##### 



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 period ended June 30, 2004 Commission File Number: 001-11376   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)   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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
          Yes x           No o Indicate the number of shares outstanding of each of the issuers classes of
common stock as of June 30, 2004: 5,558,446.




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THE ALLIED DEFENSE GROUP, INC.
INDEX   PAGENUMBERPART I. FINANCIAL INFORMATION  UNAUDITEDItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets June 30,
2004 and December 31, 2003
    
    
    2Condensed Consolidated Statements of Earnings
Three and six months ended June 30, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2004 and 2003
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Market Risk Disclosure
    
    
    27Item 4.
    
    Disclosure Controls and Procedures
    
    
    27PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    28Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    28Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    29Signatures
    
    
    31




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The Allied Defense Group, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (Thousands of Dollars, except per share data)   June 30, 2004
    
    December 31, 2003UnauditedASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    22,100
    
    
    $
    43,377Restricted cash
    
    
    10,864
    
    
    
    15,937Accounts receivable
    
    
    31,576
    
    
    
    29,321Costs and accrued earnings on uncompleted contracts
    
    
    86,461
    
    
    
    68,414Inventories
    
    
    14,351
    
    
    
    12,068Deferred tax asset
    
    
    1,707
    
    
    
    1,016Fair value of foreign exchange contracts
    
    
    3,811
    
    
    
    9,378Prepaid and other current assets
    
    
    9,191
    
    
    
    4,880Total current assets
    
    
    180,061
    
    
    
    184,391PROPERTY, PLANT AND EQUIPMENT net of accumulated depreciation
    
    
    25,093
    
    
    
    24,615OTHER ASSETSIntangibles, net of accumulated amortization
    
    
    3,948
    
    
    
    4,135Goodwill
    
    
    13,558
    
    
    
    13,718Other assets
    
    
    525
    
    
    
    37818,031
    
    
    
    18,231$
    223,185
    
    
    $
    227,237LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESNotes payable
    
    $
    10,901
    
    
    $
    14,200Current maturities of long-term debt
    
    
    2,239
    
    
    
    2,709Convertible subordinated debenture, current, less unamortized discount
    
    
    6,693
    
    
    
    5,250Accounts payable
    
    
    43,074
    
    
    
    53,284Accrued liabilities
    
    
    21,549
    
    
    
    16,846Customer deposits
    
    
    9,159
    
    
    
    4,938Foreign exchange contracts
    
    
    3,811
    
    
    
    9,378Income taxes
    
    
    4,295
    
    
    
    906Total current liabilities
    
    
    101,721
    
    
    
    107,511LONG-TERM OBLIGATIONSLong-term debt, less current maturities and unamortized discount
    
    
    6,057
    
    
    
    4,902Convertible subordinated debenture, less current maturities and
unamortized discount
    
    
    
    
    
    
    2,156Deferred compensation
    
    
    1,705
    
    
    
    1,334Deferred taxes
    
    
    1,150
    
    
    
    1,3398,912
    
    
    
    9,731STOCKHOLDERS 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, 5,558,446 in 2004 and 5,551,373 in 2003
    
    
    556
    
    
    
    555Additional paid-in capital
    
    
    26,096
    
    
    
    25,891Retained earnings
    
    
    75,136
    
    
    
    70,166Accumulated other comprehensive income
    
    
    10,764
    
    
    
    13,383112,552
    
    
    
    109,995$
    223,185
    
    
    $
    227,237
 The accompanying notes are an integral part of these consolidated financial statements. 2




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The Allied Defense Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Thousands of Dollars, except per share data) (Unaudited)   Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenue
    
    $
    45,228
    
    
    $
    42,723
    
    
    $
    79,696
    
    
    $
    85,380Cost and expensesCost of sales
    
    
    30,537
    
    
    
    30,691
    
    
    
    54,848
    
    
    
    59,606Selling and administrative
    
    
    5,702
    
    
    
    6,520
    
    
    
    12,349
    
    
    
    12,294Research and development
    
    
    1,816
    
    
    
    906
    
    
    
    3,377
    
    
    
    1,757Operating income
    
    
    7,173
    
    
    
    4,606
    
    
    
    9,122
    
    
    
    11,723Other income (expense)Interest income
    
    
    93
    
    
    
    131
    
    
    
    195
    
    
    
    228Interest expense
    
    
    (520
    )
    
    
    (524
    )
    
    
    (998
    )
    
    
    (959
    )Other-net
    
    
    (85
    )
    
    
    (348
    )
    
    
    (434
    )
    
    
    (320
    )(512
    )
    
    
    (741
    )
    
    
    (1,237
    )
    
    
    (1,051
    )Earnings before income taxes
    
    
    6,661
    
    
    
    3,865
    
    
    
    7,885
    
    
    
    10,672Income tax expense
    
    
    2,435
    
    
    
    1,563
    
    
    
    2,915
    
    
    
    4,436NET EARNINGS
    
    $
    4,226
    
    
    $
    2,302
    
    
    $
    4,970
    
    
    $
    6,236Earnings per shareBasic
    
    $
    .76
    
    
    $
    .42
    
    
    $
    .89
    
    
    $
    1.14Diluted
    
    $
    .71
    
    
    $
    .40
    
    
    $
    .84
    
    
    $
    1.08Weighted average number of common shares:Basic
    
    
    5,555,509
    
    
    
    5,487,919
    
    
    
    5,553,454
    
    
    
    5,483,546Diluted
    
    
    6,017,500
    
    
    
    5,920,786
    
    
    
    6,031,710
    
    
    
    5,919,666
 The accompanying notes are an integral part of these consolidated financial statements. 3




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The Allied Defense Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands of Dollars) (Unaudited)   Six months ended June 302004
    
    2003Cash flows from operating activitiesNet earnings
    
    $
    4,970
    
    
    $
    6,236Adjustments to reconcile net earnings to net cash provided by (used in) operating activitiesDepreciation and amortization
    
    
    2,295
    
    
    
    1,810Provision for estimated losses on contracts
    
    
    242
    
    
    
    438Deferred taxes
    
    
    (877
    )
    
    
    144Debenture issue costs and conversion feature
    
    
    52
    
    
    
    205Deferred compensation
    
    
    413
    
    
    
    226Common stock award
    
    
    34
    
    
    
    Changes in assets and liabilitiesAccounts receivable
    
    
    (2,887
    )
    
    
    10,224Costs and accrued earnings on uncompleted contracts
    
    
    (21,129
    )
    
    
    (1,742
    )Inventories
    
    
    (2,613
    )
    
    
    (1,656
    )Prepaid and other current assets
    
    
    (5,377
    )
    
    
    (6,437
    )Accounts payable, accrued liabilities and customer deposits
    
    
    1,424
    
    
    
    105Income taxes
    
    
    3,474
    
    
    
    1,513Net cash provided by (used in) operating activities
    
    
    (19,979
    )
    
    
    11,066Cash flows from investing activitiesCapital expenditures
    
    
    (3,476
    )
    
    
    (3,023
    )Net cash used in investing activities
    
    
    (3,476
    )
    
    
    (3,023
    )Cash flows from financing activitiesPrincipal payments on long-term borrowing
    
    
    (2,190
    )
    
    
    (1,166
    )Proceeds from issuance of long-term debt
    
    
    3,305
    
    
    
    1,247Net decrease in short-term borrowings
    
    
    (2,812
    )
    
    
    (153
    )Proceeds from employee stock purchases
    
    
    
    
    
    
    132Option exercises
    
    
    84
    
    
    
    43Restricted cash
    
    
    4,580
    
    
    
    (1,871
    )Net cash provided by (used in) financing activities
    
    
    2,967
    
    
    
    (1,768
    )Net increase (decrease) in cash and cash equivalents
    
    
    (20,488
    )
    
    
    6,275Effects of exchange rate changes on cash and cash equivalents
    
    
    (789
    )
    
    
    918NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (21,277
    )
    
    
    7,193Cash and cash equivalents at beginning of year
    
    
    43,377
    
    
    
    14,876Cash and cash equivalents at end of period
    
    $
    22,100
    
    
    $
    22,069Supplemental Disclosures of Cash Flow InformationCash paid during the period forInterest
    
    $
    569
    
    
    $
    635Taxes
    
    
    4,983
    
    
    
    8,426Supplemental Disclosures of Non-cash financing activitiesWarrants issued in conjunction with senior secured credit facility

    
    $
    68
    
    
    $
    
 The accompanying notes are an integral part of these consolidated financial statements. 4




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The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Thousands of Dollars)
(Unaudited)   NOTE 1  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying condensed consolidated financial statements have been prepared
by the Company without audit. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements reflect all necessary
adjustments and reclassifications (all of which are of a normal, recurring
nature) that are necessary for fair presentation for the periods presented. 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 included in the Companys
December 31, 2003, Form 10-K filed with the Securities and Exchange Commission.
The results of operations for the periods ended June 30, 2004 and 2003 are not
necessarily indicative of the operating results for the full year. Certain reclassifications have been made to the prior periods financial
statements to conform to the current presentation. NOTE 2  PRINCIPLES OF CONSOLIDATION The condensed consolidated financial statements include the accounts of The
Allied Defense Group, Inc. (Allied or the Company), a Delaware corporation,
and its wholly-owned subsidiaries as follows:  
    
    ARC Europe, S.A. (ARC Europe), a Belgian company,  
    
    Allied Research Corporation Limited (Limited), an inactive United Kingdom company,  
    
    News/Sports Microwave Rental, Inc. (NS Microwave), a California corporation,  
    
    Titan Dynamics Systems, Inc. (Titan Dynamics), a Texas corporation,  
    
    SeaSpace Corporation (SeaSpace), a California corporation, and  
    
    MECAR USA, Inc. (MECAR USA), a Delaware corporation ARC Europe includes its wholly-owned subsidiaries MECAR S.A. (MECAR),
Sedachim S.I. S.A., Hendrickx S.A., and the VSK Group. The VSK Group is
comprised of VSK Electronics N.V. and its wholly-owned subsidiaries, Télé
Technique Générale S.A., Intelligent Data Capturing Systems (IDCS) N.V., and
VIGITEC S.A. The Company operates in four (4) segments, which are outlined below:  
    
    Ordnance & Manufacturingsegment
consists of MECAR and MECAR USA. MECAR
develops and produces medium caliber
tank, mortar and other ammunition.
MECAR USA will initially pursue
contracts from the U.S. government and
others for ammunition and pyrotechnics
devices. MECAR USA is expected to be
operational in the latter portion of
2004.  
    
    Electronic Securitysegment consists of
The VSK Group and NS Microwave. VSK
Electronics N.V. manufactures access
control, intrusion protection, fire
detection and video systems; Télé
Technique Générale S.A. installs
security systems; Intelligent Data
Capturing Systems N.V. manufacturers
integrated video systems; and VIGITEC
S.A. installs networked video
surveillance systems. NS Microwave
designs, manufactures, distributes and
services industrial and law enforcement
security products and systems.  
    
    Environmental Safety & Securitysegment
consists of SeaSpace, which designs,
manufactures, distributes and services
weather and environmental satellite
ground reception systems.  
    
    Software, Training & Simulationsegment
consists of Titan Dynamics, which
designs, manufactures and sells
battlefield effects simulators. Allied, the parent company, provides management services to its subsidiaries
and has no operating activities. Significant intercompany transactions have been eliminated in consolidation. 5




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The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Thousands of Dollars)
(Unaudited)   NOTE 3  DERIVATIVE FINANCIAL INSTRUMENTS As of June 30, 2004 and December 31, 2003, futures contracts designated as fair
value hedges with notional amounts of $58,550 and $50,000 were outstanding and
the fair values of these contracts were $12,568 and $21,966, respectively. At
June 30, 2004 and December 31, 2003, the total fair value was included in costs
and accrued earnings on uncompleted contracts, and fair value of foreign
exchange contracts. Deferred gains on fair value hedges related to multi-year
sales contracts are included in accrued liabilities. NOTE 4  RESTRICTED CASH MECAR is generally required under the terms of its contracts with foreign
governments and its distributor to provide performance bonds and advance
payment guarantees. 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. $8,739 and $15,812 at June 30, 2004 and December
31, 2003, respectively, was restricted or pledged as collateral for these
agreements. Restricted cash also included $2,000 at June 30, 2004 as a requirement of the
senior secured facility which was completed on May 28, 2004. Restricted cash also included $125 at June 30, 2004 and December 31, 2003, as a
result of a deposit which was a requirement of the SeaSpace acquisition
agreement. In 2002, the Company issued a $250 promissory note payable in equal
installments on July 31, 2003 and 2004. Payment is subject to certain
conditions being met as defined in the acquisition agreement. NOTE 5  ACCOUNTS RECEIVABLE Accounts receivable at June 30, 2004 and December 31, 2003 are comprised as
follows: 2004
    
    2003Direct and indirect receivables from foreign governments
    
    $
    19,269
    
    
    $
    15,613Commercial and other receivables, less allowance for doubtful
receivables of $119 in 2004 and $115 in 2003
    
    
    12,307
    
    
    
    13,708$
    31,576
    
    
    $
    29,321
 Receivables from foreign government and government agencies are generally due
within 30 days of shipment, less a 10% hold back provision which is generally
due within 90 days. Since these receivables are supported by letters of credit
or other guarantees, no provision for doubtful accounts is deemed necessary.
The Company evaluates its allowance for doubtful accounts on commercial
receivables on an ongoing basis and provides for losses as deemed necessary. 6




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The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Thousands of Dollars)
(Unaudited)   NOTE 6  COSTS AND ACCRUED EARNINGS ON UNCOMPLETED CONTRACTS Costs and accrued earnings on uncompleted contracts are recognized by MECAR, NS
Microwave and SeaSpace for their fixed priced sales contracts in accordance
with the percentage of completion method of accounting. Under this method,
revenue is recognized as work progresses, based on the relationship between
actual costs incurred during the period and total estimated cost to be incurred
for the total contract. Management reviews these estimates as work progresses
and the effect of any change in cost estimates is reflected in cost of sales in
the period in which the change is identified. The revenue recognized on the
contracts in progress for the three and six months ended June 30, 2004 and 2003
were $41,253 and $74,092, and $41,724 and $82,726, respectively. NOTE 7  INVENTORIES Inventories at June 30, 2004 and December 31, 2003 are comprised as follows: 2004
    
    2003Raw materials
    
    $
    11,824
    
    
    $
    9,852Work in process
    
    
    1,231
    
    
    
    1,017Finished goods, less reserve for obsolescence of
$212 in 2004 and $214 in 2003
    
    
    1,296
    
    
    
    1,199$
    14,351
    
    
    $
    12,068
 NOTE 8  INTANGIBLE ASSETS AND GOODWILL June 30, 2004
    
    December 31, 2003Gross
    
    Accumulated
    
    
    
    
    
    Gross
    
    AccumulatedAmount
    
    Amortization
    
    Net
    
    Amount
    
    Amortization
    
    NetIntangible assets subject to
amortization:Capitalized Software
    
    $
    1,213
    
    
    $
    367
    
    
    $
    846
    
    
    $
    1,179
    
    
    $
    282
    
    
    $
    897Customer Lists
    
    
    2,248
    
    
    
    449
    
    
    
    1,799
    
    
    
    2,247
    
    
    
    356
    
    
    
    1,891Patents
    
    
    1,494
    
    
    
    191
    
    
    
    1,303
    
    
    
    1,494
    
    
    
    147
    
    
    
    1,347Total
    
    $
    4,955
    
    
    $
    1,007
    
    
    $
    3,948
    
    
    $
    4,920
    
    
    $
    785
    
    
    $
    4,135
 Consolidated amortization
expense related to intangible assets, excluding
goodwill, for each of the three and six months ended June 30, 2004 and 2003
were $111 and $222. Estimated future aggregate annual amortization for intangible assets is as
follows: Period
    
    AmountSix months ended December 31, 2004
    
    $
    222Year ended December 31, 2005
    
    
    540Year ended December 31, 2006
    
    
    379Year ended December 31, 2007
    
    
    297Year ended December 31, 2008
    
    
    225Thereafter
    
    
    2,285
 The $13,558 of goodwill at June 30, 2004 is comprised of $7,580 related to the
Electronic Security Segment, $4,322 related to the Environmental Safety &
Security Segment and $1,656 related to the Software, Training & Simulation
Segment. The change in goodwill during the six-month period ended
June 30, 2004 was due to the currency translation adjustment. 7




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The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Thousands of Dollars)
(Unaudited)   NOTE 9  NOTES PAYABLE AND CREDIT FACILITY Notes Payable
At June 30, 2004, MECAR had borrowed $10,827 under its lines of
credit with its lenders. NS Microwave had a note of $74 for machinery and
vehicles. At December 31, 2003 MECAR had borrowed $4,322 under its lines of credit
with its lenders. In addition, MECAR borrowed $9,878 under a short-term loan
which was secured by a receivable of $9,878. The weighted average
interest rate for Notes Payable as of June 30, 2004 and December 31, 2003 was
3%. Credit Facility MECAR is obligated under an agreement (the Agreement),
executed March 2002, with its foreign banking syndicate that provides credit
facilities primarily for bank guarantees including performance bonds, letters
of credit and similar instruments required for specific sales contracts as well
as a line-of-credit for tax prepayments and working capital. The Agreement
provides for certain bank charges and fees as the facility is used, plus fees
of 2% of guarantees issued and quarterly fees at an annual rate of 1.25% of
guarantees outstanding. These fees are charged to interest expense. As of
June 30, 2004 and December 31, 2003, guarantees and performance bonds of
approximately $20,563 and $17,233 respectively, were outstanding. Advances under the Agreement are secured by restricted cash at June 30, 2004
and December 31, 2003 of approximately $8,737 and $15,813, respectively.
Amounts outstanding are also collateralized by a pledge of approximately
$41,624 of MECARs net assets. The Agreement requires that MECAR maintain net
worth and working capital covenants. NOTE 10  LONG-TERM DEBT Long-term obligations consist of the following as of June 30, 2004 and December
31, 2003, respectively: June 30, 2004
    
    December 31, 2003Notes payable, less unamortized discount and debt issue costs
    
    $
    1,103
    
    
    $
    Mortgage loan agreements
    
    
    279
    
    
    
    908Capital leases and other
    
    
    6,914
    
    
    
    6,703$
    8,296
    
    
    $
    7,611Less current maturities
    
    
    2,239
    
    
    
    2,709$
    6,057
    
    
    $
    4,902
 Notes payable.On May 28, 2004 the Company obtained a senior loan facility
from an accredited lender under which the Company may borrow up to $18,000 for
acquisitions and working capital. At closing, the Company borrowed $2,000 and
deposited $2,000 in a restricted account to secure the repayment. The facility
allows the Company to make additional draws under the facility under certain
conditions through November 28, 2005. All loans under the facility bear
interest at the rate of 11.5% per year payable monthly. Principal is paid in
sixty equal monthly payments commencing in late December 2005. The Company
pays a fee on the unused portion of the facility. Warrants (exercisable at
$0.01 per share) to purchase 4,000 shares of the Companys common stock were
issued at closing and were valued at $68. Additional warrants (at the rate of
2,000 for each $1 million loan) will be issued with future loan advances. The
facility includes certain financial and other covenants. The Company is
currently in compliance with those covenants. Mortgage loan agreements.The VSK Group is obligated on a mortgage on its
building, which has a balance of approximately $279 at June 30, 2004. These
mortgages are payable in annual installments of approximately $56 plus
interest. 8




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The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Thousands of Dollars)
(Unaudited)   NOTE 10  LONG-TERM DEBT  Continued Capital leases and other.The Company and its subsidiaries are also obligated
on various vehicle, equipment, capital lease obligations and other loans. The
notes and leases are generally secured by the assets acquired, bear interest at
rates ranging from 3.5% to 8.0% and mature at various dates through 2009. Scheduled annual maturities of long-term obligations as of June 30, 2004 are
approximately as follows: Year
    
    Amount2005
    
    $
    2,2392006
    
    
    2,0012007
    
    
    1,5562008
    
    
    8992009
    
    
    498Thereafter
    
    
    1,103
 NOTE 11  CONVERTIBLE SUBORDINATED DEBENTURE On June 28, 2002 the Company sold to an accredited investor for $7,500 (i) an
8% subordinated debenture that is convertible into shares of the Companys
common stock at $25.00 per share and (ii) warrants to purchase 15,000 shares of
the Companys common stock at an exercise price of $28.75 per share in cash.
The debenture bears interest at the rate of 8% per year, payable semi-annually.
The Company may elect to pay the principal and/or the interest in cash or in
registered shares of its common stock at a 10% discount to the then current
market price. The warrants to purchase 15,000 shares of the Companys common
stock were valued at $140. Monthly principal payments, in the amount of $750, began on June 28, 2004 and
continue for a period of ten (10) months or until March 28, 2005. The holder
of the debenture may choose to convert all or a portion of the principal amount
outstanding into shares of the Companys common stock at any time before
maturity. The right of the Company to sell and the holders right to purchase
additional debentures expired in August 2003. The Company has registered the
shares of common stock that could be issued in the event the holder elects to
convert the debenture and exercise the warrants. 9




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The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Thousands of Dollars)
(Unaudited)   NOTE 12  EARNINGS PER SHARE Basic earnings per share exclude dilution and are computed by dividing net
earnings by the weighted average number of common shares outstanding for the
period. The computation of diluted earnings per share includes the effects of
stock options, warrants and convertible debenture, if such effect is dilutive.
The table below shows the calculation of basic and diluted earnings per share
for the three and six months ended June 30, 2004 and June 30, 2003,
respectively: Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net earnings
    
    $
    4,226
    
    
    $
    2,302
    
    
    $
    4,970
    
    
    $
    6,236Interest on convertible debenture, net of taxes
    
    
    46
    
    
    
    90
    
    
    
    123
    
    
    
    179Net earnings before interest on convertible
debenture
    
    $
    4,272
    
    
    $
    2,392
    
    
    $
    5,093
    
    
    $
    6,415Weighted average number of basic shares
    
    
    5,555,509
    
    
    
    5,487,919
    
    
    
    5,553,454
    
    
    
    5,483,546Common stock equivalents
    
    
    461,991
    
    
    
    432,867
    
    
    
    478,256
    
    
    
    436,120Weighted average number of diluted shares
    
    
    6,017,500
    
    
    
    5,920,786
    
    
    
    6,031,710
    
    
    
    5,919,666Basic earning per share
    
    $
    .76
    
    
    $
    .42
    
    
    $
    .89
    
    
    $
    1.14Diluted earnings per share
    
    $
    .71
    
    
    $
    .40
    
    
    $
    .84
    
    
    $
    1.08
 NOTE 13  COMPREHENSIVE INCOME A summary of the components of Comprehensive Income for the three and six
months ended June 30, 2004 and 2003, are as follows: Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net earnings
    
    $
    4,226
    
    
    $
    2,302
    
    
    $
    4,970
    
    
    $
    6,236Currency translation adjustment
    
    
    (614
    )
    
    
    4,250
    
    
    
    (2,619
    )
    
    
    6,819Comprehensive income
    
    $
    3,612
    
    
    $
    6,552
    
    
    $
    2,351
    
    
    $
    13,055
 The currency translation adjustment for the three and six months ended June 30,
2004 resulted from the depreciation of the Euro during the respective periods.
In contrast, the currency translation adjustment for the comparable periods in
2003 resulted from the appreciation of the Euro during those periods. NOTE 14  STOCK BASED COMPENSATION The Company currently accounts for stock options using the intrinsic value
method and is applying APB Opinion No. 25, Accounting for Stock Issued to
Employees.Accordingly, compensation costs for stock options is measured and
recorded as the excess, if any, of the quoted market price of the Companys
stock at the date of grant over the amount an employee must pay to acquire the
stock. Compensation cost for stock awards is recorded based on the quoted
market value of the Companys stock at the time of grant. No compensation cost
has been recognized for the granting of stock options to employees in the three
and six months ended June 30, 2004 and 2003. 10




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##### 



The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Thousands of Dollars)
(Unaudited)   NOTE 14  STOCK BASED COMPENSATION  Continued The following table presents the pro forma decrease in income for the three and
six months ended June 30, 2004 and 2003, that would have been recorded had the
fair values of options granted been recognized as compensation expense on a
straight-line basis over the vesting period of the grant: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Dollars in thousands, except per share amounts)
    
    2004
    
    2003
    
    2004
    
    2003Reported net earnings
    
    $
    4,226
    
    
    $
    2,302
    
    
    $
    4,970
    
    
    $
    6,236Stock-based compensation costs that would have
been included in the determination of reported
net earnings, if the fair value method was
applied to all awards, net of tax
    
    
    (165
    )
    
    
    (120
    )
    
    
    (331
    )
    
    
    (241
    )Pro forma net earnings
    
    $
    4,061
    
    
    $
    2,182
    
    
    $
    4,639
    
    
    $
    5,995Basic earnings per share:Reported earnings per share
    
    $
    .76
    
    
    $
    0.42
    
    
    $
    .89
    
    
    $
    1.14Compensation costs, net of tax
    
    
    (.03
    )
    
    
    (.02
    )
    
    
    (.06
    )
    
    
    (.04
    )Pro forma basic earnings per share
    
    $
    .73
    
    
    $
    0.40
    
    
    $
    .83
    
    
    $
    1.10Diluted earnings per share:Reported earnings per share
    
    $
    .71
    
    
    $
    0.40
    
    
    $
    .84
    
    
    $
    1.08Compensation costs, net of tax
    
    
    (.03
    )
    
    
    (.02
    )
    
    
    (.05
    )
    
    
    (.04
    )Pro forma diluted earnings per share
    
    $
    .68
    
    
    $
    0.38
    
    
    $
    .79
    
    
    $
    1.04
 Options granted during the three and six months ended June 30, 2004 were
40,000. Options granted during the three and six months ended June 30, 2003
were 110,000. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes options pricing model. The weighted-average fair
value of each option at the date of grant for the three and six months ended
June 30, 2004 was $7.59. The weighted-average fair value of each option at the
date of grant for the three and six months ended June 30, 2003 was $6.50. The
weighted average assumptions used in the model were as follows: Three Months Ended June 30
    
    Six Months Ended June 302004
    
    2003
    
    2004
    
    2003Risk free interest rate
    
    
    2.86
    %
    
    
    2.86
    %
    
    
    2.86
    %
    
    
    2.86
    %Expected volatility rate
    
    
    47.00
    %
    
    
    47.00
    %
    
    
    47.00
    %
    
    
    47.00
    %Expected lives  years
    
    
    3
    
    
    
    3
    
    
    
    3
    
    
    
    3Divided yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 The weighted average assumptions were consistent between 2003 and 2004 and will
be evaluated prior to the publication of the next Form 10-K. We do not believe that
the factors used above have changed materially over the past twelve months.
The pro forma amounts may not be representative of future amounts since the
estimated fair value of stock options is amortized to expense over the vesting
period, and additional options may be granted in future periods. 11




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##### 



The Allied Defense Group, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Thousands of Dollars)
(Unaudited)   NOTE 15  INDUSTRY SEGMENTS Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues from external customersOrdnance & Manufacturing
    
    $
    32,296
    
    
    $
    33,319
    
    
    $
    55,373
    
    
    $
    65,986Electronic Security
    
    
    11,559
    
    
    
    7,707
    
    
    
    20,890
    
    
    
    14,438Environmental Safety & Security
    
    
    1,223
    
    
    
    1,509
    
    
    
    3,247
    
    
    
    3,815Software, Training & Simulation
    
    
    150
    
    
    
    188
    
    
    
    186
    
    
    
    1,141$
    45,228
    
    
    $
    42,723
    
    
    $
    79,696
    
    
    $
    85,380Segment profit before taxesOrdnance & Manufacturing
    
    $
    5,667
    
    
    $
    4,908
    
    
    $
    6,947
    
    
    $
    11,726Electronic Security
    
    
    2,237
    
    
    
    (63
    )
    
    
    3,057
    
    
    
    (5
    )Environmental Safety & Security
    
    
    (1,046
    )
    
    
    (345
    )
    
    
    (1,182
    )
    
    
    (337
    )Software, Training & Simulation
    
    
    (162
    )
    
    
    (58
    )
    
    
    (341
    )
    
    
    109Corporate and Other
    
    
    (35
    )
    
    
    (577
    )
    
    
    (596
    )
    
    
    (821
    )$
    6,661
    
    
    $
    3,865
    
    
    $
    7,885
    
    
    $
    10,672
 NOTE 16  COMMITMENTS AND CONTINGENCIES A suit has been filed against one of the VSK subsidiaries in the Belgian courts
alleging a breach of a non-compete clause within a teaming agreement executed
with a claimant in prior years. Management intends to vigorously defend this
suit and believes that it has meritorious defense to the claim. SeaSpace is in litigation with a former distributor concerning certain aspects
of the termination of the distributor relationship. The former distributor has
filed a preliminary injunction action in Japan concerning the termination.
SeaSpace has filed an action for monetary damages in California and the former
distributor has filed a similar action for monetary damages in Japan. The
California court has recently ruled that the matter should be resolved in an
international arbitration proceeding. Management continues to vigorously
defend these matters and believes that it has a meritorious position. NOTE 17  RECENT ACCOUNTING PRONOUNCEMENTS There were no new accounting pronouncements during the six months ended June
30, 2004 that would impact the Companys financial reporting. 12




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##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2004
(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, 2003 and the
Companys Quarterly Report on Form 10-Q for the period ended March 31, 2004 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 those reports. Overview Allied is a strategic portfolio of defense and security businesses, with
presence in worldwide markets, offering both government and commercial
customers leading edge products and services. Allied operates in four (4)
segments:  
    
    Ordnance & Manufacturingsegment consists of MECAR, located in
Belgium, and MECAR USA, located in Marshall, TX. MECAR develops and
produces medium caliber tank, mortar and other ammunition. MECAR USA
will initially pursue contracts from U.S. and foreign governments for
ammunition and pyrotechnics devices. MECAR USA is expected to be
marginally operational in the fourth quarter of 2004.  
    
    Electronic Securitysegment consists of The VSK Group, located in
Belgium, and NS Microwave, located in San Diego, CA. The VSK Group
consists of VSK Electronics N.V. which manufactures access control,
intrusion protection, fire detection and video systems; Télé Technique
Générale S.A. which installs security systems; Intelligent Data
Capturing Systems N.V. which manufacturers integrated video systems;
and VIGITEC S.A. which installs networked video surveillance systems.
NS Microwave designs, manufactures, distributes and services
industrial and law enforcement surveillance products and systems.  
    
    Environmental Safety & Securitysegment consists of SeaSpace, located
in San Diego, CA, which designs, manufactures, distributes and
services weather and environmental satellite ground reception systems
        .  
    
    Software, Training & Simulationsegment consists of Titan Dynamics,
located in Marshall, TX, which designs, manufactures and sells
battlefield effects simulators, minor pyrotechnics and other training
devices. Allied, the parent company, provides management services to its subsidiaries
and has no operating activities. Allied earned net profits of $4,226 and
$4,970 for the three and six months ended June 30, 2004, respectively, compared
to net profits of $2,302 and $6,236 for the comparable periods of 2003. Allied entered 2004 with substantial cash reserves and anticipates no liquidity
concerns in 2004. Allied has secured a senior domestic lending facility for
working capital and acquisitions. 13




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##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2004
(Thousands of Dollars)
(Unaudited)   Results of Operations for the Three Months Ended June 30, 2004 and 2003 The table below shows, for the three months ended June 30, 2004 and 2003,
certain items from Allieds condensed consolidated statements of earnings
expressed as a percentage of revenue: Three months ended June 30,2004
    
    2003Revenue
    
    $
    45,228
    
    
    
    100.0
    %
    
    $
    42,723
    
    
    
    100.0
    %Cost and expensesCost of sales
    
    
    30,537
    
    
    
    67.5
    
    
    
    30,691
    
    
    
    71.8Selling and administrative
    
    
    5,702
    
    
    
    12.6
    
    
    
    6,520
    
    
    
    15.3Research and development
    
    
    1,816
    
    
    
    4.0
    
    
    
    906
    
    
    
    2.1Operating income
    
    
    7,173
    
    
    
    15.9
    
    
    
    4,606
    
    
    
    10.8Other income (expense)Interest income
    
    
    93
    
    
    
    0.2
    
    
    
    131
    
    
    
    0.3Interest expense
    
    
    (520
    )
    
    
    (1.1
    )
    
    
    (524
    )
    
    
    (1.2
    )Other  net
    
    
    (85
    )
    
    
    (0.2
    )
    
    
    (348
    )
    
    
    (0.8
    )Earnings before
income taxes
    
    
    6,661
    
    
    
    14.8
    
    
    
    3,865
    
    
    
    9.1Income tax expense
    
    
    2,435
    
    
    
    5.4
    
    
    
    1,563
    
    
    
    3.7Net earnings
    
    $
    4,226
    
    
    
    9.4
    %
    
    $
    2,302
    
    
    
    5.4
    %
 Revenue.Allied had revenue of $45,228 in the three months ended June 30,
2004, which was 6% higher than its revenue in the same period of 2003. This
increase was principally attributable to higher distribution sales and
increased activities at the VSK Group and NS Microwave and the increase in the
value of the Euro. Revenue by SegmentThree Months Ended
    
    Three Months EndedJune 30, 2004
    
    June 30, 2003Percentage
    
    
    
    
    
    PercentageAmount
    
    of total
    
    Amount
    
    of totalOrdnance & Manufacturing
    
    $
    32,296
    
    
    
    71
    %
    
    $
    33.319
    
    
    
    78
    %Electronic Security
    
    
    11,559
    
    
    
    26
    %
    
    
    7,707
    
    
    
    18
    %Environmental Safety & Security
    
    
    1,223
    
    
    
    3
    %
    
    
    1,509
    
    
    
    4
    %Software, Training & Simulation
    
    
    150
    
    
    
    
    %
    
    
    188
    
    
    
    
    %$
    45,228
    
    
    
    100
    %
    
    $
    42,723
    
    
    
    100
    %
 Ordnance & Manufacturing Segment revenue for the second quarter of 2004
decreased by 3% from the comparable 2003 period. The entire decrease occurred
at MECAR as MECAR USA is not expected to be fully operational until the latter
portion of 2004 or early 2005. The 2003 period was benefited by substantial
activity under the approximately $130,000 Foreign Military Sales (FMS) contract
which is in its final stages and did not provide as much revenue in the current
period. While MECAR continues to meet the ammunition needs of its traditional
customers, it is actively seeking to diversify its customer base. 14




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##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2004
(Thousands of Dollars)
(Unaudited)   Results of Operations for the Three Months Ended June 30, 2004 and 2003 -
Continued Electronic Security Segment revenue for the second quarter of 2004 increased by
$3,852, or 50%, over the 2003 period due to increases at both NS Microwave and
the VSK Group. Approximately $3,000 of the increase was from NS Microwave as
it has begun to obtain long-awaited orders for its security products. A
substantial portion of NS Microwaves increased revenue was attributable to a
U.S. government contract scheduled for completion in the third quarter of 2004.
The increase at the VSK Group stemmed from the continued expansion of its
distribution network in Europe, as well as its strong marketing and business
development efforts. Environmental Safety & Security Segment revenues for the second quarter of 2004
decreased by $286 from the comparable 2003 period. SeaSpace continues to
suffer from increased competition by domestic and foreign competitors.
Further, a substantial project initially forecast for the second quarter of
2004 has been delayed to the latter portion of 2004. Software, Training & Simulation Segment revenues for the second quarter of 2004
decreased from the comparable 2003 period. Titan Dynamics sales of its Battle
Effects Simulators (BES) continue to be depressed pending safety certifications
expected in late 2004 or early 2005 from the U.S. Navy/Marine Corps
and the U.S. Army. Accordingly, Titan Dynamics revenue is now largely comprised of
cartridge sales for previously sold simulators. Cost of Sales.Cost of sales as a percentage of sales for the three months
ended June 30, 2004 was 68% compared with 72% for the same period in 2003. Cost of Sales as Percentage of Sales by Segment Three months
endedJune 302004
    
    2003Ordnance & Manufacturing
    
    
    72
    %
    
    
    76
    %Electronic Security
    
    
    56
    %
    
    
    55
    %Environmental Safety & Security
    
    
    60
    %
    
    
    71
    %Software, Training & Simulation
    
    
    67
    %
    
    
    43
    %Total
    
    
    68
    %
    
    
    72
    %
 Ordnance & Manufacturing Segment cost of sales as a percentage of sales for the
three months ended June 30, 2004 decreased from the same period of 2003 due to
more efficient production activity in 2004 as well as product mix. In the
second quarter of 2004, MECAR worked on a research & development contract which
had an unusually low cost of sales. Electronic Security Segment cost of sales as a percentage of sales for the
three months ended June 2004 increased over the same period in 2003 due to
higher NS Microwave material costs associated with using new product components
to fulfill customer requirements as well as replacing components which were
discontinued by vendors. In contrast, the VSK Group had consistent cost of
sales as a percentage of sales between 2003 and 2004 as it continues to
experience production efficiencies while expanding its distribution channel
throughout Europe. Environmental Safety & Security Segment cost of sales as a percentage of sales
decreased from 2003 as a result of the change in product mix and streamlined
labor costs. SeaSpace has taken efforts to right-size its organization and
reduce its cost of goods sold in light of the competitive environment. 15




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##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2004
(Thousands of Dollars)
(Unaudited)   Results of Operations for the Three Months Ended June 30, 2004 and 2003 -
Continued Software, Training & Simulation Segment cost of sales as a percentage of sales
for the three months ended June 2004 increased over 2003 as a result of the
change in product mix and higher labor costs. Direct labor as a percentage of
sales was higher in 2004 because the cartridges are more labor intensive than
BES systems and other products. Selling and Administrative Expenses.Selling and administrative expenses as a
percentage of sales for the three months ended June 30, 2004 was approximately
13% compared with 15% for the same period in 2003. This decrease
stemmed from lower administrative costs at NS Microwave and Allied. In 2003,
NS Microwaves administrative costs were burdened with compensation charges
associated with production personnel, which did not recur in 2004. Also in
2003, Allieds administrative costs included the write-off of funding costs
associated with a structured debt financing proposal, which did not recur in
2004. For the other business units, costs were greater in the second quarter
of 2004 due primarily to increased compensation expenses for administrative
personnel. Research and Development.Research and development costs increased for the
three months ended June 30, 2004 by 100% over 2003 levels. The increase was
attributed to increased research being conducted at all the business units,
except NS Microwave. Expenditures decreased at NS Microwave as the staff
utilized for research and development efforts were assigned to production
efforts during the quarter. This trend of increased research and development
is expected to continue for the remainder of the year. Interest Income.Interest income decreased for the three months ended June 30,
2004 by 29% from 2003 levels. The total dollar decrease was nominal and was
primarily attributed to earnings on interest bearing cash accounts. Interest Expense.Interest expense for the three months ended June 30, 2004
was materially consistent with 2003 levels. Other-Net.Other-net primarily represents currency gains/losses, resulting
from foreign currency transactions at MECAR and the VSK Group, as well as bank
charges related to MECARs performance bonds and advance payment guarantees,
which are generally required under the terms of MECARs contracts with foreign
governments and its distributor. Other-net expense for the three months ended
June 30, 2004 increased over the comparable 2003 period. Pre-Tax Profit Pre-Tax Profit (Loss) by Segment Three months
endedJune 302004
    
    2003Ordnance & Manufacturing
    
    $
    5,667
    
    
    $
    4,908Electronic Security
    
    
    2,237
    
    
    
    (63
    )Environmental Safety & Security
    
    
    (1,046
    )
    
    
    (345
    )Software, Training & Simulation
    
    
    (162
    )
    
    
    (58
    )Corporate and other
    
    
    (35
    )
    
    
    (577
    )$
    6,661
    
    
    $
    3,865
 16




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##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2004
(Thousands of Dollars)
(Unaudited)   Results of Operations for the Three Months Ended June 30, 2004 and 2003 -
Continued Ordnance & Manufacturing Segment pre-tax profit for the three months ended June
30, 2004 increased over the comparable period in 2003 principally due to
services performed on a small research & development project which had a higher
than normal profit margin. This contract has been substantially completed.
MECARs profitability for 2004 is expected to be at lower levels than in prior
years due to a lack of substantial high-margin contracts which benefited
2001-2003 results. Electronic Security Segment pre-tax profit for the three months ended June 30,
2004 increased from the comparable period in 2003. Activity at the VSK Group
was favorably impacted by increased sales to non-Belgian customers via the VSK
Groups distribution network and NS Microwaves increased business, largely
from one U.S. government contract. Environmental Safety & Security Segment pre-tax loss resulted from increased
competitive pressures, both at home and abroad, as well as increased
development costs associated with new products expected to be available for
sale before year-end and substantial legal expenses associated with an ongoing
dispute with a former sales representative. SeaSpace has taken efforts to
right-size its organization and reduce its cost of goods sold in light of the
competitive environment. Software, Training & Simulation Segment pre-tax loss in 2004 results from Titan
Dynamics principal product lacking U.S. Government safety certification.
Titan Dynamics anticipates receipt of Navy/Marine Corp certification in the
fourth quarter of 2004. Corporate and other Segment pre-tax loss for the three months ended June 30,
2004 decreased from the 2003 level due to reduced intercompany management fee
adjustments and reduced taxes. Income Taxes.The effective income tax rate in the three months ended June 30,
2004 was 37% compared to 42% in the same period of 2003. This decrease
occurred at MECAR and the VSK Group. While the corporate tax rate in Belgium
was reduced from 40.17% to 33.99% effective for tax years beginning January 1,
2003, the reduced tax rate did not take effect at MECAR and the VSK Group until
the second half of 2003. Net Earnings.The Company earned a $4,226 net profit for the three months
ended June 30, 2004 compared with $2,302 net profit in the same periods of
2003. The increase in 2004 resulted principally from the activities at MECAR,
NS Microwave and the VSK Group. 17




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##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2004
(Thousands of Dollars)
(Unaudited)   Results of Operations for the Six Months Ended June 30, 2004 and 2003 The table below shows, for the six months ended June 30, 2004 and 2003, certain
items from Allieds condensed consolidated statements of earnings expressed as
a percentage of revenue: Six months ended June 30,2004
    
    2003Revenue
    
    $
    79,696
    
    
    
    100.0
    %
    
    $
    85,380
    
    
    
    100.0
    %Cost and expensesCost of sales
    
    
    54,848
    
    
    
    68.8
    
    
    
    59,606
    
    
    
    69.8Selling and administrative
    
    
    12,349
    
    
    
    15.5
    
    
    
    12,294
    
    
    
    14.4Research and development
    
    
    3,377
    
    
    
    4.2
    
    
    
    1,757
    
    
    
    2.1Operating income
    
    
    9,122
    
    
    
    11.5
    
    
    
    11,723
    
    
    
    13.7Other income (expense)Interest income
    
    
    195
    
    
    
    0.3
    
    
    
    228
    
    
    
    0.3Interest expense
    
    
    (998
    )
    
    
    (1.3
    )
    
    
    (959
    )
    
    
    (1.1
    )Other  net
    
    
    (434
    )
    
    
    (0.6
    )
    
    
    (320
    )
    
    
    (0.4
    )Earnings before
income taxes
    
    
    7,885
    
    
    
    9.9
    
    
    
    10,672
    
    
    
    12.5Income tax expense
    
    
    2,915
    
    
    
    3.7
    
    
    
    4,436
    
    
    
    5.2Net earnings
    
    $
    4,970
    
    
    
    6.2
    %
    
    $
    6,236
    
    
    
    7.3
    %
 Revenue. Allied had revenue of $79,696 in the six months ended June 30, 2004, which was
7% lower than its revenue in the same period of 2003. This decrease was
principally attributable to reduced production activities at MECAR. Revenue by SegmentSix Months Ended
    
    Six Months EndedJune 30, 2004
    
    June 30, 2003Percentage
    
    
    
    
    
    PercentageAmount
    
    of total
    
    Amount
    
    of totalOrdnance & Manufacturing
    
    $
    55,373
    
    
    
    69
    %
    
    $
    65,986
    
    
    
    77
    %Electronic Security
    
    
    20,890
    
    
    
    26
    %
    
    
    14,438
    
    
    
    17
    %Environmental Safety & Security
    
    
    3,247
    
    
    
    5
    %
    
    
    3,815
    
    
    
    5
    %Software, Training & Simulation
    
    
    186
    
    
    
    
    %
    
    
    1,141
    
    
    
    1
    %$
    79,696
    
    
    
    100
    %
    
    $
    85,380
    
    
    
    100
    %
 Ordnance & Manufacturing Segment revenue for the six months ended June 30, 2004
decreased by 16% from the comparable period in 2003. The decrease was the
result of reduced activity on the large FMS contract received in
February 2002 and production delays encountered during the first
quarter of 2004. 18




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##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2004
(Thousands of Dollars)
(Unaudited)   Results of Operations for the Six Months Ended June 30, 2004 and 2003 Electronic Security Segment revenue for the six months ended June 30, 2004
increased by $6,452 over the comparable period in 2003. The VSK Group and NS
Microwave contributed $2,547 and $3,905 to this increase, respectively. The
increase at the VSK Group is principally the result of continued expansion of
its export sales via its European distribution network. NS Microwaves
business has improved due to receipt of some substantial orders in late 2003
and in the first half of 2004. Environmental Safety & Security Segment revenues for the six months ended June
30, 2004 decreased by $568 from the comparable period in 2003 as a result of
increased competition and delayed projects as noted above. Software, Training & Simulation Segment revenues for the six month ended June
30, 2004 decreased by $955 from the comparable period in 2003 due to reduced
simulator sales. Cost of Sales.Cost of sales as a percentage of sales for the six month
periods ended June 30, 2004, was 69% compared with 70% for the same period in
2003. Cost of Sales as Percentage of Sales by Segment Six months endedJune 302004
    
    2003Ordnance & Manufacturing
    
    
    74
    %
    
    
    74
    %Electronic Security
    
    
    57
    %
    
    
    55
    %Environmental Safety & Security
    
    
    58
    %
    
    
    65
    %Software, Training & Simulation
    
    
    67
    %
    
    
    59
    %Total
    
    
    69
    %
    
    
    70
    %
 Ordnance & Manufacturing Segment cost of sales as a percentage of sales was
consistent between the six months ended June 30, 2004 and 2003. Electronic Security Segment cost of sales as a percentage of sales for the six
months ended June 2004 increased over the same period of 2003 due to the higher
NS Microwave material costs as noted above. Environmental Safety & Security Segment cost of sales as a percentage of sales
decreased from 2003 as a result of the change in product mix and streamlined
labor costs Software, Training & Simulation Segment cost of sales as a percentage of sales
for the six months ended June 30, 2004 increased over 2003 as a result of the
change in product mix and higher labor costs 19




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##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2004
(Thousands of Dollars)
(Unaudited)   Results of Operations for the Six Months Ended June 30, 2004 and 2003 Selling and Administrative Expenses.Selling and administrative expenses as a
percentage of sales for the six months ended June 30, 2004 was approximately
16% compared with 14% for the same period in 2003. This resulted from higher
costs at MECAR, the VSK Group and SeaSpace for increased compensation expenses
for administrative personnel, offset by decreased costs at NS Microwave and
Allied. Research and Development.Research and development costs increased for the six
months ended June 30, 2004 by 92% over 2003 levels. This trend of increased
research and development is expected to continue for the remainder of the year. Interest Income.Interest income decreased for the six months ended June 30,
2004 by 14% from 2003 levels. The total dollar decrease was nominal and was
primarily attributed to earnings on interest bearing cash accounts. Interest Expense.Interest expense increased for the six months ended June 30,
2004 by 4% over 2003 levels. The increase was primarily due to the
total increase in long-term obligations. Other-Net.Other-net primarily represents currency gains/losses, resulting
from foreign currency transactions at MECAR and the VSK Group, as well as bank
charges related to MECARs performance bonds and advance payment guarantees,
which are generally required under the terms of MECARs contracts with foreign
governments and its distributor. Other-net expense for the six months ended
June 30, 2004 increased over the comparable period of 2003 from currency losses
in 2004 on MECARs U.S. bank accounts. Pre-Tax Profit Pre-Tax Profit (Loss) by Segment Six months endedJune 302004
    
    2003Ordnance & Manufacturing
    
    $
    6,946
    
    
    $
    11,726Electronic Security
    
    
    3,057
    
    
    
    (5
    )Environmental Safety & Security
    
    
    (1,182
    )
    
    
    (337
    )Software, Training & Simulation
    
    
    (341
    )
    
    
    109Corporate and other
    
    
    (595
    )
    
    
    (821
    )$
    7,885
    
    
    $
    10,672
 Ordnance & Manufacturing Segment pre-tax profit for the first half of 2004
decreased from 2003 levels due to reduced work on the FMS contract. Electronic Security Segment pre-tax profit for the period ended June 30, 2004
increased over 2003 levels due to increased business and increased margins at
both the VSK Group and NS Microwave. 20




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##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2004
(Thousands of Dollars)
(Unaudited)   Results of Operations for the Six Months Ended June 30, 2004 and 2003 Environmental Safety & Security Segment pre-tax loss for the six months period
ended June 30, 2004 increased over the 2003 loss due to competitive pressures,
increased development costs and higher legal expenses. Software, Training & Simulation Segment pre-tax loss for the period ended June
30, 2004 resulted from reduced business awaiting necessary safety
certifications. Corporate and other Segment pre-tax loss for the six months ended June 30, 2004
was less than the comparable 2003 period due to reduced taxes. Income Taxes.The effective income tax rate in the first six months of 2004
was 37% compared to 42% in the same period of 2003. This decrease occurred at
MECAR and the VSK Group. While the corporate tax rate in Belgium was reduced
from 40.17% to 33.99% effective for tax years beginning January 1, 2003, the
reduced tax rate did not take effect at MECAR and the VSK Group until the
second half of 2003. Net Earnings.The Company earned a $4,970 net profit for the six months ended
June 30, 2004 compared with $6,236 net profit in the same periods of 2003. The
decrease in 2004 resulted from the activities at MECAR, SeaSpace and Titan
Dynamics. Backlog.As of June 30, 2004, the Companys backlog was $88,620 compared to
$115,416 at December 31, 2003, and $140,843 at June 30, 2003. The June 30,
2004 and December 31, 2003 amounts included unfunded portion of approximately
$9,700 from an indefinite delivery, indefinite quantity (IDIQ) federal
contract. Backlog by SegmentJune 30, 2004
    
    June 30, 2003Percentage
    
    
    
    
    
    PercentageAmount
    
    of total
    
    Amount
    
    Of totalOrdnance & Manufacturing
    
    $
    63,408
    
    
    
    72
    %
    
    $
    127,028
    
    
    
    90
    %Electronic Security
    
    
    23,029
    
    
    
    26
    
    
    
    12,281
    
    
    
    9Environmental Safety & Security
    
    
    1,630
    
    
    
    2
    
    
    
    1,452
    
    
    
    1Software, Training & Simulation
    
    
    553
    
    
    
    
    
    
    
    82
    
    
    
    $
    88,620
    
    
    
    100
    %
    
    $
    140,843
    
    
    
    100
    %
 The decrease in backlog is primarily the result of MECARs work on the
approximately $130,000 FMS multi-year contract awarded in February 2002. The
backlog associated with this particular contract will continue to decrease in
accordance with the delivery terms of the award. MECAR has undertaken a
customer diversification effort in the past few years, which
continues to be productive in 2004. In addition to meeting the ammunition needs of its
traditional customers, MECAR has gained new customers which have contributed to
a majority of its new orders for 2004. Electronic Security backlog increased
from new contracts received at the VSK Group and NS Microwave. Electronic
Security backlog includes an unfunded portion of approximately $9,700 from an
IDIQ federal contract. 21




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##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2004
(Thousands of Dollars)
(Unaudited)   Liquidity and Capital Resources Balance Sheet The Companys June 30, 2004 condensed consolidated balance
sheet was affected by the value of the Euro. All European values were
converted at the June 30, 2004 and December 31, 2003 conversion ratios of
1.2085 and 1.2557, respectively. Historically, the Companys positive cash flow from operations and available
credit facilities have provided adequate liquidity and working capital to fully
fund the Companys operational needs. Working capital, which includes
restricted cash, was $78,340 at June 30, 2004, which is an increase of $1,460
from the December 31, 2003, level. Working capital remains strong due to
profitable operations. Cash at June 30, 2004 decreased by $21,277 from December 31, 2003 as
substantial cash was expended in the first half of 2004 to repay current
liabilities including MECARs short-term borrowings. Restricted cash decreased
by $5,073 in the first half of 2004 due to completion of certain contracts at
MECAR. Accounts receivable at June 30, 2004 increased by $2,255, or 8% from December
31, 2003, due to higher sales in the second quarter 2004 versus the second
quarter 2003. Costs and accrued earnings on uncompleted contracts increased by
$18,047 from year-end 2003 primarily as a result of continued work on MECAR
contracts. Inventories increased $2,283 primarily from higher raw material
purchases. The inventory buildup will give the subsidiaries the ability to
deliver products with the shortest possible lead times. Fair value of foreign
exchange contracts was $3,811 at June 30, 2004, compared to $9,378 at December
31, 2003. MECAR uses foreign currency hedge contracts to minimize the foreign
currency exposures that arise from sales contracts with certain foreign
customers. Prepaid and other current assets increased $4,311 primarily from costs on
MECARs hedge contract agreements. Property, Plant & Equipment, net of accumulated depreciation, increased
primarily from equipment purchases at the business units during the first six
months of 2004. Intangibles decreased primarily from the amortization of
capitalized software, customer lists and patents. Goodwill decreased solely
from the currency translation adjustment. Notes Payable decreased $3,299 from December 31, 2003 as a result of MECAR
paying off a short-term loan. During the first six
months of 2004, MECAR used its cash from operations for working capital needs.
Accounts payable decreased $10,210 as a result of lower production costs,
primarily at MECAR, for the six months ended June 30, 2004 compared to the six
months ended December 2003. In contrast, accrued liabilities increased $4,703
due primarily to the costs associated with deferred gains related to forward
exchange contracts at MECAR. MECAR entered into new foreign exchange contracts
during 2004. Customer deposits increased $4,221 primarily at MECAR as a result
of shipments during the period and other new contracts in 2004 requiring
deposits. Income taxes increased $3,389 due to the tax provisions at MECAR and
the VSK Group, offset by the tax benefits at NS Microwave, SeaSpace, Titan
Dynamics and Corporate. Convertible-subordinated debenture, current and long-term, was materially
unchanged between June 30, 2004, and December 31, 2003. The Company has
commenced repayment of the debenture. Monthly payments will continue through
March 2005. Stockholders equity as of June 30, 2004, was negatively affected by the
reduction in the value of the Euro versus the U.S. dollar during the first six
months of 2004, resulting in a decrease in accumulated other comprehensive
income by $2,619. The Euro depreciated by approximately 4% since the beginning
of the year. 22




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##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2004
(Thousands of Dollars)
(Unaudited)   Liquidity and Capital Resources  Continued Cash Flows The table below provides the cash flow statement data for the periods
presented. Six months ended June 302004
    
    2003Net cash provided by (used in) operating activities
    
    $
    (19,979
    )
    
    $
    11,066Net cash used in investing activities
    
    
    (3,476
    )
    
    
    (3,023
    )Net cash used in financing activities
    
    
    2,967
    
    
    
    (1,768
    )
 Operating Activities.
The Company used $19,979 of cash in its operating
activities during the six months ended June 30, 2004 whereas it generated
$11,066 of cash during the same period of 2003. This is attributed primarily
to reduction in earnings for the six months ended June 2004 and
increase in costs and accrued earnings on uncompleted contracts. Cash paid for interest was $569 and $635, for the six months ended June 30,
2004 and 2003, respectively. Cash paid for income taxes was $4,983 and $8,426
for the six months ended June 30, 2004 and 2003, respectively, and includes
federal, international and state taxes. Investing Activities.Net cash used in investing activities increased by 15%
between the two periods. This stemmed from higher capital expenditures for
production equipment and leasehold improvements at the Belgian business units.
The Company anticipates that cash generated from operations will be sufficient
to support any further capital expenditures over the remainder of the year.
Future expenditures for the remainder of the year will be primarily incurred
for machinery and equipment. Financing Activities.The Company generated $2,967 of cash from its financing
activities during the six months ended June 30, 2004 whereas it used $1,768 of
cash during the same period of 2003. This stemmed from proceeds of
long-term
debt, in particular the senior secured facility, as well as a reduction in
restricted cash. This was offset by payment of short-term borrowings, which
primarily pertained to MECAR operations. Allied.The parent company continues to operate based on fees and dividends
received from its subsidiaries. In the second quarter of 2004, Allied has made
cash infusions to NS Microwave, Titan Dynamics and SeaSpace to support working
capital requirements. On May 28, 2004 the Company obtained a senior loan
facility under which the Company may borrow up to $18,000 for acquisitions and
working capital. At closing, the Company borrowed $2,000 and deposited $2,000
in a restricted account to secure the repayment. The facility allows the
Company to make additional draws under the facility under certain conditions
through November 28, 2005. All loans under the facility bear interest at the
rate of 11.5% per year payable monthly. Principal is paid in sixty equal
monthly payments commencing in late December 2005. The Company pays a fee on
the unused portion of the facility. Warrants (exercisable at $0.01 per share)
to purchase 4,000 shares of the Companys common stock were issued at closing
and were valued at $68. Additional warrants (at the rate of 2,000 for each $1
million loan) will be issued with future loan advances. The facility includes
certain financial and other covenants. The Company is currently in compliance
with those covenants. 23




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##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2004
(Thousands of Dollars)
(Unaudited)   Liquidity and Capital Resources  Continued MECAR.MECAR continues to operate from internally generated cash and funds
provided by its bank syndicate and financing from capital leases. The bank
syndicate agreement provides (i) lines of credit for tax prepayments and
working capital and (ii) a facility for guarantees/bonds to support customer
contracts. The financial lending terms and fees are denominated in Euros and
the dollar equivalents will fluctuate according to global economic conditions.
The bank agreement imposes two financial covenants requiring MECAR to maintain
minimum net worth and working capital levels. As of June 30, 2004, MECAR was
in compliance with both of these bank covenants. MECARs obligations under the
bank syndicate agreement continue to be collateralized by a pledge of MECARs
assets. The agreement includes Allieds pledge to support MECAR so that it
remains in compliance with its total borrowing obligations. VSK Group.The VSK Group operated solely from cash generated from business
operations. The VSK Group is obligated on several mortgages and other
long-term obligations. Other Subsidiaries.NS Microwave, Titan Dynamics and SeaSpace operated from
cash generated from operations and cash infusions by Allied. Stock Repurchases.The Company did not repurchase any shares of its common
stock during the six months ended June 30, 2004 and does not anticipate
repurchasing shares of Company stock during the remainder of 2004. Future Liquidity.The Company is exploring additional financing in light of
its repayment of the convertible debenture. At times, the Company has utilized
the services of an Investment Banker in an attempt to secure appropriate financing. Funds for the build-out of the initial MECAR USA infrastructure are being
provided by the Marshall Economic Development Corporation of Marshall, Texas.
This is a state funded organization with the initial proceeds directed at
creating roads and a manufacturing plant on the grounds. The Companys ability to cover its anticipated future operating and capital
requirements is dependent upon its continued ability to generate positive cash
flow from the operations of its subsidiaries, particularly the operations of
MECAR and the VSK Group, and its ability to successfully integrate its
acquisitions. The Company expects its acquisitions to be accretive to
operations over a period of not longer than 24 months, although this cannot be
assured. This will depend upon many factors including the successful release
of new product offerings, successful research and development efforts, and
increased market share. Off-Balance Sheet Arrangements.As part of our ongoing business, we do not
participate in transactions that generate relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities (SPEs), which would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes. As of June 30, 2004, we are
not involved in any material unconsolidated SPE transactions. MECAR is
required to provide performance bonds and advance payment guarantees for
certain contracts, which are provided by MECARs bank syndicate. MECAR is
obligated to repay the bank syndicate any amounts it pays as a result of any
demands on the bonds or guarantees. To date, there have never been any such
demands. 24




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##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2004
(Thousands of Dollars)
(Unaudited)   Critical Accounting Policies Our significant accounting policies are described in Note A to the consolidated
financial statements included in Item 7 of the Form 10-K for the year ended
December 31, 2003, and are outlined below:  
    
    Revenue recognition via the percentage of completion method.The
percentage of completion method is used by MECAR, NS Microwave and
SeaSpace for their fixed price sales contracts. Approximately 91% and
93%, and 98% and 97%, of condensed consolidated revenue was recognized
under the percentage of completion method during the three and six
months ended June 30, 2004 and 2003, respectively.  
    
    Goodwill and intangible asset valuation.The Company completed a
goodwill impairment analysis in the fourth quarter of 2003 and did not
determine that an impairment charge to earnings was required. As
required by the accounting rules, the Company will perform a similar
review each year or earlier if indicators of potential impairment
exist. As of June 30, 2004, there were no indicators of impairment.  
    
    Inventory reserves and allowance for doubtful accounts.The Company
reviews its recorded inventory and estimates a write-down for obsolete
or slow-moving items to their net realizable value. Allowances for
doubtful accounts are evaluated based upon detailed analysis and
assessment of receivables that may not be collected in the normal
course of operations. The inventory reserves and allowance for
doubtful accounts are deemed reasonable.  
    
    Valuation of deferred income taxes and income tax reserves.The
Company is subject to taxation by federal, state and international
jurisdictions. The Company reviews the balances on a quarterly basis
and believes the balances are adequate. Forward-Looking Statements This Managements Discussion and Analysis 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 the following:  
    
    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; 25




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##### 



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2004
(Thousands of Dollars)
(Unaudited)    
    
    general risks associated with doing business outside the United States, including, without limitation,
import duties, tariffs, quotas and political and economic instability;  
    
    the effects of terrorist actions on business activities, customer orders and cancellations, and the United
States and international governments responses to these terrorist actions;  
    
    changes in government regulations;  
    
    liability and other claims asserted against us;  
    
    the ability to attract and retain qualified personnel; and  
    
    continued availability of financing, financial instruments and financial resources in the amounts, at the
times, and on the terms required to support the Companys future business. We operate in a very competitive and rapidly changing environment. New risk
factors can arise and it is not possible for management to predict all such
risk factors, nor can it assess the impact of all such risk factors on our
business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements. Given these risks and uncertainties, investors
should not place undue reliance on forward-looking statements as a prediction
of actual results. 26




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##### 



The Allied Defense Group, Inc. June 30, 2004   QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE At June 30, 2004, Allied had $33 million of cash (including restricted cash).
Assuming all the cash was available for investment, a 1% change in interest
rates would impact interest income for the three and six months ended June 30,
2004 and 2003 by $0.08 million and $0.16 million, respectively. Approximately 89% and 92% of the Companys revenue for the six months ended
June 30, 2004 and 2003, respectively, were derived from operations outside the
U.S. Accordingly, exposure exists to potentially adverse movement in foreign
currency rates. It is estimated that a 10% change in the value of the Euro
would impact reported net earnings for the three and six months ended June 30,
2004 and 2003 by approximately $0.46 million and $0.64 million and $0.40
million and $0.88 million, respectively. DISCLOSURE CONTROLS AND PROCEDURES  1.
    
    Evaluation of disclosure controls and proceduresUnder the direction and with the participation of the Companys management,
including the Companys Chief Executive Officer and Chief Financial Officer,
the Company carried out an evaluation of the effectiveness of the design and
operation of its disclosure controls and procedures pursuant to Exchange Act
Rule 13a-15 as of the end of the period covered by the report. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company
in reports that it files or submits under the Exchange Act of 1934 (i) is
recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms and
(ii) is accumulated and communicated to the Companys senior management to
allow timely decisions regarding required disclosure.  2.
    
    Changes in internal controlsThere have been no significant changes in our internal controls over
financial reporting or, to our knowledge, in other factors that could
significantly affect our internal control over financial reporting
subsequent to the date we conducted the above-described evaluation. We are
currently reviewing the new internal controls documentation and attestation
requirements regarding Rule 404 of the Sarbanes Oxley Act of 2002. We have
retained an independent consulting firm to assist us in evaluating and
improving our internal controls. We are confident that we will fully comply
with such requirements by December 31, 2004. 27




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##### 



The Allied Defense Group, Inc.
PART II  OTHER INFORMATION
June 30, 2004   Item 1 Legal Proceedings See Note 16 to the Condensed Consolidated Financial Statements. Item 4 Submission of Matters to a Vote of Security Holders  On June 4, 2004, the Company held its annual meeting of shareholders.  The Companys shareholders re-elected J. H. Binford Peay, III, John G.
Meyer, Jr., J.R. Sculley, Clifford C. Christ, Harry H. Warner, Ronald H.
Griffith and Gilbert F. Decker as members of the Board of Directors of the
Company.  The following votes were cast in connection with the election of directors: Nominee
    
    In Favor
    
    WithheldJ. H. Binford Peay, III
    
    
    4,697,196
    
    
    
    215,752John G. Meyer, Jr.
    
    
    4,696,906
    
    
    
    216,042Clifford C. Christ
    
    
    4,809,382
    
    
    
    103,566Ronald H. Griffith
    
    
    4,819,358
    
    
    
    93,590J. R. Sculley
    
    
    4,690,270
    
    
    
    222,678Harry H. Warner
    
    
    4,818,806
    
    
    
    94,142Gilbert F. Decker
    
    
    4,817,806
    
    
    
    95,142
  The Companys shareholders ratified the appointment of
Grant Thornton LLP as the Companys independent auditors
for 2004. The following votes were cast in connection
with such ratification: For
    
    Against
    
    Abstain4,868,813
    
    
    36,758
    
    
    
    7,377
 28




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##### 



The Allied Defense Group, Inc.
PART II  OTHER INFORMATION
June 30, 2004   Item 6 Exhibits and Reports on Form 8-K  (a)
    
    Reports on Form 8-K  On April 30, 2004, the Company filed a Form 8-K reporting execution and
delivery of a new employment agreement with Wayne F. C. Hosking, Jr., the
Companys Vice President for Corporate Strategic Development.  On May 5, 2004, the Company filed a Form 8-K providing its financial results
for the year ended March 31, 2004.  On June 2, 2004, the Company filed a Form 8-K reporting its senior secured
financing facility. (b) Exhibit No.
    
    Description of Exhibits3.1
    
    
    Certificate of Incorporation, as amended (Incorporated
by reference from Form 10-Q filed in August 2002).3.2
    
    
    Amended and Restated By-Laws3.3
    
    
    Rights Agreement between Allied and Mellon Investor
Services, LLC (Incorporated by reference from Form 8-K
filed in June 2001).10.1
    
    
    Employment Agreement between Allied and John G. Meyer,
Jr. (Incorporated by reference from Form 8-K filed in
March 2001 and Form 8-K filed in August 2001).10.2
    
    
    Employment Agreement letter amendments between Allied
and John G. Meyer, Jr.10.3
    
    
    Employment Agreement between Allied and Charles A.
Hasper (Incorporated by reference from Form 8-K filed in
August 2001).10.4
    
    
    Employment Agreement letter amendment between Allied and
Charles A. Hasper.10.5
    
    
    Employment Agreement between Allied and Monte L. Pickens
(Incorporated by reference from Form 8-K filed in April
2003).10.6
    
    
    Employment Agreement letter amendment between Allied and
Monte L. Pickens.10.7
    
    
    Employment Agreement between Allied and Wayne F. C.
Hosking, Jr. (Incorporated by reference from Form 8-K
filed in April 2004).10.8
    
    
    Employment Agreement between Allied and John J. Marcello10.9
    
    
    2001 Equity Incentive Plan, as amended (Incorporated by
reference from Proxy Statements filed in April 2001 and
April 2002).10.10
    
    
    8% Convertible Debenture, Series A and related documents
(Incorporated by reference from Form 8-K filed in July
2002).10.11
    
    
    Credit Agreement for MECAR S.A. (Incorporated by
reference from Form 10-Q filed in August 2002).10.12
    
    
    Award/Contract dated as of March 1, 2002, by and between
MECAR S.A. and U.S. Government (Incorporated by
reference from Form 10-Q filed in August 2002).
 29




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##### 



The Allied Defense Group, Inc.
PART II  OTHER INFORMATION
June 30, 2004   (b) Exhibit No.
    
    Description of Exhibits10.13
    
    
    Employee Stock Purchase Plan, as amended (Incorporated
by reference from Form 10-Q filed in November 2002).10.14
    
    
    Lease Agreement, as amended (Incorporated by reference
from Form 10-Q filed in November 2002).10.15
    
    
    Form of Indemnity Agreement for Directors and Executive
Officers (Incorporated by reference from Form 10-Q filed
in November 2002).10.16
    
    
    International Distribution Agreement (Incorporated by
reference from Form 10-Q filed in November 2002).10.17
    
    
    Deferred Compensation Plan for Non-Employee Directors.10.18
    
    
    Loan and Security Agreement among Wilton Funding, LLC
and Allied and certain of its subsidiaries (Incorporated
by reference from Form 8-K filed in June 2004).21
    
    
    List of Subsidiaries (Incorporated by reference from
Form 10-K filed in March 2004)23
    
    
    Consent of Independent Certified Public Accountants
(Incorporated by reference from Form 10-K filed in March
2004)31.1
    
    
    Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232
    
    
    Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
 30




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##### 



The Allied Defense Group, Inc. 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. THE ALLIED DEFENSE GROUP, INC./s/ Charles A. HasperDate: August 9, 2004
    
    Charles A. Hasper,
Chief Financial Officer and
Treasurer
 31