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, 1996

                                       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 750
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, 1996: 4,440,387.


<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, 1995 and September 30, 1996.........................................2,3



                  Condensed Consolidated Statements of Earnings

                           Three months and nine months ended September 30, 1996 and 1995.....................4



                  Condensed Consolidated Statements of Cash Flows

                           Nine months ended September 30, 1996 and 1995......................................5



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



         Item 2.  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations..................................................................10



PART II. OTHER INFORMATION...................................................................................14
</TABLE>


<PAGE>

                           Allied Research Corporation

                      CONDENSED CONSOLIDATED BALANCE SHEETS

                             (Thousands of Dollars)

                                     ASSETS

                                   (Unaudited)

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


<TABLE>
<CAPTION>
                                                           September 30, 1996     December 31, 1995
                                                           ------------------     -----------------
<S> <C>
CURRENT ASSETS
    Cash and equivalents, including restricted cash              $12,629              $15,744
    Accounts receivable                                           23,934               21,091
    Costs and accrued earnings on uncompleted contracts            8,606                6,311
    Inventories                                                    7,068                6,337
    Prepaid expenses                                               1,589                1,113
                                                                 -------              -------

            Total current assets                                  53,826               50,596


PROPERTY, PLANT AND EQUIPMENT - AT COST
    Buildings                                                     13,218               14,247
    Machinery and equipment                                       32,554               35,189
                                                                 -------              -------
                                                                  45,772               49,436
    Less accumulated depreciation                                 31,966               33,330
                                                                 -------              -------
                                                                  13,806               16,106
    Land                                                           1,425                1,545
                                                                 -------              -------

            Total property, plant and equipment                   15,231               17,651


OTHER ASSETS
    Deposit - restricted cash                                     12,828               18,492
    Intangibles                                                    6,490                7,085
    Other                                                            291                  429
                                                                 -------              -------

            Total other assets                                    19,609               26,006
                                                                 -------              -------

                                                                 $88,666              $94,253
                                                                 =======              =======
</TABLE>

The accompanying notes are an integral part of these statements.

                                       2

<PAGE>

                           Allied Research Corporation

                CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED

                             (Thousands of Dollars)

                                   LIABILITIES

                                   (Unaudited)

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


<TABLE>
<CAPTION>
                                                            September 30, 1996     December 31, 1995
                                                            ------------------     -----------------
<S> <C>
CURRENT LIABILITIES
    Notes payable                                              $     823             $     485
    Current maturities of long-term debt                           1,374                 2,786
    Accounts and trade notes payable                              17,918                17,787
    Accrued liabilities                                            5,291                 5,289
    Customer deposits                                             11,488                 9,900
    Income taxes                                                     829                   371
                                                               ---------             ---------

            Total current liabilities                             37,723                36,618


LONG-TERM DEBT, less current maturities                           21,345                28,435

DEFERRED INCOME TAXES                                              1,059                   847

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 4,440,387
        in 1996 and 4,422,056 in 1995                                444                   442
    Capital in excess of par value                                10,830                10,745
    Retained earnings                                             14,484                12,676
    Accumulated foreign currency translation adjustment            2,781                 4,490
                                                               ---------             ---------

            Total stockholders' equity                            28,539                28,353
                                                               ---------             ---------

                                                                 $88,666               $94,253
                                                               =========             =========
</TABLE>

The accompanying notes are an integral part of these statements.

                                       3


<PAGE>

                           Allied Research Corporation

                  CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

                             (Thousands of Dollars)

                                   (Unaudited)

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


<TABLE>
<CAPTION>
                                          Three months ended             Nine months ended
                                             September 30,                 September 30,
                                          1996          1995            1996          1995
                                        --------      --------        --------      --------
<S> <C>
Revenue                                  $17,547       $16,530         $64,078       $38,958

Cost and expenses
    Cost of sales                         13,206        13,947          48,930        33,741
    Selling and administrative             2,672         2,128           9,795         7,903
    Research and development                 488           181           1,262           674
                                       ---------     ---------        --------     ---------
                                          16,366        16,256          59,987        42,318

            Operating income (loss)        1,181           274           4,091        (3,360)

Other income (deductions)
    Interest expense                        (825)         (695)         (2,365)       (2,273)
    Interest income                          781           546           1,512         1,617
    Other - net                             (438)          160            (669)          372
                                       ---------     ---------        --------     ---------
                                            (482)           11          (1,522)         (284)
                                       ---------     ---------        --------     ---------

            Earnings (loss) before
                income taxes                 699           285           2,569        (3,644)

Income taxes                                 178            70             761           623
                                       ---------     ---------        --------     ---------

            NET EARNINGS (LOSS)        $     521     $     215        $  1,808       $(4,267)
                                       =========     =========        ========     =========

Net income (loss) per common share     $     .12     $     .05        $    .41     $    (.97)
                                       =========     =========        ========     =========

Weighted average number of shares      4,437,438     4,409,577       4,430,136     4,404,146
</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                                1996        1995
                                                                         --------    --------
<S> <C>
Cash flows from operating activities
   Net earnings (loss)                                                    $ 1,808     $(4,267)
   Adjustments to reconcile net earnings to net cash provided by
      (used in) operating activities
        Depreciation and amortization                                       1,337       1,734
        Changes in assets and liabilities
           Accounts receivable                                             (3,741)     11,187
           Costs and accrued earnings on uncompleted contracts             (2,841)     (3,039)
           Inventories                                                     (1,225)       (130)
           Prepaid expenses and other assets                                 (164)       (453)
           Accounts payable, accrued liabilities and customer deposits      3,289      (4,129)
           Income taxes                                                       475        (125)
                                                                          -------     -------

              Net cash provided by (used in) operating activities          (1,062)        778

Cash flows (used in) investing activities
   Capital expenditures                                                      (267)       (925)
   Acquisitions (net of cash acquired)                                         --      (2,600)
                                                                          -------     -------

              Net cash (used in ) investing activities                       (267)     (3,525)

Cash flows from financing activities
   Principal payments of long-term debt                                    (5,879)     (4,309)
   Net increase in long-term borrowings                                        --       1,281
   Net increase (decrease) in short-term borrowings                           801      (9,180)
   Stock option/stock plan                                                     87          58
   Deposits - restricted cash                                               5,664       6,400
                                                                          -------     -------

              Net cash (used in) provided by financing activities             673      (5,750)

Effects of exchange rate changes on cash                                   (2,459)        186
                                                                          -------     -------

              NET DECREASE IN CASH AND CASH EQUIVALENTS                    (3,115)     (8,311)

Cash and equivalents at beginning of year                                  15,744      43,606
                                                                          -------     -------

Cash and equivalents at end of period                                     $12,629     $35,295
                                                                          =======     =======


Supplemental Disclosures of Cash Flow Information
   Cash paid during the period for
      Interest                                                            $   689    $  1,002
      Taxes                                                                   455         373
</TABLE>

The accompanying notes are an integral part of these statements.

                                       5

<PAGE>


                           Allied Research Corporation

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                               September 30, 1996

                             (Thousands of Dollars)

                                   (Unaudited)

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


NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

    The  condensed  consolidated  balance  sheets as of  September  30, 1996 and
    December 31, 1995, the condensed consolidated statements of earnings and the
    condensed  consolidated  statements  of cash flows for the nine months ended
    September  30, 1996 and 1995,  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 flow at September 30,
    1996 and 1995 have been made.

    Certain information and footnote  disclosures normally included in financial
    statements   prepared  in  accordance  with  generally  accepted  accounting
    principles  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,  1995 Form 10-K  filed  with the  Securities  and  Exchange  Commission,
    Washington,  D.C.  20549.  The results of  operations  for the period  ended
    September 30, 1996 and 1995 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 the
    Company's  wholly-owned  subsidiaries,  Mecar, S.A. (a Belgian Company),
    Allied Research  Corporation  Limited (a United Kingdom Company),  Barnes &
    Reinecke,  Inc. (a Delaware  Corporation), and ARC Services, Inc. (a
    Delaware Corporation).

    Mecar, S.A.'s wholly-owned  Belgian subsidiaries  include,  Mecar Immobliere
    S.A. (IMMO), Sedachim,  S.I., Tele Technique Generale,  Management Export
    Services, N.V. (MES),  I.D.C.S.,  N.V. (which was acquired May 9, 1995), VSK
    France, a French company formed in 1995 and VSK Electronics  N.V. and its
    wholly-owned subsidiaries,  Classics,  B.V.B.A.  Detectia,  N.V.  and
    Belgian  Automation Units,  N.V.,  (collectively  "The VSK Group"). A
    minority interest owned by VSK Electronics in Building Control  Services,
    N.V. (BCS) was accounted for under the equity  method in 1995.  BCS and MES
    were  liquidated  in 1995. IMMO was liquidated in 1996. In addition, the
    Company effectively ceased operations of ARC Services, Inc. in December,
    1995. VSK France was put into liquidation  effective December 31, 1995.

    The VSK Group acquisitions were accounted for as purchases,  and revenue and
    results  of  operations  from  June  1,  1994  and  May 9,  1995  (dates  of
    acquisition), have been consolidated.

    Significant intercompany transactions have been eliminated in consolidation.


NOTE 3 - ACQUISITION

    On May 31, 1994, the Company's wholly-owned subsidiary, Mecar S.A., acquired
    The VSK Group, a group of Belgian companies,  as well as a minority interest
    in a Belgian  company,  for  approximately  $6,072 and on May 9,  1995,  VSK
    Electronics N.V. acquired I.D.C.S.,  N.V. a Belgian company and its minority
    interest in Belgian Automation Unites, N.V. for a total of $2,972.

                                       6

<PAGE>

                           Allied Research Corporation

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                               September 30, 1996

                             (Thousands of Dollars)

                                  (Unaudited)

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

NOTE 3 - ACQUISITION - Continued

    The companies  manufacture,  distribute  and service an  integrated  line of
    industrial  security  products,  including  devices such as building  access
    control,  parking  control,  intrusion and fire  detection and intrusion and
    fire alarms.

    The  acquisitions  have been  accounted  for as  purchases  and the purchase
    prices  in  excess  of the  net  assets  acquired  have  been  reflected  in
    intangibles.  The  financial  statements  include the results of  operations
    since  the  dates  of  acquisition.  Pro  forma  financial  data  for  these
    acquisitions  prior to the dates of  acquisition  would not have a  material
    effect on reported results.

                                                 May 9, 1995       May 31, 1994

       Fair value of tangible assets acquired       $2,587            $7,720
       Liabilities assumed                             855             6,285
                                                       ---             -----
       Net assets acquired                           1,732             1,435
       Purchase price                                2,972             6,072
                                                     -----             -----

       Excess of cost over assets acquired          $1,240            $4,637
                                                     =====             =====


NOTE 4 - RESTRICTED CASH

    Mecar is generally  required  under the terms of its contracts  with foreign
    governments to provide  performance  bonds,  advance payment  guarantees and
    letters of credit.  The credit  facility  agreements  used to provide  these
    financial guarantees generally place restrictions on cash deposits and other
    liens on Mecar's assets, until the customer accepts delivery.  Cash deposits
    totaling  approximately  $20,753 and $29,051 ($12,828 of which is classified
    as long-term at September 30, 1996 and $18,492 at December 31, 1995),  as of
    September 30, 1996 and December 31, 1995,  respectively,  are  restricted or
    pledged as  collateral  for various  bank  agreements  and are  comprised as
    follows:

                                                             1996        1995
                                                           --------    --------
       Cash
         Credit facility and related term loan agreements  $  6,095    $  7,775
         Other bank guarantees and letters of credit          1,830       1,769
         Notes payable                                           --       1,035
                                                           --------    --------
                                                              7,925      10,559

       Deposits - restricted cash - long-term
         Credit facility and related term loan agreements    12,828      18,492
                                                            -------     -------
                                                            $20,753     $29,051
                                                            =======     =======

                                       7

<PAGE>

                           Allied Research Corporation

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                               September 30, 1996

                             (Thousands of Dollars)

                                  (Unaudited)

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

NOTE 5 - INVENTORIES

    Inventories consist of the following:

                                       September 30, 1996   December 31, 1995

          Raw materials and supplies         $7,068               $6,337
                                             ======               ======


NOTE 6 - NOTES PAYABLE

    At September  30, 1996 and December 31, 1995,  secured  short-term  loans of
    $823 and $485, respectively,  were outstanding.  BRI has two $500 three year
    term  loan  facilities  at 2% over  prime  with an  outstanding  balance  at
    September 30, 1996 of $740 for capital  improvements  and a $1,000 revolving
    line-of-credit  which had an  outstanding  balance of $425 at September  30,
    1996.  The line bears  interest  at the rate of prime  plus .5%.  The credit
    facility  is secured by BRI's  eligible  accounts  receivable  and  Allied's
    guarantee.   The  former  agreement  was  a  $750  revolving  line-of-credit
    agreement which had an outstanding balance of $445 as of December 31, 1995.


NOTE 7 - CREDIT FACILITY

    Mecar is obligated under an amended credit  agreement (the Agreement) with a
    banking pool  comprised of foreign  banks that  provided  credit  facilities
    primarily  for letters of credit,  bank  guarantees,  performance  bonds and
    similar  instruments  required for specific sales  contracts.  The Agreement
    provides  for  certain  bank  charges  and  fees,  plus  an  annual  fee  of
    approximately 2% of guarantees issued. As of September 30, 1996,  guarantees
    of $17,027 remain outstanding.

    Advances  under the credit  facility  and other  guarantees  were secured by
    deposits of $20,753 of which  $12,828 is long-term at September 30, 1996 and
    deposits of $26,247 at December 31, 1995,  $18,492 of which is classified as
    long-term  deposit at  December  31,  1995.  Amounts  outstanding  were also
    collateralized  by pledges  of  approximately  $27,600  on  Mecar's  assets,
    letters of credit and certain funds received  under the contracts  financed.
    The Agreement  provides for  restrictions on payments or transfers to Allied
    and ARCL  for  management  fees,  intercompany  loans,  loan  payments,  the
    maintenance of certain net worth,  income and loss levels and the payment of
    bank fees and charges as defined in the Agreement.


NOTE 8 - INCOME TAXES

    The Company  adopted the provisions of Statement of Financial  Accounting
    Standards No. 109,  "Accounting  for Income Taxes" ("SFAS No. 109").

    The  Company's  provision  for income  taxes  differs  from the  anticipated
    combined  federal  and state  statutory  rates due to  operating  losses and
    earnings from foreign subsidiaries.

                                       8

<PAGE>

                           Allied Research Corporation

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                               September 30, 1996

                             (Thousands of Dollars)

                                  (Unaudited)

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

NOTE 8 - INCOME TAXES  Continued

    The  Company's  Belgian  subsidiaries  have unused net  operating  losses of
    approximately  $18,700 at September 30, 1996, which under Belgian law cannot
    be carried back but may be carried forward indefinitely,  and are subject to
    annual limitations for 1996.

    As of  September  30,  1996,  the  Company  had  unused  foreign  tax credit
    carryforwards of approximately $700 which expire through 2000.

    Deferred tax  liabilities  have not been  recognized  for bases  differences
    related  to  investments  in  the  Company's   Belgian  and  United  Kingdom
    subsidiaries.  These  differences,  which  consist  primarily of  unremitted
    earnings intended to be indefinitely  reinvested,  aggregated  approximately
    $16,500 at September  30, 1996 and December 31, 1995.  Determination  of the
    amount of unrecognized deferred tax liabilities is not practicable.


NOTE 9 - EARNINGS (LOSS) PER SHARE

    Stock  options   outstanding  have  not  been  included  in  the  per  share
    computation  because there would not be a material effect on earnings (loss)
    per share.

                                       9

<PAGE>

                           Allied Research Corporation

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

                               September 30, 1996

                             (Thousands of Dollars)

                                   (Unaudited)

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

    The Company  conducts its business  through its  wholly-owned  subsidiaries:
    Mecar, S.A., ("Mecar"), a Belgian corporation,  and its subsidiaries,  Mecar
    Immobliere,  S.A., Sedachim,  S.I., as well as Tele Technique Generale,  VSK
    Electronics,  N.V., Classics,  B.V.B.A., Detectia, N.V., I.D.C.S., N.V., and
    Belgian  Automation Units,  N.V.  (collectively  "The VSK Group"):  Barnes &
    Reinecke,   Inc.,  ("Barnes")  a  Delaware  corporation,   headquartered  in
    Illinois;  Allied Research Corporation Limited,  ("Limited") a U.K. Company;
    and ARC Services,  Inc., ("Services") a Delaware corporation,  headquartered
    in Vienna,  Virginia.  This discussion refers to the financial condition and
    results of operations of the Company on a consolidated basis.

    Sales

    Revenue for the first nine months of 1996 was $64,078,  a 64% increase  from
    the  comparable  period in 1995,  principally  due to  Mecar's  increase  in
    revenue.  Mecar  revenue was $41,933,  up 129%  compared to the period ended
    September 30, 1995.  Barnes revenues was $9,058, up 25% compared to the same
    period in 1995.  The VSK  Group's  revenue for the first nine months of 1996
    was $13,085 compared to $13,348 in 1995 (provided,  however,  the prior year
    only included I.D.C.S. for the post-May, 1995 period).  Limited and Services
    did not have  significant  revenue this period or in last year's  comparable
    period.

    Revenue for the quarter ended September 30, 1996 was $17,547,  a 6% increase
    from revenue for the quarter  ended  September  30, 1995.  Mecar  recognized
    revenue of $10,724 for the quarter  ended  September 30, 1996, a 2% decrease
    over quarter  ended  September 30, 1995.  Barnes'  revenue of $2,659 for the
    quarter  ended  September  30, 1996  constituted  an 18%  decrease  over the
    quarter ended September 30, 1995; the revenue of The VSK Group of $4,163 for
    the quarter  ended  September  30, 1996  constituted a 76% increase over the
    quarter ended September 30, 1995.

    The  increase in Mecar's  revenue and revenue  from The VSK Group during the
    first nine (9) months of 1996 resulted  principally from a higher backlog of
    orders at the end of  calendar  year 1995 than at the end of  calendar  year
    1994  and  continued  new  orders  in  1996.  Similarly,   Barnes'  improved
    performance  principally  resulted from continued  execution of the order it
    received  during  calendar  year  1995 for the  benefit  of a  foreign-based
    customer.

    Results of Operations

    The  Company  recognized  a profit  for the first nine (9) months of 1996 of
    $1,808,  compared  with a loss of $4,267  for the first  nine (9)  months of
    1995. The improvement is principally  attributable  to increased  amounts of
    business  at each of the  operating  units.  The $521  profit  earned by the
    Company for the three (3) month period ended September 30, 1996 was slightly
    in excess of the $215 profit  earned by the Company in the third  quarter of
    1995 due to product mix.

    The  results of  operations  for the third  quarter  of 1996 were  adversely
    affected by delays  experienced by Mecar in receipt of certain raw materials
    from  various  vendors.  Such  supplies  have now either  been  received  or
    management  has received  assurance of future receipt of such materials such
    that timely completion of the relevant contracts should not be jeopardized.

                                       10

<PAGE>

                           Allied Research Corporation

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

                               September 30, 1996

                             (Thousands of Dollars)

                                   (Unaudited)

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

    Results of Operations - Continued

    The foregoing paragraph contains a forward-looking  statement concerning the
    Company's  anticipated  performance  of  certain  of  its  contracts.   Such
    forward-looking  statement is made pursuant to the safe harbor provisions of
    the Private Securities  Litigation Reform Act of 1995. Readers are cautioned
    that all  forward-looking  statements  involve risks and uncertainties  that
    could cause actual events to differ materially from those projected.  If the
    raw materials are not timely delivered, or Mecar encounters other unexpected
    vendor or manufacturing difficulties,  it could experience additional delays
    in  completing  its  contracts  which  would  result in  delays  in  revenue
    recognition as well as potential contract-specified financial penalties.

    Backlog

    As of September  30,  1996,  the  Company's  backlog was  $103,552  compared
    with $98,906 at June 30, 1996 and $68,100 at December 31, 1995.

    Mecar's  backlog at September 30, 1996 was $78,132  compared with $73,351 as
    of June 30, 1996.

    Barnes'  backlog as of September 30, 1996 was $8,765 compared with $7,763 as
    of June 30, 1996.

    The backlog of The VSK Group as of September  30, 1996 was $16,665  compared
    with $17,792 as of June 30, 1996.

    Operating Costs and Expenses

    Cost of sales for the first nine months of 1996 was approximately $48,930 or
    76% of sales as  compared  to $33,741  or 87% for the first  nine  months of
    1995.  Cost of sales for the quarter ended September 30, 1996 was $13,206 or
    75% of sales compared to 84% of sales for the same period the previous year.
    The percentage decrease is primarily due to the increased amounts of revenue
    in 1996 and the product mix.

    Selling and  administrative  expenses  were  approximately  $9,795 or 15% of
    revenues for the nine months ended  September 30, 1996 as compared to $7,903
    or  20%  for  the  nine  months  ended  September  30,  1995.   Selling  and
    administrative expenses for the quarter ended September 30, 1996 were $2,672
    or 15% of  sales  compared  to 13% of  revenue  for the same  period  in the
    previous  year.  The  percentage  increase  for the third  quarter  reflects
    increased expenditures in business development and marketing activities.

    Research and Development

    Research and development expenses were 2% of sales for the nine month period
    and 3% of sales for the three  month  period  ended  September  30,  1996 as
    compared with 2% for the corresponding periods in 1995. This increase is due
    to increased efforts to expand product lines.

                                       11

<PAGE>

                           Allied Research Corporation

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

                               September 30, 1996

                             (Thousands of Dollars)

                                   (Unaudited)

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

    Operating Results

    Operating  income was  $4,091 for the first nine  months of 1996 (or 6.4% of
    revenue). This compares with an operating loss of $3,360 for the nine months
    ended September 30, 1995.  During the third quarter of 1996, the Company had
    operating  income of $1,181 (or 6.7% of  revenue)  compared  with  operating
    income of $274 for the  quarter  ended  September  30,  1995.  The  improved
    results are primarily  attributable to increased  amounts of revenue at each
    of the  Company's  operating  units.  In  addition,  the 1995  results  were
    adversely  affected by the shutdown of Mecar's  facilities due to the April,
    1995 explosion.

    Interest Expense

    Interest  expense  for  the  nine  months  ending  September  30,  1996  was
    approximately  the same as for the nine months  ended  September  30,  1995.
    Interest expense  increased by approximately  19% for the three month period
    ended  September  30,  1996 over the same  period  in 1995 due to  increased
    levels of borrowing.

    Interest Income

    Interest  income  decreased  for the  first  nine  months  of 1996  over the
    comparable  period  in 1995 as a result of lower  levels  of cash.  Interest
    income  increased  for the three month period ended  September 30, 1996 over
    the same period in 1995 due to increased cash levels.

    Other - Net

    For the  nine  months  ended  September  30,  1996,  Other - Net  represents
    primarily  currency  losses,  net of currency gains,  resulting from foreign
    currency transactions.

    Liquidity and Capital Resources

    During the first nine months of 1996 and throughout 1995,  Allied funded its
    operations  principally  with  internally  generated cash and back-up credit
    facilities required for foreign government contracts. At September 30, 1996,
    the Company had unrestricted  cash (i.e.,  cash not required by the terms of
    the bank agreement to collateralize  contracts) of approximately  $4,704, as
    compared with  approximately  $4,564 at June 30, 1996 and $5,185 at December
    31, 1995.

    As  described  in  prior  filings,  Mecar's  bank  pool  facility  has  been
    historically guaranteed, in part, by the regional government in Belgium (the
    "Walloon  Region").  The  additional  financing  necessary for the contracts
    received  by Mecar in the second  quarter of 1996 was based upon the partial
    guarantee by the Walloon Region.  Representatives of the Walloon Region have
    advised  Mecar that the partial  guarantee  will not be available to finance
    additional contracts for the foreseeable future given the improved financial
    condition of Mecar. Such action will not affect the guarantees  currently in
    place for  existing  contracts.  Further,  management  believes  that future
    contracts will be financable by the bank pool without benefit of the Walloon
    Region partial guarantee.

                                       12

<PAGE>

                           Allied Research Corporation

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

                               September 30, 1996

                             (Thousands of Dollars)

                                   (Unaudited)

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

    Liquidity and Capital Resources - Continued

    One of the four banks comprising the bank pool has advised Mecar that it has
    established  a  maximum  exposure  limit  with  respect  to Mecar  which may
    preclude it from participating in future contract financings. Management has
    been engaged in active  negotiations  with other banks  seeking the entry of
    such  banks  into the bank  pool and  management  believes  that one or more
    additional banks will agree to participate in the bank pool.

    The  foregoing  paragraphs  contain  forward-looking  statements  concerning
    Mecar's financing. Such forward-looking  statements are made pursuant to the
    safe harbor  provisions of the Private  Securities  Litigation Reform Act of
    1995.  Readers are cautioned  that all  forward-looking  statements  involve
    risks and uncertainties  that could cause actual events to differ materially
    from those  projected.  Changes in the credit  philosophies  of the relevant
    banks,  changes in the relevant bank  representatives or actual or perceived
    changes  in  Mecar's  financial   condition  could  cause  the  above-stated
    forward-looking statements to not come to fruition.

    Accounts  receivable at September 30, 1996  increased over December 31, 1995
    by $2,843 and cost and accrued earnings on uncompleted  contracts  increased
    by $2,295 from 1995 as a result of an increase  in  production.  Inventories
    and prepaid expenses remained level. Current liabilities increased by $1,105
    from December 31, 1995 levels as a result of increased customer deposits and
    payments on current  maturities  of long-term  debt.  At September 30, 1996,
    Barnes  had a  line-of-credit  balance  of $425,  compared  with  $445 as of
    December 31, 1995.

    Long-term debt (including  current  maturities  thereof) as of September 30,
    1996,  decreased by approximately  $8,502 from December 31, 1995 as a result
    of a decrease  in the term loan  provided  by certain of Mecar's  banks (the
    "Term Loan").  The Term Loan decrease was  occasioned by the decrease in the
    bank pools  exposure from the expiration of advance  payment  guarantees and
    performance bonds.

    In summary,  working capital was  approximately  $16,103 at September 30,
    1996,  which is an increase of $2,125 from December 31, 1995.

                                       13

<PAGE>

                           Allied Research Corporation

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

                               September 30, 1996

                             (Thousands of Dollars)

                                   (Unaudited)

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

PART II.        OTHER INFORMATION

                None.

                                       14


<PAGE>

                           ALLIED RESEARCH CORPORATION


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

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/ J. R. Sculley
                                     -----------------------------
Date:  November 13, 1996             J. R. Sculley
                                     Chairman of the Board,
                                     Chief Executive Officer and
                                     Chief Financial Officer