##### 



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, 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 June 30, 2007
  Commission File
    Number: 1-11376
   The Allied Defense Group,
    Inc.
 (Exact name of Registrant as
    specified in its charter)
   Delaware

04-2281015(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Number)   8000 Towers Crescent Drive, Suite 260
 Vienna, Virginia 22182
 (Address of principal executive
    offices, including zip code)
  (703) 847-5268
 (Registrants telephone
    number, including area code)
   þ o
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ




---



##### 



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


Financial
    Statements (Unaudited)Condensed
    Consolidated Balance Sheets June 30, 2007 and
    December 31, 2006


2Condensed
    Consolidated Statements of Operations Three and Six months ended
    June 30, 2007 and 2006


3Condensed
    Consolidated Statements of Stockholders Equity and
    Comprehensive Income June 30, 2007 and December 31,
    2006


4Condensed
    Consolidated Statements of Cash Flows Six months ended
    June 30, 2007 and 2006


5Notes to Condensed
    Consolidated Financial Statements


7Item 2.


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


21Item 3.


Quantitative and
    Qualitative Disclosures About Market Risk


37Item 4.


Controls and
    Procedures


37PART II.
    OTHER INFORMATIONItem 1.


Legal
    Proceedings


39Item 1A.


Risk
    Factors


39Item 2.


Unregistered Sales
    of Equity Securities and Use of Proceeds


40Item 3.


Defaults Upon
    Senior Securities


40Item 4.


Submission of
    Matters to a Vote of Security Holders


40Item 5.


Other
    Information


40Item 6.


Exhibits


41Signatures


42




---



##### 



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


December 31,2007


2006(a)ASSETSCurrent AssetsCash and cash equivalents

$
6,159


$
19,493Restricted cash


6,091



8,401Accounts receivable, net


15,524



17,513Costs and accrued earnings on
    uncompleted contracts


15,652



25,534Inventories, net


25,237



24,393Prepaid and other current assets


3,778



4,107Assets held for sale


3,422



7,829Total current assets


75,863



107,270PROPERTY, PLANT AND EQUIPMENT,
    NET


31,837



32,850Other AssetsIntangible assets, net


9,048



9,651Goodwill


16,335



16,243Other assets


145



2,031Total other assets


25,528



27,925TOTAL ASSETS

$
133,228


$
168,045CURRENT LIABILITIESSenior subordinated convertible
    notes

$



$
26,907Bank overdraft facility


9,057



13,702Current maturities of long-term debt


9,216



9,693Accounts payable


16,722



12,092Accrued liabilities


16,934



16,565Deferred revenue


1,347



1,470Customer deposits


12,061



19,906Foreign exchange contracts


8



6Income taxes


4,097



3,881Liabilities held for sale


2,443



2,001Total current liabilities


71,885



106,223LONG TERM OBLIGATIONSLong-term debt, less current
    maturities and unamortized discount


3,496



4,689Senior secured convertible notes


32,607



Deferred tax liability, non-current


15



15Derivative instrument


294



1,192Other long-term liabilities


576



579Total long-term obligations


36,988



6,475TOTAL LIABILITIES


108,873



112,698CONTINGENCIES 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, 7,800,912 at June 30, 2007 and 6,440,944 at
    December 31, 2006


780



644Capital in excess of par value


53,428



43,312Retained deficits


(48,640
)


(6,631
)Accumulated other comprehensive
    income


18,787



18,022Total stockholders equity


24,355



55,347TOTAL LIABILITIES AND
    STOCKHOLDERS EQUITY

$
133,228


$
168,045     (a)
    
    Condensed consolidated balance sheet as of December 31,
    2006, 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


Six Months EndedJune 30,


June 30,2007


2006


2007


2006Revenues

$
14,912


$
30,060


$
34,505


$
64,765Cost and expensesCost of sales


15,733



24,072



32,769



50,503Selling and administrative


9,878



8,773



18,998



17,345Research and development


2,160



1,859



3,680



3,409Operating loss


(12,859
)


(4,644
)


(20,942
)


(6,492
)Other income
    (expenses)Interest income


106



162



420



286Interest expense


(5,426
)


(1,402
)


(8,286
)


(3,715
)Net (loss) gain on fair value of
    senior convertible notes and warrants


(4,392
)


447



(7,766
)


1,014Other-net


(45
)


617



9



959(9,757
)


(176
)


(15,623
)


(1,456
)Loss from continuing operations
    before income taxes


(22,616
)


(4,820
)


(36,565
)


(7,948
)Income tax expense


484



2



779



Loss from continuing
    operations


(23,100
)


(4,822
)


(37,344
)


(7,948
)Discontinued operations, net of
    tax


(1,055
)


(211
)


(4,665
)


(796
)NET LOSS

$
(24,155
)

$
(5,033
)

$
(42,009
)

$
(8,744
)Loss per share 
    basic and diluted:Net loss from continuing operations

$
(3.52
)

$
(0.80
)

$
(5.74
)

$
(1.32
)Net loss from discontinued
    operations


(0.16
)


(0.03
)


(0.72
)


(0.13
)Total loss per share 
    basic and diluted

$
(3.68
)

$
(0.83
)

$
(6.46
)

$
(1.45
)Weighted average number of
    common shares:Basic


6,559,295



6,037,280



6,510,211



6,029,251Diluted


6,559,295



6,037,280



6,510,211



6,029,251    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


Retained


Other


TotalStock, No





$.10


in Excess


Earnings


Comprehensive


StockholdersPar Value


Shares


Par value


of Par Value


(Deficit)


(Loss) Income


EquityBalance at January 1,
    2006

$




5,982,008


$
598


$
34,354


$
34,466


$
12,075


$
81,493Common stock awards






16,584



2



761











763Retired stocks






(1,345
)






(29
)










(29
)Common stock issued in Private
    Placement






400,000



40



6,644











6,684Employee stock purchase plan
    purchases






7,530



1



151











152Exercise of stock options






36,167



3



397











400Warrants issued














373











373Directors deferred stock
    compensation














164











164Issue of stock options














497











497Comprehensive loss:Net loss for the year


















(41,097
)






(41,097
)Currency translation adjustment






















5,947



5,947Total comprehensive loss


























(35,150
)Balance at December 31,
    2006

$




6,440,944


$
644


$
43,312


$
(6,631
)

$
18,022


$
55,347Common stock awards






32,631



3



573











576Employee stock purchase plan
    purchases






39,337



4



305











309Common stock issued to noteholders






1,288,000



129



9,415











9,544Directors deferred stock
    compensation














(311
)










(311
)Issue of stock options














134











134Comprehensive loss:Net loss for the six months ended


















(42,009
)






(42,009
)Currency translation adjustment






















765



765Total comprehensive loss


























(41,244
)Balance at June 30,
    2007

$




7,800,912


$
780


$
53,428


$
(48,640
)

$
18,787


$
24,355    4




---



##### 



The
    Allied Defense Group, Inc.
  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (Thousands of Dollars)
  Six Months Ended June 30,2007


2006Cash flows from operating
    activitiesNet loss

$
(42,009
)

$
(8,744
)Adjustments to reconcile net loss
    to net cash provided by (used in) operating activitiesDepreciation and amortization


3,714



3,246Amortization of debt discount and
    debt issue costs


3,235



1,420Unrealized losses (gains) on
    forward contracts


2



(964
)Loss (gain) on sale of fixed assets


2



(10
)Net loss (gain) related to fair
    value of notes and warrants


7,766



(1,014
)Provision for estimated losses on
    contracts


1,294



292Interest and penalties converted
    to debt principal


1,204



Provision for uncollectible
    accounts


(209
)


Provision for inventory
    obsolescence


1,124



Deferred taxes






175Common stock and stock option
    awards


757



570Deferred director stock awards


(311
)


74Discontinued operations, net of tax


4,665



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


2,447



(1,577
)Accounts receivable


2,567



(5,053
)Costs and accrued earnings on
    uncompleted contracts


10,227



9,684Inventories


(1,584
)


3,085Prepaid and other current assets


381



1,951Accounts payable and accrued
    liabilities


3,002



(12,244
)Deferred revenue


750



1,007Customer deposits


(8,984
)


9,586Deferred compensation


(11
)


27Income taxes


136



(523
)Net cash provided by (used in)
    operating activities  continuing operations


(9,835
)


1,784Net cash provided by operating
    activities  discontinued operations


144



312Net cash provided by (used in)
    operating activities


(9,691
)


2,096 5




---



##### 



Six Months Ended June 30,2007


2006Cash flows from investing
    activitiesCapital expenditures


(1,593
)


(2,542
)Payment for acquisitions






(173
)Proceeds from sale of fixed assets


12



Net cash used in investing
    activities  continuing operations


(1,581
)


(2,715
)Net cash used in investing
    activities  discontinued operations


(51
)


(5
)Net cash used in investing
    activities


(1,632
)


(2,720
)Cash flows from financing
    activitiesBank overdraft payments


(4,861
)


(4,457
)Principal payments on long-term
    borrowing


(871
)


(14,015
)Debt issue costs


(1,098
)


(1,908
)Repayment on capital lease
    obligations


(1,039
)


(1,331
)Proceeds from issuance of
    long-term debt


5,376



30,010Net increase in short-term
    borrowings






2,700Proceeds from employee stock
    purchases


263



66Proceeds from option exercises






401Net cash provided by (used in)
    financing activities


(2,230
)


11,466Net change in cash of discontinued
    operations


90



(139
)Effects of exchange rate on cash


129



382NET INCREASE (DECREASE) IN CASH
    AND CASH EQUIVALENTS


(13,334
)


11,085Cash and cash equivalents at
    beginning of period


19,493



7,544Cash and cash equivalents at
    end of period

$
6,159


$
18,629Supplemental Disclosures of
    Cash Flow informationCash paid during the period forInterest

$
2,900


$
2,453Taxes

$
646


$
712Supplemental Disclosures of
    Non-Cash Investing and Financing ActivitiesWarrants issued in conjunction
    with senior secured credit facility

$



$
2,387GMS Acquisition (shares and Nasiri
    note)

$



$
173Issuance of common stock in
    exchange of convertible notes

$
9,544


$
Interest and financing charges
    converted to debt principal

$
1,580


$
Capital leases

$
2


$
1,299    6




---



##### 



The
    Allied Defense Group, Inc.
    NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS
    June 30, 2007
    (Thousands of Dollars)
  NOTE 1 
    CONDENSED
    CONSOLIDATED FINANCIAL STATEMENTS    Form 10-K
    (Form 10-K)
    Liquidity
    and Cash Flows
       7




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Resolution
    of Note Holder Disputes
    MECAR
    Credit Facility Default
    Plan
    for 2007
   8




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      
    The Company will be successful securing additional MECAR
    financing.
    The Company will be able to timely divest of certain operating
    units in order to use the cash proceeds for operations.
    The Company will be able to meet its financial debt covenants.    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,
    Titan Dynamics Systems, Inc. (Titan), a Texas
    corporation,
    SeaSpace Corporation (SeaSpace), a California
    corporation (Discontinued Operation),
    MECAR USA, Inc. (MECAR USA), a Delaware corporation,
    Allied Technology, LLC (Allied Technology), a
    Maryland limited liability company, and
    Global Microwave Systems, Inc (GMS), a California corporation.      Ammunition & Weapons Effects
 9




---



##### 



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


December 31,2007


2006Direct and indirect receivables
    from governments

$
3,017


$
6,801Commercial and other receivables


12,944



11,35015,961



18,151Less: Allowance for doubtful
    receivables


(437
)


(638
)$
15,524


$
17,513      10




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  NOTE 4 
    INVENTORIES    June 30,


December 31,2007


2006Raw materials

$
18,966


$
15,658Work in process


6,328



7,779Finished goods


2,665



2,52727,959



25,964Less reserve for obsolescence


(2,722
)


(1,571
)$
25,237


$
24,393   NOTE 5 
    GOODWILL      NOTE 6 
    BANK
    OVERDRAFT CREDIT FACILITY   11




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  NOTE 7 
    LONG-TERM
    DEBT    June 30,


December 31,2007


2006Fair value of Senior secured
    convertible notes

$
32,607


$
Fair value of Senior subordinated
    convertible notes






26,907Note related to GMS acquisition,
    less unamortized discount


5,687



6,431Mortgage loan agreements


121



152Loan for CMS Security Systems
    acquisition


100



100Other notes payable


4,587



4,497Capital leases and other


2,217



3,202Total long-term debt


45,319



41,289Less current maturities


(9,216
)


(36,600
)Long-term debt, less current
    maturities and unamortized discount

$
36,103


$
4,689        12




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Senior subordinated convertible notes.
    Accounting
    for Certain Hybrid Instruments
  Senior secured convertible notes.
  and/or and/or
   13




---



##### 



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
  Accounting for Certain Hybrid Instruments
 14




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Warrants EITF 00-19, Accounting for Derivative Instruments Index to, and
    Potentially Settled in, a Companys Own Stock
  Loan for Global Microwave Systems
    acquisition. EITF 96-19 Debtors Accounting for a Modification or Exchange of
    Debt Instruments
  Mortgage Loan Agreements.
  Loan for CMS Security Systems acquisition.
  Other notes payable.
  Capital lease and other.
 15




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  NOTE 8 
    LOSS PER
    SHARE    Three Months Ended


Six Months EndedJune 30,


June 30,2007


2006


2007


2006Net loss from continuing operations

$
(23,100
)

$
(4,822
)

$
(37,344
)

$
(7,948
)Net loss from discontinued
    operations


(1,055
)


(211
)


(4,665
)


(796
)Net loss

$
(24,155
)

$
(5,033
)

$
(42,009
)

$
(8,744
)Weighted average number of basic
    and diluted shares


6,559,295



6,037,280



6,510,211



6,029,251Basic & Diluted net loss
    per share from continuing operations

$
(3.52
)

$
(0.80
)

$
(5.74
)

$
(1.32
)Basic & Diluted net loss
    per share from discontinued operations


(0.16
)


(0.03
)


(0.72
)


(0.13
)Total

$
(3.68
)

$
(0.83
)

$
(6.46
)

$
(1.45
)     NOTE 9 
    COMPREHENSIVE
    LOSS    Three Months Ended


Six Months EndedJune 30,


June 30,2007


2006


2007


2006Net loss

$
(24,155
)

$
(5,033
)

$
(42,009
)

$
(8,744
)Currency Translation Adjustment


24



1,841



765



2,860Comprehensive loss

$
(24,131
)

$
(3,192
)

$
(41,244
)

$
(5,884
)     NOTE 10 
    SHARE-
    BASED COMPENSATION   16




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    NOTE 11 
    INDUSTRY
    SEGMENTS  Three Months Ended


Six Months EndedJune 30,


June 30,2007


2006


2007


2006Revenues from external
    customersAmmunitions & Weapons
    Effects

$
2,682


$
18,403


$
10,162


$
41,887Electronic Security


12,230



11,657



24,343



22,878$
14,912


$
30,060


$
34,505


$
64,765Segment profit (loss) before
    provision for income taxesAmmunitions & Weapons
    Effects

$
(9,891
)

$
(3,037
)

$
(17,168
)

$
(4,363
)Electronic Security


(297
)


(527
)


(173
)


(232
)Corporate


(12,428
)


(1,256
)


(19,224
)


(3,353
)$
(22,616
)

$
(4,820
)

$
(36,565
)

$
(7,948
)   NOTE 12 
    PROVISION
    FOR TAXES         17




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Accounting for Income
  NOTE 13 
    COMMITMENTS
    AND CONTINGENCIES        Form 8-K,
 18




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    NOTE 14 
    DISCONTINUED
    OPERATIONS  Accounting for the
    Impairment or Disposal of Long-Lived Assets.
          Three Months Ended June 30,


Six Months Ended June 30,2007


2006


2007


2006Revenues

$
789


$
1,236


$
2,847


$
2,699Loss before taxes


(1,055
)


(211
)


(4,664
)


(796
)Loss from discontinued operations,
    net of tax


(1,055
)


(211
)


(4,665
)


(796
)  19




---



##### 



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


December 31,2007


2006Cash

$
156


$
247Accounts receivable, net


709



2,110Costs and accrued earnings on
    uncompleted contracts


1,532



211Inventories, net


415



572Prepaid and other current assets


72



324Property, Plant and Equipment, net


532



481Intangible assets, net






2,491Goodwill






1,387Other assets


6



6Assets held for sale

$
3,422


$
7,829Accounts payable

$
549


$
681Accrued liabilities


303



328Deferred revenue


431



421Customer deposits


884



309Long-term debt


276



262Liabilities held for sale

$
2,443


$
2,001   NOTE 15 
    SUBSEQUENT
    EVENT  Senior
    Secured Convertible Notes
    Sale of
    SeaSpace
   20




---



##### 



The
    Allied Defense Group, Inc.
  MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND
    RESULTS OF OPERATIONS
 June 30, 2007
 (Thousands of Dollars)
 (Unaudited)
  Overview
      
    Ammunition & Weapons Effectssegment consists
    of MECAR, located in Belgium and MECAR USA and Titan, 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. Titan designs, manufactures and sells
    battlefield effects simulators, minor pyrotechnics and other
    training devices. Titan and MECAR USA are co-located at the same
    facility, are operated under a unified management team, share
    production facilities and employees and have a fully integrated
    back office and support service organization. MECAR, MECAR USA
    and Titan have similar products and services, similar production
    processes, common customers, similar methods to sell and
    distribute their products and operate in a similar regulatory
    environment.
    Electronic Securitysegment consists of VSK, located in
    Belgium and California, and NSM and Global Microwave Systems
    (GMS) located near San Diego, California. VSK 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 CMS Security
    Systems which manufactures access control systems. 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. GMS designs and
    manufactures miniature and sub-miniature FM and digital
    transmitters, receivers, and related equipment for
    investigative, surveillance, and security applications, and live
    TV news/sports/entertainment coverage.     21




---



##### 



22




---



##### 



Results
    of Operations for the Three Months Ended June 30, 2007 and
    2006
    Three Months Ended June 30,2007


2006Amount


%


Amount


%Revenue

$
14,912



100.0
%

$
30,060



100.0
%Cost and expensesCost of sales


15,733



105.5



24,072



80.1Selling and administrative


9,878



66.2



8,773



29.2Research and development


2,160



14.5



1,859



6.2Operating loss


(12,859
)


(86.2
)


(4,644
)


(15.5
)Other income (expense)Interest income


106



0.7



162



0.5Interest expense


(5,426
)


(36.4
)


(1,402
)


(4.7
)Gain (loss) from fair value of
    notes and warrants


(4,392
)


(29.5
)


447



1.5Other  net


(45
)


(0.3
)


617



2.1Loss from continuing operations
    before income taxes


(22,616
)


(151.7
)


(4,820
)


(16.0
)Income tax expense (benefit)


484



3.2



2



0.0Net loss from continuing
    operations, net of tax


(23,100
)


(154.9
)


(4,822
)


(16.0
)Discontinued operations, net of tax


(1,055
)


(7.1
)


(211
)


(0.7
)Net loss

$
(24,155
)


(162.0
)%

$
(5,033
)


(16.7
)%   Revenue.
  Revenue by SegmentThree Months Ended


Three Months EndedJune 30, 2007


June 30, 2006Percentage





PercentageAmount


of total


Amount


of totalAmmunitions & Weapons
    Effects

$
2,682



18
%

$
18,403



61
%Electronic Security


12,230



82



11,657



39Total

$
14,912



100
%

$
30,060



100
%      23




---



##### 



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


Three Months EndedJune 30,


June 30,2007


2006Percentage of





Percentage ofAmount


Segment Revenue


Amount


Segment RevenueAmmunitions & Weapons
    Effects

$
8,666



323
%

$
17,698



96
%Electronic Security


7,067



58



6,374



55Total

$
15,733



106
%

$
24,072



80
%       Selling and Administrative Expenses.
 24




---



##### 



Research and Development.
   Net (Loss) Gain on fair value of the Senior convertible notes
    and warrants.
  Other  Net.
  Interest Income.
  Interest Expense.
  Pre-Tax
    Loss
  Pre-Tax Income (Loss) by SegmentThree Months Ended


Three Months EndedJune 30, 2007


June 30, 2006Percentage of





Percentage ofAmount


Total revenue


Amount


Total revenueAmmunitions & Weapons
    Effects

$
(9,891
)


(66
)%

$
(3,037
)


(10
)%Electronic Security


(297
)


(2
)


(527
)


(2
)Corporate


(12,428
)


(84
)


(1,256
)


(4
)Total

$
(22,616
)


(152
)%

$
(4,820
)


(16
)%      25




---



##### 



Income Taxes.
  Discontinued Operations.
  Net Loss.
  Results
    of Operations for the Six Months Ended June 30, 2007 and
    2006
    Six Months Ended June 30,2007


2006Amount


%


Amount


%Revenue

$
34,505



100.0
%

$
64,765



100.0
%Cost and expensesCost of sales


32,769



95.0



50,503



78.0Selling and administrative


18,998



55.0



17,345



26.8Research and development


3,680



10.7



3,409



5.3Operating loss


(20,942
)


(60.7
)


(6,492
)


(10.0
)Other income (expense)Interest income


420



1.2



286



0.4Interest expense


(8,286
)


(24.0
)


(3,715
)


(5.7
)Gain (loss) from fair value of
    notes and warrants


(7,766
)


(22.5
)


1,014



1.6Other  net


9



0.0



959



1.5Loss from continuing operations
    before income taxes


(36,565
)


(106.0
)


(7,948
)


(12.3
)Income tax expense (benefit)


779



2.2







0.0Net loss from continuing
    operations, net of tax


(37,344
)


(108.2
)


(7,948
)


(12.3
)Discontinued operations, net of tax


(4,665
)


(13.5
)


(796
)


(1.2
)Net loss

$
(42,009
)


(121.7
)%

$
(8,744
)


(13.5
)%   Revenue.
  26




---



##### 



Revenue by SegmentSix Months Ended


Six Months EndedJune 30, 2007


June 30, 2006Percentage





PercentageAmount


of total


Amount


of totalAmmunitions & Weapons
    Effects

$
10,162



29
%

$
41,887



65
%Electronic Security


24,343



71



22,878



35Total

$
34,505



100
%

$
64,765



100
%       Cost of Sales.
  Cost of Sales as a Percentage of Sales by SegmentSix Months Ended


Six Months EndedJune 30, 2007


June 30, 2006Percentage of





Percentage ofAmount


Segment Revenue


Amount


Segment RevenueAmmunitions & Weapons
    Effects

$
18,939



186
%

$
38,357



92
%Electronic Security


13,830



57



12,146



53Total

$
32,769



95
%

$
50,503



78
%    27




---



##### 



Selling and Administrative Expenses.
  Research and Development.
  Net (Loss) Gain on fair value of the Senior convertible notes
    and warrants.
  Other  Net.
  Interest Income.
 28




---



##### 



Interest Expense.
  Pre-Tax
    Loss
  Pre-Tax Income (Loss) by SegmentSix Months Ended


Six Months EndedJune 30, 2007


June 30, 2006Percentage of





Percentage ofAmount


Total revenue


Amount


Total revenueAmmunitions & Weapons
    Effects

$
(17,168
)


(50
)%

$
(4,363
)


(7
)%Electronic Security


(173
)


(1
)


(232
)


Corporate


(19,224
)


(55
)


(3,353
)


(5
)Total

$
(36,565
)


(106
)%

$
(7,948
)


(12
)%         Income Taxes.
  Discontinued Operations.
  Net Loss.
 29




---



##### 



Backlog.
  Backlog by SegmentJune 30, 2007


June 30, 2006Percentage





PercentageAmount


of total


Amount


of totalAmmunitions & Weapons
    Effects

$
38,669



66
%

$
37,870



65
%Electronic Security


20,339



34



20,033



35Total

$
59,008



100
%

$
57,903



100
%     Liquidity
    and Cash Flows
           30




---



##### 



Resolution
    of Note Holder Disputes
    MECAR
    Credit Facility Default
    Plan for
    2007
      
    The Company will be successful securing additional MECAR
    financing.
    The Company will be able to timely divest of certain operating
    units in order to use the cash proceeds for operations.
    The Company will be able to meet its financial debt covenants. 31




---



##### 



Balance
    Sheet
               32




---



##### 



Cash
    Flows
    For Six Months EndedJune 30,


June 30,2007


2006Net cash provided by (used in)
    operating activities

$
(9,691
)

$
2,096Net cash provided by (used in)
    investing activities


(1,632
)


(2,720
)Net cash provided by (used in)
    financing activities


(2,230
)


11,466   Operating Activities. Form S-1
  Investing Activities.
  Financing Activities.
  Allied.
 33




---



##### 



MECAR.
  VSK Group.
  Other Subsidiaries.
  Stock Repurchases.
  Off-Balance Sheet Arrangements.
  Trends
  
    The Company has entered into definitive agreements with its
    convertible note holders to recapitalize the Company and to
    resolve all outstanding disputes.
    The Company continues to aggressively manage its liquidity.
    The Company will consider divesting one or more of its
    subsidiaries in the coming months to further bolster liquidity
    and thereby provide greater focus on core capabilities.
    Reduced revenues at MECAR have overshadowed revenue increases
    within the Companys Electronic Segment. With the increase
    of backlog at MECAR resulting from its new contracts, the
    Company expects this trend to end in the first quarter of 2008
    with significantly improved MECAR revenues through 2009.
    MECAR has received orders from various clients from within
    Europe, North America and from export markets totaling more than
    $170,000 over a two-year period. Of the $170,000, contracts for
    $90,000 were placed in July 2007 for execution in 2007 and 2008.
    The remainder has been approved by the client and is subject to
    the award of a contract, which has been scheduled for early
    2008. The Company expects these new orders to return the Company
    to profitability in 2008.
    The Company has taken steps to reduce the operating costs of its
    U.S. operations. 34




---



##### 



Critical
    Accounting Policies
      
    Revenue recognition via the percentage of completion method;
    Goodwill and intangible asset valuation;
    Inventory reserves and allowance for doubtful accounts;
    Derivative instruments;
    Valuation of Senior secured convertible notes;
    Valuation of deferred income taxes and income tax reserves.  Form 10-K 10-K
  Recent
    Accounting Pronouncements
  Accounting for Uncertainty in
    Income Taxes- an interpretation of SFAS No. 109
  Fair Value
    Measurements
  The Fair Value
    Option for Financial Assets and Financial
    Liabilities  Including an amendment of FASB Statement
    No. 115
 35




---



##### 



Forward-Looking
    Statements
      
    substantial reliance on MECARs principal customers to
    continue to acquire products on a regular basis;
    the cyclical nature of the Companys military business;
    rapid technological developments and changes and the
    Companys ability to continue to introduce competitive new
    products and services on a timely, cost effective basis;
    the ability of the Company to successfully continue to expand
    its business base;
    the ability of the Companys acquired businesses to mature
    and meet performance expectations;
    the mix of products/services;
    domestic and foreign governmental fiscal affairs and public
    policy changes which may affect the level of purchases made by
    customers;
    changes in environmental and other domestic and foreign
    governmental regulations;
    changes in foreign currency exchange rates and interest rate
    fluctuation from market conditions;
    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 the Company;
    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.   36




---



##### 



The
    Allied Defense Group, Inc.
    June 30, 2007
    (Thousands of Dollars)
  ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE MARKET RISK DISCLOSURE        ITEM 4.
    DISCLOSURE
    CONTROLS AND PROCEDURES  1.  Evaluation
    of disclosure controls and procedures
  Disclosure
    Controls and Procedures
  Rule 13a-15 Form 10-K
     37




---



##### 



2.  Changes
    in internal controls
   38




---



##### 



PART II.
    OTHER INFORMATION  Item 1.
    Legal
    Proceedings    Item 1A.
    Risk
    Factors  Form 10-K Form 10-K and/or
  WE MAY
    NOT BE ABLE TO TIMELY REPAY OUR OUTSTANDING
    INDEBTEDNESS
    STOCKHOLDERS
    WILL EXPERIENCE SIGNIFICANT DILUTION FROM OUR SALE OF
    CONVERTIBLE NOTES, WARRANTS, AND STOCK
    and/or
  
    4,553,969 shares to provide for the conversion of the Notes.
    1,200,000 shares for 1) payment of interest on the
    notes in the Companys stock for two quarters and
    2) the payment of interest in the Companys stock in
    future periods at the discretion of the Company in lieu of cash.
    349,297 shares to provide for the exercise of warrants that
    are exercisable at $17.97.
    1,233,734 shares set aside as a reserve that is equal to
    approximately 20% of the shares required for the conversion and
    payment of interest on the Notes and exercise of warrants.   39




---



##### 



WE MAY
    NOT BE ABLE TO REGISTER SHARES UNDERLYING THE SENIOR SECURED
    CONVERTIBLE NOTES WITHIN THE REQUIRED TIME FRAME
    WE MAY
    FAIL TO MEET OUR DEBT COVENANTS
    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   40




---



##### 



Item 6.
    Exhibits  Exhibit No.

Description of Exhibits10
.2

Employment Agreement between
    Allied and Deborah F. Ricci.10
.24

Amended and Restated Securities
    Purchase Agreement, dated as of June 19, 2007, between The
    Allied Defense Group, Inc. and the Purchasers.10
.25

Form of Notes.10
.26

Form of Amended and Restated
    Registration Rights Agreement.10
.27

MECAR Certificate dated
    July 11, 2007.31
.1

Certification of Chief Executive
    Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002.31
.2

Certification of Chief Financial
    Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002.32


Certification Pursuant to
    18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.  41




---



##### 



SIGNATURE      /s/  Deborah
    F. Ricci      42