##### 



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, 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 September 30, 2007
    and December 31, 2006


2Condensed Consolidated Statements of Operations Three and Nine
    months ended September 30, 2007 and 2006


3Condensed Consolidated Statements of Stockholders Equity
    and Comprehensive Income (Loss) September 30, 2007 and
    December 31, 2006


4Condensed Consolidated Statements of Cash Flows Nine months
    ended September 30, 2007 and 2006


5Notes to Unaudited Condensed Consolidated Financial Statements


7Item 2.


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


24Item 3.


Quantitative and Qualitative Disclosures About Market Risk


41Item 4.


Controls and Procedures


41PART II. OTHER INFORMATIONItem 1.


Legal Proceedings


43Item 1A.


Risk Factors


43Item 2.


Unregistered Sales of Equity Securities and Use of Proceeds


45Item 3.


Defaults Upon Senior Securities


45Item 4.


Submission of Matters to a Vote of Security Holders


45Item 5.


Other Information


45Item 6.


Exhibits


46Signatures


47




---



##### 



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


December 31,2007


2006(a)ASSETSCurrent AssetsCash and cash equivalents

$
50,316


$
16,739Restricted cash


5,223



8,401Accounts receivable, net


6,097



8,895Costs and accrued earnings on uncompleted contracts


20,888



25,534Inventories, net


23,199



22,638Prepaid and other current assets


2,440



2,885Assets held for sale






31,914Total current assets


108,163



117,006PROPERTY, PLANT AND EQUIPMENT, NET


27,892



28,095Other AssetsIntangible assets, net


8,707



9,609Goodwill


9,932



11,327Other assets


116



2,008Total other assets


18,755



22,944TOTAL ASSETS

$
154,810


$
168,045CURRENT LIABILITIESSenior subordinated convertible notes

$



$
26,907Bank overdraft facility


8,833



13,702Current maturities of long-term debt


7,508



9,515Accounts payable


13,303



7,883Accrued liabilities


19,952



15,700Deferred revenue






862Customer deposits


10,879



19,855Income taxes


3,567



3,523Liabilities held for sale






8,532Total current liabilities


64,042



106,479LONG TERM OBLIGATIONSLong-term debt, less current maturities and unamortized discount


4,006



4,448Senior secured convertible notes


40,501



Derivative instrument


454



1,192Other long-term liabilities


613



579Total long-term obligations


45,574



6,219TOTAL LIABILITIES


109,616



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, 7,860,581 at
    September 30, 2007 and 6,440,944 at December 31, 2006


786



644Capital in excess of par value


53,805



43,312Retained deficit


(26,357
)


(6,631
)Accumulated other comprehensive income


16,960



18,022Total stockholders equity


45,194



55,347TOTAL LIABILITIES AND STOCKHOLDERS EQUITY

$
154,810


$
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


Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006Revenues

$
14,442


$
17,255


$
32,253


$
67,677Cost and expensesCost of sales


12,596



15,841



35,930



58,225Selling and administrative


6,866



7,972



21,922



21,707Gain on sale of fixed assets


(6
)






(18
)


Impairment of goodwill


1,395







1,395



Research and development


1,029



1,357



3,057



3,266Operating loss


(7,438
)


(7,915
)


(30,033
)


(15,521
)Other income (expenses)Interest income


78



429



395



638Interest expense


(1,743
)


(1,313
)


(9,949
)


(4,967
)Net (loss) gain on fair value of senior convertible notes and
    warrants


1,080



4,190



(6,686
)


5,204Other-net


(21
)


(301
)


(154
)


580(606
)


3,005



(16,394
)


1,455Loss from continuing operations before income taxes


(8,044
)


(4,910
)


(46,427
)


(14,066
)Income tax (benefit) expense


(8
)


(4,271
)


9



(4,271
)Loss from continuing operations


(8,036
)


(639
)


(46,436
)


(9,795
)Income (loss) from discontinued operations, net of taxGain on sale of subsidiaries


29,774







29,774



Income (loss) from discontinued operations


545



1,131



(3,064
)


1,54330,319



1,131



26,710



1,543NET EARNINGS (LOSS)

$
22,283


$
492


$
(19,726
)

$
(8,252
)Earnings (Loss) per share  basic and diluted:Net loss from continuing operations

$
(1.02
)

$
(0.11
)

$
(6.65
)

$
(1.62
)Net earnings from discontinued operations


3.84



0.19



3.82



0.26Total earnings (loss) per share  basic and diluted

$
2.82


$
0.08


$
(2.83
)

$
(1.36
)Weighted average number of common shares:Basic and Diluted


7,897,299



6,059,989



6,987,508



6,039,940    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






61,086



6



624











630Employee stock purchase plan purchases






42,583



4



331











335Common stock issued to noteholders






1,288,000



129



9,415











9,544Directors deferred stock compensation














(293
)










(293
)Issue of stock options














176











176Exercise of warrants






27,968



3



240











243Comprehensive loss:Net loss for the nine months ended


















(19,726
)






(19,726
)Currency translation adjustment






















(1,062
)


(1,062
)Total comprehensive loss


























(20,788
)Balance at September 30, 2007

$




7,860,581


$
786


$
53,805


$
(26,357
)

$
16,960


$
45,194    4




---



##### 



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


2006Cash flows from operating activitiesNet loss

$
(19,726
)

$
(8,252
)Adjustments to reconcile net loss to net cash used in operating
    activitiesDepreciation and amortization


4,895



4,689Impairment of goodwill


1,395



Amortization of debt discount and debt issue costs


3,297



1,593Unrealized losses (gains) on forward contracts






(1,212
)Gain on sale of subsidiaries


(29,774
)


Loss (gain) on sale of fixed assets


(18
)


353Net loss (gain) related to fair value of notes and warrants


6,686



(5,204
)Provision for estimated losses on contracts


1,216



295Interest and penalties converted to debt principal


1,204



Provision for warranty reserves


159



Provision for uncollectible accounts


2



450Provision for inventory obsolescence


1,356



Deferred taxes






(3,988
)Common stock and stock option awards


1,099



905Deferred director stock awards


(293
)


128Discontinued operations, net of tax


3,064



(1,543
)(Increase) decrease in operating assets and increase (decrease)
    in liabilities, net of effects from discontinued businessRestricted cash


3,621



(1,642
)Accounts receivable


2,926



699Costs and accrued earnings on uncompleted contracts


6,221



4,235Inventories


(598
)


6,043Prepaid and other current assets


569



2,919Accounts payable and accrued liabilities


8,217



(7,973
)Customer deposits


(10,738
)


(521
)Deferred compensation


2



27Income taxes


(218
)


150Net cash used in operating activities  continuing
    operations


(15,436
)


(7,849
)Net cash provided by operating activities 
    discontinued operations


3,174



4,512Net cash used in operating activities


(12,262
)


(3,337
) 5




---



##### 



Nine Months Ended September 30,2007


2006Cash flows from investing activitiesCapital expenditures


(2,184
)


(3,045
)Payment for acquisitions






(473
)Proceeds from sale of subsidiaries


43,474



Proceeds from sale of fixed assets


12



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


41,302



(3,518
)Net cash used in investing activities  discontinued
    operations


(533
)


(1,458
)Net cash provided by (used in) investing activities


40,769



(4,976
)Cash flows from financing activitiesBank overdraft payments


(5,632
)


1,934Principal payments on long-term borrowing


(1,675
)


(14,000
)Principal payments on senior secured convertible notes


(867
)


Debt issue costs


(1,296
)


(1,908
)Repayment on capital lease obligations


(1,425
)


(1,206
)Proceeds from issuance of long-term debt


15,376



30,000Net increase in short-term borrowings






4,759Proceeds from employee stock purchases


285



95Proceeds from option exercises






429Net cash provided by financing activities  continuing
    operations


4,766



20,103Net cash used in financing activities  discontinued
    operations


(251
)


(162
)Net cash provided by financing activities


4,515



19,941Net change in cash of discontinued operations


(2,390
)


(2,013
)Effects of exchange rate on cash


2,945



437NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


33,577



10,052Cash and cash equivalents at beginning of period


16,739



5,932Cash and cash equivalents at end of period

$
50,316


$
15,984Supplemental Disclosures of Cash Flow informationCash paid during the period forInterest

$
3,695


$
3,300Taxes

$
1,018


$
1,343Supplemental Disclosures of Non-Cash Investing and Financing
    ActivitiesWarrants issued in conjunction with senior secured credit
    facility

$



$
2,387Issuance of common stock in exchange of convertible notes

$
9,544


$
Interest and financing charges converted to debt principal

$
1,605


$
Capital leases

$
2


$
1,281    6




---



##### 



The
    Allied Defense Group, Inc.
    NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS
    September 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 and 2008
   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 successful in its restructuring and
    turnaround efforts at its subsidiaries.
    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    September 30,


December 31,2007


2006Direct and indirect receivables from governments

$
2,023


$
6,801Commercial and other receivables


4,710



2,6866,733



9,487Less:Allowance for doubtful receivables


(636
)


(592
)$
6,097


$
8,895      10




---



##### 



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


December 31,2007


2006Raw materials

$
17,336


$
14,334Work in process


6,123



7,593Finished goods


2,702



2,19726,161



24,124Less reserve for obsolescence


(2,962
)


(1,486
)$
23,199


$
22,638   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    September 30,


December 31,2007


2006Fair value of Senior secured convertible notes

$
40,501


$
Fair value of Senior subordinated convertible notes






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


4,893



6,431Other notes payable


4,857



4,497Capital leases and other


1,764



3,035Total long-term debt


52,015



40,870Less current maturities


(7,508
)


(36,422
)Long-term debt, less current maturities and unamortized discount

$
44,507


$
4,448        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
  Other notes payable.
 15




---



##### 



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


Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006Net loss from continuing operations

$
(8,036
)

$
(639
)

$
(46,436
)

$
(9,795
)Net earnings from discontinued operations


30,319



1,131



26,710



1,543Net earnings (loss)

$
22,283


$
492


$
(19,726
)

$
(8,252
)Weighted average number of basic and diluted shares


7,897,299



6,059,989



6,987,508



6,039,940Basic and diluted net loss per share from continuing operations

$
(1.02
)

$
(0.11
)

$
(6.65
)

$
(1.62
)Basic and diluted net earnings per share from discontinued
    operations


3.84



0.19



3.82



0.26Total

$
2.82


$
0.08


$
(2.83
)

$
(1.36
)        16




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  NOTE 9 
    COMPREHENSIVE
    INCOME (LOSS)    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006Net earnings (loss)

$
22,283


$
492


$
(19,726
)

$
(8,252
)Currency Translation Adjustment


2,620



963



3,386



3,823Accumulated currency translation adjustments attributable to the
    VSK Group


(4,448
)






(4,448
)


Comprehensive income (loss)

$
20,455


$
1,455


$
(20,788
)

$
(4,429
)     NOTE 10 
    SHARE-
    BASED COMPENSATION     17




---



##### 



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


Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006Revenues from external customersAmmunitions & Weapons Effects

$
10,797


$
13,293


$
20,959


$
55,180Electronic Security


3,645



3,962



11,294



12,497$
14,442


$
17,255


$
32,253


$
67,677Segment profit (loss) before provision for income taxesAmmunitions & Weapons Effects

$
(4,844
)

$
(5,673
)

$
(22,012
)

$
(10,036
)Electronic Security


(634
)


(1,088
)


(2,334
)


(2,186
)Corporate


(2,566
)


1,851



(22,081
)


(1,844
)$
(8,044
)

$
(4,910
)

$
(46,427
)

$
(14,066
)   NOTE 12 
    PROVISION
    FOR TAXES             18




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Accounting for Income
  NOTE 13 
    COMMITMENTS
    AND CONTINGENCIES           19




---



##### 



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.
  SeaSpace
    Corporation
      The VSK
    Group
     20




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    CMS
    Security Systems
        CMS SecurityThe VSK Group


Systems


SeaSpace


TotalCash

$
2,704


$
51


$
247


$
3,002Accounts receivable, net


8,591



28



2,110



10,729Costs and accrued earnings on uncompleted contracts










211



211Inventories, net


1,701



53



572



2,326Prepaid and other current assets


1,198



24



324



1,546Property, Plant and Equipment, net


4,701



54



481



5,236Intangible assets, net






43



2,491



2,534Goodwill


4,464



452



1,387



6,303Other assets


18



3



6



27Assets held for sale

$
23,377


$
708


$
7,829


$
31,914Accounts payable

$
4,209


$



$
681


$
4,890Accrued liabilities


1,473







328



1,801Deferred revenue










421



421Customer deposits


52







309



361Other liabilities


379











379Long-term debt


418







262



680Liabilities held for sale

$
6,531


$



$
2,001


$
8,532    21




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three Months Ended September 30, 2007


Three Months Ended September 30, 2006The VSK


CMS Security











The VSK


CMS SecurityGroup


Systems


SeaSpace


Total





Group


Systems


SeaSpace


TotalRevenues

$
6,077


$
94


$
100


$
6,271






$
6,718



56


$
2,123


$
8,897Income (loss) before taxes


1,243



(737
)


(423
)


83







1,114



(152
)


169



1,131Income (loss) from discontinued operations, net of tax


901



(737
)


381



545







1,114



(152
)


169



1,131Gain on sale of subsidiaries, net of tax


29,774











29,774



















Discontinued operations, net of tax

$
30,675


$
(737
)

$
381


$
30,319






$
1,114


$
(152
)

$
169


$
1,131   Nine Months Ended September 30, 2007


Nine Months Ended September 30, 2006The VSK


CMS Security











The VSK


CMS SecurityGroup


Systems


SeaSpace


Total





Group


Systems


SeaSpace


TotalRevenues

$
22,719


$
146


$
2,947


$
25,812






$
20,905


$
212


$
4,822


$
25,939Income (loss) before taxes


3,297



(974
)


(5,087
)


(2,764
)






2,478



(310
)


(625
)


1,543Income (loss) from discontinued operations, net of tax


2,194



(974
)


(4,284
)


(3,064
)






2,478



(310
)


(625
)


1,543Gain on sale of subsidiaries, net of tax


29,774











29,774



















Discontinued operations, net of tax

$
31,968


$
(974
)

$
(4,284
)

$
26,710






$
2,478


$
(310
)

$
(625
)

$
1,543   NOTE 15 
    SUBSEQUENT
    EVENTS  Sale of
    Titan
      September 30,


December 31,2007


2006Cash

$
38


$
342Accounts receivable, net


387



922Inventories, net


2,043



1,546Property, Plant and Equipment, net


2,346



1,037Intangible assets, net


417



484Goodwill






1,395Other assets


62



55Total Assets


5,293



5,781Accounts payable


839



576Accrued liabilities


351



969Customer deposits


968



Other liabilities


2



1Total Liabilities

$
2,160


$
1,546  22




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Senior
    Secured Convertible Notes
     23




---



##### 



The
    Allied Defense Group, Inc.
  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION
 AND RESULTS OF OPERATIONS
 September 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. On October 22, 2007, the Company
    committed to sell Titan in an effort to focus on its munitions
    capabilities. The sale is expected to be completed in the fourth
    quarter of 2007.
    Electronic Securitysegment consists of NSM and Global
    Microwave Systems (GMS) 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. 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.     24




---



##### 



25




---



##### 



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


2006Amount


%


Amount


%Revenue

$
14,442



100.0
%

$
17,255



100.0
%Cost and expensesCost of sales


12,596



87.2



15,841



91.8Selling and administrative


6,866



47.5



7,972



46.2(Gains) loss  sale of fixed assets


(6
)


0.0







0.0Research and development


1,029



7.1



1,357



7.9Impairment of goodwill


1,395



9.7







0.0Operating loss


(7,438
)


(51.5
)


(7,915
)


(45.9
)Other income (expense)Interest income


78



0.6



429



2.5Interest expense


(1,743
)


(12.1
)


(1,313
)


(7.6
)Gain (loss) from fair value of notes and warrants


1,080



7.4



4,190



24.3Other  net


(21
)


(0.1
)


(301
)


(1.8
)Loss from continuing opertions before income taxes


(8,044
)


(55.7
)


(4,910
)


(28.5
)Income tax expense (benefit)


(8
)


(0.1
)


(4,271
)


(24.8
)Net loss from continuing operations, net of tax


(8,036
)


(55.6
)


(639
)


(3.7
)Gain on sale of subsidiaries, net of tax


29,774



206.1







0.0Income (loss) from discontinued operations, net of tax


545



3.8



1,131



6.6Income (loss) from discontinued operations, net of tax


30,319



209.9



1,131



6.6Net Earnings

$
22,283



154.3
%

$
492



2.9
%   Revenue.
  Revenue by SegmentThree Months Ended September 30, 2007


Three Months Ended September 30, 2006Percentage





PercentageAmount


of total


Amount


of totalAmmunitions & Weapons Effects

$
10,797



75
%

$
13,293



77
%Electronic Security


3,645



25



3,962



23Total

$
14,442



100
%

$
17,255



100
%    26




---



##### 



Cost of Sales.
  Cost of Sales as a Percentage of Revenue by SegmentThree Months Ended September 30,


Three Months Ended September 30,2007


2006Percentage of





Percentage ofAmount


Segment Revenue


Amount


Segment RevenueAmmunitions & Weapons Effects

$
10,744



100
%

$
14,603



110
%Electronic Security


1,852



51



1,238



31Total

$
12,596



87
%

$
15,841



92
%      27




---



##### 



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




---



##### 



Pre-Tax
    Loss
  Pre-Tax Income (Loss) by SegmentThree Months Ended September 30, 2007


Three Months Ended September 30, 2006Percentage of





Percentage ofAmount


Total revenue


Amount


Total revenueAmmunitions & Weapons Effects

$
(4,844
)


(34
)%

$
(5,673
)


(33
)%Electronic Security


(634
)


(4
)


(1,088
)


(6
)Corporate


(2,566
)


(18
)


1,851



11Total

$
(8,044
)


(56
)%

$
(4,910
)


(28
)%         Income Taxes. Accounting for Income Taxes in
    Interim periods
  Discontinued Operations.
  Net Earnings.
 29




---



##### 



Results
    of Operations for the Nine Months Ended September 30, 2007
    and 2006
    Nine Months Ended September 30,2007


2006Amount


%


Amount


%Revenue

$
32,253



100.0
%

$
67,677



100.0
%Cost and expensesCost of sales


35,930



111.4



58,225



86.0Selling and administrative


21,922



68.0



21,707



32.1(Gains) loss  sale of fixed assets


(18
)


0.0







0.0Research and development


3,057



9.4



3,266



4.8Impairment of goodwill


1,395



4.3







0.0Operating loss


(30,033
)


(93.1
)


(15,521
)


(22.9
)Other income (expense)Interest income


395



1.2



638



0.9Interest expense


(9,949
)


(30.9
)


(4,967
)


(7.3
)Gain (loss) from fair value of notes and warrants


(6,686
)


(20.7
)


5,204



7.6Other  net


(154
)


(0.5
)


580



0.9Loss from continuing opertions before income taxes


(46,427
)


(144.0
)


(14,066
)


(20.8
)Income tax expense (benefit)


9



0.0



(4,271
)


(6.3
)Net loss from continuing operations, net of tax


(46,436
)


(144.0
)


(9,795
)


(14.5
)Gain on sale of subsidiaries, net of tax


29,774



92.3







0.0Income (loss) from discontinued operations, net of tax


(3,064
)


(9.5
)


1,543



2.3Income (loss) from discontinued operations, net of tax


26,710



82.8



1,543



2.3Net loss

$
(19,726
)


(61.2
)%

$
(8,252
)


(12.2
)%   Revenue.
  Revenue by SegmentNine Months Ended September 30, 2007


Nine Months Ended September 30, 2006Percentage





PercentageAmount


of total


Amount


of totalAmmunitions & Weapons Effects

$
20,959



65
%

$
55,180



82
%Electronic Security


11,294



35



12,497



18Total

$
32,253



100
%

$
67,677



100
%    30




---



##### 



ramp-up
    Cost of Sales.
  Cost of Sales as a Percentage of Revenue by SegmentNine Months Ended September 30, 2007


Nine Months Ended September 30, 2006Percentage of





Percentage ofAmount


Segment Revenue


Amount


Segment RevenueAmmunitions & Weapons Effects

$
29,683



142
%

$
52,960



96
%Electronic Security


6,247



55



5,265



42Total

$
35,930



111
%

$
58,225



86
%       Selling and Administrative Expenses.
 31




---



##### 



Research and Development.
  Impairment of Goodwill.
  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 SegmentNine Months Ended September 30, 2007


Nine Months Ended September 30, 2006Percentage of





Percentage ofAmount


Total revenue


Amount


Total revenueAmmunitions & Weapons Effects

$
(22,012
)


(68
)%

$
(10,036
)


(15
)%Electronic Security


(2,334
)


(7
)


(2,186
)


(3
)Corporate


(22,081
)


(69
)


(1,844
)


(3
)Total

$
(46,427
)


(144
)%

$
(14,066
)


(21
)%  32




---



##### 



Income Taxes.
  Discontinued Operations.
  Net Loss.
  Backlog.
  Backlog by SegmentAt


AtSeptember 30, 2007


September 30, 2006Percentage





PercentageAmount


of total


Amount


of totalAmmunitions & Weapons Effects

$
133,883



93
%

$
30,840



72
%Electronic Security


9,406



7



12,041



28Total

$
143,289



100
%

$
42,881



100
%    33




---



##### 



Liquidity
    and Cash Flows
              Resolution
    of Note Holder Disputes
   34




---



##### 



MECAR
    Credit Facility Default
    Plan for
    2007 and 2008
        
    The Company will be successful securing additional MECAR
    financing and restructuring its banking group.
    The Company will be successful in its restructuring and
    turnaround efforts at its subsidiaries.
    The Company will be able to meet its financial debt covenants. 35




---



##### 



Balance
    Sheet
             36




---



##### 



Cash
    Flows
    For Nine Months EndedSeptember 30,


September 30,2007


2006Net cash used in operating activities

$
(12,262
)

$
(3,337
)Net cash provided by (used in) investing activities


40,769



(4,976
)Net cash provided by financing activities


4,515



19,941Effects of exchange rate on cash


2,945



437   Operating Activities. Form S-1
  Investing Activities.
 37




---



##### 



Financing Activities.
  Effects of Exchange Rate.
  Allied.
  MECAR.
  Other Subsidiaries.
  Stock Repurchases.
  Off-Balance Sheet Arrangements.
  Trends
  
    The Company has greatly improved its liquidity with the sale of
    The VSK Group. The Company will continue to aggressively manage
    its liquidity on an ongoing basis.
    The Company has used a portion of the proceeds of The VSK Group
    sale to reduce its long-term debt and interest expense going
    forward. 38




---



##### 




    The Companys Senior Secured Notes mature on June 26,
    2010, subject to the right of the purchasers to demand payment
    eighteen months after closing, or December 26, 2008 for the
    notes issued on June 26, 2007 or January 19, 2009 for
    the notes issued on July 19, 2007. After the October 2007
    repayments, the amount note holders could put on
    December 26, 2008 is $14,262 while the amount note holders
    could put on January 19, 2009 is $6,095.
    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.
    In October 2007, the Company committed to a sale of its Titan
    subsidiary in order to provide greater focus on core
    capabilities.
    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 and MECAR. The focus has been on reducing
    the long-term fixed cost structure of MECAR, NSM and the
    Corporate operations.  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
 39




---



##### 



Fair Value
    Measurements
  The Fair Value
    Option for Financial Assets and Financial
    Liabilities  Including an amendment of FASB Statement
    No. 115
  Forward-Looking
    Statements
     40




---



##### 



The
    Allied Defense Group, Inc.
 September 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
     41




---



##### 



2.  Changes
    in internal controls
   42




---



##### 



PART II.
    OTHER INFORMATION
  Item 1.
    Legal
    Proceedings    Item 1A.
    Risk
    Factors  Form 10-K 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.
   43




---



##### 



and/or
  
    2,177,176 shares to provide for the conversion of the Notes.
    573,696 shares for 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.
    620,034 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.
    41,739 shares sold to one of the selling stockholders in
    the 2006 Private Offering.    PRODUCTS
    WE MANUFACTURE MAY CONTAIN DESIGN OR MANUFACTURING DEFECTS THAT
    COULD RESULT IN REDUCED DEMAND FOR OUR PRODUCTS AND LIABILITY
    CLAIMS AGAINST US.
    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
   44




---



##### 



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   45




---



##### 



Item 6.
    Exhibits  Exhibit No.

Description of Exhibits10
.2

Employment Agreement between Allied and Deborah F. Ricci
    (Incorporated by reference from
    Form 10-Q
    filed in May 2007).10
.24

Amended and Restated Securities Purchase Agreement, dated as of
    September 19, 2007, between The Allied Defense Group, Inc.
    and the Purchasers (Incorporated by reference from
    Form 8-K
    filed June 20, 2007).10
.25

Form of Notes (Incorporated by reference from
    Form 8-K
    filed June 20, 2007).10
.26

Form of Amended and Restated Registration Rights Agreement
    (Incorporated by reference from
    Form 8-K
    filed June 20, 2007).10
.27

MECAR Certificate dated July 11, 2007 (Incorporated by
    reference from
    Form 8-K
    filed July 12, 2007).10
.28

Stock Purchase Agreement, dated as of September 6, 2007
    between Ving Holdings (Belgium) BVBA in incorporation
    (in oprichting), as purchaser and ARC Europe
    SA, as seller (Incorporated by reference from
    Form 8-K
    filed September 10, 2007).10
.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.  46




---



##### 



SIGNATURE
      /s/  Deborah
    F. Ricci      47