UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
  Form 10-Q
  QUARTERLY REPORT PURSUANT TO
    SECTION 13 or 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
  For the quarterly period ended September 30, 2008
   Commission File
    Number: 1-11376
  The Allied Defense Group,
    Inc.
 (Exact name of Registrant as
    specified in its charter)
   Delaware(State or other jurisdiction
    of
    incorporation or organization)

04-2281015(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)
   þ o
  12b-2
  Large accelerated
    filer o

Accelerated
    filer o

Non-accelerated
    filer o

Smaller reporting
    company þ(Do not check if a smaller reporting company)   Rule 12b-2 o þ




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##### 



THE
    ALLIED DEFENSE GROUP, INC.
  INDEX
   
 PAGENUMBERPART I. FINANCIAL INFORMATION  UNAUDITEDItem 1.


Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at
    September 30, 2008 and December 31, 2007


2Condensed Consolidated Statements of Operations
    for the three and nine months ended September 30, 2008 and
    2007 and 2007


3Condensed Consolidated Statements of
    Stockholders Equity and Comprehensive Income (Loss) for
    the nine months ended September 30, 2008 and the year ended
    December 31, 2007


4Condensed Consolidated Statements of Cash Flows
    for the nine months ended September 30, 2008 and 2007


5Notes to Unaudited Condensed Consolidated
    Financial Statements


7Item 2.


Managements Discussion and Analysis of
    Financial Condition and Results of Operations


26Item 3.


Quantitative and Qualitative Disclosures About
    Market Risk


43Item 4T.


Controls and Procedures


43PART II. OTHER INFORMATIONItem 1.


Legal Proceedings


44Item 1A.


Risk Factors


44Item 2.


Unregistered Sales of Equity Securities and Use
    of Proceeds


44Item 3.


Defaults Upon Senior Securities


44Item 4.


Submission of Matters to a Vote of Security
    Holders


44Item 5.


Other Information


44Item 6.


Exhibits


45Signatures




---



##### 



The
    Allied Defense Group, Inc.
 CONDENSED
    CONSOLIDATED BALANCE SHEETS (Unaudited)
    (Thousands of Dollars, except per share and share
    data)
  September 30,


December 31,2008


2007(a)ASSETSCurrent AssetsCash and cash equivalents

$
5,093


$
21,750Restricted cash


7,993



13,052Accounts receivable, net


19,881



6,965Costs and accrued earnings on uncompleted contracts


56,100



39,313Inventories, net


22,569



22,027Prepaid and other current assets


6,627



4,098Assets held for sale


18,095



24,177Total current assets


136,358



131,382PROPERTY, PLANT AND EQUIPMENT, NET


21,177



24,585Other AssetsIntangible assets, net


479



493Goodwill






3,495Other assets


235



296Total other assets


714



4,284TOTAL ASSETS

$
158,249


$
160,251CURRENT LIABILITIESCurrent maturities of senior secured convertible notes

$
19,493


$
13,610Bank overdraft facility


5,372



7,239Current maturities of long-term debt


4,433



881Accounts payable


19,443



16,370Accrued liabilities


20,880



15,780Belgium social security


3,983



8,307Customer deposits


30,250



26,835Foreign exchange contracts


1,398



Income taxes


3,969



3,680Liabilities held for sale


3,801



5,830Total current liabilities


113,022



98,532LONG TERM OBLIGATIONSLong-term debt, less current maturities and unamortized discount


7,450



9,439Senior secured convertible notes, less current maturities






5,782Derivative instrument


283



183Other long-term liabilities


691



660Total long-term obligations


8,424



16,064TOTAL LIABILITIES


121,446



114,596CONTINGENCIES AND COMMITMENTSSTOCKHOLDERS EQUITYPreferred 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, 8,080,203 at
    September 30, 2008 and 8,013,161 at December 31, 2007


808



801Capital in excess of par value


55,765



55,355Retained deficit


(36,518
)


(27,909
)Accumulated other comprehensive income


16,748



17,408Total stockholders equity


36,803



45,655TOTAL LIABILITIES AND STOCKHOLDERS EQUITY

$
158,249


$
160,251     (a)
    
    Condensed consolidated balance sheet as of December 31,
    2007, has been derived from audited consolidated financial
    statements.   2




---



##### 



The
    Allied Defense Group, Inc.
 CONDENSED
    CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
    (Thousands of Dollars, except per share and share
    data)
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,2008


2007


2008


2007Revenue

$
50,813


$
11,247


$
121,530


$
21,573Cost and expensesCost of sales


44,078



10,938



100,671



29,444Selling and administrative


5,678



5,962



17,285



19,046Research and development


683



599



2,067



1,797Impairment of goodwill and long-lived assets


3,957







3,957



Operating loss


(3,583
)


(6,252
)


(2,450
)


(28,714
)Other income (expenses)Interest income


103



75



513



382Interest expense


(1,432
)


(1,584
)


(5,494
)


(9,359
)Net gain (loss) on fair value of senior convertible notes and
    warrants


(155
)


1,080



(682
)


(6,686
)Other-net


(2,173
)


(37
)


(2,290
)


(171
)(3,657
)


(466
)


(7,953
)


(15,834
)Loss from continuing operations before income taxes


(7,240
)


(6,718
)


(10,403
)


(44,548
)Income tax (benefit) expense


174



(8
)


496



3Loss from continuing operations


(7,414
)


(6,710
)


(10,899
)


(44,551
)Income from discontinued operations, net of taxGain on sale of subsidiaries






29,774



113



29,774Income (loss) from discontinued operations


1,194



(781
)


2,177



(4,949
)1,194



28,993



2,290



24,825NET INCOME (LOSS)

$
(6,220
)

$
22,283


$
(8,609
)

$
(19,726
)Earnings (loss) per share  basic and diluted:Net loss from continuing operations

$
(0.92
)

$
(0.85
)

$
(1.36
)

$
(6.37
)Net earnings from discontinued operations


0.15



3.67



0.29



3.55Total earnings (loss) per share  basic and diluted

$
(0.77
)

$
2.82


$
(1.07
)

$
(2.82
)Weighted average number of common shares:Basic and diluted


8,067,089



7,897,299



8,034,164



6,987,508    3




---



##### 



The
    Allied Defense Group, Inc.
 CONDENSED
    CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

AND COMPREHENSIVE INCOME (LOSS) (Unaudited)
    (Thousands of Dollars, except per share and share
    data)
  AccumulatedPreferred


Common Stock


Capital





Other


TotalStock, No





$.10


in Excess


Retained


Comprehensive


StockholdersPar Value


Shares


Par value


of Par value


(Deficit)


Income (Loss)


EquityBalance at January 1, 2007

$




6,440,944


$
644


$
43,312


$
(6,631
)

$
18,022


$
55,347Common stock awards






59,986



6



710











716Retired stocks






(1,668
)






(14
)










(14
)Employee stock purchase plan purchases






47,431



4



358











362Common stock converted from Notes






150,500



15



1,392











1,407Common stock issued to noteholders






1,288,000



129



9,415











9,544Directors deferred stock compensation














(275
)










(275
)Issue of stock options














216











216Exercise of warrants






27,968



3



241











244Comprehensive loss:Net loss for the year ended


















(21,278
)






(21,278
)Currency translation adjustment related to sale of The VSK Group






















(4,491
)


(4,491
)Currency translation adjustment






















3,877



3,877Total comprehensive loss


























(21,892
)Balance at December 31, 2007

$




8,013,161


$
801


$
55,355


$
(27,909
)

$
17,408


$
45,655Common stock awards






52,395



5



224











229Retired stocks






(1,351
)






(9
)










(9
)Employee stock purchase plan purchases






15,998



2



92











94Issue of stock options














49











49Directors deferred stock compensation














54











54Comprehensive loss:Net loss for the nine months ended


















(8,609
)






(8,609
)Currency translation adjustment






















(660
)


(660
)Total comprehensive loss


























(9,269
)Balance at September 30, 2008

$




8,080,203


$
808


$
55,765


$
(36,518
)

$
16,748


$
36,803    4




---



##### 



The
    Allied Defense Group, Inc.
 CONDENSED
    CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
    (Thousands of Dollars)
  Nine Months Ended September 30,2008


2007Cash flows from operating activitiesNet loss

$
(8,609
)

$
(19,726
)Less: Gain on sale of subsidiaries


(113
)


(29,774
)Discontinued operations, net of tax


(2,177
)


4,949Loss from continuing operations


(10,899
)


(44,551
)Adjustments to reconcile net loss from continuing operations to
    net cash used in operating activities, net of divestitures:Depreciation and amortization


4,254



3,834Amortization of debt discount and debt issue costs


88



3,297Impairment of goodwill and long-lived assets


3,957



Unrealized loss on forward contracts


1,473



Loss (gain) on sale of fixed assets


(19
)


(18
)Net loss related to fair value of notes and warrants


682



6,686Interest and penalties converted to debt principal






1,204Provision for estimated losses on contracts


926



1,216Provision for warranty reserves, uncollectible accounts and
    inventory obsolescence


738



1,254Common stock and stock option awards


292



1,099Deferred director stock awards


54



(293
)(Increase) decrease in operating assets and increase (decrease)
    in liabilities, net of effects from discontinued businessesRestricted cash


5,076



3,621Accounts receivable


(13,913
)


2,353Costs and accrued earnings on uncompleted contracts


(18,504
)


6,221Inventories


(1,326
)


649Prepaid and other current assets


(2,553
)


645Accounts payable and accrued liabilities


3,832



7,678Customer deposits


4,074



(10,855
)Deferred compensation


40



2Income taxes


390



(219
)Net cash used in operating activities  continuing
    operations


(21,338
)


(16,177
)Net cash provided by operating activities 
    discontinued operations


3,788



3,915Net cash used in operating activities


(17,550
)


(12,262
) 5




---



##### 



Nine Months Ended September 30,2008


2007Cash flows from investing activitiesCapital expenditures


(1,556
)


(726
)Proceeds from sale of subsidiaries


2,433



43,474Proceeds from sale of fixed assets


20



12Net cash provided by investing activities  continuing
    operations


897



42,760Net cash used in investing activities  discontinued
    operations


(71
)


(1,991
)Net cash provided by investing activities


826



40,769Cash flows from financing activitiesDecrease in bank overdraft


(1,822
)


(5,632
)Principal payment on senior secured notes


(481
)


(867
)Increase in short-term borrowings


2,588



Proceeds from issuance of senior convertible notes






15,376Net cash transferred to discontinued operations






(411
)Principal payments on long-term borrowing


(58
)


(1,675
)Repayment on capital lease obligations


(691
)


(1,426
)Debt issue cost on senior secured notes






(1,296
)Proceeds from employee stock purchases


80



285Retirement of stock


(9
)


Net cash provided by (used in) financing activities 
    continuing operations


(393
)


4,354Net cash provided by financing activities 
    discontinued operations






161Net cash provided by (used in) financing activities


(393
)


4,515Net change in cash of discontinued operations






(2,085
)Effects of exchange rate on cash


460



2,944NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS


(16,657
)


33,881Cash and cash equivalents at beginning of period


21,750



16,397Cash and cash equivalents at end of period

$
5,093


$
50,278Supplemental Disclosures of Cash Flow informationCash paid during the period forInterest

$
5,518


$
3,695Taxes

$
99


$
1,018Supplemental Disclosures of Non-Cash Investing and Financing
    ActivitiesIssuance of common stock in exchange of convertible notes

$



$
9,544Interest and financing charges converted to debt principal

$



$
1,605Capital leases

$
26


$
2    6




---



##### 



The
    Allied Defense Group, Inc.NOTES TO UNAUDITED CONDENSED CONSOLIDATED
    FINANCIAL STATEMENTSSeptember 30, 2008
    (Thousands of Dollars)
  NOTE 1 
    CONDENSED
    CONSOLIDATED FINANCIAL STATEMENTS    Form 10-K
    (Form 10-K)
    Liquidity
    and Capital Resources
     7




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
         and/or
     8




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      
    The Company will be successful securing MECARs long-term
    financing.
    The Company will be successful generating adequate cash at its
    MECAR subsidiary in the fourth quarter of 2008 to repay its
    existing credit facility.
    The Company will be successful in taking necessary steps to be
    in a position to satisfy the put of its senior
    secured convertible notes which will be made in December 2008
    and January 2009.
    The Company will be successful in its restructuring and
    turnaround efforts at its subsidiaries.
    The Company will be able to meet the financial debt covenants of
    its debt instruments.    Reclassification
    NOTE 2 
    PRINCIPLES
    OF CONSOLIDATION    
    ARC Europe, S.A. (ARC Europe), a Belgian company,
    Allied Research Corporation Limited (Limited), an
    inactive United Kingdom company,
    News/Sports Microwave Rental, Inc. (NSM), a
    California corporation,
    MECAR USA, Inc. (MECAR USA), a Delaware corporation,
    Global Microwave Systems, Inc (GMS), a California corporation.
    (Discontinued Operation)      Ammunition & Weapons Effects. and/or
  Electronic Security.
 9




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Other.
    NOTE 3 
    ACCOUNTS
    RECEIVABLE AND COSTS AND ACCRUED EARNINGS ON UNCOMPLETED
    CONTRACTS    September 30,


December 31,2008


2007Direct and indirect receivables from governments

$
17,650


$
2,657Commercial and other receivables


3,259



4,96020,909



7,617Less: Allowance for doubtful receivables


(1,028
)


(652
)$
19,881


$
6,965       NOTE 4 
    INVENTORIES    September 30,


December 31,2008


2007Raw materials

$
13,042


$
13,106Work in process


11,600



11,096Finished goods


393



25,035



24,202Less: Reserve for obsolescence


(2,466
)


(2,175
)$
22,569


$
22,027  10




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  NOTE 5 
    GOODWILL    NOTE 6 
    IMPAIRMENT
    OF LONG-LIVED ASSETS    NOTE 7 
    BANK
    OVERDRAFT CREDIT FACILITY       11




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    NOTE 8 
    LONG-TERM
    OBLIGATIONS    September 30,


December 31,2008


2007Fair value of Senior secured convertible notes

$
19,493


$
19,392SOGEPA loan


8,670



8,837Bank note payable


2,456



Capital leases and other


757



1,483Total long-term debt


31,376



29,712Less: Current maturities


(23,926
)


(14,491
)Long-term debt, less current maturities and unamortized discount

$
7,450


$
15,221         Senior secured convertible notes.
  Accounting
    for Certain Hybrid Instruments and/or and/or
 12




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          FSP 00-19-2 Accounting for Registration Payment Arrangements FSP 00-19-2, FSP 00-19-2, Accounting for Contingencies
 13




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        September 30,


December 31,2008


2007Amended Notes

$
12,886


$
13,134First Closing of New Notes


500



476Second Closing of New Notes


6,107



5,782$
19,493


$
19,392       September 30,


December 31,2008


2007Amended Notes

$
13,282


$
13,763First Closing of New Notes


499



499Second Closing of New Notes


6,095



6,095$
19,876


$
20,357     Warrants EITF 00-19, Accounting for Derivative Instruments Index to, and
    Potentially Settled in, a Companys Own Stock
 14




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  SOGEPA Loan. Société Wallonne de Gestion et de
    Participations
  Capital lease and other.
    NOTE 9 
    DERIVATIVE
    FINANCIAL INSTRUMENTS  Derivatives
    not designated as hedges
    NOTE 10 
    FAIR
    VALUE MEASUREMENTS  Fair Value Measurements FSP 157-2.
   15




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    
    Level 1  Observable inputs such as quoted prices
    in active markets for identical assets or liabilities
    Level 2  Inputs other than quoted prices that
    are observable for the asset or liability, either directly or
    indirectly. These include quoted prices for similar assets or
    liabilities in active markets, quoted prices for identical or
    similar assets or liabilities in markets that are not active and
    amounts derived from valuation models where all significant
    inputs are observable in active markets
    Level 3  Unobservable inputs that reflect
    managements assumptions      Quoted Prices in


SignificantActive Markets for


Other


SignificantIdentical Assets or


Observable


UnobservableLiabilities (Level 1)


Inputs (Level 2)


Inputs (Level 3)


TotalLiabilitiesSenior secured convertible notes

$



$
19,493


$



$
19,493Derivative instrument






283







283Foreign exchange contract






1,398







1,398$



$
21,174


$



$
21,174    16




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  NOTE 11 
    EARNINGS
    (LOSS) PER SHARE    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2008


2007


2008


2007Net loss from continuing operations

$
(7,414
)

$
(6,710
)

$
(10,899
)

$
(44,551
)Net earnings from discontinued operations


1,194



28,993



2,290



24,825Net earnings (loss)

$
(6,220
)

$
22,283


$
(8,609
)

$
(19,726
)Weighted average number of basic and diluted shares


8,067,089



7,897,299



8,034,164



6,987,508Basic and diluted net loss per share from continuing operations

$
(0.92
)

$
(0.85
)

$
(1.36
)

$
(6.37
)Basic and diluted net earnings per share from discontinued
    operations


0.15



3.67



0.29



3.55Total

$
(0.77
)

$
2.82


$
(1.07
)

$
(2.82
)     NOTE 12 
    COMPREHENSIVE
    INCOME (LOSS)    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2008


2007


2008


2007Net Income (Loss)

$
(6,220
)

$
22,283


$
(8,609
)

$
(19,726
)Currency Translation Adjustment


(3,146
)


2,620



(660
)


3,386Accumulated currency translation adjustments attributable to the
    VSK Group






(4,448
)






(4,448
)Comprehensive Income (Loss)

$
(9,366
)

$
20,455


$
(9,269
)

$
(20,788
)    17




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  NOTE 13 
    SHARE-BASED
    COMPENSATION      Nine Months EndedSeptember 30,2008Risk free interest rate


1.53
%Expected volatility rate


92.11
%Expected life  year


1Dividend yield


       NOTE 14 
    INDUSTRY
    SEGMENTS  Three Months Ended


Nine Months EndedSeptember 30,


September 30,2008


2007


2008


2007Revenues from external customersAmmunitions & Weapons Effects

$
49,248


$
10,193


$
116,365


$
16,744Electronic Security


1,565



1,054



5,165



4,829$
50,813


$
11,247


$
121,530


$
21,573Segment profit (loss) before provision for income taxesAmmunitions & Weapons Effects

$
53


$
(3,050
)

$
2,840


$
(18,351
)Electronic Security


(4,106
)


(1,030
)


(4,240
)


(2,233
)Corporate


(3,187
)


(2,638
)


(9,003
)


(23,964
)$
(7,240
)

$
(6,718
)

$
(10,403
)

$
(44,548
)  18




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    NOTE 15 
    PROVISION
    FOR TAXES            Accounting for Income
   19




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  NOTE 16 
    COMMITMENTS
    AND CONTINGENCIES        Indemnification
    provisions.
         20




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Tax
    Litigation
    Social
    Security Litigation
    NOTE 17 
    DISCONTINUED
    OPERATIONS  Accounting for the Impairment or
    Disposal of Long-Lived Assets
  SeaSpace
    Corporation
      The VSK
    Group
     21




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Foreign Currency Translation
  CMS
    Security Systems
    Titan
    Dynamics Systems, Inc.
    Global
    Microwave Systems, Inc.
   22




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        September 30, 2008


December 31, 2007GMS


GMS


Titan


TotalCash

$



$



$
74


$
74Accounts receivable, net


1,758



2,375



714



3,089Inventories, net


2,689



2,678



2,219



4,897Other assets


13,648



14,525



1,592



16,117Assets held for sale

$
18,095


$
19,578


$
4,599


$
24,177Accounts payable

$
388


$
437


$
883


$
1,320Accrued liabilities


73



90



241



331Customer deposits










922



922Other liabilities


3,340



3,252



5



3,257Liabilities held for sale

$
3,801


$
3,779


$
2,051


$
5,830     For the Three Months Ended September 30, 2008Titan


GMS


TotalRevenues

$



$
4,425


$
4,425Income (loss) before taxes






1,194



1,194Income (loss), net of tax






1,194



1,194Discontinued operations, net of tax

$



$
1,194


$
1,194  23




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  For the Nine Months Ended September 30, 2008Titan


GMS


TotalRevenues

$
668


$
10,083


$
10,751Income (loss) before taxes


(142
)


2,320



2,178Income (loss), net of tax


(142
)


2,319



2,177Gain on sale of subsidiaries, net of tax


113







113Discontinued operations, net of tax

$
(29
)

$
2,319


$
2,290     For the Three Months Ended September 30, 2007The VSK


CMS SecurityGroup


Systems


SeaSpace


Titan


GMS


TotalRevenues

$
6,077


$
94


$
100


$
604


$
2,591


$
9,466Income (loss) before taxes


1,243



(737
)


(423
)


(1,940
)


614



(1,243
)Income (loss), net of tax


901



(737
)


381



(1,940
)


614



(781
)Gain on sale of subsidiaries, net of tax


29,774



















29,774Discontinued operations, net of tax

$
30,675


$
(737
)

$
381


$
(1,940
)

$
614


$
28,993   For the Nine Months Ended September 30, 2007The VSK


CMS SecurityGroup


Systems


SeaSpace


Titan


GMS


TotalRevenues

$
22,719


$
146


$
2,947


$
4,215


$
6,465


$
36,492Income (loss) before taxes


3,297



(974
)


(5,087
)


(2,247
)


368



(4,643
)Income (loss), net of tax


2,194



(974
)


(4,284
)


(2,252
)


367



(4,949
)Gain on sale of subsidiaries, net of tax


29,774



















29,774Discontinued operations, net of tax

$
31,968


$
(974
)

$
(4,284
)

$
(2,252
)

$
367


$
24,825   NOTE 18 
    SUBSEQUENT
    EVENTS  Sale of
    GMS
   24




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Sale of
    NSM
      September 30,


December 31,2008


2007Cash

$
284


$
99Accounts receivable, net


1,668



2,449Inventories, net


1,133



1,078Other assets


970



4,722Assets held for sale

$
4,055


$
8,348Accounts payable

$
254


$
815Accrued liabilities


510



516Customer deposits






169Other liabilities


131



74Liabilities held for sale

$
895


$
1,574   Senior
    Secured Convertible Notes
  and/or
 25




---



##### 



The
    Allied Defense Group, Inc.
  MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION
 AND RESULTS OF OPERATIONS
 September 30, 2008
 (Thousands of Dollars)
 (Unaudited)
  Overview
      
    Ammunition & Weapons Effectssegment 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 became operational in
    late 2005 and pursues contracts from U.S. and foreign
    governments for ammunition and pyrotechnics devices with a focus
    on the 105MM market. More recently, MECAR USA has begun
    purchasing and selling weapon systems
    and/or
    ammunition manufactured by others, in the form of procurement
    contracts for the benefit of the U.S government and other
    foreign governments.
    Electronic Securitysegment consists of News Sports
    Microwave (NSM) located near San Diego, California. NSM
    designs, manufactures, installs and services industrial and law
    enforcement surveillance products and integrated systems for the
    law enforcement community and agencies of the Department of
    Homeland Security and the Department of Defense.      Liquidity
    and Capital Resources
  Form 10-K
 26




---



##### 



and/or
   27




---



##### 




    The Company will be successful securing MECARs long-term
    financing.
    The Company will be successful generating adequate cash at its
    MECAR subsidiary in the fourth quarter of 2008 to repay its
    existing credit facility.
    The Company will be successful in taking necessary steps to be
    in a position to satisfy the put of its senior
    secured convertible notes which will be made in December 2008
    and January 2009.
    The Company will be successful in its restructuring and
    turnaround efforts at its subsidiaries.
    The Company will be able to meet the financial debt covenants of
    its debt instruments.    Overview
    Results
         28




---



##### 



Results
    of Operations for the Three Months Ended September 30, 2008
    and 2007
  Three Months Ended September 30,2008


2007Amount


%


Amount


%Revenue

$
50,813



100.0
%

$
11,247



100.0
%Cost and expensesCost of sales


44,078



86.8



10,938



97.3Selling and administrative


5,678



11.2



5,962



53.0Research and development


683



1.3



599



5.3Impairment of goodwill and long-lived assets


3,957



7.8







Operating loss


(3,583
)


(7.1
)


(6,252
)


(55.6
)Other income (expense)Interest income


103



0.2



75



0.6Interest expense


(1,432
)


(2.8
)


(1,584
)


(14.1
)Gain (loss) from fair value of notes and warrants


(155
)


(0.3
)


1,080



9.6Other  net


(2,173
)


(4.3
)


(37
)


(0.3
)Loss from continuing operations before income taxes


(7,240
)


(14.3
)


(6,718
)


(59.8
)Income tax expense (benefit)


174



0.3



(8
)


(0.1
)Net loss from continuing operations, net of tax


(7,414
)


(14.6
)


(6,710
)


(59.7
)Gain on sale of subsidiaries, net of tax










29,774



264.7Income (loss) from discontinued operations, net of tax


1,194



2.4



(781
)


(6.9
)Income from discontinued operations, net of tax


1,194



2.4



28,993



257.8Net Income (loss)

$
(6,220
)


(12.2
)%

$
22,283



198.1
%   Revenue.
  Revenue by SegmentThree Months Ended


Three Months EndedSeptember 30, 2008


September 30, 2007Percentage





PercentageAmount


of total


Amount


of totalAmmunitions & Weapons Effects

$
49,248



97
%

$
10,193



91
%Electronic Security


1,565



3



1,054



9Total

$
50,813



100
%

$
11,247



100
%    29




---



##### 



Cost of Sales.
  Cost of Sales as a Percentage of Revenue by SegmentThree Months Ended


Three Months EndedSeptember 30, 2008


September 30, 2007Percentage of





Percentage ofAmount


Segment Revenue


Amount


Segment RevenueAmmunitions & Weapons Effects

$
42,851



87
%

$
9,769



96
%Electronic Security


1,227



78



1,169



111Total

$
44,078



87
%

$
10,938



97
%      30




---



##### 



Selling and Administrative Expenses.
      Research and Development.
  Impairment of Goodwill and Long-Lived
    Assets.
  Interest Income.
  Interest Expense.
  Net Loss on fair value of the senior convertible notes and
    warrants.
  Other  Net.
 31




---



##### 



Pre-Tax
    Income (Loss)
    Pre-Tax Income (Loss) by SegmentThree Months Ended


Three Months EndedSeptember 30, 2008


September 30, 2007Percentage of





Percentage ofAmount


Total Revenue


Amount


Total RevenueAmmunitions & Weapons Effects

$
53




%

$
(3,050
)


(27
)%Electronic Security


(4,106
)


(8
)


(1,030
)


(9
)Corporate


(3,187
)


(6
)


(2,638
)


(23
)Total

$
(7,240
)


(14
)%

$
(6,718
)


(59
)%   Other-net
      Income Taxes. Accounting for Income Taxes in Interim periods
  Income (Loss) from discontinued operations, net of
    tax. (
 32




---



##### 



Net Income(Loss).
  Results
    of Operations for the Nine Months Ended September 30, 2008
    and 2007
  Nine Months Ended September 30,2008


2007Amount


%


Amount


%Revenue

$
121,530



100.0
%

$
21,573



100.0
%Cost and expensesCost of sales


100,671



82.8



29,444



136.5Selling and administrative


17,285



14.2



19,046



88.3Research and development


2,067



1.7



1,797



8.3Impairment of goodwill and long-lived assets


3,957



3.3







Operating loss


(2,450
)


(2.0
)


(28,714
)


(133.1
)Other income (expense)Interest income


513



0.4



382



1.8Interest expense


(5,494
)


(4.5
)


(9,359
)


(43.4
)Loss from fair value of notes and warrants


(682
)


(0.6
)


(6,686
)


(31.0
)Other  net


(2,290
)


(1.9
)


(171
)


(0.8
)Loss from continuing operations before income taxes


(10,403
)


(8.6
)


(44,548
)


(206.5
)Income tax expense


496



0.4



3



Net loss from continuing operations, net of tax


(10,899
)


(9.0
)


(44,551
)


(206.5
)Gain on sale of subsidiaries, net of tax


113



0.1



29,774



138.0Income (loss) from discontinued operations, net of tax


2,177



1.8



(4,949
)


(22.9
)Income from discontinued operations, net of tax


2,290



1.9



24,825



115.1Net Loss

$
(8,609
)


(7.1
)%

$
(19,726
)


(91.4
)%   Revenue.
  Revenue by SegmentNine Months Ended


Nine Months EndedSeptember 30, 2008


September 30, 2007Percentage





PercentageAmount


of Total


Amount


of TotalAmmunitions & Weapons Effects

$
116,365



96
%

$
16,744



78
%Electronic Security


5,165



4



4,829



22Total

$
121,530



100
%

$
21,573



100
%  33




---



##### 



Cost of Sales.
  Cost of Sales as a Percentage of Revenue by SegmentNine Months Ended


Nine Months EndedSeptember 30, 2008


September 30, 2007Percentage of





Percentage ofAmount


Segment Revenue


Amount


Segment RevenueAmmunitions & Weapons Effects

$
97,323



84
%

$
25,298



151
%Electronic Security


3,348



65



4,146



86Total

$
100,671



83
%

$
29,444



136
%        34




---



##### 



Selling and Administrative Expenses.
      Research and Development.
  Impairment of Goodwill and Long-Lived
    Assets.
  Interest Income.
  Interest Expense.
  Net Loss on fair value of the senior convertible notes and
    warrants.
  Other  Net.
 35




---



##### 



Pre-Tax
    Income (Loss)
    Pre-Tax Loss by SegmentNine Months Ended


Nine Months EndedSeptember 30, 2008


September 30, 2007Percentage of





Percentage ofAmount


Total revenue


Amount


Total revenueAmmunitions & Weapons Effects

$
2,840



2
%

$
(18,351
)


(85
)%Electronic Security


(4,240
)


(4
)


(2,233
)


(10
)Corporate


(9,003
)


(7
)


(23,964
)


(111
)Total

$
(10,403
)


(9
)%

$
(44,548
)


(206
)%         Income Taxes. Accounting for Income Taxes
    in Interim periods
  Income (Loss) from discontinued operations, net of
    tax.
 36




---



##### 



Net Loss.
  Backlog.
  Backlog by SegmentAt September 30,


At September 30,2008


2007Percentage





Percentageof Total


Amount


of TotalAmmunitions & Weapons Effects

$
168,363



99
%

$
128,492



98
%Electronic Security


1,381



1



2,290



2Total

$
169,744



100
%

$
130,782



100
%        37




---



##### 



Balance
    Sheet
    September 30,


December 31,2008


2007ASSETSCash

$
13,086


$
34,802Accounts receivable, net


19,881



6,965Costs and accrued earnings on uncompleted contracts


56,100



39,313Inventories, net


22,569



22,027Other current assets


24,722



28,275Other assets


21,891



28,869TOTAL ASSETS

$
158,249


$
160,251LIABILITIESBank overdraft facility

$
5,372


$
7,239Accounts payable and accrued liabilities


44,306



40,457Customer deposits


30,250



26,835Other current liabilities


9,168



9,510Senior convertible notes


19,493



19,392Long-term debt and other liabilities


12,857



11,163TOTAL LIABILITIES


121,446



114,596STOCKHOLDERS EQUITY


36,803



45,655TOTAL LIABILITIES AND STOCKHOLDERS EQUITY

$
158,249


$
160,251          38




---



##### 



Cash
    Flows
    For Nine MonthsEnded September 30,2008


2007Net cash used in operating activities

$
(17,550
)

$
(12,262
)Net cash provided by investing activities


826



40,769Net cash provided by (used in) financing activities


(393
)


4,515Effects of exchange rate on cash


460



2,944   Operating Activities.
 39




---



##### 



Investing Activities.
  Financing Activities.
  Effects of Exchange Rate.
  Allied.
  MECAR.
  Other Subsidiaries.
 40




---



##### 



Stock Repurchases.
  Off-Balance Sheet Arrangements.
    Critical
    Accounting Policies
      
    Revenue recognition via the percentage of completion method
    Goodwill and intangible asset valuation
    Inventory reserves and allowance for doubtful accounts
    Foreign currency translations
    Derivative Instruments
    Valuation of deferred income taxes and income tax reserves.  Form 10-K 10-K
  Recent
    Accounting Pronouncements
  FSP 142-3, Determining the Useful Life of Intangible Assets FSP 142-3 FSP 142-3 FSP 142-3
  Disclosures about Derivative Instruments and Hedging
    Activities  an amendment of FASB Statement
    No. 133
 41




---



##### 



The
    Fair Value Option for Financial Assets and Financial
    Liabilities  Including an amendment of FASB Statement
    No. 115
  Fair Value Measurements No. 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2),
  Forward-Looking
    Statements
     42




---



##### 



The
    Allied Defense Group, Inc.
 September 30, 2008
  ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE MARKET RISK DISCLOSURE    ITEM 4T.
    DISCLOSURE
    CONTROLS AND PROCEDURES  1.
    Evaluation
    of disclosure controls and procedures  Disclosure
    Controls and Procedures
  Rule 13a-15
  2.
    Changes
    in internal controls   43




---



##### 



PART II.
    OTHER INFORMATION  Item 1.
    Legal
    Proceedings    Item 1A.
    Risk
    Factors    Item 2.
    Unregistered
    Sales of Equity Securities and Use of Proceeds    Item 3.
    Defaults
    Upon Senior Securities    Item 4.
    Submission
    of Matters to a Vote of Security Holders    Item 5.
    Other
    Information   44




---



##### 



Item 6.
    Exhibits  Exhibit No.

Description of Exhibits10
.29

Consolidated EBITDA Schedule31
.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.  45




---



##### 



SIGNATURE      /s/  Deborah
    F. Ricci      46