<PAGE>

                                 UNITED STATES

                      SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    Form 10-Q


Mark one
(X)     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) of the Securities
          Exchange Act of 1934

For the period ended                                     September 30, 2001
                                                         ------------------

                                      OR

( )     TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) of the Securities
          Exchange Act of 1934

For the transition period from ________________________ to _____________________

                                                          Commission File Number
                                                                  0-2545

                                                           ---------------------

                          Allied Research Corporation

              --------------------------------------------------
            (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)                          (Zip Code)

Registrant's telephone number, including area code:           (703) 847-5268

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                  Yes   X     No
                       ---

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 30, 2001: 4,938,950
<PAGE>

                           Allied Research Corporation

                                      INDEX

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                          PAGE
PART I.           FINANCIAL INFORMATION - UNAUDITED                                                      NUMBER
<S>                                                                                                      <C>

         Item 1.  Financial Statements


                  Condensed Consolidated Balance Sheets

                           December 31, 2000 and September 30, 2001......................................     3


                  Condensed Consolidated Statements of Operations

                           Three months and nine months ended September 30, 2001 and 2000................     4


                  Condensed Consolidated Statements of Cash Flows

                           Nine months ended September 30, 2001 and 2000.................................     5


                  Notes to Condensed Consolidated Financial Statements...................................     6


         Item 2.  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations..............................................................    11


         Item 3.  Quantitative and Qualitative Market Risk Disclosure....................................    15


PART II           OTHER INFORMATION......................................................................    16
</TABLE>
<PAGE>

                          Allied Research Corporation

                     CONDENSED CONSOLIDATED BALANCE SHEETS

                            (Thousands of Dollars)

                                    ASSETS

                                  (Unaudited)

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                           September 30, 2001     December 31, 2000
                                                                           ------------------     -----------------
<S>                                                                        <C>                    <C>
                                ASSETS

CURRENT ASSETS
   Cash and equivalents                                                            $11,815              $ 7,570
   Restricted cash                                                                  10,472                3,010
   Accounts and note receivable                                                     19,856               18,662
   Costs and accrued earnings on uncompleted contracts                              37,739               34,136
   Inventories                                                                       6,435                5,911
   Prepaid expenses                                                                  7,942                2,996
   Fair value of forward exchange contracts                                          2,353                    -
                                                                                  --------              -------

           Total current assets                                                     96,612               72,285

PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation                      11,900               11,675

OTHER ASSETS
   Intangibles, net of accumulated amortization                                      3,016                3,252
   Deferred taxes                                                                      340                  406
   Other                                                                               137                  139
                                                                                  --------              -------
                                                                                     3,493                3,797
                                                                                  --------              -------

                                                                                  $112,005              $87,757
                                                                                  ========              =======

                  LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Notes payable                                                                    $12,383               $3,699
  Current maturities of long-term debt                                                 938                1,079
  Accounts payable                                                                  17,293               22,009
  Accrued liabilities                                                               13,001                4,823
  Customer deposits                                                                  9,429                5,777
  Forward exchange contract commitments                                              2,353                    -
                                                                                  --------              -------

           Total current liabilities                                                55,397               37,387

LONG-TERM DEBT, less current maturities                                              3,053                3,529

DEFERRED INCOME TAXES                                                                    -                  121

STOCKHOLDERS' EQUITY
  Preferred stock, no par value; authorized, 10,000 shares; none issued                  -                    -
  Common stock, par value, $.10 per share; authorized 10,000,000 shares;
    issued and outstanding, 4,938,950 in 2001 and 4,812,464 in 2000                    493                  481
  Capital in excess of par value                                                    14,781               13,689
  Retained earnings                                                                 46,675               40,306
  Accumulated other comprehensive loss                                              (8,394)              (7,756)
                                                                                  --------              -------
                                                                                    53,555               46,720
                                                                                  --------              -------

                                                                                  $112,005              $87,757
                                                                                  ========              =======
</TABLE>

The accompanying notes are an integral part of these statements.

                                       3
<PAGE>

                           Allied Research Corporation

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                              Thousands of Dollars)

                                   (Unaudited)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------

                                                                    Three months ended          Nine months ended
                                                                       September 30,               September 30,
                                                                     -----------------          -----------------
                                                                   2001           2000           2001          2000
                                                               -----------    -----------    -----------   ------------
<S>                                                            <C>            <C>            <C>           <C>
Revenue                                                        $    26,847    $    25,308    $    69,694    $    77,332

Costs and expenses
   Cost of sales                                                    16,804         17,180         47,253         59,766
   Selling and administrative                                        3,222          3,200          8,823          7,804
   Research and development                                            386            337          1,219          1,086
                                                               -----------    -----------    -----------    -----------
                                                                    20,412         20,717         57,295         68,656
                                                               -----------    -----------    -----------    -----------

           Operating income                                          6,435          4,591         12,399          8,676

Other (income) deductions
   Interest income                                                    (118)          (199)          (392)          (514)
   Interest expense                                                    342            401          1,142            925
   Other - net                                                         362           (877)           132         (1,030)
                                                               -----------    -----------    -----------    -----------
                                                                       586           (675)           882           (619)
                                                               -----------    -----------    -----------    -----------

           Earnings before discontinued operation and income
              taxes                                                  5,849          5,266         11,517          9,295

Income tax expense                                                   2,646          2,146          5,149          3,759
                                                               -----------    -----------    -----------    -----------

           Earnings from continuing operations                       3,203          3,120          6,368          5,536

Discontinued operation -
   Engineering and technical segment                                    --             --             --             54
      Income from operations, net of income taxes                       --             --             --            462
                                                               -----------    -----------    -----------    -----------
      Gain on sale, net of income taxes                                 --             --             --            516
                                                               -----------    -----------    -----------    -----------

           NET EARNINGS                                        $     3,203    $     3,120    $     6,368    $     6,052
                                                               ===========    ===========    ===========    ===========

Earnings per share
   Basic
      Continuing operations                                    $       .65    $       .64    $      1.30    $      1.14
      Discontinued operation                                            --             --             --            .11
                                                               -----------    -----------    -----------    -----------
        Net income                                             $       .65    $       .64    $      1.30    $      1.25
                                                               ===========    ===========    ===========    ===========
   Diluted
      Continuing operations                                    $       .65    $       .64    $      1.30    $      1.14
      Discontinued operation                                            --             --             --            .11
                                                               -----------    -----------    -----------    -----------
        Net income                                             $       .65    $       .64    $      1.30    $      1.25
                                                               ===========    ===========    ===========    ===========

Weighted average number of shares

   Basic                                                         4,918,991      4,845,079      4,898,919      4,848,235

   Diluted                                                       4,941,459      4,847,445      4,908,871      4,854,685
</TABLE>

The accompanying notes are an integral part of these statements.

                                       4
<PAGE>

                           Allied Research Corporation

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (Thousands of Dollars)

                                   (Unaudited)

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                  Nine months ended
                                                                                                    September 30,
                                                                                                --------------------
Increase (decrease) in cash and equivalents                                                       2001        2000
                                                                                                --------     -------
<S>                                                                                             <C>          <C>
Cash flows from (used in) operating activities
   Net earnings                                                                                 $  6,368     $ 6,052
   Adjustments to reconcile net earnings to net cash provided by (used in)
      operating activities
        Depreciation and amortization                                                              1,293       2,515
        (Gain) on sale of discontinued operations                                                      -        (462)
        (Income) from discontinued operations                                                          -         (54)
        Changes in assets and liabilities
           Accounts receivable                                                                    (1,542)     (2,932)
           Costs and accrued earnings on uncompleted contracts                                    (4,301)    (29,441)
           Inventories                                                                              (640)     (1,421)
           Prepaid expenses and other assets                                                      (3,716)     (5,615)
           Accounts payable, accrued liabilities and customer deposits                             6,519      22,195
           Income taxes                                                                              973       1,319
                                                                                                --------     -------

              Net cash provided by (used in) continuing operating activities                       4,954      (7,844)

Cash flows (used in) investing activities
   Capital expenditures                                                                           (1,910)     (3,028)
   Restricted cash and deposits                                                                   (7,462)     (1,064)
                                                                                                --------     -------

              Net cash (used in) investing activities                                             (9,372)     (4,092)

Cash flows from financing activities
   Principal payments of long-term debt                                                             (764)       (799)
   Proceeds from long-term borrowings                                                                385         862
   Net increase in short-term borrowings                                                           8,446       6,370
   Stock grant                                                                                       545         133
   Stock plan and option exercises                                                                   559         237
   Retirement - common stock                                                                           -        (387)
                                                                                                --------     -------

              Net cash provided by financing activities                                            9,171       6,416

Net cash provided by discontinued operations                                                           -         516

Effects of exchange rate changes on cash                                                            (508)      3,455
                                                                                                --------     -------

              NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                                                                                   4,245      (1,549)

Cash and equivalents at beginning of period                                                        7,570       5,968
                                                                                                --------     -------

Cash and equivalents at end of period                                                           $ 11,815     $ 4,419
                                                                                                ========     =======

Supplemental Disclosures of Cash Flow Information:
-------------------------------------------------
   Cash paid during the period for
      Interest                                                                                  $    644     $   791
      Taxes                                                                                        6,175       5,991
</TABLE>

The accompanying notes are an integral part of these statements.

                                       5
<PAGE>

                          Allied Research Corporation

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                              September 30, 2001

                            (Thousands of Dollars)

                                  (Unaudited)

--------------------------------------------------------------------------------

NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

    The condensed consolidated balance sheets as of September 30, 2001 and
    December 31, 2000, the condensed consolidated statements of earnings for the
    three and nine month periods ended September 30, 2001 and 2000 and the
    condensed consolidated statements of cash flows for the nine months ended
    September 30, 2001 and 2000, have been prepared by the Company without
    audit. In the opinion of management, all adjustments (which include only
    normal recurring adjustments) necessary to present fairly the financial
    position, results of operations and changes in cash flows at September 30,
    2001 and 2000 have been made.

    Certain information and footnote disclosures normally included in financial
    statements prepared in accordance with accounting principles generally
    accepted in the United States of America have been condensed or omitted. It
    is suggested that these condensed consolidated financial statements be read
    in conjunction with the financial statements and notes thereto included in
    the Company's December 31, 2000 Form 10-K filed with the Securities and
    Exchange Commission, Washington, D.C. 20549. The results of operations for
    the three and nine month periods ended September 30, 2001 and 2000 are not
    necessarily indicative of the operating results for the full year.


NOTE 2 - PRINCIPLES OF CONSOLIDATION

    The condensed consolidated financial statements include the accounts of
    Allied Research Corporation (a Delaware Corporation) and its subsidiaries,
    ARC Europe, S.A. (ARC Europe), a Belgian company, Barnes & Reinecke, Inc.
    (BRI), a Delaware Corporation (which was sold in March 2000) and Allied
    Research Corporation Limited (Limited), an inactive United Kingdom company
    and ARC International Sales Corporation, a Barbados corporation which was
    dissolved in October 2001.

    ARC Europe includes its wholly-owned subsidiaries Mecar S.A. (Mecar) and
    the VSK Group of companies. Mecar includes a related Belgian subsidiary,
    Sedachim, S.I. The VSK Group is comprised of Tele Technique Generale, S.A.,
    I.D.C.S., N.V. and VSK Electronics N.V. and its wholly-owned subsidiaries,
    Belgian Automation Units, N.V. and Vigitec S.A. (Vigitec).


NOTE 3 - DERIVATIVE FINANCIAL INSTRUMENTS

    In the first quarter of the current calendar year, the Company adopted
    Statement of Financial Accounting Standards) No. 133, "Accounting for
    Derivative Instruments and Hedging Activities" (SFAS 133), which establishes
    accounting and reporting standards for derivative instruments, including
    certain derivative instruments embedded in other contracts, and for hedging
    activities. SFAS 133 requires that an entity recognize all derivatives as
    either assets or liabilities in the statement of financial position and
    measure those instruments at fair value. The accounting for the changes in
    the fair value of the derivative depends on the intended use of the
    derivative and the resulting designation.

    The Company designates its derivatives based upon the criteria established
    by SFAS 133. For a derivative designated as a fair value hedge, the gain or
    loss is recognized in earnings in the period of change together with the
    offsetting loss or gain on the risk being hedged. For a derivative
    designated as a cash flow hedge, the effective portion of the derivative's
    gain or loss is initially reported as a component of accumulated other
    comprehensive

                                       6
<PAGE>

                           Allied Research Corporation

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                               September 30, 2001

                             (Thousands of Dollars)

                                   (Unaudited)

--------------------------------------------------------------------------------

NOTE 3 - DERIVATIVE FINANCIAL INSTRUMENTS - Continued

    income (loss) and is subsequently reclassified to earnings when the hedge
    exposure effects earnings. The ineffective portion of the hedge is reported
    in earnings immediately.

    The Company uses derivatives to manage exposures to foreign currency
    exchange rate risks. The objective is to reduce the volatility of earnings
    and cash flows associated with changes in foreign currency exchange rates.

    The Company uses foreign currency future contracts to minimize the foreign
    currency exposures that arise from sales contracts with certain foreign
    customers and certain costs associated with these contracts. Under the terms
    of these sales contracts, the selling price and certain costs are payable in
    U.S. dollars rather than the Euro, which is Mecar's functional currency.
    These futures contracts are designated as fair value hedges since they are
    designed to lock in the net Euros that will be realized when the amounts due
    under the sales agreement are received. As a matter of policy, the Company
    does not enter into speculative hedge contracts or use other derivative
    financial instruments.

    As of September 30, 2001 futures contracts designated as fair value hedges
    with a $40 million notional amount were outstanding and the fair value of
    these contracts was $2,353.

    The Company estimates the fair value of outstanding hedge contracts based on
    quotes obtained from the counterparties to the derivative contracts. The
    Company recognizes the fair value of hedge contracts that expire in less
    than one year as current assets or liabilities. Those that expire in more
    than one year are recognized as long-term assets or liabilities.

    The adoption of SFAS 133 did not have a material impact on the Company's
    operating results. Gains and losses from settlements of derivative contracts
    are reported as a component of other income. Net changes in the fair value
    of derivative contracts prior to settlement are also reported as a component
    of other income. There were no net gains or losses realized during the nine
    months ended September 30, 2001 from hedge ineffectiveness, from firm
    commitments that no longer qualifies as fair value hedges, nor were any
    amounts excluded from the assessment of hedge effectiveness.

    The Company's foreign exchange forward and option contracts expose the
    Company to credit risks to the extent that the counter parties may be unable
    to meet the terms of the agreement. The company minimizes such risk by using
    major financial institutions as its counterparties. Management does not
    expect any material loss as result of default by counterparties.

NOTE 4 - RESTRICTED CASH

    Mecar is generally required under the terms of its contracts to provide
    performance bonds, advance payment guarantees and letters of credit. The
    credit facility agreements used to provide these financial guarantees place
    restrictions on cash deposits and other liens on Mecar's assets. The VSK
    Group has also pledged certain term deposits to secure outstanding bank
    guarantees.

    Restricted cash of $10,472 and $3,010 included in current assets at
    September 30, 2001 and December 31, 2000, respectively, was restricted or
    pledged as collateral for these agreements and other obligations.

                                       7
<PAGE>

                          Allied Research Corporation

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                              September 30, 2001

                            (Thousands of Dollars)

                                  (Unaudited)

--------------------------------------------------------------------------------

NOTE 5 - DISCONTINUED OPERATION

    On December 10, 1999, the Company contracted to sell the engineering and
    technical segment of its business (Barnes and Reinecke, Inc). Settlement of
    the sale occurred on March 10, 2000 and resulted in a gain of $462, net of
    taxes, and income from discontinued operation, net of taxes, of $54.


NOTE 6 - INVENTORIES

    Inventories are composed of raw materials and supplies.


NOTE 7 - NOTES PAYABLE

    Mecar has a line-of-credit of up to $9,000 for working capital and its banks
    have also provided additional short term financing of up to $7,000. This
    short term financing is expected to be paid back before the end of the year.
    Approximately $12,077 of these facilities was used at September 30, 2001 and
    $2,800 was outstanding at December 31, 2000.


NOTE 8 - CREDIT FACILITY

    The Company is obligated under various credit agreements (the "Agreements")
    with its foreign banking pool that provide credit facilities primarily for
    letters of credit, bank guarantees, performance bonds and similar
    instruments required for specific sales contracts. The Agreements provide
    for certain bank charges and fees as the line is used, plus fees of 2% of
    guarantees issued and quarterly fees at an annual rate of 1.25% of letters
    of credit and guarantees outstanding. These fees are accrued to interest
    expense. As of September 30, 2001 and December 31, 2000, guarantees and
    performance bonds of $24,764 and $22,687, respectively, remain outstanding.

    Advances under the Agreements are secured by restricted cash at September
    30, 2001 and December 31, 2000 of $10,472 and $3,010, respectively. Amounts
    outstanding are also collateralized by the letters of credit received under
    the contracts financed, and a pledge of approximately $25,000 on Mecar's net
    assets. The bank covenants contained in the financing agreements place
    restrictions on payments or transfers to Allied and its affiliates for
    dividends, management fees, intercompany loans, loan payments, the
    maintenance of certain net worth levels and other provisions.

NOTE 9 - LONG-TERM FINANCING

    Mecar is obligated on a mortgage with a balance of approximately $1,200 on
    its manufacturing and administration facilities. The loan is payable in
    annual principal installments of approximately $422 and matures in 2004. The
    Company is also obligated on several mortgages on the VSK Group's buildings,
    which have a balance of approximately $661 at September 30, 2001. These
    mortgages are payable in annual installments of approximately $49 plus
    interest. The balance of the long term debt pertains to capital equipment
    leases and notes payable on vehicles.

NOTE 9 - LONG-TERM FINANCING-Continued

                                       8
<PAGE>

                          Allied Research Corporation

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                              September 30, 2001

                            (Thousands of Dollars)

                                  (Unaudited)

--------------------------------------------------------------------------------

    Scheduled annual maturities of long-term obligations as of September 30,
2001 are approximately as follows:

                         Year            Amount
                         ----            ------

                         2002               938
                         2003             1,266
                         2004               852
                         2005               477
                         2006               458


NOTE 10 - INCOME TAXES

    As of December 31, 2000, the Company had unused foreign tax credit
    carryforwards of approximately $288 which expire through 2004 and domestic
    net operating loss carryforwards of approximately $600 which expire in 2020.

    Deferred tax liabilities have not been recognized for basis differences
    related to investments in the Company's Belgian and United Kingdom (an
    inactive subsidiary) subsidiaries. These differences, which consist
    primarily of unremitted earnings intended to be indefinitely reinvested in
    the subsidiaries, aggregated approximately $18,300 at September 30, 2001.
    Determination of the amount of unrecognized deferred tax liabilities is not
    practicable.

NOTE 11 - EARNINGS (LOSS) PER SHARE

    Incremental shares from the assumed conversion of stock options outstanding
    have been included in the diluted per share computation.

NOTE 12 - RECENT ACCOUNTING PRONOUNCEMENTS

    On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
    Statement of Financial Accounting Standards (SFAS) 141, Business
    Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is
    effective for all business combinations completed after June 30, 2001. SFAS
    142 is effective for fiscal years beginning after December 15, 2001;
    however, certain provisions of this Statement apply to goodwill and other
    intangible assets acquired between July 1, 2001 and the effective date of
    SFAS 142. Major provisions of these Statements and their effective dates for
    the Company are:

 .   All business combinations initiated after June 30, 2001 are required to use
    the purchase method of accounting. The pooling of interest method of
    accounting is prohibited except for transactions initiated before July 1,
    2001.
 .   Intangible assets acquired in a business combination are required to be
    recorded separately from goodwill if they arise from contractual or other
    legal rights or are separable from the acquired entity and can be sold,
    transferred, licensed, rented or exchanged, either individually or as part
    of a related contract, asset or liability.
 .   Goodwill, as well as intangible assets with indefinite lives, acquired after
    June 30, 2001, will not be amortized. Effective January 1, 2002, all
    previously recognized goodwill and intangible assets with indefinite lives
    will no longer be subject to amortization.

NOTE 12 - RECENT ACCOUNTING PRONOUNCEMENTS-Continued

                                       9
<PAGE>

                          Allied Research Corporation

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                              September 30, 2001

                            (Thousands of Dollars)

                                  (Unaudited)

--------------------------------------------------------------------------------

 .   Effective January 1, 2002, goodwill and intangible assets with indefinite
    lives will be tested for impairment annually and whenever there is an
    impairment indicator.
 .   All acquired goodwill must be assigned to reporting units for purposes of
    impairment testing and segment reporting.

    In July, 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
    Obligations. This Statement addresses financial accounting and reporting for
    obligations associated with the retirement of tangible long-lived assets and
    the associated asset retirement costs. This Statement applies to all
    entities. It applies to legal obligations associated with the retirement of
    long-lived assets that result from the acquisition, construction,
    development and (or) the normal operation of a long-lived asset, except for
    certain obligations of lessees. This Statement is effective for financial
    statements issued for fiscal years beginning after June 15, 2002.

    In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
    or Disposal of Long-Lived Assets. This statement addresses financial
    accounting and reporting for the impairment or disposal of long-lived assets
    and supersedes FASB Statement No. 121, Accounting for the Impairment of
    Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
    provisions of the statement are effective for financial statements issued
    for fiscal years beginning after December 15, 2001.

    The Company's management has not completed it's assessment of the impact of
    these statements, however, it does not anticipate that they will have a
    material impact, if any, on its financial position or results of operations.

                                       10
<PAGE>

                           Allied Research Corporation

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                               September 30, 2001

                             (Thousands of Dollars)

                                   (Unaudited)

--------------------------------------------------------------------------------

    The following is intended to update the information contained in the
    Company's Annual Report on Form 10-K for the year ended December 31, 2000
    and the Quarterly Reports on Form 10-Q for the periods ended March 31, 2001
    and June 30, 2001 and presumes that readers have access to, and will have
    read, "Management's Discussion and Analysis of Financial Condition and
    Results of Operations" contained in such Forms 10-K and 10-Q.

    The Company conducts its business through its wholly-owned subsidiaries:
    Mecar, S.A. ("Mecar"), a Belgian corporation; and a group of Belgian
    corporations led by VSK Electronics, N.V., Tele Technique General, S.A.,
    Vigitec S.A. and IDCS, N.V. (collectively, the "VSK Group"). This discussion
    refers to the financial condition and results of operations of the Company
    on a consolidated basis. All dollars are in thousands except per share
    amounts.

    Forward-Looking Statements
    --------------------------

    This Management's Discussion and Analysis of Financial Condition and Results
    of Operations contains forward-looking statements that are based on current
    expectations, estimates and projections about the Company and the industries
    in which it operates. In addition, other written or oral statements which
    constitute forward-looking statements may be made by or on behalf of the
    Company. Words such as "expects", "anticipates", "intends", "plans",
    "believes", "seeks", "estimates", or variations of such words and similar
    expressions are intended to identify such forward-looking statements. These
    statements are not guarantees of future performance and involve certain
    risks, uncertainties and assumptions ("Future Factors") which are difficult
    to predict. Therefore, actual outcomes and results may differ materially
    from what is expressed or forecast in such forward-looking statements. The
    Company undertakes no obligation to update publicly any forward-looking
    statements, whether as a result of new information, future events or
    otherwise.

    Future Factors include substantial reliance on Mecar's principal customers
    to continue to acquire Mecar's 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 increase the commercial component of
    its business; 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; 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. These are representative of the Future Factors that could affect
    the outcome of the forward-looking statements. In addition, such statements
    could be affected by general industry and market conditions and growth
    rates; general domestic and international economic conditions including
    interest rate and currency exchange rate fluctuations; increasing
    competition by foreign and domestic competitors, including new entrants; and
    other Future Factors.

                                       11
<PAGE>

                          Allied Research Corporation

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED

                              September 30, 2001

                             (Thousand of Dollars)

                                  (Unaudited)

================================================================================

    Revenue
    -------

    Allied had revenue of $69,694 in the first nine months of 2001, which was
    90% of its revenue in the first nine months of 2000.

<TABLE>
<CAPTION>
                                                            Revenues by Segment
                           Nine months ended September 30,                       Three months ended September 30,
                           2001                       2000                      2001                      2000
                ---------------------------------------------------   ------------------------------------------------

                           Percentage                 Percentage                     Percentage                Percentage
              Amount        of total      Amount       of total         Amount        of total      Amount      of total
              ------        --------      ------       --------         ------        --------      ------      --------
<S>         <C>            <C>            <C>         <C>              <C>           <C>            <C>        <C>
Mecar       $54,962          79%          $63,171         82%          $22,077           82%        $21,738         86%
VSK Group    14,732          21%           14,161         18%            4,770           18%          3,570         14%
</TABLE>

    Total revenue for the quarter ended September 30, 2001 was $26,847, a 6%
    increase in revenue earned over the third quarter of 2000. Mecar's third
    quarter 2001 revenue was $22,077, a 2% increase in revenue earned from the
    third quarter of 2000. Mecar's third quarter revenue was positively impacted
    by an FMS subcontract that is generating higher profit margins to date. The
    VSK Group's revenue in the third quarter of 2001 increased by $1,200, or 34%
    from its revenue in the third quarter of 2000. The VSK Group experienced
    better than normal sales during the summer months, which are normally
    affected adversely by the seasonal buying patterns during the months of July
    and August. Additionally, the 2001 results were negatively affected by
    currency fluctuations.

    The reduction in sales from 2000 levels is attributable to an increase in
    revenue from the Company's independent distributor/value added reseller. The
    Company is receiving contracts from its independent distributor on a
    subcontract basis instead of direct contracts. These contracts generally
    have lower sales values than Mecar's traditional direct sales; however, they
    do not reduce the Company's gross margins or profitability. This is because
    Mecar's costs are reduced relative to its agreement with their independent
    distributor.

    Backlog
    -------

    As of September 30, 2001, the Company's backlog was $85,147 compared to
    $63,500 at December 31, 2000. The September 30, 2001 backlog consists of
    backlog of approximately $70,417 and $14,730 at Mecar and the VSK Group,
    respectively.

   Operating Costs and Expenses
   ----------------------------

    Cost of sales for the first nine months of 2001 was approximately $47,253,
    or 68% of revenue, as compared to $59,766, or 77% of revenue, for the first
    nine months of 2000.

    Cost of sales as a percentage of sales for the third quarter of 2001 was
    approximately 63%, compared to 68% for the same period in 2000.

    The improvement in cost of sales in 2001 results primarily from cost
    reductions, the increase in subcontracts via its independent distributor and
    the impact of an FMS subcontract during the quarter. Certain fees, selling
    expenses and other customer related expenses in connection with direct sales
    to customers are not incurred on distributor subcontracts.

                                       12
<PAGE>

                          Allied Research Corporation

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED

                              September 30, 2001

                             (Thousand of Dollars)

                                  (Unaudited)

================================================================================


    Selling and administrative expenses were approximately $8,823, or 13% of
    revenue, for the nine months ended September 30, 2001, as compared to
    $7,804, or 10% or revenue, for the nine months ended September 30, 2000.

    Selling and administrative expenses in the third quarter of 2001 were
    comparable to those incurred in 2000.

    Selling and administrative expenses in the first nine months of 2001 were
    greater than in the same 2000 period. This was due to costs incurred with
    new additions to the Company's management team and nonrecurring costs
    related to evaluation and due diligence associated the Company's acquisition
    strategy.

    Research and Development
    ------------------------

    Research and development costs incurred in the first nine months of 2001
    increased by $133 over costs incurred in the same period of 2000 and are
    associated with the engineering and ballistic design, and product
    development.

    Research and development costs incurred in the third quarter of 2001 were
    flat when compared to the prior year.

    Interest Income
    ---------------

    Interest income in the first nine months and in the third quarter of 2001
    was slightly lower than the comparable third quarter and nine month 2000
    period due to lower amounts invested and lower interest rates on deposits.

    Interest Expense
    ----------------

    Interest expense increased by 23% during the first nine months of 2001
    compared to the same period in 2000. Such increases were principally as a
    result of higher borrowings at Mecar under its credit facility and bank
    charges on new contracts. Interest charges in the third quarter of 2001
    decreased by 15% compared to the amount incurred in 2000. This decrease is
    due to lower amounts borrowed combined with lower rates on borrowings during
    the period.

    Other - Net
    -----------

    Other-net represents primarily currency gains and currency losses, resulting
    from foreign currency transactions incurred during the periods ending
    September 30, 2001 and 2000.

    Pre-Tax Profit From Continuing Operations
    -----------------------------------------

                                      Pre- Tax Profit by Segment
                                          1/st/ Nine Months
                                      --------------------------
                                        2001              2000
                                        ----              ----

              Mecar                   $ 10,361          $ 7,156
              VSK Group                  2,380            2,139
              Corporate and other       (1,224)               -

                                       13
<PAGE>

                          Allied Research Corporation

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED

                              September 30, 2001

                             (Thousand of Dollars)

                                  (Unaudited)

================================================================================

    Mecar's pre-tax profit for the first nine months of 2001 increased by
    $3,205, or 45% over its pre-tax profit for the comparable 2000 period.
    Slightly more than half of Mecar's 2001 revenue was from indirect sales to
    its independent distributor/value added reseller. Such contracts produce
    less revenue than direct sales but do not adversely affect profitability,
    since there is corresponding cost reductions. Further, Mecar's quarterly
    results were favorably impacted by the higher profit margins on the FMS
    subcontract.

    The VSK Group's 2001 pre-tax profit increased by $241, or 11%, over its 2000
    performance, notwithstanding substantial currency fluctuations, principally
    due to increased efficiency in operations.

    The Corporate and other expenses increased due to the hiring of three
    additional management team members and the costs associated with
    implementing its corporate acquisition strategy. In 2000, corporate and
    other costs were fully offset by management fees from Mecar and VSK.

    Income Taxes
    ------------

    The effective income tax expense in the first nine months of 2001 was 45%
    compared to 40% for the similar period 2000. The increase is primary due to
    the adjustment of prior year tax accruals. Through the third quarter of
    2001, Mecar has prepaid approximately $5,000 in taxes to obtain a lower
    effective tax rate.

    Net Earnings
    ------------

    The Company earned a $6,368 net profit from continuing operations ($1.30 per
    share basic and diluted) in the first nine months of 2001 compared with
    $5,536 for the first nine months of 2000 ($1.14 per share basic and
    diluted).

    In the third quarter of 2001, the Company earned $3,203 from continuing
    operations (or $0.65 per share basic and diluted) compared with $3,120 (or
    $0.64 per share basic and diluted) in the third quarter of 2000.

    In addition, in the first quarter of 2000, the Company reported (i) a $462
    gain, net of income taxes, on the sale of its former subsidiary Barnes &
    Reinecke, Inc. ("BRI") and (ii) a $54 profit from discontinued operations
    (i.e., the operations of BRI prior to sale).

    Liquidity
    ---------

    Working capital, which includes restricted cash, was approximately $41,215
    at September 30, 2001, which is an increase of $6,317 over the December 31,
    2000 level. Allied's current working capital is required for operations and
    to support credit facility agreements.

    During the first nine months of 2001, Allied funded its operations
    principally with internally generated cash and back-up credit facilities
    required for foreign government contracts. Mecar has a line-of-credit of up
    to $9,000 for working capital and its banks have also provided additional
    short term financing of up to $7,000. This short term financing is expected
    to be paid back before the end of the year. Approximately $12,077 of the
    line was used at September 30, 2001 and $2,800 was outstanding at December
    31, 2000.

    As of September 30, 2001, the Company had unrestricted cash (i.e., cash not
    required by the terms of the bank pool agreement to collateralize contracts)
    of approximately $11,815 compared with approximately $7,570 at December 31,
    2000. Restricted cash increased to $10,472 as of September 30, 2001 due in
    part to the expiration of the temporary waiver of the restricted cash
    requirement.

                                       14
<PAGE>

                          Allied Research Corporation

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED

                              September 30, 2001

                             (Thousand of Dollars)

                                  (Unaudited)

================================================================================

    Accounts receivable at September 30, 2001 increased from December 31, 2000
    levels by $1,194 due to shipments made at quarter-end. Costs and accrued
    earnings on uncompleted contracts increased by $3,603 from December 31, 2000
    levels due to higher incurred levels of work-in-progress. Inventories
    increased from year-end levels by $524 due to increased purchases during the
    third quarter of 2001. Prepaid expenses increased by $4,946 in the first
    nine months of 2001 principally due to a tax prepayment of $5,000. Current
    liabilities increased by $18,010 from December 31, 2000 levels principally
    as a result of increases in customer deposits, notes payable, and accrued
    expenses to meet increased production levels and foreign exchange hedging
    commitments.

    Allied's stockholders' equity as of September 30, 2001 was adversely
    affected by the deterioration of the value of the Euro verses the U.S.
    dollar during the nine months of 2001, resulting in a $638 increase in
    "Accumulated other comprehensive loss."

    Allied is continuing to explore alternate methods of obtaining financing
    necessary to implement its growth plans, to include restructuring of its
    current line, and/or obtaining new senior debt and subordinated debt
    facilities.

    Allied's ability to cover its anticipated future operating and capital
    requirements is dependent upon its ability to generate positive cash flow
    from the operations of its subsidiaries, particularly the operations of
    Mecar.

    Quantitative and Qualitative Market Risk Disclosure
    ---------------------------------------------------

    The events of September 11, 2001 and subsequent related events have not
    resulted in any material changes to quantitative and qualitative market risk
    disclosures of the Company as presented in the Company's Annual Report on
    Form 10-K for the year ended December 31, 2000. However, it is difficult to
    assess the impact that these events will have on future operations.

                                       15
<PAGE>

                           Allied Research Corporation

                               September 30, 2001

--------------------------------------------------------------------------------

PART II.        OTHER INFORMATION

                None

                                       16
<PAGE>

                           Allied Research Corporation

                               September 30, 2001

--------------------------------------------------------------------------------

SIGNATURE

  Pursuant to the requirements of the Securities Exchange Act of 1934, the
  Registrant has duly caused this report to be signed on its behalf by the
  undersigned thereunto duly authorized.

                              ALLIED RESEARCH CORPORATION




                              /s/ Charles A. Hasper
                              ------------------------------------
Date:  November 7, 2001       Charles A. Hasper
                              Treasurer and
                              Chief Financial Officer

                                       17