UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   Form 10-Q



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

For the period ended                                            June 30, 1998

                                       OR

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

For the transition period from _____________________ to ____________________

                                                       Commission File Number
                                                               0-2545

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

                          Allied Research Corporation
               --------------------------------------------------
             (Exact name of Registrant as specified in its charter)

         Delaware                                          04-2281015
------------------------------                     ---------------------------
(State or other jurisdiction of                     (I.R.S. Employer Number)
 incorporation or organization)

8000 Towers Crescent Drive, Suite 750
Vienna, Virginia                                                22182
-------------------------------------                           -----
(Address of principal executive offices)                     (Zip Code)

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

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

                  Yes    X          No
                        ---            ---

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of June 30, 1998: 4,739,754.


<PAGE>




                          Allied Research Corporation

                                     INDEX

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


                                                                         PAGE
PART I.     FINANCIAL INFORMATION - UNAUDITED                           NUMBER



   Item 1.  Financial Statements



            Condensed Consolidated Balance Sheets

               June 30, 1998 and December 31, 1997.......................2, 3



            Condensed Consolidated Statements of Earnings

               Three months and six months ended June 30, 1998 and 1997.....4



            Condensed Consolidated Statements of Cash Flows

               Six months ended June 30, 1998 and 1997...................5, 6



            Notes to Condensed Consolidated Financial Statements............7



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



PART II.    OTHER INFORMATION..............................................14


<PAGE>



                          Allied Research Corporation

                     CONDENSED CONSOLIDATED BALANCE SHEETS

                             (Thousands of Dollars)

                                     ASSETS

                                  (Unaudited)

-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                               June 30, 1998    December 31, 1997
                                                               -------------    -----------------
<S><C>
CURRENT ASSETS
   Cash and equivalents, including restricted cash               $ 24,838            $16,421
   Accounts receivable                                             18,406             40,650
   Costs and accrued earnings on uncompleted contracts             15,530              7,804
   Inventories                                                      5,440              6,966
   Prepaid expenses and deposits                                   13,026              4,094
                                                                 --------            -------

           Total current assets                                    77,240             75,935




PROPERTY, PLANT AND EQUIPMENT - AT COST
   Buildings and improvements                                      11,765             11,714
   Machinery and equipment                                         30,924             28,897
                                                                 --------            -------
                                                                   42,689             40,611
   Less accumulated depreciation                                   32,359             30,259
                                                                 --------            -------
                                                                   10,330             10,352
   Land                                                             1,204              1,208
                                                                 --------            -------
                                                                   11,534             11,560


OTHER ASSETS
   Deposits                                                         6,554              6,414
   Intangibles, net of amortization                                 4,899              5,028
   Other                                                              764                563
                                                                 --------            -------
                                                                   12,217             12,005
                                                                 --------            -------

                                                                 $100,991            $99,500
                                                                 ========            =======
</TABLE>


The accompanying notes are an integral part of these statements.


                                       2


<PAGE>



                          Allied Research Corporation

               CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED

                             (Thousands of Dollars)

                                  LIABILITIES

                                  (Unaudited)

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



<TABLE>
<CAPTION>
                                                               June 30, 1998    December 31, 1997
                                                               -------------    -----------------
<S><C>
CURRENT LIABILITIES
   Notes payable                                                 $  3,495            $ 1,720
   Current maturities of long-term debt                               841              1,281
   Accounts and trade notes payable                                13,095             34,656
   Accrued liabilities                                              4,763              4,747
   Accrued loss on contracts                                          392                572
   Customer deposits                                               24,804              6,994
   Income taxes                                                       417                848
                                                                 --------            -------

           Total current liabilities                               47,807             50,818


LONG-TERM DEBT, less current maturities                             4,686              5,311


ADVANCE PAYMENTS ON CONTRACTS                                       5,850              5,850


DEFERRED INCOME TAXES                                                 627                627


STOCKHOLDERS' EQUITY
   Preferred stock, no par value; authorized, 10,000
      shares; none issued                                               -                  -
   Common stock, par value, $.10 per share; authorized
      10,000,000 shares; issued and outstanding, 4,739,754
      in 1998 and 4,443,092 in 1997                                   474                460
   Capital in excess of par value                                  13,233             12,100
   Retained earnings                                               30,909             26,046
   Accumulated foreign currency translation adjustment             (2,595)            (1,713)
                                                                 --------            -------
                                                                   42,021             36,894
                                                                 --------            -------

                                                                 $100,991            $99,500
                                                                 ========            =======
</TABLE>



The accompanying notes are an integral part of these statements.


                                       3


<PAGE>



                          Allied Research Corporation

                 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

                             (Thousands of Dollars)

                                  (Unaudited)

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






<TABLE>
<CAPTION>
                                              Three months ended June 30,        Six months ended June 30,
                                              ---------------------------      ----------------------------
                                                1998              1997             1998              1997
                                              --------        ----------       ----------        ----------
<S><C>
Revenue                                     $   32,154        $   24,630       $   67,907        $   54,395

Cost and expenses
   Cost of sales                                24,774            18,012           53,897            42,287
   Selling and administrative                    3,514             3,107            6,785             6,429
   Research and development                        273               316              730               683
                                            ----------        ----------       ----------        ----------
                                                28,561            21,435           61,412            49,399
                                            ----------        ----------       ----------        ----------

        Operating income                         3,593             3,195            6,495             4,996

Other income (deductions)
   Interest expense                              (470)             (612)            (877)           (1,120)
   Interest income                                 318               191              554               444
   Other - net                                   (372)             (132)            (384)               507
                                            ----------        ----------       ----------        ----------
                                                 (524)             (553)            (707)             (169)
                                            ----------        ----------       ----------        ----------

        Earnings before income taxes             3,069             2,642            5,788             4,827

Income taxes                                       523               335              985               536
                                            ----------        ----------       ----------        ----------

        NET EARNINGS                        $    2,546        $    2,307       $    4,803        $    4,291
                                            ==========        ==========       ==========        ==========

Net income  per common share
  Basic                                     $      .53        $      .51       $     1.02        $      .95
                                            ==========        ==========       ==========        ==========

  Diluted                                   $      .53        $      .50       $      .99        $      .94
                                            ==========        ==========       ==========        ==========

Weighted average number of shares
  Basic                                      4,781,038         4,532,371        4,687,482         4,502,521

  Diluted                                    4,835,367         4,580,003        4,833,441         4,557,138
</TABLE>


The accompanying notes are an integral part of these statements.


                                       4

<PAGE>



                          Allied Research Corporation

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (Thousands of Dollars)

                                  (Unaudited)

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



<TABLE>
<CAPTION>
                                                                            Six months ended June 30
                                                                            ------------------------
Increase (decrease) in cash and equivalents                                   1998           1997
                                                                            ---------      ---------
<S><C>
Cash flows from operating activities
   Net earnings                                                             $   4,803      $  4,292
   Adjustments to reconcile net earnings to net cash provided by
      (used in) operating activities
        Depreciation and amortization                                           2,061           992
        Changes in assets and liabilities
           Accounts receivable                                                 22,040       (9,068)
           Costs and accrued earnings on uncompleted contracts                (7,635)         9,397
           Inventories                                                          1,401         1,491
           Prepaid expenses and other assets                                    8,591           803
           Accounts payable, accrued liabilities and customer deposits       (21,952)       (5,674)
           Income taxes                                                         (429)           574
                                                                            --------       --------

                Net cash provided by (used in) operating activities            8,880          2,807

Cash flows (used in) investing activities
   Capital expenditures                                                       (1,840)          (346)
                                                                            --------       --------

                Net cash (used in ) investing activities                      (1,840)          (346)
                                                                            --------       --------
</TABLE>



The accompanying notes are an integral part of these statements.


                                       5

<PAGE>



                          Allied Research Corporation

          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                             (Thousands of Dollars)

                                  (Unaudited)

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





<TABLE>
<CAPTION>
                                                                            Six months ended June 30
                                                                            ------------------------
                                                                               1998           1997
                                                                            ---------      ---------
<S><C>
Cash flows from financing activities
   Principal payments of long-term debt                                       (1,065)        (7,897)
   Increase in long-term debt                                                      -          1,800
   Net (decrease) increase in short-term borrowings                            1,775         (2,694)
   Stock grant/stock plan                                                        685            581
   Options exercised                                                             459            214
   Deposits - restricted cash                                                   (140)        (1,800)
                                                                             -------       --------

                Net cash (used in) provided by financing activities            1,714         (9,796)

Effects of exchange rate changes on cash                                        (337)        (3,233)
                                                                             -------       --------

                NET INCREASE (DECREASE) IN CASH AND
                   CASH EQUIVALENTS                                            8,417        (10,568)

Cash and equivalents at beginning of year                                     16,421         32,859
                                                                             -------       --------

Cash and equivalents at end of period                                        $24,838       $ 22,291
                                                                             =======       ========

Supplemental Disclosures of Cash Flow Information
   Cash paid during the period for
      Interest                                                               $   893       $    685
      Taxes                                                                    1,682            405
</TABLE>



The accompanying notes are an integral part of these statements.


                                       6


<PAGE>





                          Allied Research Corporation

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                 June 30, 1998

                             (Thousands of Dollars)

                                  (Unaudited)

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

NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

    The condensed consolidated balance sheets as of June 30, 1998 and December
    31, 1997, the condensed consolidated statements of earnings and the
    condensed consolidated statements of cash flows for the six months ended
    June 30, 1998 and 1997, have been prepared by the Company without audit. In
    the opinion of management, all adjustments (which include only normal
    recurring adjustments) necessary to present fairly the financial position,
    results of operations and changes in cash flow at June 30, 1998 and 1997
    have been made.

    Certain information and footnote disclosures normally included in financial
    statements prepared in accordance with generally accepted accounting
    principles have been condensed or omitted. It is suggested that these
    condensed consolidated financial statements be read in conjunction with the
    financial statements and notes thereto included in the Company's December
    31, 1997 Form 10-K filed with the Securities and Exchange Commission,
    Washington, D.C. 20549. The results of operations for the period ended June
    30, 1998 and 1997 are not necessarily indicative of the operating results
    for the full year.


NOTE 2 - PRINCIPLES OF CONSOLIDATION

    The condensed consolidated financial statements include the accounts of
    Allied Research Corporation (a Delaware Corporation) and the Company's
    wholly-owned subsidiaries, Mecar, S.A. (a Belgian Company), Allied Research
    Corporation Limited (a United Kingdom Company) and Barnes & Reinecke, Inc.
    (a Delaware Corporation)

    Mecar, S.A.'s wholly-owned Belgian subsidiaries include, Sedachim, S.I.,
    Tele Technique Generale, and VSK Electronics, N.V., its wholly-owned
    subsidiary Belgian Automation Units, N.V. and I.D.C.S., N.V., (collectively
    "The VSK Group").

    Significant intercompany transactions have been eliminated in consolidation.


NOTE 3 - RESTRICTED CASH

    Mecar is generally required under the terms of its contracts with foreign
    governments to provide performance bonds, advance payment guarantees and
    letters of credit. The credit facility agreements used to provide these
    financial guarantees generally place restrictions on cash deposits and other
    liens on Mecar's assets until the customer accepts delivery. Cash deposits
    totaling approximately $18,807 and long-term deposits of $6,554 at June 30,
    1998 and ($8,727 and $6,414 at December 31, 1997) are restricted or pledged
    as collateral for various bank agreements.

NOTE 4 - INVENTORIES

    Inventories are composed of raw materials and supplies.


                                       7



<PAGE>


                          Allied Research Corporation

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                                 June 30, 1998

                             (Thousands of Dollars)

                                  (Unaudited)

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




NOTE 5 - NOTES PAYABLE

    Barnes and Reinecke has a $3,500 revolving line-of-credit agreement which
    had an outstanding balance at June 30, 1998 of $3,495 ($1,720 at December
    31, 1997). These lines-of-credit expired at the earlier of contract
    completion or November, 1999. Borrowings are secured by assets, as defined
    in the agreement, and are guaranteed by Allied and prepaid deposits from the
    customer. The agreement contains covenants requiring the maintenance of
    certain financial ratios and other matters.

    Mecar has a $800 line-of-credit agreement with a foreign bank which is
    unused at June 30, 1998 and December 31, 1997. The line is secured by a cash
    deposit pledge equal to the full amount of the line.


NOTE 6 - CREDIT FACILITY

    The Company is obligated under various credit agreements (the Agreements)
    with its foreign banking pool and its domestic bank that provided credit
    facilities primarily for letters of credit, bank guarantees, performance
    bonds and similar instruments required for specific sales contracts. The
    Agreements provide for certain bank charges and fees as the line is used,
    plus fees of 2% of guarantees issued and annual fees of 1.25% - 1.35% of
    letters of credit and guarantees outstanding. As of June 30, 1998,
    guarantees and performance bonds of $38.2 million ($28.6 million at December
    31, 1997) remain outstanding.

    Advances under the Agreements are secured by cash of $18,807 and long-term
    cash deposits of $6,554. Amounts outstanding are also collateralized by the
    letters of credit received under the contracts financed, and a pledge of
    approximately $23 million on Mecar's assets. Certain Agreements provide for
    restrictions on payments or transfers to Allied and ARCL for management
    fees, intercompany loans, loan payments, the maintenance of certain net
    worth levels and other provisions.


NOTE 7 - LONG-TERM FINANCING

    Mecar is obligated on an approximately $3,316 mortgage on its manufacturing
    and administration facilities. As amended, the balance of the loan is
    payable in annual principal installments of approximately $500 and matures
    in 2004. The Company is also obligated on several mortgages on The VSK
    Group's buildings which has a balance of approximately $1,838 at June 30,
    1998. The mortgages are payable in annual installments of approximately $270
    plus interest. BRI is obligated on a $373 term loan.


                                       8



<PAGE>



                          Allied Research Corporation

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                                 June 30, 1998

                             (Thousands of Dollars)

                                  (Unaudited)

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

NOTE 7 - LONG-TERM FINANCING - Continued

    Scheduled annual maturities of long-term obligations as of June 30, 1998 are
    approximately as follows:

         Year                    Amount
        ------                   ------
        1999                     $  841
        2000                      1,176
        2001                        764
        2002                        825
        2003                        825
        Thereafter                1,096


NOTE 8 - INCOME TAXES

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

    The Company's Belgian subsidiaries have unused net operating losses of
    approximately $700 at June 30, 1998, which under Belgian law cannot be
    carried back but may be carried forward indefinitely, and are subject to
    certain annual limitations.

    As of June 30, 1998, the Company had unused foreign tax credit carryforwards
    of approximately $455 which expire through 2009.

    Deferred tax liabilities have not been recognized for bases differences
    related to investments in the Company's Belgian and United Kingdom
    subsidiaries. These differences, which consist primarily of unremitted
    earnings intended to be indefinitely reinvested, aggregated approximately
    $32,000 at June 30, 1998. Determination of the amount of unrecognized
    deferred tax liabilities is not practicable.


NOTE 9 - EARNINGS (LOSS) PER SHARE

    Stock options outstanding have been included in the diluted per share
    computation on a weighted average basis.


                                       9



<PAGE>



                          Allied Research Corporation

                     MANAGEMENT DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULT OF OPERATIONS

                                 June 30, 1998

                             (Thousands of Dollars)

                                  (Unaudited)

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

The Company conducts its business through its wholly-owned subsidiaries: Mecar,
S.A., ("Mecar"), a Belgian corporation and Barnes & Reinecke, Inc. ("Barnes"), a
Delaware corporation, headquartered in Illinois; as well as a group of Belgian
corporations acquired in 1994 and 1995 led by VSK Electronics, N.V.,
Teletechnique General, S.A., Belgian Automation Units, N.V. and I.D.C.S., S.A.
(collectively, the "VSK Group"). This discussion refers to the financial
condition and results of operations of the Company on a consolidated basis.


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

This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that are based on current
expectations, estimates and projections about the Company and the industries in
which it operates. In addition, other written or oral statements which
constitute forward-looking statements may be made by or on behalf of the
Company. Words such as "expects", "anticipates", "intends", "may", "plans"
"believes", "seeks", "estimates", or variations of such words or 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 increasing competition from foreign and domestic
competitors, including new entrants; substantial reliance on Mecar's principal
customers to continue to acquire Mecar's products on a regular basis; the
cyclical nature of the Company's military business; rapid technological
developments and changes and the Company's ability to continue to introduce
competitive new products and services on a timely, cost effective basis; the
ability of the Company to successfully continue its transition from a pure
defense firm to a firm with a substantial commercial component; the mix of
products/services; the achievement of lower costs and expenses; domestic and
foreign governmental and public policy changes which may affect the level of
purchases made by customers; changes in environmental and other domestic and
foreign governmental regulations; continued availability for financing,
financial instruments and financial resources in the amounts, at the times and
on the terms required to support the Company's future business. These are
representative of the Future Factors that could affect the outcome of the
forward-looking statements. In addition, such statements could be affected by
general industry and market conditions and growth rates, general domestic and
international economic conditions including interest rate and currency exchange
rate fluctuations and other Future Factors.


Revenue
-------

Revenue for the first six (6) months of 1998 was $67,907, an increase of 25%
over the comparable period in 1997, principally due to increased revenue from
Mecar and VSK Group. Mecar's sales were $53,350, up 30% compared to the period
ended June 30, 1997. The VSK Group's revenue for the six months was $9,665, up
14% over the first half of 1997. Barnes' revenue was $4,892, up 2% compared to
the same period in 1997.


                                       10


<PAGE>



                          Allied Research Corporation

                     MANAGEMENT DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULT OF OPERATIONS - CONTINUED

                                 June 30, 1998

                             (Thousands of Dollars)

                                  (Unaudited)

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



Revenue - Continued
-------------------

Revenue for the quarter ended June 30, 1998 was $32,154, a 31% increase over the
quarter ended June 30, 1997. Mecar recognized revenue of $24,735 for the quarter
ended June 30, 1998, a 39% increase over the quarter ended June 30 1997; Barnes'
revenue of $2,535 for the quarter ended June 30, 1998 is about the same as the
revenue for the quarter ended June 30, 1997; the revenue of the VSK Group of
$4,884 for the quarter ended June 30, 1998 increased 15% over the comparable
period in 1997


Backlog
-------

As of June 30, 1998, the Company's backlog was $105,100 compared with $92,800 at
December 31, 1997 and $121,000 at March 31, 1998.

At June 30, 1998 and June 30, 1997, respectively, the backlog of each of the
Company's operating units was as follows:

                                     June 30,
                                ------------------
                                 1998        1997
                                -------    -------
Mecar                           $78,600    $95,100
Barnes                            9,300     12,300
VSK Group                        17,200     14,200


The principal portion of the $16,200 of new awards received by the Company
during the second quarter of 1998 was received by the VSK Group. Mecar continues
to aggressively pursue additional ammunition orders for new weapon systems being
developed for Mecar's traditional customers.


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

Cost of sales for the first six months of 1998 was  approximately  $53,897 or
79% of sales as  compared  to $42,287 or 78% for the first six months of 1997.

Cost of sales for the  second  three  months  of 1998 was  approximately
$24,774  or 77% of sales as  compared  to $18,012, or 73% of sales for the
second quarter of 1997.

Selling and administrative expenses were approximately $6,785 of revenues or 10%
of sales for the six months ended June 30, 1998, as compared to $6,429 or 12% of
sales for the six months ended June 30, 1997.

Selling and administrative expenses were approximately $3,514 or 11% of revenue
for the three months ended June 30, 1998 as compared to $3,107 or 13% for the
three months ended June 30, 1997.


                                       11



<PAGE>



                          Allied Research Corporation

                     MANAGEMENT DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULT OF OPERATIONS - CONTINUED

                                 June 30, 1998

                             (Thousands of Dollars)

                                  (Unaudited)

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


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

Research and development expenses were 1% as a ratio of sales for each of the
six months and three months periods ended June 30, 1998 and 1997.


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

Interest expense for the six months ending June 30, 1998 was $877, compared to
$1,120 for the comparable period in 1997. Similarly, interest expense decreased
during the second quarter of 1998 was $470 compared to $612 for the second
quarter of 1997. All such decreases are principally due to reduced levels of
borrowing.


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

Interest income for each of the six months and three months periods of 1998
increased over the comparable periods of 1997, principally as a result of
increased amounts of cash invested.


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

Other - Net represents primarily net currency losses, resulting from foreign
currency transactions for the six months ended June 30, 1998. The fluctuation of
currency rates resulted in the decrease in the current period.


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

The Company had a $4,803 net profit ($1.02 per share basic and $.99 per share
diluted) for the first six months of 1998 compared with a $4,291 net profit
($.95 per share basic and $.94 diluted) for the comparable period in 1997. The
Company earned a $2,546 profit ($.53 per share basic and diluted) in the second
quarter of 1998 compared with a $2,307 profit ($.51 per share basic and $.50
diluted) in the second three months of 1997. The VSK Group continued to
experience increased profit margins during the second quarter of 1998.


Liquidity and Capital Resources
-------------------------------

During the first six months of 1998 and throughout 1997, Allied funded its
operations principally with internally generated cash and back-up credit
facilities required for foreign government contracts.

Mecar continues to finance its activities via credit facilities supplied by a
foreign bank pool. In the second quarter of 1998, Mecar paid in full a
short-term loan from Allied. Mecar is limited by its bank pool agreement in the
amounts it may transfer to Allied or other affiliates.

Barnes will seek an addition to its bank line-of-credit in order to obtain
additional funds necessary principally to continue work on a project for a
foreign-based customer which is expected to be delivered in mid-1999.

The VSK Group continues to reduce its bank and other long-term indebtedness.


                                       12


<PAGE>


                          Allied Research Corporation

                     MANAGEMENT DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULT OF OPERATIONS - CONTINUED

                                 June 30, 1998

                             (Thousands of Dollars)

                                  (Unaudited)

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


Liquidity and Capital Resources - Continued
-------------------------------

At June 30, 1998, the Company had unrestricted cash (i.e., cash note required by
the terms of the bank pool agreement to collateralize contracts) of
approximately $6,031 compared with approximately $2,097 and $7,694 at June 30,
1997 and at December 31, 1997, respectively.

Accounts receivable at June 30, 1998 decreased from December 31, 1997 levels by
$22,244 due to substantial collections in the first half of 1998. Cost and
accrued earnings on uncompleted contracts increased by $7,726 from December 31,
1997 levels due to increased levels of work-in-progress. Inventories decreased
from year-end levels by $1,526 due to decreases in purchases during the first
half of 1998. Prepaid expenses and deposits increased by $8,932 primarily due to
increases in prepaid expenses. Current liabilities decreased by $3,513 from
December 31, 1997 levels principally as a result of reductions in accounts
payable and increases in customer deposits.

In summary, working capital was approximately $29,433 at June 30, 1998, which is
an increase of $4,316 from working capital at December 31, 1997. The increase is
primarily attributable to the Company's continuing profitability, increased
work-in-progress, customer deposits and a substantial reduction in accounts
payable.


                                       13


<PAGE>



                           Allied Research Corporation

                                  June 30, 1998

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

PART II.        OTHER INFORMATION




                                       14


<PAGE>



                          Allied Research Corporation

                                 June 30, 1998

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

    Item 4.   Submission of Matters to a Vote of Security Holders.

              (a) The Company's annual meeting of shareholders was held on June
3, 1998.

              (b) The matters voted upon at the meeting referred to in the
foregoing Item 4(a) were (i) the ratification of the selection of Grant Thornton
LLP as the Company's independent auditors for 1998 (ii) the election of five (5)
directors to serve for the ensuing year and until their successors are elected
and qualified and (iii) the approval of the Company's 1998 Incentive Stock Plan
(the "Plan"). As to the ratification of the selection of Grant Thornton as the
Company's independent auditors for 1998, 3,273,164 shares was voted for, 3,543
shares were voted against, 170,165 shares abstained from voting and there were
no shares counted as broker non-votes. With respect to the election of directors
to serve for the ensuing year, shares were voted for (or votes were withheld)
for the five (5) nominees, all of whom were elected, as follows: J. R. Sculley -
3,113,379 (333,493); Clifford C. Christ - 2,870,209 (576,663); Earl P. Smith -
2,870,497 (576,375); Robert W. Hebel - 2,863,666 (583,206); and Harry H. Warner
- 3,067,126 (379,746). With respect to the approval of the Plan, 2,527,991
shares were voted for, 689,844 shares were voted against, 172,215 shares
abstained from voting and there were 47,822 shares counted as broker non-votes.


                                       15


<PAGE>



                          Allied Research Corporation





SIGNATURE

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

                                  ALLIED RESEARCH CORPORATION




                                  /s/ J. R. Sculley
                                  ______________________________
Date: July 28, 1998               J. R. Sculley
                                  Chairman of the Board,
                                  Chief Executive Officer and
                                  Chief Financial Officer



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