##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
  Form 10-Q
   QUARTERLY REPORT PURSUANT TO
    SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT
    OF 1934
  For the quarterly period ended March 31, 2007
  Commission File Number: 1-11376
   The Allied Defense Group,
    Inc.
 (Exact name of Registrant as
    specified in its charter)
   Delaware(State or other
    jurisdiction of
    incorporation or organization)

04-2281015(I.R.S Employer
    Number)   8000 Towers Crescent Drive, Suite 260
 Vienna, Virginia 22182
 (Address of principal executive
    offices, including zip code)
  (703) 847-5268
 (Registrants telephone
    number, including area code)
   o þ
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ




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##### 



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


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


2Condensed
    Consolidated Statements of Operations Three months ended
    March 31, 2007 and 2006


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


4Condensed
    Consolidated Statements of Cash Flows Three months ended
    March 31, 2007 and 2006


5Notes to Condensed
    Consolidated Financial Statements


6Item 2.


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


19Item 3.


Quantitative and
    Qualitative Disclosures About Market Risk


32Item 4.


Controls and
    Procedures


32PART II.
    OTHER INFORMATIONItem 5.


Legal
    Proceedings


33Item 6.


Submission of
    Matters to a Vote of Security Holders


33Item 7.


Exhibits


33Signatures


34EX-10.2EX-31.1EX-31.2EX-32




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##### Table of Contents



The
    Allied Defense Group, Inc.
  CONDENSED
    CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 (Thousands of dollars, except per share and share data)
   March 31,


December 31,2007


2006(a)ASSETSCURRENT ASSETSCash and cash equivalents

$
6,476


$
19,493Restricted cash


8,546



8,401Accounts receivable, net


15,844



17,513Costs and accrued earnings on
    uncompleted contracts


26,842



25,534Inventories, net


25,111



24,393Prepaid and other current assets


3,987



4,107Assets held for sale


4,111



7,829Total current assets


90,917



107,270PROPERTY, PLANT AND EQUIPMENT,
    NET


32,634



32,850OTHER ASSETSIntangible assets, net


9,349



9,651Goodwill


16,288



16,243Other assets


1,921



2,031Total other assets


27,558



27,925TOTAL ASSETS

$
151,109


$
168,045CURRENT LIABILITIESSenior convertible notes

$
31,394


$
26,907Bank overdraft facility


7,986



13,702Current maturities of long-term debt


8,897



9,693Accounts payable


15,542



12,092Accrued liabilities


17,804



16,565Deferred revenue


1,494



1,470Customer deposits


19,256



19,906Foreign exchange contracts


7



6Income taxes


3,830



3,881Liabilities held for sale


2,031



2,001Total current liabilities


108,241



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


3,690



4,689Deferred tax liability, non-current


15



15Derivative instrument


79



1,192Other long-term liabilities


559



579Total long-term obligations


4,343



6,475TOTAL LIABILITIES


112,584



112,698CONTINGENCIES AND
    COMMITMENTSSTOCKHOLDERS
    EQUITYPreferred stock, no par value;
    authorized 1,000,000 shares; none issued






Common stock, par value,
    $.10 per share; authorized 30,000,000 shares; issued
    and outstanding, 6,472,132 at March 31, 2007 and 6,440,944
    at December 31, 2006


647



644Capital in excess of par value


43,600



43,312Retained deficits


(24,485
)


(6,631
)Accumulated other comprehensive
    income


18,763



18,022Total stockholders equity


38,525



55,347TOTAL LIABILITIES AND
    STOCKHOLDERS EQUITY

$
151,109


$
168,045     (a)
    
    Condensed consolidated balance sheet as of December 31,
    2006, has been derived from audited consolidated financial
    statements.   2




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##### Table of Contents



The
    Allied Defense Group, Inc.
  CONDENSED CONSOLIDATED STATEMENTS OF
    OPERATIONS
 (Unaudited)
 (Thousands of dollars, except per share and share data)
  Three Months EndedMarch 31,2007


2006Revenues

$
19,593


$
34,705Cost and expensesCost of sales


17,036



26,431Selling and administrative


9,127



8,572Research and development


1,520



1,550Operating loss


(8,090
)


(1,848
)Other income
    (expenses)Interest income


314



124Interest expense


(2,860
)


(2,313
)Net (loss) gain on fair value of
    Senior Convertible notes and warrants


(3,374
)


567Other-net


61



342(5,859
)


(1,280
)Loss from continuing operations
    before income taxes


(13,949
)


(3,128
)Income tax expense
    (benefit)


295



(2
)Loss from continuing
    operations


(14,244
)


(3,126
)Discontinued operations, net of
    tax


(3,610
)


(585
)NET LOSS

$
(17,854
)

$
(3,711
)Loss per share 
    basic and diluted:Net loss from continuing operations

$
(2.20
)

$
(0.52
)Net loss from discontinued
    operations


(0.56
)


(0.10
)Total loss per share 
    basic and diluted

$
(2.76
)

$
(0.62
)Weighted average number of
    common shares:Basic


6,469,969



6,020,149Diluted


6,469,969



6,020,149    3




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##### Table of Contents



The
    Allied Defense Group, Inc.
  CONDENSED CONSOLIDATED STATEMENTS OF
    STOCKHOLDERS EQUITY
 AND COMPREHENSIVE INCOME
 (Unaudited)
 (Thousands of dollars, except per share and share data)
  AccumulatedPreferred


Common Stock


Capital


Retained


Other


TotalStock, No





$.10


in Excess


Earnings


Comprehensive


StockholdersPar Value


Shares


Par Value


of Par Value


(Deficit)


(Loss) Income


EquityBalance at January 1,
    2006

$




5,982,008


$
598


$
34,354


$
34,466


$
12,075


$
81,493Common stock awards






16,584



2



761











763Retired stocks






(1,345
)






(29
)










(29
)Common stock issued in Private
    Placement






400,000



40



6,644











6,684Employee stock purchase plan
    purchases






7,530



1



151











152Exercise of stock options






36,167



3



397











400Warrants issued














373











373Directors deferred stock
    compensation














164











164Issue of stock options














497











497Comprehensive loss:Net loss for the year


















(41,097
)






(41,097
)Currency translation adjustment






















5,947



5,947Total comprehensive loss


























(35,150
)Balance at December 31,
    2006

$




6,440,944


$
644


$
43,312


$
(6,631
)

$
18,022


$
55,347Common stock awards






23,631



2



463











465Employee stock purchase plan
    purchases






7,557



1



64











65Exercise of stock options


























Warrants issued


























Directors deferred stock
    compensation














(329
)










(329
)Issue of stock options














90











90Comprehensive loss:Net loss for the three months ended


















(17,854
)






(17,854
)Currency translation adjustment






















741



741Total comprehensive loss


























(17,113
)Balance at March 31,
    2007

$




6,472,132


$
647


$
43,600


$
(24,485
)

$
18,763


$
38,525    4




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##### Table of Contents



The
    Allied Defense Group, Inc.
  CONDENSED CONSOLIDATED STATEMENTS OF CASH
    FLOWS
 (Unaudited)
 (Thousands of dollars)
  Three Months Ended March 31,2007


2006Cash flows from operating
    activitiesNet loss

$
(17,854
)

$
(3,711
)Adjustments to reconcile net loss
    to net cash provided by (used in) operating activities
    Depreciation and amortization


1,850



1,523Amortization of debt discount and
    debt issue costs


153



1,247Unrealized losses (gains) on
    forward contracts


1



(724
)Gain on sale of fixed assets


(7
)


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


3,374



(567
)Provision for estimated losses on
    contracts


138



667Deferred taxes






(128
)Common stock and stock option awards


564



292Deferred director stock awards


(329
)


38Discontinued operations, net of tax


3,610



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


(62
)


2,039Accounts receivable


2,251



1,754Costs and accrued earnings on
    uncompleted contracts


(1,053
)


(6,144
)Inventories


(524
)


1,281Prepaid and other current assets


171



728Accounts payable and accrued
    liabilities


4,264



(8,312
)Deferred revenue


3



857Customer deposits


(803
)


10,224Deferred compensation


(24
)


(2
)Income taxes


(88
)


(229
)Net cash provided by (used in)
    operating activities  continuing operations


(4,365
)


1,418Net cash provided by (used in)
    operating activities  discontinued operations


305



(87
)Net cash provided by (used in)
    operating activities


(4,060
)


1,331Cash flows from investing
    activitiesCapital expenditures


(1,087
)


(1,062
)Proceeds from sale of fixed assets


12



Net cash used in investing
    activities  continuing operations


(1,075
)


(1,062
)Net cash used in investing
    activities  discontinued operations


(25
)


(8
)Net cash used in investing
    activities


(1,100
)


(1,070
)Cash flows from financing
    activitiesBank overdraft


(5,751
)


447Principal payments on long-term
    borrowing


(854
)


(13,995
)Debt issue costs






(1,908
)Repayment on capital lease
    obligations


(543
)


(515
)Proceeds from issuance of long-term
    debt






30,000Net increase (decrease) in
    short-term borrowings


(525
)


5,962Proceeds from employee stock
    purchases


9



34Proceeds from option exercises






377Net cash provided by (used in)
    financing activities


(7,664
)


20,402Net change in cash of discontinued
    operations


(142
)


160Effects of exchange rate on cash


(51
)


162NET INCREASE (DECREASE) IN CASH AND
    CASH EQUIVALENTS


(13,017
)


20,985Cash and cash equivalents at
    beginning of period


19,493



7,544Cash and cash equivalents at end
    of period

$
6,476


$
28,529Supplemental Disclosures of Cash
    Flow informationCash paid during the period forInterest

$
1,806


$
976Taxes

$
441


$
277Supplemental Disclosures of
    Non-Cash Investing and Financing ActivitiesWarrants issued in conjunction with
    senior secured credit facility

$



$
2,387Capital leases

$
2


$
497    5




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##### Table of Contents



The
    Allied Defense Group, Inc.
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED
    FINANC IAL STATEMENTS
 March 31, 2007
 (Thousands of Dollars)
  NOTE 1 
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    Form 10-K
    (Form 10-K)
    Liquidity
    and Cash Flows
         6




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##### Table of Contents



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Senior
    Subordinated Convertible Notes
    Default
    Notices
    
    In the period February 20, 2007 through March 23,
    2007, the Company, received letters, separately, from each of
    the four note holders alleging events of default, very similar
    to one another, that dated back to March 9, 2006, the date
    of inception of the note agreement. All four of these notices
    demanded acceleration of the notes and redemption of the notes
    in their entirety. Each of the four note holders seeks payment
    of the full principal amount, plus a redemption premium equal to
    25% of the principal amount and unpaid interest at the default
    interest rate from inception of the note agreements.
    The requirements of the debt covenant create further uncertainty
    regarding the Companys liquidity position. In addition,
    the terms of the convertible debt facility required the Company
    to have an effective registration statement with the SEC for the
    resale of the common stock underlying the convertible debt and
    warrants issued in the transaction by January 28, 2007. The
    Company failed to meet this deadline and is still in the process
    of responding to SEC comments regarding the registration
    statement. Additional SEC comments were received as recently as
    April 24, 2007 and the Company is in the process of
    responding to that letter. The Company paid $900 in the three
    months ended March 31, 2007 related to these continuing
    delays, but has ceased making delay payments. The terms of the
    notes provide that the Company will be in default if the
    registration statement for the shares of common stock is not
    effective by March 29, 2007. The Company did not have an
    effective registration statement by this date. On or after
    March 30 2007, all four note holders, by separate letter,
    provided an additional event of default based on the
    Companys failure to timely effect the registration of
    shares of the Companys common stock. The terms of the
    notes provide, in the event of default, the holders with the
    right to demand redemption at a price equal to the sum of the
    face value of the notes, accrued and unpaid interest, and a
    redemption premium equal to 25% of the face value of the notes
    or $7,500. The terms of the notes provide that the Company is
    subject to penalties of 1% of the outstanding balance per month
    until the registration statement is effective. 7




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##### Table of Contents



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   
    On April 27, 2007, the Company was served notice that Kings
    Road filed suit in the Southern District of New York seeking
    payments of the principal amount, redemption premium and accrued
    and unpaid interest of not less than $16,665.  MECAR
    Credit Facility Default
    The
    Companys Plan for 2007
         8




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##### Table of Contents



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  and/or
    
    The Company will be able to get the common shares underlying the
    convertible debt financing registered,
    The credit facility at MECAR will not be suspended again and if
    MECAR fails to meet the financial covenants the banking group
    will be willing to waive the covenants,
    The Company will be able to sell SeaSpace in 2007 in order to
    use the cash proceeds for operations,
    The Company will be able to issue additional shares of common
    stock to raise capital as needed,
    The Company will be able to refinance any of its existing debt
    if it becomes callable.  and/or and/or
  Reclassification
    NOTE 2 
    PRINCIPLES OF CONSOLIDATION
    
    ARC Europe, S.A. (ARC Europe), a Belgian company,
    Allied Research Corporation Limited (Limited), an
    inactive United Kingdom company,
    News/Sports Microwave Rental, Inc. (NSM), a
    California corporation,
    Titan Dynamics Systems, Inc. (Titan), a Texas
    corporation,
    SeaSpace Corporation (SeaSpace), a California
    corporation,
    MECAR USA, Inc. (MECAR USA), a Delaware
    corporation, and
    Allied Technology, LLC (Allied Technology), and a
    Maryland limited liability company,
    Global Microwave Systems, Inc (GMS), a California corporation.   9




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##### Table of Contents



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Ammunition & Weapons Effects
  Electronic Security sub-miniature
  Other
    NOTE 3 
    ACCOUNTS RECEIVABLE AND COSTS AND ACCRUED EARNINGS ON
    UNCOMPLETED CONTRACTS
    March 31,


December 31,2007


2006Direct and indirect receivables
    from governments

$
3,653


$
6,801Commercial and other receivables


12,699



11,35016,352



18,151Less: Allowance for doubtful
    receivables


(509
)


(638
)$
15,844


$
17,513      10




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##### Table of Contents



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   NOTE 4 
    INVENTORIES
    March 31,


December 31,2007


2006Raw materials

$
14,665


$
15,658Work in process


10,328



7,779Finished goods


2,462



2,52727,455



25,964Less reserve for obsolescence


(2,344
)


(1,571
)$
25,111


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




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##### Table of Contents



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   NOTE 7 
    LONG-TERM DEBT
    March 31,


December 31,2007


2006Fair value of Senior subordinated
    convertible notes

$
31,394


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


5,660



6,431Mortgage loan agreements


137



152Loan for CMS Security Systems
    acquisition


100



100Other notes payable


4,008



4,497Capital leases and other


2,682



3,201Total long-term debt


43,981



41,288Less current maturities


(40,291
)


(36,599
)Long-term debt, less current
    maturities and unamortized discount

$
3,690


$
4,689   Senior subordinated convertible notes.
  Form 10-K Form S-1 Form S-1 Form S-1/A
   12




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##### Table of Contents



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Accounting for Certain Hybrid
    Instruments
  Accounting for Derivative and Hedging
    Activities
  Loan for Global Microwave Systems
    acquisition.
 13




---



##### Table of Contents



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Mortgage Loan Agreements.
  Loan for CMS Security Systems acquisition.
  Other notes payable.
  Capital lease and other.
  NOTE 8 
    LOSS PER SHARE
    Three Months EndedMarch 31,2007


2006Net loss from continuing operations

$
(14,244
)

$
(3,126
)Net loss from discontinued
    operations


(3,610
)


(585
)Net loss

$
(17,854
)

$
(3,711
)Weighted average number of basic
    and diluted shares


6,469,969



6,020,149Basic & Diluted net loss
    per share from continuing operations

$
(2.20
)

$
(0.52
)Basic & Diluted net loss
    per share from discontinued operations


(0.56
)


(0.10
)Total

$
(2.76
)

$
(0.62
)    14




---



##### Table of Contents



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   NOTE 9 
    COMPREHENSIVE LOSS
    Three Months EndedMarch 31,2007


2006Net loss

$
(17,854
)

$
(3,711
)Currency Translation Adjustment


741



1,016Comprehensive loss

$
(17,113
)

$
(2,695
)     NOTE 10 
    SHARE-BASED COMPENSATION
      NOTE 11 
    INDUSTRY SEGMENTS
  Three Months EndedMarch 31,2007


2006Revenues from external
    customersAmmunitions & Weapons
    Effects

$
7,480


$
23,484Electronic Security


12,113



11,221$
19,593


$
34,705Segment profit (loss) before
    provision for income
    taxesAmmunitions & Weapons
    Effects

$
(7,277
)

$
(1,326
)Electronic Security


124



295Corporate


(6,796
)


(2,097
)$
(13,949
)

$
(3,128
)   NOTE 12 
    PROVISION FOR TAXES
   15




---



##### Table of Contents



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
             Accounting for Income
  NOTE 13 
    COMMITMENTS AND CONTINGENCIES
     16




---



##### Table of Contents



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       Form 8-K, Form 10-K
    NOTE 14 
    DISCONTINUED OPERATIONS
  Accounting for the
    Impairment or Disposal of Long-Lived Assets.
   17




---



##### Table of Contents



The
    Allied Defense Group, Inc.
  NOTES TO
    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Three Months Ended March 31,2007


2006Revenues

$
2,058


$
1,463Loss before taxes


(3,609
)


(585
)Loss from discontinued operations,
    net of tax


(3,610
)


(585
)     March 31,


December 31,2007


2006Cash

$
388


$
247Accounts receivable, net


765



2,110Costs and accrued earnings on
    uncompleted contracts


1,392



211Inventories, net


826



572Prepaid and other current assets


207



324Property, Plant and Equipment, net


505



481Intangible assets, net






2,491Goodwill






1,387Other assets


28



6Assets held for sale

$
4,111


$
7,829Accounts payable

$
302


$
681Accrued liabilities


408



328Deferred revenue


360



421Customer deposits


700



309Long-term debt


261



262Liabilities held for sale

$
2,031


$
2,001  18




---



##### Table of Contents



The
    Allied Defense Group, Inc.
  MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND
    RESULTS OF OPERATIONS
 March 31, 2007
 (Thousands of Dollars)
 (Unaudited)
  Overview
      
    Ammunition & Weapons Effectssegment consists
    of MECAR, located in Belgium and MECAR USA and Titan, located in
    Marshall, TX. MECAR develops and produces medium caliber, tank,
    mortar and other ammunition. MECAR USA became operational in
    late 2005 and pursues contracts from U.S. and foreign
    governments for ammunition and pyrotechnics devices with a focus
    on the 105MM market. Titan designs, manufactures and sells
    battlefield effects simulators, minor pyrotechnics and other
    training devices. Titan and MECAR USA are co-located at the same
    facility, are operated under a unified management team, share
    production facilities and employees and have a fully integrated
    back office and support service organization. MECAR, MECAR USA
    and Titan have similar products and services, similar production
    processes, common customers, similar methods to sell and
    distribute their products and operate in a similar regulatory
    environment.
    Electronic Securitysegment consists of VSK, located in
    Belgium and California, and NSM and Global Microwave Systems
    (GMS) located near San Diego, California. VSK consists of
    VSK Electronics N.V., which manufactures access control,
    intrusion protection, fire detection and video systems;
    Télé Technique Générale S.A., which installs
    security systems; Intelligent Data Capturing Systems N.V., which
    manufacturers integrated video systems; VIGITEC S.A., which
    installs networked video surveillance systems; and CMS Security
    Systems which manufactures access control systems. NSM designs,
    manufactures, installs and services industrial and law
    enforcement surveillance products and integrated systems for the
    law enforcement community and agencies of the Department of
    Homeland Security and the Department of Defense. GMS designs and
    manufactures miniature and
    sub-miniature
    FM and digital transmitters, receivers, and related equipment
    for investigative, surveillance, and security applications, and
    live TV news/sports/entertainment coverage.
    The Othersegment consists of SeaSpace located near
    San Diego, CA. It designs, manufactures, distributes and
    services weather and environmental satellite ground reception
    systems, and manufactures and markets a line of antenna systems. 19




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##### Table of Contents



Results
    of Operations for the Three Months Ended March 31, 2007 and
    2006
    Three Months Ended March 31,2007


2006Amount


%


Amount


%Revenue

$
19,593



100.0
%

$
34,705



100.0
%Cost and expensesCost of sales


17,036



86.9



26,431



76.2Selling and administrative


8,175



41.7



7,893



22.7Research and development


1,520



7.8



1,550



4.4Depreciation and Amortization


952



4.9



679



2.0Operating loss


(8,090
)


(41.3
)


(1,848
)


(5.3
)Other income (expense)Interest income


314



1.6



124



0.4Interest expense


(2,860
)


(14.6
)


(2,313
)


(6.7
)Gain (loss) from fair value of
    notes and warrants


(3,374
)


(17.2
)


567



1.6Other  net


61



0.3



342



1.0Loss from continuing opertions
    before income taxes


(13,949
)


(71.2
)


(3,128
)


(9.0
)Income tax expense (benefit)


295



1.5



(2
)


0.0Net loss from continuing
    operations, net of tax


(14,244
)


(72.7
)


(3,126
)


(9.0
)Discontinued operations, net of tax


(3,610
)


(18.4
)


(585
)


(1.7
)Net loss

$
(17,854
)


(91.1
)%

$
(3,711
)


(19.7
)%   Revenue.
  20




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##### Table of Contents



Revenue by SegmentThree Months Ended


Three Months EndedMarch 31, 2007


March 31, 2006Percentage





PercentageAmount


of total


Amount


of totalAmmunitions & Weapons
    Effects

$
7,480



38
%

$
23,484



68
%Electronic Security


12,113



62



11,221



32Total

$
19,593



100
%

$
34,705



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


Three Months EndedMarch 31, 2007


March 31, 2006Percentage of





Percentage ofSegment





SegmentAmount


Revenue


Amount


RevenueAmmunitions & Weapons
    Effects

$
10,273



137
%

$
20,659



88
%Electronic Security


6,763



56



5,772



52Total

$
17,036



87
%

$
26,431



76
%    21




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##### Table of Contents



Selling and Administrative Expenses.
  Research and Development.
  Depreciation and Amortization
    Expenses.
  Net (Loss) Gain on fair value of Senior Subordinated
    Convertible Notes and warrants.
  Other  Net.
  Interest Income.
  Interest Expense.
 22




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##### Table of Contents



Pre-Tax
    Loss
  Pre-Tax Income (Loss) by SegmentThree Months Ended


Three Months EndedMarch 31, 2007


March 31, 2006Percentage of





Percentage ofAmount


Total revenue


Amount


Total revenueAmmunitions & Weapons
    Effects

$
(7,277
)


(37
)%

$
(1,326
)


(4
)%Electronic Security


124



1



295



1Corporate


(6,796
)


(35
)


(2,097
)


(6
)Total

$
(13,949
)


(71
)%

$
(3,128
)


(9
)%         Income Taxes.
  Discontinued Operations.
  Net Loss.
  Backlog.
  23




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##### Table of Contents



Backlog by SegmentThree Months Ended


Three Months EndedMarch 31, 2007


March 31, 2006Percentage





PercentageAmount


of total


Amount


of totalAmmunitions & Weapons
    Effects

$
35,231



60
%

$
49,949



69
%Electronic Security


23,116



40



22,371



31Total

$
58,347



100
%

$
72,320



100
%     Liquidity
    and Cash Flows
            Senior
    Subordinated Convertible Notes
   24




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##### Table of Contents



Default
    Notices
    
    In the period February 20, 2007 through March 23,
    2007, the Company, received letters, separately, from each of
    the four note holders alleging events of default, very similar
    to one another, that dated back to March 9, 2006, the date
    of inception of the note agreement. All four of these notices
    demanded acceleration of the notes and redemption of the notes
    in their entirety. Each of the four note holders seeks payment
    of the full principal amount, plus a redemption premium equal to
    25% of the principal amount and unpaid interest at the default
    interest rate from inception of the note agreements.
    The requirements of the debt covenant create further uncertainty
    regarding the Companys liquidity position. In addition,
    the terms of the convertible debt facility required the Company
    to have an effective registration statement with the SEC for the
    resale of the common stock underlying the convertible debt and
    warrants issued in the transaction by January 28, 2007. The
    Company failed to meet this deadline and is still in the process
    of responding to SEC comments regarding the registration
    statement. Additional SEC comments were received as recently as
    April 24, 2007 and the Company is in the process of
    responding to that letter. The Company paid $900 in the three
    months ended March 31, 2007 related to these continuing
    delays but has ceased making delay payments. The terms of the
    notes provide that the Company will be in default if the
    registration statement for the shares of common stock is not
    effective by March 29, 2007. The Company did not have an
    effective registration statement by this date. On or after
    March 30 2007, all four note holders, by separate letter,
    provided an additional event of default based on the
    Companys failure to timely effect the registration of
    shares of the Companys common stock. The terms of the
    notes provide, in the event of default, the holders with the
    right to demand redemption at a price equal to the sum of the
    face value of the notes, accrued and unpaid interest, and a
    redemption premium equal to 25% of the face value of the notes
    or $7,500.
    On April 27, 2007, the Company was served notice that Kings
    Road filed suit in the Southern District of New York seeking
    payments of the principal amount, redemption premium and accrued
    and unpaid interest of not less than $16,665.  MECAR
    Credit Facility Default
    The
    Companys Plan for 2007
   25




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##### Table of Contents



and/or
    
    The Company will be able to get the common shares underlying the
    convertible debt financing registered,
    The credit facility at MECAR will not be suspended again and if
    MECAR fails to meet the financial covenants the banking group
    will be willing to waive the covenants,
    The Company will be able to sell SeaSpace in 2007 in order to
    use the cash proceeds for operations,
    The Company will be able to issue additional shares of common
    stock to raise capital as needed,
    The Company will be able to refinance any of its existing debt
    if it becomes callable.  and/or and/or
 26




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##### Table of Contents



Balance
    Sheet
        45-60 days
        Cash
    Flows
    For Three Months EndedMarch 31, 2007


March 31, 2006Net cash provided by (used in)
    operating activities

$
(4,060
)

$
1,331Net cash provided by (used in)
    investing activities


(1,100
)


(1,070
)Net cash provided by (used in)
    financing activities


(7,664
)


20,402   Operating Activities.
 27




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##### Table of Contents



Form S-1
  Investing Activities.
  Financing Activities.
  Allied.
  MECAR.
  VSK Group.
  Other Subsidiaries.
  Stock Repurchases.
  Off-Balance Sheet Arrangements.
 28




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##### Table of Contents



Trends
  
    The Company is focusing on solving its liquidity issues in 2007.
    The Company expects a significant MECAR order from a principal
    customer in 2007.
    The Company continues to work hard to expand MECARs market
    and expects further positive results in 2007 from new customers.
    The Company has taken steps to reduce the operating costs of its
    U.S. operations, particularly by reducing the break even at
    the Marshall, Texas facility, and is taking steps to reduce
    operating costs in its foreign operations,
    Titan is now operational and will continue to attempt to
    maximize work on its Battlefield Effects Simulator contract.  Critical
    Accounting Policies
      
    Revenue recognition via the percentage of completion method;
    Goodwill and intangible asset valuation;
    Inventory reserves and allowance for doubtful accounts;
    Derivative instruments;
    Valuation of deferred income taxes and income tax reserves.  Form 10-K 10-K
  Recent
    Accounting Pronouncements
  Accounting for Uncertainty in
    Income Taxes- an interpretation of SFAS No. 109.
 29




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##### Table of Contents



Fair Value
    Measurements
  The Fair Value
    Option for Financial Assets and Financial
    Liabilities  Including an amendment of FASB Statement
    No. 115
  Forward-Looking
    Statements
    
    substantial reliance on MECARs principal customers to
    continue to acquire products on a regular basis;
    the cyclical nature of the Companys military business;
    rapid technological developments and changes and the
    Companys ability to continue to introduce competitive new
    products and services on a timely, cost effective basis;
    the ability of the Company to successfully continue to expand
    its business base;
    the ability of the Companys acquired businesses to mature
    and meet performance expectations;
    the mix of products/services;
    domestic and foreign governmental fiscal affairs and public
    policy changes which may affect the level of purchases made by
    customers;
    changes in environmental and other domestic and foreign
    governmental regulations;
    changes in foreign currency exchange rates and interest rate
    fluctuation from market conditions;
    general risks associated with doing business outside the United
    States, including, without limitation, import duties, tariffs,
    quotas and political and economic instability;
    the effects of terrorist actions on business activities,
    customer orders and cancellations, and the United States and
    international governments responses to these terrorist
    actions;
    changes in government regulations;
    liability and other claims asserted against the Company;
    the ability to attract and retain qualified personnel; and 30




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##### Table of Contents




    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.   31




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##### Table of Contents



The
    Allied Defense Group, Inc.
    March 31, 2007
    (Thousands of Dollars)
  ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE MARKET RISK DISCLOSURE        ITEM 4.
    DISCLOSURE
    CONTROLS AND PROCEDURES  1.  Evaluation
    of disclosure controls and procedures
  Disclosure
    Controls and Procedures
  Rule 13a-15 Form 10-K
     32




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##### Table of Contents



2.  Changes
    in internal controls
    PART II.
    OTHER INFORMATION  Item 5.
    Legal
    Proceedings    Item 6.
    Submission
    of Matters to a Vote of Security Holders      Director Name

FOR


WITHHELDJ. H. Binford Peay, III


4,554,765



151,957Ronald H. Griffith


4,655,225



51,497Gilbert F. Decker


4,655,510



51,212John G. Meyer, Jr.


4,555,514



151,208Charles S. Ream


4,677,827



28,895John J. Marcello


4,555,519



151,203Thomas R. Hudson, Jr.


4,678,219



28,503Frederick G. Wasserman


4,679,602



27,120     FOR

AGAINST

ABSTAIN4,696,456


4,176



6,090     FOR

AGAINST

ABSTAIN2,377,052


1,005,269



208,506   Item 7.
    Exhibits  ExhibitNo.

Description of Exhibits10
.2

Employment Agreement between
    Allied and Deborah F. Ricci.31
.1

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

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


Certification Pursuant to
    18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.  33




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##### Table of Contents



SIGNATURE      /s/  Deborah
    F. Ricci      34