SUBORDINATION AND INTERCREDITOR AGREEMENT

THIS SUBORDINATION AND INTERCREDITOR AGREEMENT (this “Agreement”) is entered
into as of February 3, 2006, by and among Robert P. Dowski (“Subordinated
Creditor”), The Allied Defense Group, Inc., a Delaware corporation (“Company”),
Patriot Capital Funding LLC I, a Delaware limited liability company, as
successor in interest to Wilton Funding, LLC, a Delaware limited liability
company (“Lender”).

R E C I T A L S

A. Company and Lender have entered into a Credit Agreement dated as of May 28,
2004, as amended (as the same may be further amended, supplemented or otherwise
modified from time to time, the “Credit Agreement”) pursuant to which, among
other things, Lender has agreed, subject to the terms and conditions set forth
in the Credit Agreement, to make certain loans and financial accommodations to
Company.

B. Company desires to obtain from Subordinated Creditor a short term loan in an
amount not to exceed $2,000,000.00 (“Subordinated Indebtedness”) and to execute
and deliver to Subordinated Creditor a Term Loan Promissory Note of even date
herewith (as the same may be amended, supplemented or otherwise modified from
time to time as permitted hereunder, the “Subordinated Note”).

D. As required by the Credit Agreement, the Company has requested the consent of
the Lender to obtain the Subordinated Indebtedness and to execute and deliver
the Subordinated Note; the Lender has agreed to provide its consent on the
condition that the Subordinated Creditor and the Company execute and deliver
this Agreement in order to set forth the relative rights and priorities of the
Lender and Subordinated Creditor under the Senior Indebtedness and the
Subordinated Indebtedness.

NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, the parties hereto hereby agree as follows:

1. Definitions. The following terms shall have the following meanings in this
Agreement:

"Enforcement Action” means, with respect to the Subordinated Indebtedness, any
action to collect all or any portion of the Subordinated Indebtedness, to
accelerate the Subordinated Indebtedness or to enforce any of the rights and
remedies of the holder of the Subordinated Note, either at law or in equity,
including, but not limited to: (i) commencing or pursuing legal proceedings to
collect any amounts owed with respect to the Subordinated Indebtedness; (ii)
execution upon, or otherwise enforcing any judgment obtained with respect to
amounts owed on the Subordinated Indebtedness; or (iii) commencing or pursuing
any judicial or non-judicial proceedings with respect to the Subordinated
Indebtedness to foreclose upon, or to acquire title in lieu of foreclosure as
to, all or any portion of the assets of Company.

"Finally Paid” or “Final Payment,” when used in connection with the Senior
Indebtedness, shall mean the full, final and indefeasible payment of all of the
Senior Indebtedness, and the irrevocable termination of Lender’s obligation to
make loans or other advances under the Credit Agreement .

"Lender” shall mean Patriot Capital Funding LLC I.

"Senior Indebtedness” shall mean the liabilities, obligations and other
indebtedness of Company under the Credit Agreement and all ancillary documents,
including, without limitation, any interest accruing on such liabilities,
obligations and other indebtedness after the commencement of a Proceeding,
without regard to whether or not such interest is an allowed claim.

"Senior Loan Documents” shall mean the Credit Agreement and any documents,
agreements and instruments executed and delivered in connection therewith, and
upon any refinance of the liabilities, obligations and other indebtedness
thereunder, such documents, agreements and instruments evidencing such
refinance.

"Person” shall mean any natural person, corporation, general or limited
partnership, limited liability company, firm, trust, association, government,
governmental agency or other entity, whether acting in an individual, fiduciary
or other capacity.

"Proceeding” shall mean any voluntary or involuntary insolvency, bankruptcy,
receivership, custodianship, liquidation, dissolution, reorganization,
assignment for the benefit of creditors, appointment of a custodian, receiver,
trustee or other officer with similar powers or any other proceeding for the
liquidation, dissolution or other winding up of a Person.

"Senior Event of Default” shall mean any “event of default” as defined in any
Senior Loan Document that has not been waived in writing by Lender.

2. Subordination.

2.1. Subordination of Subordinated Indebtedness to Senior Indebtedness. Company
covenants and agrees, and Subordinated Creditor by its acceptance of the
Subordinated Note (whether upon original issue or upon transfer or assignment)
likewise covenants and agrees, notwithstanding anything to the contrary
contained in the Subordinated Note, that the payment of any and all of the
Subordinated Indebtedness shall be subordinate and subject in right and time of
payment, to the extent and in the manner hereinafter set forth, to the payment
in full of the Senior Indebtedness. Each holder of Senior Indebtedness, whether
now outstanding or hereafter created, incurred, assumed or guaranteed, shall be
deemed to have acquired Senior Indebtedness in reliance upon the provisions
contained in this Agreement.

2.2. Liquidation, Dissolution, Bankruptcy. In the event of any Proceeding
involving Company or any of its subsidiaries, (i) all Senior Indebtedness first
shall be Finally Paid before any payment of or with respect to the Subordinated
Indebtedness shall be made; and (ii) any payment which, but for the terms
hereof, otherwise would be payable or deliverable in respect of the Subordinated
Indebtedness, shall be paid or delivered directly to Lender until all Senior
Indebtedness is Finally Paid. The Senior Indebtedness shall continue to be
treated as Senior Indebtedness and the provisions hereof shall continue to
govern the relative rights and priorities of Lender and Subordinated Creditor
even if all or part of the Senior Indebtedness or the security interests
securing the Senior Indebtedness are subordinated, set aside, avoided or
disallowed in connection with any such Proceeding and the terms hereof shall be
reinstated if at any time any payment of any of the Senior Indebtedness is
rescinded or must otherwise be returned by any holder of the Senior Indebtedness
or any representative of such holder.

2.3. Subordinated Indebtedness Payment Restrictions. No payment (whether made in
cash, by payment-in-kind, the issuance of securities or the distribution of any
property) of principal, interest or any other amount due with respect to the
Subordinated Indebtedness shall be made or received, and Subordinated Creditor
shall not exercise any right of set-off or recoupment with respect to the
Subordinated Indebtedness, until all of the Senior Indebtedness is Finally Paid.

2.4. Incorrect Payments. If any payment not permitted hereunder is received by
Subordinated Creditor on account of the Subordinated Indebtedness before all
Senior Indebtedness is Finally Paid, such payment shall not be commingled with
any asset of Subordinated Creditor, shall be held in trust by Subordinated
Creditor for the benefit of Lender and shall be paid over to Lender, or its
designated representative, for application to the payment of the Senior
Indebtedness then remaining unpaid, until all of the Senior Indebtedness is
Finally Paid.

2.5. Prohibition on Action by Subordinated Creditor. Until the Senior
Indebtedness is Finally Paid, Subordinated Creditor shall not take any
Enforcement Action; provided, that Subordinated Creditor may commence and pursue
legal proceedings to collect any payment following 180 days prior written notice
to Lender of its intent do so (but under no circumstances may Subordinated
Creditor accelerate the Subordinated Indebtedness under this proviso and
Subordinated Creditor shall not commence any such action, and shall cease any
action commenced, if a Senior Event of Default exists in the payment of any of
the Senior Indebtedness). Further, until the Senior Indebtedness is Finally
Paid, Subordinated Creditor shall not obtain any guaranties, credit support or
liens with respect to the Subordinated Indebtedness.

2.6. Continued Effectiveness; Third Party Beneficiaries. The terms hereof, the
subordination effected hereby, and the rights and the obligations of
Subordinated Creditor and Lender arising hereunder, shall not be affected,
modified or impaired in any manner or to any extent by: (a) any amendment or
modification of or supplement to any Credit Agreement or the Subordinated Note;
(b) the validity or enforceability of any of such documents; or (c) any exercise
or non-exercise of any right, power or remedy under or in respect of the Senior
Indebtedness or the Subordinated Indebtedness or any of the instruments or
documents referred to in clause (a) above. Each holder of Senior Indebtedness
shall be deemed to be a third party beneficiary of the terms and conditions set
forth in this Agreement and, until all Senior Indebtedness has been Finally
Paid, none of such terms and conditions may be modified, rescinded or canceled
without the prior written consent of Lender.

2.7. Modifications to Subordinated Note. Until the Senior Indebtedness has been
Finally Paid, Subordinated Creditor agrees that the Subordinated Note shall not,
without the prior written consent of Lender, be amended, modified or
supplemented.

2.8. Legends. Until the termination of this Agreement in accordance with Section
13 hereof, Subordinated Creditor will cause to be clearly, conspicuously and
prominently inserted on the face of the Subordinated Note, as well as any
replacements thereof, the following legend:

“This instrument and the rights and obligations evidenced hereby are subordinate
in the manner and to the extent set forth in that certain Subordination and
Intercreditor Agreement (the “Subordination Agreement”) dated as of February 3,
2006 among Robert P. Dowski, The Allied Defense Group, Inc. and Patriot Capital
Funding LLC I; and each holder of this instrument, by its acceptance hereof,
irrevocably agrees to be bound by the provisions of the Subordination
Agreement.”

3. Representations and Warranties of Subordinated Creditor. Subordinated
Creditor hereby represents and warrants to Lender that as of the date hereof:
(a) Subordinated Creditor has the power and authority to enter into, execute,
deliver and carry out the terms of this Agreement, all of which have been duly
authorized by all proper and necessary action; (b) the execution of this
Agreement by Subordinated Creditor will not violate or conflict with any
material agreement binding upon Subordinated Creditor or any law, regulation or
order or require any consent or approval which has not been obtained; (c) this
Agreement is the legal, valid and binding obligation of Subordinated Creditor,
enforceable against Subordinated Creditor in accordance with its terms, except
as such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors’ rights generally and by equitable principles; (d) Subordinated
Creditor is the sole owner of record of the Subordinated Note and the
Subordinated Indebtedness; and (e) the Subordinated Indebtedness is, and at all
times prior to the termination of this Agreement shall remain, an unsecured
obligation of Company.

4. Modification. Any modification or waiver of any provision of this Agreement,
or any consent to any departure by any party from the terms hereof, shall not be
effective in any event unless the same is in writing and signed by Lender and
Subordinated Creditor, and then such modification, waiver or consent shall be
effective only in the specific instance and for the specific purpose given. Any
notice to or demand on any party hereto in any event not specifically required
hereunder shall not entitle the party receiving such notice or demand to any
other or further notice or demand in the same, similar or other circumstances
unless specifically required hereunder.

5. Further Assurances. Each party to this Agreement promptly will execute and
deliver such further instruments and agreements and do such further acts and
things as may be reasonably requested in writing by any other party hereto that
may be necessary or desirable in order to effect fully the purposes of this
Agreement.

6. Notices. Unless otherwise specifically provided herein, any notice delivered
under this Agreement shall be in writing addressed to the respective party as
set forth below and may be personally served, telecopied or sent by overnight
courier service or certified or registered United States mail and shall be
deemed to have been given (a) if delivered in person, when delivered; (b) if
delivered by telecopy, on the date of transmission if transmitted on a business
day before 4:00 p.m. (New York time) or, if not, on the next succeeding business
day; (c) if delivered by overnight courier, one business day after delivery to
such courier properly addressed; or (d) if by United States mail, four business
days after deposit in the United States mail, postage prepaid and properly
addressed.

Notices shall be addressed as follows: (A) if to Subordinated Creditor: Robert
P. Dowski, The Allied Defense Group, Inc, 8000 Towers Crescent Drive, Suite 260,
Vienna, Virginia 22182; (B) if to Company: The Allied Defense Group, Inc., 8000
Towers Crescent Drive, Suite 260, Vienna Virginia 22182, Attn: Chief Executive
Officer; and (C) if to Lender: Patriot Capital Funding LLC I, 274 Riverside
Avenue First Floor, Westport CT 06880;

or in any case, to such other address as the party addressed shall have
previously designated by written notice to the serving party, given in
accordance with this Section 6.

7. Successors and Assigns. This Agreement shall inure to the benefit of, and
shall be binding upon, the respective successors and assigns of Lender,
Subordinated Creditor and the Company. To the extent permitted under the Senior
Loan Documents, Lender may, from time to time, without notice to Subordinated
Creditor, assign or transfer any or all of the Senior Indebtedness or any
interest therein to any Person and, notwithstanding any such assignment or
transfer, or any subsequent assignment or transfer, the Senior Indebtedness
shall, subject to the terms hereof, be and remain Senior Indebtedness for
purposes of this Agreement, and every permitted assignee or transferee of any of
the Senior Indebtedness or of any interest therein shall, to the extent of the
interest of such permitted assignee or transferee in the Senior Indebtedness, be
entitled to rely upon and be the third party beneficiary of the subordination
provided under this Agreement and shall be entitled to enforce the terms and
provisions hereof to the same extent as if such assignee or transferee were
initially a party hereto. Subordinated Creditor further agrees that it will, at
the request of Lender, enter into an agreement, in the form of this Agreement,
mutatis mutandis, with any party that refinances any Senior Indebtedness;
provided, that the failure of Subordinated Creditor to execute such an agreement
shall not affect such party’s right to rely on and enforce the terms of this
Agreement. Subordinated Creditor agrees that it shall not assign or transfer any
of the Subordinated Indebtedness without the prior consent of Lender unless any
assignee signs a counterpart of this Agreement pursuant to which such assignee
agrees to be bound by all of the provisions of this Agreement as if it had
originally executed this Agreement as Subordinated Creditor..

8. Relative Rights. This Agreement shall define the relative rights of Lender
and Subordinated Creditor. Nothing in this Agreement shall (a) impair, as among
Company, Lender and as between Company and Subordinated Creditor, the
obligations of Company with respect to the payment of the Senior Indebtedness
and the Subordinated Indebtedness in accordance with their respective terms or
(b) affect the relative rights of Lender or Subordinated Creditor with respect
to any other creditors of Company.

9. Conflict. In the event of any conflict between any term, covenant or
condition of this Agreement and any term, covenant or condition of the
Subordinated Note, the provisions of this Agreement shall control and govern.

10. Headings. The paragraph headings used in this Agreement are for convenience
only and shall not affect the interpretation of any of the provisions hereof.

11. Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.

12. Severability. In the event that any provision of this Agreement is deemed to
be invalid, illegal or unenforceable by reason of the operation of any law or by
reason of the interpretation placed thereon by any court or governmental
authority, the validity, legality and enforceability of the remaining provisions
of this Agreement shall not in any way be affected or impaired thereby, and the
affected provision shall be modified to the minimum extent permitted by law so
as most fully to achieve the intention of this Agreement.

13. Continuation of Subordination; Termination of Agreement. This Agreement
shall remain in full force and effect until all the Senior Indebtedness has been
Finally Paid after which this Agreement shall terminate without further action
on the part of the parties hereto.

14. Applicable Law. This Agreement shall be governed by and shall be construed
and enforced in accordance with the internal laws of the State of New York,
without regard to conflicts of law principles.

15. CONSENT TO JURISDICTION. EACH PARTY HERETO HEREBY CONSENTS TO THE
JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE CITY OF NEW YORK,
STATE OF NEW YORK AND IRREVOCABLY AGREES THAT, SUBJECT TO LENDER’S ELECTION, ALL
ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE
LITIGATED IN SUCH COURTS. EACH PARTY HERETO EXPRESSLY SUBMITS AND CONSENTS TO
THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON
CONVENIENS. EACH PARTY HERETO HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL
PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON IT BY
CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO SUCH PARTY
AT ITS ADDRESS SET FORTH IN THIS AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE
10 DAYS AFTER THE SAME HAS BEEN POSTED.

16. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES ITS RIGHTS TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT, THE SUBORDINATED NOTE OR ANY OF THE SENIOR LOAN DOCUMENTS. EACH OF
SUBORDINATED CREDITOR, COMPANY AND LENDER ACKNOWLEDGES THAT THIS WAIVER IS A
MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS RELIED
ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THE SENIOR LOAN DOCUMENTS AND
THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS.
EACH PARTY HERETO WARRANTS AND REPRESENTS THAT IT HAS HAD THE OPPORTUNITY OF
REVIEWING THIS JURY WAIVER WITH LEGAL COUNSEL, AND THAT IT KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS.

[SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.

 
 
Robert P. Dowski
THE ALLIED DEFENSE GROUP, INC,
a Delaware corporation
By
Its
PATRIOT CAPITAL FUNDING LLC I,
a Delaware limited liability company
By
Its

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