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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2009
 Commission File Number: 1-11376
 The Allied Defense Group, Inc.
 (Exact name of Registrant as specified in its charter)
 Delaware(State or other jurisdiction of 
incorporation or organization)
    
    04-2281015(I.R.S. Employer Number)
 8000 Towers Crescent Drive, Suite 260
Vienna, Virginia 22182
 (Address of principal executive offices, including zip code)  (703) 847-5268
 (Registrants telephone number, including area code)
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
  o þ




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##### 



THE ALLIED DEFENSE GROUP, INC.
INDEX
 PAGENUMBERPART I. FINANCIAL INFORMATION  UNAUDITEDItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at September 30, 2009 and December 31, 2008
    
    
    2Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2009 and 2008
    
    
    3Condensed Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss)
for the nine months ended September 30, 2009 and the year ended December 31, 2008
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30,
2009 and 2008
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4T. Controls and Procedures
    
    
    36PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    37Item 1A. Risk Factors
    
    
    37Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 3. Defaults Upon Senior Securities
    
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    
    37Item 5. Other Information
    
    
    37Item 6. Exhibits
    
    
    37Signatures
    
    
    38Exhibit 10.13Exhibit 31.1Exhibit 31.2Exhibit 32




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The Allied Defense Group, Inc.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 (Thousands of Dollars, except per share and share data)
 September 30,
    
    
    December 31,2009
    
    
    2008 (a)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    4,083
    
    
    $
    8,816Restricted cash
    
    
    8,039
    
    
    
    9,666Accounts receivable, net
    
    
    20,610
    
    
    
    12,646Costs and accrued earnings on uncompleted contracts
    
    
    35,360
    
    
    
    21,999Inventories, net
    
    
    20,798
    
    
    
    21,508Contracts in progress
    
    
    2,413
    
    
    
    1,469Prepaid and other current assets
    
    
    4,145
    
    
    
    3,137Assets held for sale
    
    
    
    
    
    
    4,474Total current assets
    
    
    95,448
    
    
    
    83,715Property, Plant and Equipment, net
    
    
    17,789
    
    
    
    19,525Other Assets
    
    
    1,852
    
    
    
    459TOTAL ASSETS
    
    $
    115,089
    
    
    $
    103,699CURRENT LIABILITIESCurrent maturities of senior secured convertible notes
    
    $
    
    
    
    $
    933Bank overdraft facility
    
    
    4,657
    
    
    
    381Current maturities of long-term debt
    
    
    5,294
    
    
    
    2,659Current maturities of foreign exchange contracts
    
    
    261
    
    
    
    405Accounts payable
    
    
    15,983
    
    
    
    14,536Accrued liabilities
    
    
    18,100
    
    
    
    16,099Customer deposits
    
    
    23,748
    
    
    
    16,731Belgium social security
    
    
    2,876
    
    
    
    3,522Income taxes
    
    
    3,842
    
    
    
    3,913Liabilities held for sale
    
    
    
    
    
    
    1,316Total current liabilities
    
    
    74,761
    
    
    
    60,495LONG TERM OBLIGATIONSLong-term debt, less current maturities
    
    
    5,210
    
    
    
    6,681Long-term foreign exchange contracts, less current maturities
    
    
    295
    
    
    
    1,072Derivative instrument
    
    
    65
    
    
    
    318Other long-term liabilities
    
    
    1,353
    
    
    
    682Total long-term obligations
    
    
    6,923
    
    
    
    8,753TOTAL LIABILITIES
    
    
    81,684
    
    
    
    69,248CONTINGENCIES AND COMMITMENTSSTOCKHOLDERS EQUITYPreferred stock, no par value; authorized 1,000,000 shares; none issued
    
    
    
    
    
    
    Common stock, par value, $.10 per share; authorized 30,000,000 shares; issued
and outstanding, 8,172,368 at September 30, 2009 and 8,079,509 at December
31, 2008
    
    
    817
    
    
    
    808Capital in excess of par value
    
    
    56,361
    
    
    
    55,912Accumulated deficit
    
    
    (40,783
    )
    
    
    (38,351
    )Accumulated other comprehensive income
    
    
    17,010
    
    
    
    16,082Total stockholders equity
    
    
    33,405
    
    
    
    34,451TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    115,089
    
    
    $
    103,699
 (a)
    
    Condensed consolidated balance sheet as of December 31, 2008, has been derived from audited consolidated financial statements. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
  2




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The Allied Defense Group, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (Thousands of Dollars, except per share and share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    

September
30,2009
    
    

2008
    
    

2009
    
    

2008Revenue
    
    $
    36,185
    
    
    $
    49,247
    
    
    $
    115,113
    
    
    $
    116,364Cost and expensesCost of sales
    
    
    32,738
    
    
    
    42,851
    
    
    
    99,614
    
    
    
    97,323Selling and administrative
    
    
    4,902
    
    
    
    4,877
    
    
    
    13,653
    
    
    
    15,125Research and development
    
    
    443
    
    
    
    535
    
    
    
    1,515
    
    
    
    1,667Impairment of long-lived assets
    
    
    
    
    
    
    462
    
    
    
    
    
    
    
    462Operating income (loss)
    
    
    (1,898
    )
    
    
    522
    
    
    
    331
    
    
    
    1,787Other income (expenses)Interest income
    
    
    20
    
    
    
    102
    
    
    
    83
    
    
    
    511Interest expense
    
    
    (1,282
    )
    
    
    (1,429
    )
    
    
    (3,186
    )
    
    
    (5,470
    )Net gain (loss) on fair value of senior convertible notes and warrants
    
    
    10
    
    
    
    (155
    )
    
    
    257
    
    
    
    (682
    )Gain (loss) from foreign exchange contracts
    
    
    343
    
    
    
    (1,329
    )
    
    
    912
    
    
    
    (1,473
    )Other-net
    
    
    (402
    )
    
    
    (846
    )
    
    
    (1,205
    )
    
    
    (837
    )(1,311
    )
    
    
    (3,657
    )
    
    
    (3,139
    )
    
    
    (7,951
    )Loss from continuing operations before income taxes
    
    
    (3,209
    )
    
    
    (3,135
    )
    
    
    (2,808
    )
    
    
    (6,164
    )Income tax (benefit) expense
    
    
    (4
    )
    
    
    173
    
    
    
    (199
    )
    
    
    495Loss from continuing operations
    
    
    (3,205
    )
    
    
    (3,308
    )
    
    
    (2,609
    )
    
    
    (6,659
    )Income (loss) from discontinued operations, net of taxGain on sale of subsidiaries
    
    
    45
    
    
    
    
    
    
    
    1,856
    
    
    
    113Loss from discontinued operations
    
    
    (114
    )
    
    
    (2,912
    )
    
    
    (1,679
    )
    
    
    (2,063
    )Net income (loss) from discontinued operations
    
    
    (69
    )
    
    
    (2,912
    )
    
    
    177
    
    
    
    (1,950
    )NET LOSS
    
    $
    (3,274
    )
    
    $
    (6,220
    )
    
    $
    (2,432
    )
    
    $
    (8,609
    )Earnings (Loss) per share  basic and diluted:Net loss from continuing operations
    
    $
    (0.39
    )
    
    $
    (0.41
    )
    
    $
    (0.32
    )
    
    $
    (0.83
    )Net earnings (loss) from discontinued operations
    
    
    (0.01
    )
    
    
    (0.36
    )
    
    
    0.02
    
    
    
    (0.24
    )Total loss per share  basic and diluted
    
    $
    (0.40
    )
    
    $
    (0.77
    )
    
    $
    (0.30
    )
    
    $
    (1.07
    )Weighted average number of common shares:Basic
    
    
    8,143,661
    
    
    
    8,067,089
    
    
    
    8,102,913
    
    
    
    8,034,164Diluted
    
    
    8,143,661
    
    
    
    8,067,089
    
    
    
    8,102,913
    
    
    
    8,034,164
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
  3




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The Allied Defense Group, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
 (Unaudited)
 (Thousands of Dollars, except per share and share data)
 AccumulatedPreferred
    
    
    Common Stock
    
    
    Capital in
    
    
    
    
    
    
    Other
    
    
    Totalstock, no
    
    
    
    
    
    
    $.10 Par
    
    
    Excess of
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersPar Value
    
    
    Shares
    
    
    value
    
    
    Par value
    
    
    (Deficit)
    
    
    Income
    
    
    EquityBalance at January 1, 2008
    
    $
    
    
    
    
    8,013,161
    
    
    $
    801
    
    
    $
    55,355
    
    
    $
    (27,909
    )
    
    $
    17,408
    
    
    $
    45,655Common stock awards
    
    
    
    
    
    
    52,395
    
    
    
    5
    
    
    
    322
    
    
    
    
    
    
    
    
    
    
    
    327Retired stocks
    
    
    
    
    
    
    (4,402
    )
    
    
    
    
    
    
    (29
    )
    
    
    
    
    
    
    
    
    
    
    (29
    )Employee stock purchase plan purchases
    
    
    
    
    
    
    18,355
    
    
    
    2
    
    
    
    107
    
    
    
    
    
    
    
    
    
    
    
    109Issue of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    65Directors deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    
    
    
    
    
    
    
    
    92Comprehensive loss:Net loss for the year ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,442
    )
    
    
    
    
    
    
    (10,442
    )Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,326
    )
    
    
    (1,326
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,768
    )Balance at December 31, 2008
    
    $
    
    
    
    
    8,079,509
    
    
    $
    808
    
    
    $
    55,912
    
    
    $
    (38,351
    )
    
    $
    16,082
    
    
    $
    34,451Common stock awards
    
    
    
    
    
    
    78,490
    
    
    
    8
    
    
    
    253
    
    
    
    
    
    
    
    
    
    
    
    261Employee stock purchase plan purchases
    
    
    
    
    
    
    14,369
    
    
    
    1
    
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    63Issue of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    52Directors deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    82Comprehensive loss:Net loss for the nine months ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,432
    )
    
    
    
    
    
    
    (2,432
    )Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    928
    
    
    
    928Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,504
    )Balance at September 30, 2009
    
    $
    
    
    
    
    8,172,368
    
    
    $
    817
    
    
    $
    56,361
    
    
    $
    (40,783
    )
    
    $
    17,010
    
    
    $
    33,405
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
  4




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The Allied Defense Group, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (Thousands of Dollars)
 Nine
Months Ended September 30,2009
    
    
    2008Cash flows from operating activitiesNet Loss
    
    $
    (2,432
    )
    
    $
    (8,609
    )Less: Gain on sale of subsidiaries
    
    
    (1,856
    )
    
    
    (113
    )Discontinued operations, net of tax
    
    
    1,679
    
    
    
    2,063Loss from continuing operations
    
    
    (2,609
    )
    
    
    (6,659
    )Adjustments to reconcile net loss from continuing operations to net cash used in operating activities, net of divestitures:Depreciation and amortization
    
    
    3,201
    
    
    
    4,018Impairment of long-lived assets
    
    
    
    
    
    
    462Amortization of debt discount and debt issue costs
    
    
    
    
    
    
    88Unrealized (gain) loss on forward contracts
    
    
    (912
    )
    
    
    1,473Loss on sale of fixed assets
    
    
    90
    
    
    
    Net (gain) loss related to fair value of notes and warrants
    
    
    (257
    )
    
    
    682Provision (reduction) for estimated losses on contracts
    
    
    (52
    )
    
    
    906Provision (reduction) for warranty reserves, uncollectible accounts and inventory obsolescence
    
    
    (55
    )
    
    
    495Common stock and stock option awards
    
    
    322
    
    
    
    292Deferred director stock awards
    
    
    82
    
    
    
    54(Increase) decrease in operating assets and increase (decrease) in liabilities, net
of effects from discontinued businessesRestricted cash
    
    
    1,833
    
    
    
    5,076Accounts receivable
    
    
    (7,475
    )
    
    
    (13,374
    )Costs and accrued earnings on uncompleted contracts
    
    
    (11,779
    )
    
    
    (19,580
    )Inventories
    
    
    1,462
    
    
    
    (1,271
    )Contracts in progress
    
    
    (944
    )
    
    
    (3,265
    )Prepaid and other current assets
    
    
    (1,263
    )
    
    
    629Accounts payable and accrued liabilities
    
    
    2,274
    
    
    
    4,419Customer deposits
    
    
    6,130
    
    
    
    4,139Deferred compensation
    
    
    614
    
    
    
    40Income taxes
    
    
    (284
    )
    
    
    390Net cash used in operating activities  continuing operations
    
    
    (9,622
    )
    
    
    (20,986
    )Net cash provided by operating activities  discontinued operations
    
    
    
    
    
    
    3,436Net cash used in operating activities
    
    
    (9,622
    )
    
    
    (17,550
    )Cash flows from investing activitiesCapital expenditures
    
    
    (1,220
    )
    
    
    (1,493
    )Proceeds from sale of fixed assets
    
    
    137
    
    
    
    Net proceeds from sale of subsidiaries
    
    
    2,023
    
    
    
    2,433Net cash provided by investing activities  continuing operations
    
    
    940
    
    
    
    940Net cash used in investing activities  discontinued operations
    
    
    
    
    
    
    (114
    )Net cash provided by investing activities
    
    
    940
    
    
    
    826
  5




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The Allied Defense Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
 Nine
Months Ended September 30,2009
    
    
    2008Cash flows from financing activitiesIncrease in short-term borrowings
    
    $
    977
    
    
    $
    2,587Principal payments on senior convertible notes
    
    
    (928
    )
    
    
    (481
    )Bank overdraft
    
    
    3,993
    
    
    
    (1,822
    )Net borrowings (repayments) of long-term debt and capital lease obligations
    
    
    (213
    )
    
    
    (702
    )Net cash transferred to discontinued operations
    
    
    
    
    
    
    3,090Proceeds from employee stock purchases
    
    
    54
    
    
    
    80Retirement of stock
    
    
    
    
    
    
    (9
    )Net cash provided by financing activities  continuing operations
    
    
    3,883
    
    
    
    2,743Net cash used in financing activities  discontinued operations
    
    
    
    
    
    
    (3,136
    )Net cash provided by (used in) financing activities
    
    
    3,883
    
    
    
    (393
    )Net change in cash of discontinued operations
    
    
    
    
    
    
    (185
    )Effects of exchange rate on cash
    
    
    66
    
    
    
    460NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (4,733
    )
    
    
    (16,842
    )Cash and cash equivalents at beginning of period
    
    
    8,816
    
    
    
    21,651Cash and cash equivalents at end of period
    
    $
    4,083
    
    
    $
    4,809Supplemental Disclosures of Cash Flow informationCash paid during the period forInterest
    
    $
    3,609
    
    
    $
    5,518Taxes
    
    $
    28
    
    
    $
    99Supplemental Disclosures of Non-Cash Investing and Financing ActivitiesCapital leases
    
    $
    22
    
    
    $
    26
 The accompanying notes are an integral part of these unaudited condensed consolidated statements.
  6




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The Allied Defense Group, Inc.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2009
 (Thousands of Dollars)
 NOTE 1  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      Liquidity and Capital Resources
   
    
    Committed to a plan to divest non-core subsidiaries and repay its convertible notes and
Mecars revolving cash line;
 
    
    Engaged in cost-cutting measures at Corporate; and
 
    
    Implemented a plan to reduce the fixed costs at Mecar and improve production efficiency.
    7




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The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Thousands of Dollars)
     Reclassifications
  NOTE 2  PRINCIPLES OF CONSOLIDATION
  
    
    ARC Europe, S.A. (ARC Europe), a Belgian company,
including its wholly-owned subsidiary Mecar S.A. (Mecar).
 
    
    Allied Research BV (BV), a Dutch company,
 
    
    Allied Research Cooperative (Coop) and,
 
    
    Mecar USA, Inc. (Mecar USA), a Delaware corporation.
  
    
    Mecar.Mecar designs, develops, manufactures and sells ammunition and ammunition related
products for military use. Substantially all of Mecars revenues are derived from the sale of
ammunition which is used with weapons that are generally considered defensive weapons. From time
to time, Mecar provides system integration services pursuant to which it purchases and resells
weapon systems, ammunition manufactured by others or consulting services to governments looking
to develop their own manufacturing capabilities in types of ammunition not manufactured by
Mecar. Mecars manufactured products consist of a wide variety of ammunition and grenades in the
medium caliber, artillery, anti-tank and anti-material categories.
 
    
    Mecar USA.Mecar USA purchases and resells ammunition and ammunition related products
manufactured by others for the benefit of the U.S government and foreign governments.
Mecar USA substantially expanded this procurement business in 2008. Mecar USA also pursues
manufacturing contracts from the U.S. Government and others for ammunition and pyrotechnics
devices. Mecar USA became operational in late-2005 following the construction of a new
facility in Marshall, Texas. Allied, the parent company, provides oversight and corporate services to its subsidiaries
and has no operating activities.
  8




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The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Thousands of Dollars)
 NOTE 3  ACCOUNTS RECEIVABLE AND COSTS AND ACCRUED EARNINGS ON UNCOMPLETED CONTRACTS
  September 30,
    
    
    December 31,2009
    
    
    2008Direct and indirect receivables from governments
    
    $
    16,379
    
    
    $
    10,173Commercial and other receivables
    
    
    5,373
    
    
    
    3,51121,752
    
    
    
    13,684Less: Allowance for doubtful receivables
    
    
    (1,142
    )
    
    
    (1,038
    )$
    20,610
    
    
    $
    12,646
   NOTE 4  INVENTORIES
  September 30,
    
    
    December 31,2009
    
    
    2008Raw materials
    
    $
    10,188
    
    
    $
    10,714Work in process
    
    
    10,707
    
    
    
    10,670Finished goods
    
    
    2,653
    
    
    
    2,91923,548
    
    
    
    24,303Less: Reserve for obsolescence
    
    
    (2,750
    )
    
    
    (2,795
    )$
    20,798
    
    
    $
    21,508
   9




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The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Thousands of Dollars)
 NOTE 5  CONTRACTS IN PROGRESS
  NOTE 6  BANK CREDIT FACILITY
     10




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Thousands of Dollars)
 NOTE 7  DEBT
 Debt as of September 30, 2009 and December 31, 2008 consists of the following:
 September 30,
    
    
    December 31,2009
    
    
    2008Fair value of senior secured convertible notes
    
    $
    
    
    
    $
    933SOGEPA loan
    
    
    8,755
    
    
    
    8,458Bank notes payable
    
    
    1,593
    
    
    
    289Capital leases and other
    
    
    156
    
    
    
    593Total debt
    
    
    10,504
    
    
    
    10,273Less: Current maturities
    
    
    (5,294
    )
    
    
    (3,592
    )Long-Term Debt, less current maturities
    
    $
    5,210
    
    
    $
    6,681
 Senior secured convertible notes.
  Warrants.
 SOGEPA Loan. Société Wallonne de Gestion et de Participations
  11




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Thousands of Dollars)
 Bank notes payable.
 Capital lease and other.
  NOTE 8  DERIVATIVE FINANCIAL INSTRUMENTS
    Liability DerivativesBalance Sheet Location
    
    Fair ValueDerivatives not designated as
hedging instruments under ASC 815Foreign currency futures contracts
    
    Current maturities of foreign exchange contracts
    
    $
    261Foreign currency futures contracts
    
    Long-term foreign exchange contracts, less current maturities
    
    
    295Total derivatives not designated
as hedging instruments under ASC
815
    
    
    
    $
    556
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,Statements of Operations Location
    
    2009
    
    
    2009Derivatives not designated as
hedging instruments under ASC 815Foreign currency futures contracts
    
    Gains (loss) from foreign exchange contracts
    
    $
    343
    
    
    $
    912
   12




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Thousands of Dollars)
 NOTE 9  FAIR VALUE MEASUREMENTS
   
    
    Level 1  Observable inputs such as quoted prices in active markets for identical assets
or liabilities.
 
    
    Level 2  Inputs other than quoted prices that are observable for the asset or liability,
either directly or indirectly. These include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or similar assets or liabilities
in markets that are not active and amounts derived from valuation models where all
significant inputs are observable in active markets.
 
    
    Level 3  Unobservable inputs that reflect
managements assumptions.
   Quoted Prices inActive Markets for
    
    
    
    
    
    SignificantIdentical Assets or
    
    
    Significant Other
    
    
    UnobservableLiabilities
    
    
    Observable Inputs
    
    
    InputsSeptember 30, 2009
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalLiabilitiesDerivative instrument  warrants
    
    $
    
    
    
    $
    65
    
    
    
    
    
    
    $
    65Foreign exchange contract
    
    
    
    
    
    
    556
    
    
    
    
    
    
    
    556$
    
    
    
    $
    621
    
    
    $
    
    
    
    $
    621
 Quoted Prices inActive Markets for
    
    
    
    
    
    SignificantIdentical Assets or
    
    
    Significant Other
    
    
    UnobservableLiabilities
    
    
    Observable Inputs
    
    
    InputsDecember
31, 2008
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalLiabilitiesSenior secured convertible notes
    
    $
    
    
    
    $
    933
    
    
    $
    
    
    
    $
    933Derivative instrument  warrants
    
    
    
    
    
    
    318
    
    
    
    
    
    
    
    318Foreign exchange contract
    
    
    
    
    
    
    1,477
    
    
    
    
    
    
    
    1,477$
    
    
    
    $
    2,728
    
    
    $
    
    
    
    $
    2,728
   13




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Thousands of Dollars)
 NOTE 10  EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Income (loss):Net loss from continuing operations
    
    $
    (3,205
    )
    
    $
    (3,308
    )
    
    $
    (2,609
    )
    
    $
    (6,659
    )Effect of dilutive potential common shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted net loss from continuing operations
    
    $
    (3,205
    )
    
    $
    (3,308
    )
    
    $
    (2,609
    )
    
    $
    (6,659
    )Number of shares:Weighted-average shares outstanding
    
    
    8,143,661
    
    
    
    8,067,089
    
    
    
    8,102,913
    
    
    
    8,034,164Basic and diluted net loss per share from
continuing operations
    
    $
    (0.39
    )
    
    $
    (0.41
    )
    
    $
    (0.32
    )
    
    $
    (0.83
    )
  NOTE 11  COMPREHENSIVE INCOME (LOSS)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss
    
    $
    (3,274
    )
    
    $
    (6,220
    )
    
    $
    (2,432
    )
    
    $
    (8,609
    )Currency Translation Adjustment
    
    
    961
    
    
    
    (3,146
    )
    
    
    928
    
    
    
    (660
    )Comprehensive loss
    
    $
    (2,313
    )
    
    $
    (9,366
    )
    
    $
    (1,504
    )
    
    $
    (9,269
    )
   14




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Thousands of Dollars)
 NOTE 12  OTHER  NET
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net currency
transaction
(losses) gains
    
    $
    (315
    )
    
    $
    (951
    )
    
    $
    (1,411
    )
    
    $
    (1,004
    )Miscellaneous  net
    
    
    (87
    )
    
    
    105
    
    
    
    206
    
    
    
    167$
    (402
    )
    
    $
    (846
    )
    
    $
    (1,205
    )
    
    $
    (837
    )
  NOTE 13  SHARE- BASED COMPENSATION
   September 30,2009
    
    
    2008Risk free interest rate
    
    
    0.80
    %
    
    
    1.53
    %Expected volatility rate
    
    
    70.71
    %
    
    
    92.11
    %Expected lives  years
    
    
    1
    
    
    
    1Divided yield
    
    
    
    
    
    
    
    15




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Thousands of Dollars)
 NOTE 14  INDUSTRY SEGMENTS
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues from external customersMecar SA
    
    $
    19,055
    
    
    $
    32,212
    
    
    $
    68,768
    
    
    $
    89,886Mecar USA
    
    
    17,130
    
    
    
    17,035
    
    
    
    46,345
    
    
    
    26,478$
    36,185
    
    
    $
    49,247
    
    
    $
    115,113
    
    
    $
    116,364Segment earnings (loss) from
continuing operations before taxesMecar SA
    
    $
    (2,756
    )
    
    $
    (707
    )
    
    $
    (1,512
    )
    
    $
    1,908Mecar USA
    
    
    1,164
    
    
    
    759
    
    
    
    3,162
    
    
    
    932Corporate
    
    
    (1,617
    )
    
    
    (3,187
    )
    
    
    (4,458
    )
    
    
    (9,004
    )$
    (3,209
    )
    
    $
    (3,135
    )
    
    $
    (2,808
    )
    
    $
    (6,164
    )
  September 30,
    
    
    December 31,2009
    
    
    2008Segment assetsMecar SA
    
    $
    100,263
    
    
    $
    86,161Mecar USA
    
    
    11,609
    
    
    
    9,324Corporate
    
    
    3,217
    
    
    
    8,214$
    115,089
    
    
    $
    103,699
  NOTE 15  PROVISION FOR TAXES
      16




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Thousands of Dollars)
  NOTE 16  COMMITMENTS AND CONTINGENCIES
      Indemnification provisions
     
  17




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Thousands of Dollars)
     Tax Litigation
  Social Security Litigation
  NOTE 17  DISCONTINUED OPERATIONS
   18




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Thousands of Dollars)
 Titan Dynamics Systems, Inc.
  Global Microwave Systems, Inc.
  NS Microwave Systems, Inc.
   19




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Thousands of Dollars)
  December 31,2008Cash
    
    $
    386Accounts receivable, net
    
    
    1,312Costs and accrued earnings on uncompleted contracts
    
    
    689Inventories, net
    
    
    1,107Other assets
    
    
    980Assets held for sale
    
    $
    4,474Accounts payable
    
    $
    408Accrued liabilities
    
    
    500Customer deposits
    
    
    382Other liabilities
    
    
    26Liabilities held for sale
    
    $
    1,316
   Three Months Ended
    
    
    Three Months EndedSeptember 30, 2009
    
    
    September 30, 2008NSM
    
    
    Titan
    
    
    GMS
    
    
    NSM
    
    
    TotalRevenue
    
    $
    315
    
    
    $
    
    
    
    $
    4,425
    
    
    $
    1,565
    
    
    $
    5,990Income (loss) before taxes
    
    
    (114
    )
    
    
    
    
    
    
    1,195
    
    
    
    (4,106
    )
    
    
    (2,911
    )Income (loss), net of tax
    
    
    (114
    )
    
    
    
    
    
    
    1,194
    
    
    
    (4,106
    )
    
    
    (2,912
    )Discontinued operations, net of tax
    
    $
    (114
    )
    
    $
    
    
    
    $
    1,194
    
    
    $
    (4,106
    )
    
    $
    (2,912
    )
 Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2009
    
    
    September 30, 2008NSM
    
    
    Titan
    
    
    GMS
    
    
    NSM
    
    
    TotalRevenue
    
    $
    2,894
    
    
    $
    668
    
    
    $
    10,083
    
    
    $
    5,165
    
    
    $
    15,916Income (loss) before taxes
    
    
    (1,675
    )
    
    
    (142
    )
    
    
    2,320
    
    
    
    (4,239
    )
    
    
    (2,061
    )Income (loss), net of tax
    
    
    (1,679
    )
    
    
    (142
    )
    
    
    2,319
    
    
    
    (4,240
    )
    
    
    (2,063
    )Discontinued operations, net of tax
    
    $
    (1,679
    )
    
    $
    (142
    )
    
    $
    2,319
    
    
    $
    (4,240
    )
    
    $
    (2,063
    )
  NOTE 18  SUBSEQUENT EVENTS
 ,
  20




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##### Table of Contents



The Allied Defense Group, Inc.
 
 MANAGEMENTS DISCUSSION AND ANALYSIS OF
 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 September 30, 2009
 (Thousands of Dollars)
 (Unaudited)
 Overview
    
    
    Mecar.Mecar designs, develops, manufactures and sells
ammunition and ammunition related products for military
use. Substantially all of Mecars revenues are derived from
the sale of ammunition which is used with weapons that are
generally considered defensive weapons. From time to time,
Mecar provides system integration services pursuant to
which it purchases and resells weapon systems, ammunition
manufactured by others or consulting services to
governments looking to develop their own manufacturing
capabilities often in types of ammunition not manufactured
by Mecar. Mecars manufactured products consist of a wide
variety of ammunition and grenades in the medium caliber,
artillery, anti-tank and anti-material categories.
    
    Mecar USA.Mecar USA purchases and resells ammunition and
ammunition related products manufactured by others for the
benefit of the U.S government and foreign governments.
Mecar USA substantially expanded this procurement business
in 2008. Mecar USA also pursues manufacturing contracts
from the U.S. Government and others for ammunition and
pyrotechnics devices. Mecar USA became operational in
late-2005 following the construction of a new facility in
Marshall, Texas.
    Liquidity and Capital Resources
   21




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2009
(Thousands of Dollars)
(Unaudited)
  
    
    Committed to a plan to divest non-core subsidiaries and repay its convertible notes and
Mecars revolving cash line;
    
    Engaged in cost-cutting measures at Corporate; and
    
    Implemented a plan to reduce the fixed costs at Mecar and improve production efficiency.
   
   
  Results of Operations
     22




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2009
(Thousands of Dollars)
(Unaudited)
  Results of Operations for the Three Months Ended September 30, 2009 and 2008
 Revenue.
 Revenue by SegmentThree Months Ended September 30,2009
    
    
    2008% of
    
    
    
    
    
    
    % ofAmount
    
    
    total
    
    
    Amount
    
    
    totalMecar
    
    $
    19,055
    
    
    
    53
    %
    
    $
    32,212
    
    
    
    65
    %Mecar USA
    
    
    17,130
    
    
    
    47
    
    
    
    17,035
    
    
    
    35Total
    
    $
    36,185
    
    
    
    100
    %
    
    $
    49,247
    
    
    
    100
    %
   Cost of Sales.
 Cost of Sales as a Percentage of Revenue by SegmentThree Months Ended September 30,2009
    
    
    2008% of
    
    
    
    
    
    
    % ofsegment
    
    
    
    
    
    
    segmentAmount
    
    
    revenue
    
    
    Amount
    
    
    revenueMecar
    
    $
    17,773
    
    
    
    93
    %
    
    $
    26,784
    
    
    
    83
    %Mecar USA
    
    
    14,965
    
    
    
    87
    
    
    
    16,067
    
    
    
    94Total
    
    $
    32,738
    
    
    
    90
    %
    
    $
    42,851
    
    
    
    87
    %
   23




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2009
(Thousands of Dollars)
(Unaudited)
  Selling and Administrative Expenses.
 Selling and Administrative Expenses by SegmentThree Months Ended September 30,2009
    
    
    2008% of
    
    
    
    
    
    
    % ofAmount
    
    
    revenue
    
    
    Amount
    
    
    revenueMecar
    
    $
    2,707
    
    
    
    14
    %
    
    $
    2,503
    
    
    
    8
    %Mecar USA
    
    
    558
    
    
    
    3
    
    
    
    238
    
    
    
    1Corporate
    
    
    1,637
    
    
    
    
    
    
    
    2,136
    
    
    
    Total
    
    $
    4,902
    
    
    
    14
    %
    
    $
    4,877
    
    
    
    10
    %
  Research and Development.
 Impairment of Goodwill and Long-Lived Assets.
 Interest Income.
 Interest Expense. 
  24




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2009
(Thousands of Dollars)
(Unaudited)
 Net Gain (Loss) on Fair Value of the Senior Convertible Notes and Warrants.
 Gain (loss) from Foreign Exchange Contracts.
 Other  Net.
 Pre-Tax Income (Loss)
  Pre-Tax Income (Loss) by SegmentThree Months Ended September 30,2009
    
    
    2008% of
    
    
    
    
    
    
    % oftotal
    
    
    
    
    
    
    totalAmount
    
    
    revenue
    
    
    Amount
    
    
    revenueMecar
    
    $
    (2,756
    )
    
    
    (7
    )%
    
    $
    (707
    )
    
    
    (1
    )%Mecar USA
    
    
    1,164
    
    
    
    3
    
    
    
    759
    
    
    
    2Corporate
    
    
    (1,617
    )
    
    
    (5
    )
    
    
    (3,187
    )
    
    
    (7
    )Total
    
    $
    (3,209
    )
    
    
    (9
    )%
    
    $
    (3,135
    )
    
    
    (6
    )%
  Income Taxes.
  25




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2009
(Thousands of Dollars)
(Unaudited)
 Net Income (Loss) from Discontinued Operations. (
 Three Months EndedSeptember 30,2009
    
    
    2008NSM
    
    $
    (114
    )
    
    $
    (4,106
    )GMS
    
    
    
    
    
    
    1,194Titan
    
    
    
    
    
    
    Income (loss) from discontinued operations
    
    
    (114
    )
    
    
    (2,912
    )Gain on sale of subsidiaries, net of tax
    
    
    45
    
    
    
    Net income (loss) from discontinued operations
    
    $
    (69
    )
    
    $
    (2,912
    )
  Net Loss.
 Results of Operations for the Nine Months Ended September 30, 2009 and 2008
 Revenue.
 Revenue by SegmentNine Months Ended September 30,2009
    
    
    2008% of
    
    
    
    
    
    
    % ofAmount
    
    
    total
    
    
    Amount
    
    
    totalMecar
    
    $
    68,768
    
    
    
    60
    %
    
    $
    89,886
    
    
    
    77
    %Mecar USA
    
    
    46,345
    
    
    
    40
    
    
    
    26,478
    
    
    
    23Total
    
    $
    115,113
    
    
    
    100
    %
    
    $
    116,364
    
    
    
    100
    %
    26




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2009
(Thousands of Dollars)
(Unaudited)
 Cost of Sales.
 Cost of Sales as a Percentage of Revenue by SegmentNine Months Ended September 30,2009
    
    
    2008% of
    
    
    
    
    
    
    % ofsegment
    
    
    
    
    
    
    segmentAmount
    
    
    revenue
    
    
    Amount
    
    
    revenueMecar
    
    $
    58,464
    
    
    
    85
    %
    
    $
    72,311
    
    
    
    80
    %Mecar USA
    
    
    41,150
    
    
    
    89
    
    
    
    25,012
    
    
    
    94Total
    
    $
    99,614
    
    
    
    87
    %
    
    $
    97,323
    
    
    
    84
    %
   Selling and Administrative Expenses.
 Selling and Administrative Expenses by SegmentNine Months Ended September 30,2009
    
    
    2008% of
    
    
    
    
    
    
    % ofAmount
    
    
    revenue
    
    
    Amount
    
    
    revenueMecar
    
    $
    7,532
    
    
    
    11
    %
    
    $
    7,782
    
    
    
    9
    %Mecar USA
    
    
    1,392
    
    
    
    3
    
    
    
    640
    
    
    
    2Corporate
    
    
    4,729
    
    
    
    
    
    
    
    6,703
    
    
    
    Total
    
    $
    13,653
    
    
    
    12
    %
    
    $
    15,125
    
    
    
    13
    %
 
  Research and Development.
 Impairment of Goodwill and Long-Lived Assets.
  27




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2009
(Thousands of Dollars)
(Unaudited)
 Interest Income.
 Interest Expense. 
 Net Gain (Loss) on Fair Value of the Senior Convertible Notes and Warrants.
 Gain (Loss) from Foreign Exchange Contracts.
 Other  Net.
 Pre-Tax Income (Loss)
  Pre-Tax Income (Loss) by SegmentNine Months Ended September 30,2009
    
    
    2008% of
    
    
    
    
    
    
    % oftotal
    
    
    
    
    
    
    totalAmount
    
    
    revenue
    
    
    Amount
    
    
    revenueMecar
    
    $
    (1,512
    )
    
    
    (1
    )%
    
    $
    1,908
    
    
    
    2
    %Mecar USA
    
    
    3,162
    
    
    
    3
    
    
    
    932
    
    
    
    1Corporate
    
    
    (4,458
    )
    
    
    (4
    )
    
    
    (9,004
    )
    
    
    (8
    )Total
    
    $
    (2,808
    )
    
    
    (2)
    %
    
    $
    (6,164
    )
    
    
    (5
    )%
   28




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2009
(Thousands of Dollars)
(Unaudited)
 Income Taxes.
 Net Income (Loss) from Discontinued Operations. (
 Nine Months EndedSeptember 30,2009
    
    
    2008NSM
    
    $
    (1,679
    )
    
    $
    (4,240
    )GMS
    
    
    
    
    
    
    2,319Titan
    
    
    
    
    
    
    (142
    )Income (loss) from discontinued operations
    
    
    (1,679
    )
    
    
    (2,063
    )Gain on sale of subsidiaries, net of tax
    
    
    1,856
    
    
    
    113Net income (loss) from discontinued operations
    
    $
    177
    
    
    $
    (1,950
    )
 
 Net Loss.
  29




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The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2009
(Thousands of Dollars)
(Unaudited)
 Backlog.
 Backlog by SegmentSeptember 30, 2009
    
    
    September 30, 2008Amount
    
    
    %
    
    
    Amount
    
    
    %Mecar
    
    $
    83,930
    
    
    
    94
    %
    
    $
    156,134
    
    
    
    93
    %Mecar USA
    
    
    5,695
    
    
    
    6
    
    
    
    12,229
    
    
    
    7Total
    
    $
    89,625
    
    
    
    100
    %
    
    $
    168,363
    
    
    
    100
    %
     Balance Sheet
  September 30,
    
    
    December 31,2009
    
    
    2008ASSETSCash and cash equivalents
    
    $
    4,083
    
    
    $
    8,816Restricted cash
    
    
    8,039
    
    
    
    9,666Accounts receivable, net
    
    
    20,610
    
    
    
    12,646Costs and accrued earnings on uncompleted contracts
    
    
    35,360
    
    
    
    21,999Inventories, net
    
    
    20,798
    
    
    
    21,508Contracts in progress
    
    
    2,413
    
    
    
    1,469Other current assets
    
    
    4,145
    
    
    
    7,611Property, plant & equipment
    
    
    17,789
    
    
    
    19,525Other assets
    
    
    1,852
    
    
    
    459TOTAL ASSETS
    
    $
    115,089
    
    
    $
    103,699LIABILITIESAccounts payable and accrued liabilities
    
    $
    36,959
    
    
    $
    34,157Customer deposits
    
    
    23,748
    
    
    
    16,731Other current liabilities
    
    
    8,499
    
    
    
    5,610Senior convertible notes
    
    
    
    
    
    
    933Other long-term liabilities and debt
    
    
    12,478
    
    
    
    11,817TOTAL LIABILITIES
    
    
    81,684
    
    
    
    69,248STOCKHOLDERS EQUITY
    
    
    33,405
    
    
    
    34,451TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    115,089
    
    
    $
    103,699
  30




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2009
(Thousands of Dollars)
(Unaudited)
  
       
  31




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2009
(Thousands of Dollars)
(Unaudited)
    Cash Flows
  Nine
Months Ended September 30,2009
    
    
    2008Net cash used in operating activities
    
    $
    (9,622
    )
    
    $
    (17,550
    )Net cash provided by investing activities
    
    
    940
    
    
    
    826Net cash provided by (used in) financing activities
    
    
    3,883
    
    
    
    (393
    )Effects of exchange rate on cash
    
    
    66
    
    
    
    460
 Operating Activities.
   32




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2009
(Thousands of Dollars)
(Unaudited)
 Investing Activities.
 Financing Activities.
 Effects of Exchange Rate.
 Allied .
 Mecar.
 Mecar USA.
 Stock Repurchases.
 Off-Balance Sheet Arrangements.
   Critical Accounting Policies
   33




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2009
(Thousands of Dollars)
(Unaudited)
  
    
    Revenue recognition
    
    Inventory reserves and allowance for doubtful accounts
    
    Foreign currency translations
    
    Derivative Instruments
    
    Valuation of deferred income taxes and income tax reserves.
  Recent Accounting Pronouncements
  The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles The Hierarchy of Generally Accepted Accounting Principles
 Subsequent Events
 Fair
Value Measurements and Disclosures
  34




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2009
(Thousands of Dollars)
(Unaudited)
 Derivatives and Hedging
  Forward-Looking Statements
    35




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##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE
  
 ITEM 4T.
    
    DISCLOSURE CONTROLS AND PROCEDURES
 Evaluation of disclosure controls and procedures
      Changes in internal controls
   36




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
  
 Item 1A.
    
    Risk Factors
  
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3.
    
    Defaults Upon Senior Securities
  
 Item 4.
    
    Submission of Matters to a Vote of Security Holders
  
 Item 5.
    
    Other Information
  
 Item 6.
    
    Exhibits
 Exhibit No.
    
    Description of Exhibits10.13
    
    
    Amended and Restated International Distribution Agreement.31.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
    
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
  37




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##### Table of Contents



SIGNATURE
  THE ALLIED DEFENSE GROUP, INC.Date: November 16, 2009
    /s/ Deborah  F. RicciDeborah  F. RicciChief Financial Officer and Treasurer  38