##### 



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, 2006
 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
    
    (I.R.S Employer Number)incorporation or organization)
 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
  þ o
  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
June 30, 2006 and December 31, 2005
    
    
    2Condensed Consolidated Statements of Operations
Three and six months ended June 30, 2006 and 2005
    
    
    3Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2006 and 2005
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Market Risk Disclosure
    
    
    37Item 4. Disclosure Controls and Procedures
    
    
    37PART II. OTHER INFORMATIONItem 6. Exhibits
    
    
    39Signatures
    
    
    40




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##### 



The Allied Defense Group, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars, except per share data)
 June 30, 2006
    
    
    December 31, 2005(a)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    19,027
    
    
    $
    7,803Restricted cash
    
    
    9,401
    
    
    
    7,428Accounts receivable
    
    
    23,740
    
    
    
    18,547Costs and accrued earnings on uncompleted contracts
    
    
    26,583
    
    
    
    35,178Inventories
    
    
    32,945
    
    
    
    34,300Deferred tax asset
    
    
    2,735
    
    
    
    2,696Fair value of foreign exchange contracts
    
    
    
    
    
    
    5Prepaid and other current assets
    
    
    7,003
    
    
    
    8,339Total current assets
    
    
    121,434
    
    
    
    114,296PROPERTY, PLANT AND EQUIPMENT net of accumulated depreciation
    
    
    32,329
    
    
    
    29,826OTHER ASSETSIntangibles, net of accumulated amortization
    
    
    12,710
    
    
    
    13,353Goodwill
    
    
    16,937
    
    
    
    16,698Deferred tax asset, non-current
    
    
    6,132
    
    
    
    5,672Other assets
    
    
    2,347
    
    
    
    1,101Total other assets
    
    
    38,126
    
    
    
    36,824TOTAL ASSETS
    
    $
    191,889
    
    
    $
    180,946LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESBank overdraft facility
    
    $
    11,438
    
    
    $
    15,086Current maturities of long-term debt
    
    
    7,953
    
    
    
    4,342Accounts payable
    
    
    23,402
    
    
    
    31,004Accrued liabilities
    
    
    14,036
    
    
    
    15,097Customer deposits
    
    
    20,278
    
    
    
    9,956Fair value of foreign exchange contracts
    
    
    240
    
    
    
    1,161Income taxes
    
    
    866
    
    
    
    1,288Total current liabilities
    
    
    78,213
    
    
    
    77,934LONG-TERM OBLIGATIONSShort-term debt, to be refinanced
    
    
    
    
    
    
    13,539Long-term debt, less current maturities and unamortized discount
    
    
    34,747
    
    
    
    7,820Deferred compensation
    
    
    186
    
    
    
    160Derivative instrument
    
    
    1,649
    
    
    
    Total long term liabilities
    
    
    36,582
    
    
    
    21,519TOTAL LIABILITIES
    
    
    114,795
    
    
    
    99,453CONTINGENCIES 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 6,019,485 at June 30, 2006 and 5,982,008 at
December 31, 2005
    
    
    603
    
    
    
    598Additional paid-in capital
    
    
    35,834
    
    
    
    34,354Retained earnings
    
    
    25,722
    
    
    
    34,466Accumulated other comprehensive income
    
    
    14,935
    
    
    
    12,075Total stockholders equity
    
    
    77,094
    
    
    
    81,493TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    191,889
    
    
    $
    180,946
 
  The accompanying notes are an integral part of these unaudited condensed consolidated
financial statements.
 2




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##### 



The Allied Defense Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars, except per share data)
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005RESTATED
    
    
    
    
    
    
    RESTATEDRevenues
    
    $
    31,296
    
    
    $
    26,158
    
    
    $
    67,464
    
    
    $
    50,176Cost and expensesCost of sales
    
    
    24,844
    
    
    
    18,254
    
    
    
    52,253
    
    
    
    38,171Selling and administrative
    
    
    9,389
    
    
    
    8,511
    
    
    
    18,856
    
    
    
    16,020Research and development
    
    
    1,994
    
    
    
    1,490
    
    
    
    3,724
    
    
    
    3,017Operating loss
    
    
    (4,931
    )
    
    
    (2,097
    )
    
    
    (7,369
    )
    
    
    (7,032
    )Other income (expense)Interest income
    
    
    170
    
    
    
    218
    
    
    
    294
    
    
    
    407Interest expense
    
    
    (1,402
    )
    
    
    (499
    )
    
    
    (3,717
    )
    
    
    (1,036
    )Gains on fair value of Senior Convertible notes and warrants
    
    
    447
    
    
    
    
    
    
    
    1,014Other-net
    
    
    685
    
    
    
    528
    
    
    
    1,034
    
    
    
    11(100
    )
    
    
    247
    
    
    
    (1,375
    )
    
    
    (618
    )Loss before income taxes and cumulative effect of change
in application of accounting principle
    
    
    (5,031
    )
    
    
    (1,850
    )
    
    
    (8,744
    )
    
    
    (7,650
    )Income tax expense (benefit)
    
    
    2
    
    
    
    (1,040
    )
    
    
    
    
    
    
    (3,184
    )Loss before cumulative effect of
change in application of accounting principle
    
    
    (5,033
    )
    
    
    (810
    )
    
    
    (8,744
    )
    
    
    (4,466
    )Cumulative effect of change in application of accounting principle
    
    
    
    
    
    
    110
    
    
    
    
    
    
    
    (5,467
    )NET LOSS
    
    $
    (5,033
    )
    
    $
    (700
    )
    
    $
    (8,744
    )
    
    $
    (9,933
    )Earnings (loss) per share:Loss before cumulative effect of change in
application of accounting principle  basic and diluted
    
    $
    (0.83
    )
    
    $
    (0.14
    )
    
    $
    (1.45
    )
    
    $
    (0.80
    )Cumulative effect of change in application of accounting principle
    
    
    
    
    
    
    0.02
    
    
    
    
    
    
    
    (0.97
    )Net loss  basic and diluted
    
    $
    (0.83
    )
    
    $
    (0.12
    )
    
    $
    (1.45
    )
    
    $
    (1.77
    )Weighted average number of common shares:Basic and diluted
    
    
    6,037,280
    
    
    
    5,655,369
    
    
    
    6,029,251
    
    
    
    5,616,751
 The accompanying notes are an integral part of these unaudited condensed consolidated
financial statements.
 3




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##### 



The Allied Defense Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
 Six months ended June 30,2006
    
    
    
    2005RESTATEDCash flows from operating activitiesNet loss
    
    $
    (8,744
    )
    
    $
    (9,933
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activitiesCumulative effect of accounting change
    
    
    
    
    
    
    5,467Depreciation and amortization
    
    
    3,487
    
    
    
    3,103Amortization of debt discount and debt issue costs
    
    
    1,420
    
    
    
    107Unrealized (gain) losses on forward contracts
    
    
    (964
    )
    
    
    2,055Loss on sale of fixed assets
    
    
    (10
    )
    
    
    Gain related to fair value of notes and warrants
    
    
    (1,014
    )
    
    
    Provision for estimated losses on contracts
    
    
    292
    
    
    
    161Deferred taxes
    
    
    175
    
    
    
    (1,435
    )Common stock and option awards
    
    
    570
    
    
    
    487Deferred director stock awards
    
    
    74
    
    
    
    (Increase) decrease in operating assets and increase (decrease) in liabilities:Restricted cash
    
    
    (1,577
    )
    
    
    712Accounts receivable
    
    
    (4,544
    )
    
    
    17,586Costs and accrued earnings on uncompleted contracts
    
    
    10,128
    
    
    
    (14,186
    )Inventories
    
    
    3,065
    
    
    
    6,596Prepaid and other current assets
    
    
    1,731
    
    
    
    (2,054
    )Accounts payable, accrued liabilities and customer deposits
    
    
    (1,493
    )
    
    
    (16,935
    )Deferred compensation
    
    
    27
    
    
    
    33Income taxes
    
    
    (527
    )
    
    
    (1,640
    )Net cash provided by (used in) operating activities
    
    
    2,096
    
    
    
    (9,876
    )Cash flows from investing activitiesCapital expenditures
    
    
    (2,547
    )
    
    
    (3,798
    )Acquisitions (final payment)
    
    
    (173
    )
    
    
    Net cash used in investing activities
    
    
    (2,720
    )
    
    
    (3,798
    )Cash flows from financing activitiesPrincipal payments on long-term borrowing
    
    
    (14,015
    )
    
    
    (4,152
    )Debt issue costs
    
    
    (1,908
    )
    
    
    Repayment on capital lease obligations
    
    
    (1,331
    )
    
    
    Proceeds from issuance of long-term debt
    
    
    30,010
    
    
    
    711Net increase (decrease) in short-term borrowings
    
    
    2,700
    
    
    
    (8
    )(Decrease) increase in bank overdraft facility
    
    
    (4,457
    )
    
    
    335Proceeds from employee stock purchases
    
    
    66
    
    
    
    46Proceeds from option exercises
    
    
    401
    
    
    
    274Net cash provided by (used in) financing activities
    
    
    11,466
    
    
    
    (2,794
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    10,842
    
    
    
    (16,468
    )Effects of exchange rate changes on cash
    
    
    382
    
    
    
    629NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    11,224
    
    
    
    (15,839
    )Cash and cash equivalents at beginning of period
    
    
    7,803
    
    
    
    27,940Cash and cash equivalents at end of period
    
    $
    19,027
    
    
    $
    12,101Supplemental Disclosures of Cash Flow InformationCash paid during the period forInterest
    
    $
    2,453
    
    
    $
    497Taxes
    
    $
    712
    
    
    $
    1,189Supplemental Disclosures of Non-cash Investing and Financing activitiesWarrants issued in conjunction with senior secured credit facility
    
    $
    2,387
    
    
    $
    Capital leases
    
    $
    1,295
    
    
    $
    1,270
 The accompanying notes are an integral part of these unaudited condensed consolidated
financial statements.
 4




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##### 



The Allied Defense Group, Inc .  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Thousands of Dollars)
 NOTE 1  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
     Liquidity and Cash Flows
    5




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##### 



The Allied Defense Group, Inc .  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Thousands of Dollars)
  
    
    The Company intends to have in place, and is in the process of negotiating, a domestic
line of credit, or other facility, that will provide $4,000 to $5,000 of immediate
liquidity with a provision to accordion up to $20,000 based on financial performance in
subsequent periods. This will be contingent on successful registration of the March 2006
issue of convertible debentures and warrants. The company is currently preparing the
filing to register these securities.
    
    The Company is exploring possible asset backed financing from local banks in Marshall,
TX. This will be contingent on successful registration of the March 2006 convertible
debentures and warrants.
    
    The Company is evaluating the disposition of certain non strategic assets.
    
    The Company has the option of receiving dividends from excess cash from its VSK Group at year end.
    
    The Company may further consolidate its California operations to continue to reduce
operating expenses.
  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,
    
    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
 6




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##### 



The Allied Defense Group, Inc .  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Thousands of Dollars)
 Electronic Security
 Other
  Accounting Change
 Restatements of Financial Results Accounting for Derivative Instruments and Hedging Activities
  7




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##### 



The Allied Defense Group, Inc .  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Thousands of Dollars)
 Selected Consolidated Statements of Earnings Data:
 Three months ended June 30, 2005
 Impact FromForeign
    
    
    
    
    
    Impact ofCurrency
    
    Impact from
    
    RevenueTranslation
    
    Compensation
    
    Recognition
    
    As PreviouslyRESTATED
    
    (1)
    
    Expense (2)
    
    (3)
    
    Reported in 10-QRevenues
    
    $
    26,158
    
    
    $
    (1,733
    )
    
    $
    
    
    
    $
    6,790
    
    
    $
    21,101Cost of Sales
    
    
    18,254
    
    
    
    (1
    )
    
    
    
    
    
    
    2,577
    
    
    
    15,678Operating Income (loss)
    
    
    (2,097
    )
    
    
    (1,731
    )
    
    
    
    
    
    
    4,214
    
    
    
    (4,580
    )Earnings before income
taxes and the cumulative
effect of change in
application of accounting
principle
    
    
    (1,850
    )
    
    
    (1,317
    )
    
    
    
    
    
    
    4,215
    
    
    
    (4,748
    )Income tax expense (benefit)
    
    
    (1,040
    )
    
    
    (583
    )
    
    
    
    
    
    
    1,433
    
    
    
    (1,890
    )Cumulative effect of
change in the application
of accounting principle
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    110
    
    
    
    Net earnings (loss)
    
    $
    (700
    )
    
    $
    (734
    )
    
    $
    
    
    
    $
    2,892
    
    
    $
    (2,858
    )Earnings (loss) per share
 Basic & Diluted:Loss before cumulative
effect of change in the
application of accounting
principle
    
    $
    (0.14
    )
    
    $
    (0.12
    )
    
    $
    
    
    
    $
    0.49
    
    
    $
    (0.51
    )Cumulative effect of
change in the application
of accounting principle
    
    $
    0.02
    
    
    
    
    
    
    $
    
    
    
    $
    0.02
    
    
    
    Net income (loss)
    
    $
    (0.12
    )
    
    $
    (0.12
    )
    
    $
    
    
    
    $
    0.51
    
    
    $
    (0.51
    )Weighted Average number
of common shares (4):Basic
    
    
    5,655,369
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,632,071Diluted
    
    
    5,655,369
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,632,071
 
 (1)
    
    Impact of correcting for the failure to comply with the documentation requirements of FAS 133,
hedge accounting, for changing the exchange rates to period end spot rates at the Companys MECAR
subsidiary for its foreign currency transactions and other adjustments related to sales contracts.(2)
    
    Impact of correcting the measurement date for options granted in February 2002 by the
Compensation Committee of the Board of Directors of the Company that were subject to subsequent
stockholder approval that was obtained in June 2002.(3)
    
    Impact of change in accounting principle on revenue recognition at the Companys MECAR
subsidiary.(4)
    
    Shares Outstanding for the period were restated to correct for deferred compensation for the
outside directors that was stock based that
had been incorrectly excluded from the earnings per share calculation in the period. 8




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##### 



The Allied Defense Group, Inc .  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Thousands of Dollars)
 Six months ended June 30, 2005
 Impact FromForeign
    
    
    
    
    
    Impact ofCurrency
    
    Impact from
    
    Revenue
    
    As PreviouslyTranslation
    
    Compensation
    
    Recognition
    
    Reported inRESTATED
    
    (1)
    
    Expense (2)
    
    (3)
    
    10-QRevenues
    
    $
    50,176
    
    
    $
    (978
    )
    
    $
    
    
    
    $
    8,997
    
    
    $
    42,157Cost of Sales
    
    
    38,171
    
    
    
    (34
    )
    
    
    
    
    
    
    7,529
    
    
    
    30,676Operating Income (loss)
    
    
    (7,032
    )
    
    
    (943
    )
    
    
    (36
    )
    
    
    1,468
    
    
    
    (7,521
    )Earnings before income taxes
and the cumulative effect of
change in application of
accounting principle
    
    
    (7,650
    )
    
    
    (1,236
    )
    
    
    (36
    )
    
    
    1,470
    
    
    
    (7,848
    )Income tax expense (benefit)
    
    
    (3,184
    )
    
    
    (588
    )
    
    
    (12
    )
    
    
    499
    
    
    
    (3,083
    )Cumulative effect of change
in the application of
accounting principle
    
    
    (5,467
    )
    
    
    
    
    
    
    
    
    
    
    (5,467
    )
    
    
    Net loss
    
    $
    (9,933
    )
    
    $
    (648
    )
    
    $
    (24
    )
    
    $
    (4,496
    )
    
    $
    (4,765
    )Earnings (loss) per share 
Basic & Diluted:Loss before cumulative
effect of change in the
application of accounting
principle

    $
    (0.80
    )
    
    $
    (0.12
    )
    
    $
    
    
    
    $
    0.17
    
    
    $
    (0.85
    )Cumulative effect of change
in the application of
accounting principle
    
    $
    (0.97
    )
    
    
    
    
    
    $
    
    
    
    $
    (0.97
    )
    
    
    Net loss
    
    $
    (1.77
    )
    
    $
    (0.12
    )
    
    $
    
    
    
    $
    (0.80
    )
    
    $
    (0.85
    )Weighted Average number of
common shares (4):Basic
    
    
    5,616,751
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,620,774Diluted
    
    
    5,616,751
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,620,774
 
 (1)
    
    Impact of correcting for the failure to comply with the documentation requirements of FAS 133,
hedge accounting, for changing the exchange rates to period end spot rates at the Companys MECAR
subsidiary for its foreign currency transactions and other adjustments related to sales contracts.(2)
    
    Impact of correcting the measurement date for options granted in February 2002 by the
Compensation Committee of the Board of Directors of the Company that were subject to subsequent
stockholder approval that was obtained in June 2002.(3)
    
    Impact of change in accounting principle on revenue recognition at the Companys MECAR
subsidiary.(4)
    
    Shares Outstanding for the period were restated to correct for deferred compensation for the
outside directors that was stock based that
had been incorrectly excluded from the earnings per share calculation in the period. 9




---



##### 



The Allied Defense Group, Inc .  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Thousands of Dollars)
 Cash Flow Information
  As previouslySix months ended June 30, 2005
    
    RESTATED
    
    ADJUSTMENT
    
    reported in 10-QCash flows from operations:Accounts payable, accrued
liabilities and
customer deposits
    
    $
    (16,935
    )
    
    $
    (335
    )
    
    $
    (16,600)
    *Cash flows from financing:Borrowings on bank
overdraft
facility
    
    $
    335
    
    
    $
    335
    
    
    
    
 
 *
    
    The As previously reported in 10-Q amount has been adjusted for the impact of foreign currency
translation and other restatement adjustments of $5,459. NOTE 3  DERIVATIVE FINANCIAL INSTRUMENTS
 Derivatives and hedging
  Fair value hedges
  Cash flow hedges
  10




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##### 



The Allied Defense Group, Inc .  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Thousands of Dollars)
 Derivatives not designated as hedges
  Counterparty credit risk
  NOTE 4  ACCOUNTS RECEIVABLE AND COSTS AND ACCRUED EARNINGS ON UNCOMPLETED CONTRACTS
  June 30, 2006
    
    
    December 31, 2005Direct and indirect receivables from foreign governments
    
    $
    5,043
    
    
    $
    1,777Commercial and other receivables, less allowance for
doubtful
receivables of $290 in 2006 and $214 in 2005
    
    
    18,697
    
    
    
    16,770$
    23,740
    
    
    $
    18,547
   11




---



##### 



The Allied Defense Group, Inc .  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Thousands of Dollars)
 NOTE 5  INVENTORIES
  June 30, 2006
    
    
    December 31, 2005Raw materials
    
    $
    18,087
    
    
    $
    14,942Work in process
    
    
    14,300
    
    
    
    19,265Finished goods
    
    
    2,353
    
    
    
    1,755Gross inventory
    
    
    34,740
    
    
    
    35,962Less reserves for obsolescence
    
    
    (1,795
    )
    
    
    (1,662
    )Net inventory
    
    $
    32,945
    
    
    $
    34,300
 NOTE 6  GOODWILL
   NOTE 7  BANK OVERDRAFT CREDIT FACILITY
  12




---



##### 



The Allied Defense Group, Inc .  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Thousands of Dollars)
 NOTE 8  LONG-TERM DEBT
  June 30, 2006
    
    
    December 31, 2005Fair value of Senior subordinated convertible notes
    
    $
    27,337
    
    
    $
    Short-term debt expected to be refinanced, less unamortized discount
    
    
    
    
    
    
    13,539Note related to GMS acquisition, less unamortized discount
    
    
    6,329
    
    
    
    6,173Mortgage loan agreements
    
    
    172
    
    
    
    193Loan for CMS Security Systems acquisition
    
    
    200
    
    
    
    200Other notes payable
    
    
    4,440
    
    
    
    618Capital leases and other
    
    
    4,422
    
    
    
    4,978Total long-term debt
    
    
    42,700
    
    
    
    25,701Less current maturities
    
    
    (7,953
    )
    
    
    (4,342
    )Long-term debt, less current maturities and unamortized
discount, including short-term debt to be
refinanced
    
    $
    34,747
    
    
    $
    21,359
 Senior subordinated convertible notes.
   13




---



##### 



The Allied Defense Group, Inc .  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Thousands of Dollars)
  Notes payable.
 Loan for Global Microwave Systems acquisition.
 Mortgage Loan Agreements.
 Loan for CMS Security Systems acquisition.
 Other notes payable.
 Capital lease and other.
 14




---



##### 



The Allied Defense Group, Inc .  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Thousands of Dollars)
 NOTE 9  LOSS PER SHARE
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,Restated
    
    
    
    
    
    
    Restated2006
    
    
    2005
    
    
    2006
    
    
    2005Net loss before Cumulative Effect of Change in
Accounting Principle
    
    $
    (5,033
    )
    
    $
    (810
    )
    
    $
    (8,744
    )
    
    $
    (4,466
    )Cumulative Effect of Change in Accounting Principle
    
    
    
    
    
    
    110
    
    
    
    
    
    
    
    (5,467
    )Net Loss
    
    $
    (5,033
    )
    
    $
    (700
    )
    
    $
    (8,744
    )
    
    $
    (9,933
    )Weighted average number of basic shares
    
    
    6,037,280
    
    
    
    5,655,369
    
    
    
    6,029,251
    
    
    
    5,616,751Senior Subordinated Convertible Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock Options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average number of diluted shares
    
    
    6,037,280
    
    
    
    5,655,369
    
    
    
    6,029,251
    
    
    
    5,616,751Basic & Diluted loss per share before Cumulative
Effect of Change in Accounting Principle
    
    $
    (0.83
    )
    
    $
    (0.14
    )
    
    $
    (1.45
    )
    
    $
    (0.80
    )Cumulative Effect of Change in Accounting Principle
    
    
    
    
    
    
    .02
    
    
    
    
    
    
    
    (.97
    )Net loss per share
    
    $
    (0.83
    )
    
    $
    (0.12
    )
    
    $
    (1.45
    )
    
    $
    (1.77
    )
  15




---



##### 



The Allied Defense Group, Inc .  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Thousands of Dollars)
 NOTE 10  COMPREHENSIVE LOSS
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Restated
    
    
    
    
    
    
    RestatedNet loss
    
    $
    (5,033
    )
    
    $
    (700
    )
    
    $
    (8,744
    )
    
    $
    (9,933
    )Currency Translation Adjustment
    
    
    1,844
    
    
    
    (5,450
    )
    
    
    2,860
    
    
    
    (10,614
    )Comprehensive loss
    
    $
    (3,189
    )
    
    $
    (6,150
    )
    
    $
    (5,884
    )
    
    $
    (20,547
    )
  NOTE 11  SHARE- BASED COMPENSATION
     16




---



##### 



The Allied Defense Group, Inc .  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Thousands of Dollars)
      Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2005(Dollars in thousands, except per share amounts)
    
    Restated
    
    
    RestatedReported net loss
    
    $
    (700
    )
    
    $
    (9,933
    )Stock-based compensation costs that would have
been included in the determination of reported
net earnings, if the fair value method was
applied to all awards, net of tax
    
    
    (85
    )
    
    
    (157
    )Pro forma net loss
    
    $
    (785
    )
    
    $
    (10,090
    )Basic and diluted loss per share:Reported loss per share
    
    $
    (0.12
    )
    
    $
    (1.77
    )Compensation costs, net of tax
    
    
    (0.02
    )
    
    
    (0.03
    )Pro forma basic loss per share
    
    $
    (0.14
    )
    
    $
    (1.80
    )
  17




---



##### 



The Allied Defense Group, Inc .  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Thousands of Dollars)
 Three Months Ended June 30, 2005
    
    Six Months Ended June 30, 2005Risk free interest rate
    
    
    3.63
    %
    
    
    3.63
    %Expected volatility rate
    
    
    47.00
    %
    
    
    33.90
    %Expected lives  years
    
    
    4
    
    
    
    4Dividend yield
    
    
    
    
    
    
    
    Weighted
    
    
    Weighted AverageAverage
    
    
    RemainingNumber of
    
    
    Exercise
    
    
    Contractual Term
    
    
    AggregateOptions
    
    
    Price
    
    
    (in years)
    
    
    Intrinsic Value*Outstanding-beginning of year
    
    
    507,667
    
    
    $
    16.94Granted
    
    
    
    
    
    
    Exercised
    
    
    36,167
    
    
    
    11.87Forfeited
    
    
    
    
    
    
    Outstanding at June 30, 2006
    
    
    471,500
    
    
    $
    17.33
    
    
    
    3.99
    
    
    $
    2,196Exercisable at June 30, 2006
    
    
    363,500
    
    
    $
    16.40
    
    
    
    4.08
    
    
    $
    2,165
 
 *
    
    The intrinsic value of a stock option is the amount by which the market value of the underlying
stock exceeds the exercise price of the option. The market value of our stock was $21.99 at June
30, 2006. 18




---



##### 



The Allied Defense Group, Inc .  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Thousands of Dollars)
 The following table summarizes options outstanding at June 30, 2006:
 Weighted Average
    
    
    ExercisableNumber
    
    Range of
    
    
    Weighted Average
    
    
    Remaining
    
    
    Number of
    
    
    Weighted AverageOutstanding
    
    Exercise Prices
    
    
    Exercise Prices
    
    
    Contractual Term
    
    
    Options
    
    
    Exercise Prices100,000
    
    $
    7.88 to $8.63
    
    
    $
    8.63
    
    
    4.51 Years
    
    
    100,000
    
    
    $
    8.6340,000
    
    $
    9.01 to $14.90
    
    
    $
    14.90
    
    
    1.84 Years
    
    
    32,000
    
    
    $
    14.90331,500
    
    $
    16.40 to $25.00
    
    
    $
    20.25
    
    
    4.09 Years
    
    
    231,500
    
    
    $
    20.25471,500
    
    $
    7.88 to $25.00
    
    
    $
    17.33
    
    
    
    
    
    
    
    363,500
    
    
    
    
  The following table summarizes restricted stock (nonvested) shares outstanding as of June 30,
2006
 Weighted- Average GrantRestricted Stock
    
    Shares
    
    
    Date Fair ValueRestricted at January 1, 2006
    
    
    51,793
    
    
    $
    22.99Granted
    
    
    7,300
    
    
    $
    21.85Vested
    
    
    (6,747
    )
    
    $
    22.49Forfeited
    
    
    (2,464
    )
    
    $
    22.33Restricted shares at June 30, 2006
    
    
    49,882
    
    
    $
    24.02
   19




---



##### 



The Allied Defense Group, Inc .  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Thousands of Dollars)
 NOTE 12  INDUSTRY SEGMENTS
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Restated
    
    
    
    
    
    
    RestatedRevenues from external customersAmmunitions & weapons effects
    
    $
    18,402
    
    
    $
    15,205
    
    
    $
    41,887
    
    
    $
    27,376Electronic security
    
    
    11,658
    
    
    
    9,844
    
    
    
    22,878
    
    
    
    20,172Other
    
    
    1,236
    
    
    
    1,109
    
    
    
    2,699
    
    
    
    2,628$
    31,296
    
    
    $
    26,158
    
    
    $
    67,464
    
    
    $
    50,176Segment (loss) before provision
for income taxes and cumulative
effect of change in accounting
principle:Ammunitions & weapons effects
    
    $
    (3,043
    )
    
    $
    (847
    )
    
    $
    (4,363
    )
    
    $
    (6,299
    )Electronic security
    
    
    (528
    )
    
    
    (50
    )
    
    
    (232
    )
    
    
    613Other
    
    
    (312
    )
    
    
    (671
    )
    
    
    (998
    )
    
    
    (1,183
    )Corporate
    
    
    (1,148
    )
    
    
    (282
    )
    
    
    (3,151
    )
    
    
    (781
    )$
    (5,031
    )
    
    $
    (1,850
    )
    
    $
    (8,744
    )
    
    $
    (7,650
    )
 NOTE 13  PROVISION FOR TAXES
    20




---



##### 



The Allied Defense Group, Inc .  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Thousands of Dollars)
 NOTE 14  COMMITMENTS AND CONTINGENCIES
  
 21




---



##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2006
(Thousands of Dollars)
(Unaudited)
 Overview
  
    
    Ammunition & Weapons Effectssegment consists of MECAR, located in
Belgium, MECAR USA, located in Marshall, TX, and Titan Dynamics,
located in Marshall, TX. MECAR develops and produces medium
caliber, tank, mortar and other ammunition. MECAR USA became
operational in late 2005 and is pursuing 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.
 
    
    Electronic Securitysegment consists of the VSK Group, located in
Belgium and California, and NSM and GMS both located in or near
San Diego, California. The VSK Group consists of VSK Electronics
N.V., which manufactures access control, intrusion protection,
fire detection and video systems; Télé Technique Générale S.A.,
which installs security systems; Intelligent Data Capturing
Systems N.V., which manufacturers integrated video systems;
VIGITEC S.A., which installs networked video surveillance systems;
and CMS Security Systems which manufactures access control
systems. NSM designs, manufactures, installs and services
surveillance products and
integrated systems for the law enforcement community, 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.
 
    
    Othersegment consists of the formerly named Environmental Safety
& Security segment and provides products in the area of
environmental monitoring and consists solely of SeaSpace.
SeaSpace designs, manufactures, distributes and services weather
and environmental satellite ground reception systems and
manufactures and markets a line of antenna systems.
    22




---



##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2006
(Thousands of Dollars)
(Unaudited)
  Results of Operations for the Three Months Ended June 30, 2006 and 2005
  Three months ended June 302006
    
    
    2005RestatedRevenue
    
    
    100.0
    %
    
    
    100.0
    %Cost and expensesCost of sales
    
    
    79.4
    
    
    
    69.8Selling and administrative
    
    
    30.0
    
    
    
    32.5Research and development
    
    
    6.4
    
    
    
    5.7Operating loss
    
    
    (15.8
    )
    
    
    (8.0
    )Other income (expense)Interest income
    
    
    0.5
    
    
    
    0.8Interest expense
    
    
    (4.5
    )
    
    
    (1.9
    )Gain (loss) from fair value of notes and warrants
    
    
    1.4
    
    
    
    Other  net
    
    
    2.1
    
    
    
    2.0Loss before income taxes
    
    
    (16.3
    )
    
    
    (7.1
    )Income tax expense (benefit)
    
    
    
    
    
    
    (4.0
    )Net loss before cumulative effect of change in
accounting principle
    
    
    (16.3
    )
    
    
    (3.1
    )Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    .4Net Loss
    
    
    (16.3
    )%
    
    
    (2.7
    )%
 Revenue.
 Revenue by SegmentThree Months Ended
    
    
    Three Months EndedJune 30, 2006
    
    
    June 30, 2005Percentage
    
    
    
    
    
    
    PercentageAmount
    
    
    of total
    
    
    Amount
    
    
    of totalRestatedAmmunition & Weapons Effects
    
    $
    18,402
    
    
    
    59
    %
    
    $
    15,205
    
    
    
    58
    %Electronic Security
    
    
    11,658
    
    
    
    37
    %
    
    
    9,844
    
    
    
    38
    %Other
    
    
    1,236
    
    
    
    4
    %
    
    
    1,109
    
    
    
    4
    %$
    31,296
    
    
    
    100
    %
    
    $
    26,158
    
    
    
    100
    %
 23




---



##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2006
(Thousands of Dollars)
(Unaudited)
   Cost of Sales.
 Cost of Sales as Percentage of Sales by Segment
 Three months endedJune 302006
    
    
    2005RestatedAmmunition & Weapons Effects (AWE)
    
    
    96
    %
    
    
    82
    %Electronic Security (ES)
    
    
    55
    %
    
    
    53
    %Other
    
    
    62
    %
    
    
    48
    %Total
    
    
    79
    %
    
    
    70
    %
    24




---



##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2006
(Thousands of Dollars)
(Unaudited)
 Selling and Administrative Expenses.
    Research and Development.
 Gain on fair value of Senior Subordinated Convertible Notes and warrants.
 Other Income.
 Interest Income.
 Interest Expense.
 25




---



##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2006
(Thousands of Dollars)
(Unaudited)
 Pre-Tax Loss
 Pre-Tax Income (Loss) by Segment Before  the Cumulative Effect of Accounting Change
 Three months endedJune 30,2006
    
    
    2005RestatedAmmunition & Weapons Effects
    
    $
    (3,043
    )
    
    $
    (847
    )Electronic Security
    
    
    (528
    )
    
    
    (50
    )Other
    
    
    (312
    )
    
    
    (671
    )Corporate
    
    
    (1,148
    )
    
    
    (282
    )$
    (5,031
    )
    
    $
    (1,850
    )
     Income Taxes.
 Net Loss.
 26




---



##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2006
(Thousands of Dollars)
(Unaudited)
 Results of Operations for the Six Months Ended June 30, 2006 and 2005
  Six months ended June 302006
    
    
    2005RestatedRevenue
    
    
    100.0
    %
    
    
    100.0
    %Cost and expensesCost of sales
    
    
    77.5
    
    
    
    76.1Selling and administrative
    
    
    27.9
    
    
    
    31.9Research and development
    
    
    5.5
    
    
    
    6.0Operating loss
    
    
    (10.9
    )
    
    
    (14.0
    )Other income (expense)Interest income
    
    
    0.4
    
    
    
    0.8Interest expense
    
    
    (5.5
    )
    
    
    (2.0
    )Gain (loss) from fair value of notes and warrants
    
    
    1.5
    
    
    
    Other  net
    
    
    1.5
    
    
    
    Loss before income taxes
    
    
    (13.0
    )
    
    
    (15.2
    )Income tax expense (benefit)
    
    
    
    
    
    
    (6.4
    )Net loss before cumulative effect of change in accounting principle
    
    
    (13.0
    )
    
    
    (8.8
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (10.9
    )Net Loss
    
    
    (13.0
    )%
    
    
    (19.7
    )%
 Revenue.
 Revenue by SegmentSix Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2005Percentage
    
    
    
    
    
    
    PercentageAmount
    
    
    of total
    
    
    Amount
    
    
    of totalRestatedAmmunition & Weapons Effects
    
    $
    41,887
    
    
    
    62
    %
    
    $
    27,376
    
    
    
    55
    %Electronic Security
    
    
    22,878
    
    
    
    34
    %
    
    
    20,172
    
    
    
    40
    %Other
    
    
    2,699
    
    
    
    4
    %
    
    
    2,628
    
    
    
    5
    %$
    67,464
    
    
    
    100
    %
    
    $
    50,176
    
    
    
    100
    %
 27




---



##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2006
(Thousands of Dollars)
(Unaudited)
   Cost of Sales.
 Cost of Sales as Percentage of Sales by Segment
 Six months endedJune 302006
    
    
    2005RestatedAmmunition & Weapons Effects (AWE)
    
    
    92
    %
    
    
    94
    %Electronic Security (ES)
    
    
    53
    %
    
    
    55
    %Other
    
    
    65
    %
    
    
    53
    %Total
    
    
    78
    %
    
    
    76
    %
    28




---



##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2006
(Thousands of Dollars)
(Unaudited)
 Selling and Administrative Expenses.
    Research and Development.
 Gain on fair value of Senior Subordinated Convertible Notes and warrants.
 Other Income.
 Interest
Income.
 Interest Expense.
 29




---



##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2006
(Thousands of Dollars)
(Unaudited)
  Pre-Tax Loss
 Pre-Tax Income (Loss) by Segment Before  the Cumulative Effect of Accounting Change
 Six months endedJune 30,2006
    
    
    2005RestatedAmmunition & Weapons Effects
    
    $
    (4,363
    )
    
    $
    (6,299
    )Electronic Security
    
    
    (232
    )
    
    
    613Other
    
    
    (998
    )
    
    
    (1,183
    )Corporate
    
    
    (3,151
    )
    
    
    (781
    )$
    (8,744
    )
    
    $
    (7,650
    )
     30




---



##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2006
(Thousands of Dollars)
(Unaudited)
 Income
Taxes.
 Net Loss.
 Backlog.
 Backlog by SegmentJune 30, 2006
    
    
    June 30, 2005Percentage
    
    
    
    
    
    
    PercentageAmount
    
    
    of total
    
    
    Amount
    
    
    of totalAmmunition & Weapons Effects
    
    $
    37,870
    
    
    
    62
    %
    
    $
    69,708
    
    
    
    74
    %Electronic Security
    
    
    20,033
    
    
    
    33
    %
    
    
    22,440
    
    
    
    24
    %Other
    
    
    3,336
    
    
    
    5
    %
    
    
    2,342
    
    
    
    2
    %$
    61,239
    
    
    
    100
    %
    
    $
    94,490
    
    
    
    100
    %
  Liquidity and Cash Flows
   31




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##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2006
(Thousands of Dollars)
(Unaudited)
    
    
    The Company intends to have in place, and is in the process of negotiating, a domestic
line of credit that will provide $4,000 to $5,000 of immediate liquidity with a provision
to accordion up to $20,000 based on financial performance in subsequent periods. This will
be contingent on successful registration of the March 2006 issue of convertible debentures
and warrants.
    
    The Company is exploring possible asset backed financing from local banks in Marshall,
TX. This will be contingent on successful registration of the March 2006 convertible
debentures and warrants.
    
    The Company is evaluating the disposition of certain non strategic assets.
    
    The Company has the option of issuing dividends of excess cash from its VSK Group at year end.
    
    The Company may further consolidate its California operations to further reduce operating expenses.
    
    If there are no new sources of cash from financing or investment activities in the
fourth quarter and if certain subsidiaries are not able to return the cash that they have
borrowed for working capital needs the Company could be out of cash to fund headquarters
expenses and to provide operating cost subsidies by year end. The Company does not believe
this is a likely scenario and is working with various parties to manage through this period
of reduced liquidity.
 Balance Sheet
    32




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##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2006
(Thousands of Dollars)
(Unaudited)
     Cash Flows
  Six months ended June 302006
    
    
    2005RestatedNet cash provided by (used in) operating activities
    
    $
    2,096
    
    
    $
    (9,876
    )Net cash used in investing activities
    
    $
    (2,720
    )
    
    $
    (3,798
    )Net cash provided by (used in) financing activities
    
    $
    11,466
    
    
    $
    (2,794
    )
 Operating Activities.
 Investing
Activities.
 33




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##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2006
(Thousands of Dollars)
(Unaudited)
 Financing Activities.
 Allied.
 MECAR.
 VSK Group.
 Other
Subsidiaries.
 Stock Repurchases.
 Off-Balance Sheet Arrangements.
 Critical Accounting Policies
  34




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##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2006
(Thousands of Dollars)
(Unaudited)
   
    
    Revenue recognition via the percentage of completion method;
 
    
    Goodwill and intangible asset valuation;
 
    
    Inventory reserves and allowance for doubtful accounts;
 
    
    Derivative instruments;
 
    
    Valuation of deferred income taxes and income tax reserves.
  Recent Accounting Pronouncements
  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;
 35




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##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2006
(Thousands of Dollars)
(Unaudited)
 
    
    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 us;
    
    the ability to attract and retain qualified personnel; and
    
    continued availability of financing, financial instruments and financial resources in the amounts, at the
times, and on the terms required to support the Companys future business.
 
 36




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##### 



The Allied Defense Group, Inc.
June 30, 2006
 QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE
    DISCLOSURE CONTROLS AND PROCEDURES
 Evaluation of disclosure controls and procedures
      37




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##### 



The Allied Defense Group, Inc.
June 30, 2006
   Changes in internal controls
  38




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##### 



The Allied Defense Group, Inc.
June 30, 2006
 PART II. OTHER INFORMATION
 Item 6 Exhibits
 Exhibit No.
    
    Description of Exhibits31.1
    
    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.
 39




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##### 



The Allied Defense Group, Inc.
 SIGNATURE
  THE ALLIED DEFENSE GROUP, INC./s/ Robert P. DowskiDate: October 26, 2006
    
    Robert P. DowskiChief Financial Officer and
Treasurer
 40