845 from the comparable period in 2003 due to reduced simulator sales.

Cost of Sales. Cost of sales as a percentage of sales for the nine months period ended September 30, 2004, was 71% compared with 72% for the same period in 2003.

Cost of Sales as Percentage of Sales by Segment

Ordnance & Manufacturing Segment cost of sales as a percentage of sales was materially consistent between the nine months ended September 30, 2004 and 2003.

Electronic Security Segment cost of sales as a percentage of sales for the nine months ended September 30, 2004 increased over the same period of 2003 due to the higher NS Microwave material costs as noted above.

Environmental Safety & Security Segment cost of sales as a percentage of sales decreased from 2003 as a result of the change in product mix and streamlined labor costs

Software, Training & Simulation Segment cost of sales as a percentage of sales for the nine months ended September 30, 2004 increased over 2003 as a result of the change in product mix and higher labor costs

19

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

Results of Operations for the Nine Months Ended September 30, 2004 and 2003

Selling and Administrative Expenses. Selling and administrative expenses as a percentage of sales for the nine months ended September 30, 2004 was approximately 16% compared with 15% for the same period in 2003. This resulted from higher costs at Corporate, MECAR, the VSK Group and SeaSpace for Sarbanes Oxley compliance costs and increased compensation expenses for administrative personnel. This was offset by decreased costs at NS Microwave. In 2003, NS Microwave administrative costs were burdened with compensation charges associated with production personnel, which did not recur in 2004.

Research and Development. Research and development costs increased for the nine months ended September 30, 2004 by 64% over 2003 levels. A substantial part of this increase relates to SeaSpace’s development of antenna products. This trend of increased research and development is expected to continue.

Interest Income. Interest income decreased for the nine months ended September 30, 2004 by 5% from 2003 levels. The total dollar decrease was nominal and was primarily attributed to earnings on interest bearing cash accounts.

Interest Expense. Interest expense increased for the nine months ended September 30, 2004 by 14% over 2003 levels. The increase was primarily due to the total increase in long-term obligations.

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. Other-net expense for the nine months ended September 30, 2004 increased over the comparable period of 2003 from currency losses in 2004 at MECAR related to unhedged foreign contracts.

Pre-Tax Profit

Pre-Tax Profit (Loss) by Segment

Ordnance & Manufacturing Segment pre-tax profit for the first nine months of 2004 decreased from 2003 levels due to reduced work on the FMS contract and production delays in the third quarter of 2004.

Electronic Security Segment pre-tax profit for the period ended September 30, 2004 increased over 2003 levels due to increased business and increased margins at both the VSK Group and NS Microwave.

20

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

Results of Operations for the Nine Months Ended September 30, 2004 and 2003

Environmental Safety & Security Segment pre-tax loss for the nine months period ended September 30, 2004 increased over the 2003 loss due to increased development costs and higher legal expenses.

Software, Training & Simulation Segment pre-tax loss for the period ended September 30, 2004 resulted from reduced business awaiting necessary safety certifications.

Corporate and other pre-tax loss for the nine months ended September 30, 2004 was more than the comparable 2003 period due to Sarbanes Oxley compliance costs and reduce intercompany fees.

Income Taxes. The effective income tax rate in the first nine months of 2004 was 33% compared to 37% in the same period of 2003. This decrease occurred at MECAR and the VSK Group. While the corporate tax rate in Belgium was reduced from 40.17% to 33.99% effective for tax years beginning January 1, 2003, the reduced tax rate did not take effect at MECAR and the VSK Group until the second half of 2003.

Net Earnings. The Company earned a $5,152 net profit for the nine months ended September 30, 2004 compared with $7,099 net profit in the same period of 2003. The decrease in 2004 resulted from the activities at MECAR, SeaSpace and Titan Dynamics.

Backlog. As of September 30, 2004, the Company’s backlog was $83,831 compared to $115,416 at December 31, 2003, and $108,268 at September 30, 2003. The September 30, 2004 and December 31, 2003 amounts included unfunded portion from an indefinite delivery, indefinite quantity (IDIQ) federal contract.

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 will continue to decrease in accordance with the delivery terms of the award. MECAR has undertaken a customer diversification effort in the past few years, which continues to be productive in 2004. In addition to meeting the ammunition needs of its traditional customers, MECAR has gained new customers which have contributed to a majority of its new orders for 2004. Electronic Security backlog increased from new contracts received at the VSK Group and NS Microwave. Electronic Security’s September 30, 2004 backlog includes an unfunded portion of approximately $9,445 from an IDIQ federal contract.

21

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

Liquidity and Capital Resources

Balance Sheet

The Company’s September 30, 2004 condensed consolidated balance sheet was affected by the value of the Euro. All European values were converted at the September 30, 2004 and December 31, 2003 conversion ratios of 1.2331 and 1.2557, 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 $78,081 at September 30, 2004, which is an increase of $1,201 from the December 31, 2003, level. Working capital remains strong due to profitable operations.

Cash at September 30, 2004 decreased by $22,832 from December 31, 2003 as substantial cash was expended in the first nine months of 2004 to repay current liabilities including MECAR’s short-term borrowings. Restricted cash decreased by $5,009 in the first nine months of 2004 due to completion of certain contracts at MECAR, offset by the $2,000 deposit required under the senior loan facility obtained on May 28, 2004.

Accounts receivable at September 30, 2004 increased by $9,908, or 34% from December 31, 2003, due to higher shipments in third quarter 2004 versus fourth quarter 2003. Costs and accrued earnings on uncompleted contracts decreased by $589 from year-end 2003 primarily as a result of continued work on MECAR contracts. Inventories increased $3,451 primarily from higher raw material purchases. The inventory buildup will give the subsidiaries the ability to deliver products with the shortest possible lead times. Fair value of foreign exchange contracts was $5,249 at September 30, 2004, compared to $9,378 at December 31, 2003. MECAR uses foreign currency hedge contracts to minimize the foreign currency exposures that arise from sales contracts with certain foreign customers.

Prepaid and other current assets increased $3,599 primarily from costs on MECAR’s hedge contract agreements, as well as prepaid taxes at MECAR in the second quarter of 2004.

Property, Plant & Equipment, net of accumulated depreciation, increased primarily from equipment purchases at the business units during the first nine months of 2004. Intangibles decreased primarily from the amortization of capitalized software, customer lists and patents. Goodwill increased as a result of the acquisition of Control Monitor Systems on August 1, 2004 as well as the currency translation adjustment.

Notes Payable decreased $2,512 from December 31, 2003 as a result of MECAR paying off a short-term loan. During the first nine months of 2004, MECAR used its cash from operations for working capital needs. Accounts payable decreased $13,234 as a result of lower production costs, primarily at MECAR, for the nine months ended September 30, 2004 compared to December 2003. Accrued liabilities decreased $1,687 due primarily to the costs associated with deferred gains related to forward exchange contracts at MECAR. Customer deposits increased $3,527 primarily at MECAR as a result of shipments during the period and other new contracts in 2004 requiring deposits. Income taxes increased $3,451 due to the tax provisions at MECAR and the VSK Group, offset by the tax benefits at NS Microwave, SeaSpace, Titan Dynamics and Corporate.

Convertible-subordinated debenture, current and long-term, decreased from December 31, 2003 to September 30, 2004 as the Company commenced its monthly principal payments on June 28, 2004. Monthly payments will continue through March 2005.

Stockholders’ equity as of September 30, 2004, was negatively affected by the reduction in the value of the Euro versus the U.S. dollar during the first nine months of 2004, resulting in a decrease in accumulated other comprehensive income by $955. The Euro depreciated by approximately 2% since the beginning of the year.

22

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

Liquidity and Capital Resources – Continued

Cash Flows

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

Operating Activities. The Company used $18,304 of cash in its operating activities during the nine months ended September 30, 2004 whereas it generated $13,228 of cash during the same period of 2003. This is attributed primarily to three factors. First, the Company’s earnings were less in 2004 than in 2003. Second, the Company paid short term liabilities, which included Sarbanes Oxley compliance costs and legal costs associated with an ongoing dispute. Third, the Company incurred higher accounts receivable from shipments to customers in 2004 for which cash was not yet received as of September 30, 2004. Cash paid for interest was $980 and $896, for the nine months ended September 30, 2004 and 2003, respectively. Cash paid for income taxes was $6,170 and $8,957 for the nine months ended September 30, 2004 and 2003, respectively, and includes federal, international and state taxes.

Investing Activities. Net cash used in investing activities increased by 20% 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.

Financing Activities. The Company generated $1,354 of cash from its financing activities during the nine months ended September 30, 2004 whereas it used $122 of cash during the same period of 2003. This stemmed from proceeds of long-term debt, in particular the senior secured facility, as well as a decrease in restricted cash. This was offset by payment of short-term borrowings, which primarily pertained to MECAR operations, and initial repayments of the convertible debenture.

Allied. The parent company continues to operate based on fees and dividends received from its subsidiaries. In the third quarter of 2004, Allied has made cash infusions to NS Microwave, Titan Dynamics and SeaSpace to support working capital requirements. On May 28, 2004 the Company obtained a senior loan facility 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 is currently in compliance with those covenants.

23

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

Liquidity and Capital Resources – Continued

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 September 30, 2004, 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 and SeaSpace 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 nine months ended September 30, 2004 and does not anticipate repurchasing shares of Company stock during the remainder of 2004.

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, we do 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 purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of September 30, 2004, we are 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 never been any such demands.

24

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

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, 2003, 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 82% and 81% of condensed consolidated revenue was recognized under the percentage of completion method during the three and nine months ended September 30, 2004, respectively. Approximately 81% and 83% of condensed consolidated revenue was recognized under the percentage of completion method during the three and nine months ended September 30, 2003, respectively.
•		Goodwill and intangible asset valuation. The Company completed a goodwill impairment analysis in the fourth quarter of 2003 and determined that an impairment charge to earnings was not required. As required by the accounting rules, the Company will perform a similar review in the fourth quarter of 2004.
•		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.
•		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.

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;

25

The Allied Defense Group, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2004
(Thousands of Dollars)
(Unaudited)

•		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.

26

The Allied Defense Group, Inc.

September 30, 2004

QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE

At September 30, 2004, Allied had $31 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 and nine months ended September 30, 2004 and 2003 by $0.08 million and $0.24 million and $0.09 million and $0.27, respectively.

Approximately 86% and 92% of the Company’s revenue for the nine months ended September 30, 2004 and 2003, respectively, were 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 earnings for the three and nine months ended September 30, 2004 and 2003 by approximately $0.10 million and $0.75 million and $0.14 million and $1.02 million, respectively.

DISCLOSURE CONTROLS AND PROCEDURES

1.		Evaluation of disclosure controls and procedures
		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. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) is accumulated and communicated to the Company’s senior management to allow timely decisions regarding required disclosure.
2.		Changes in internal controls
		There have been no significant changes in our internal controls over financial reporting or, to our knowledge, in other factors that could significantly affect our internal control over financial reporting subsequent to the date we conducted the above-described evaluation. We are currently reviewing the new internal controls documentation and attestation requirements regarding Rule 404 of the Sarbanes Oxley Act of 2002. We have retained an independent consulting firm to assist us in evaluating and improving our internal controls. We are confident that we will fully comply with such requirements by December 31, 2004.

27

The Allied Defense Group, Inc.
PART II – OTHER INFORMATION
September 30, 2004

Item 1 Legal Proceedings

See Note 17 to the Condensed Consolidated Financial Statements.

Item 6 Exhibits

28

The Allied Defense Group, Inc.
PART II – OTHER INFORMATION
September 30, 2004

29

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/ Charles A. Hasper
Date: November 9, 2004	Charles A. Hasper,
	Chief Financial Officer and Treasurer

30