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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 June 30, 2009
 Commission File Number: 1-11376
 The Allied Defense Group, Inc.
 (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 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
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
  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 June 30, 2009 and December 31, 2008
    
    
    2Condensed Consolidated Statements of Operations for the three and six months ended June
30, 2009 and 2008
    
    
    3Condensed Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss)
for the six months ended June 30, 2009 and the year ended December 31, 2008
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended June 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
    
    
    22Item 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 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)
 June 30,
    
    
    December 31,2009
    
    
    2008 (a)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    1,710
    
    
    $
    8,816Restricted cash
    
    
    14,272
    
    
    
    9,666Accounts receivable, net
    
    
    14,403
    
    
    
    12,646Costs and accrued earnings on uncompleted contracts
    
    
    31,104
    
    
    
    21,999Inventories, net
    
    
    23,732
    
    
    
    21,508Contracts in progress
    
    
    6,072
    
    
    
    1,469Prepaid and other current assets
    
    
    5,516
    
    
    
    3,137Assets held for sale
    
    
    2,712
    
    
    
    4,474Total current assets
    
    
    99,521
    
    
    
    83,715Property, Plant and Equipment, net
    
    
    18,031
    
    
    
    19,525Other Assets
    
    
    502
    
    
    
    459TOTAL ASSETS
    
    $
    118,054
    
    
    $
    103,699CURRENT LIABILITIESCurrent maturities of senior secured convertible notes
    
    $
    
    
    
    $
    933Bank overdraft facility
    
    
    221
    
    
    
    381Current maturities of long-term debt
    
    
    7,079
    
    
    
    2,659Current maturities of foreign exchange contracts
    
    
    293
    
    
    
    405Accounts payable
    
    
    14,841
    
    
    
    14,536Accrued liabilities
    
    
    18,324
    
    
    
    16,099Customer deposits
    
    
    27,350
    
    
    
    16,731Belgium social security
    
    
    2,075
    
    
    
    3,522Income taxes
    
    
    3,709
    
    
    
    3,913Liabilities held for sale
    
    
    987
    
    
    
    1,316Total current liabilities
    
    
    74,879
    
    
    
    60,495LONG TERM OBLIGATIONSLong-term debt, less current maturities
    
    
    5,625
    
    
    
    6,681Long-term foreign exchange contracts, less current maturities
    
    
    581
    
    
    
    1,072Derivative instrument
    
    
    76
    
    
    
    318Other long-term liabilities
    
    
    1,310
    
    
    
    682Total long-term obligations
    
    
    7,592
    
    
    
    8,753TOTAL LIABILITIES
    
    
    82,471
    
    
    
    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, 8,090,055 at June 30, 2009 and 8,079,509 at December 31,
2008
    
    
    809
    
    
    
    808Capital in excess of par value
    
    
    56,234
    
    
    
    55,912Accumulated deficit
    
    
    (37,509
    )
    
    
    (38,351
    )Accumulated other comprehensive income
    
    
    16,049
    
    
    
    16,082Total stockholders equity
    
    
    35,583
    
    
    
    34,451TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    118,054
    
    
    $
    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.
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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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue
    
    $
    47,380
    
    
    $
    40,322
    
    
    $
    78,928
    
    
    $
    67,117Cost and expensesCost of sales
    
    
    40,158
    
    
    
    33,484
    
    
    
    66,876
    
    
    
    54,472Selling and administrative
    
    
    4,539
    
    
    
    5,275
    
    
    
    8,751
    
    
    
    10,248Research and development
    
    
    580
    
    
    
    580
    
    
    
    1,072
    
    
    
    1,132Operating income
    
    
    2,103
    
    
    
    983
    
    
    
    2,229
    
    
    
    1,265Other income (expenses)Interest income
    
    
    28
    
    
    
    251
    
    
    
    63
    
    
    
    409Interest expense
    
    
    (1,040
    )
    
    
    (2,351
    )
    
    
    (1,904
    )
    
    
    (4,041
    )Net gain (loss) on fair value of senior convertible notes and warrants
    
    
    8
    
    
    
    706
    
    
    
    247
    
    
    
    (527
    )Gain (loss) from foreign exchange contracts
    
    
    1,231
    
    
    
    (144
    )
    
    
    569
    
    
    
    (144
    )Other-net
    
    
    (556
    )
    
    
    76
    
    
    
    (803
    )
    
    
    9(329
    )
    
    
    (1,462
    )
    
    
    (1,828
    )
    
    
    (4,294
    )Income (loss) from continuing operations before income taxes
    
    
    1,774
    
    
    
    (479
    )
    
    
    401
    
    
    
    (3,029
    )Income tax (benefit) expense
    
    
    (195
    )
    
    
    194
    
    
    
    (195
    )
    
    
    322Income (loss) from continuing operations
    
    
    1,969
    
    
    
    (673
    )
    
    
    596
    
    
    
    (3,351
    )Income (loss) from discontinued operations, net of taxGain on sale of subsidiaries
    
    
    865
    
    
    
    
    
    
    
    1,811
    
    
    
    113Income (loss) from discontinued operations
    
    
    (1,675
    )
    
    
    1,579
    
    
    
    (1,565
    )
    
    
    849Net income (loss) from discontinued operations
    
    
    (810
    )
    
    
    1,579
    
    
    
    246
    
    
    
    962NET INCOME (LOSS)
    
    $
    1,159
    
    
    $
    906
    
    
    $
    842
    
    
    $
    (2,389
    )Earnings (Loss) per share  basic:Net earnings (loss) from continuing operations
    
    $
    0.24
    
    
    $
    (0.09
    )
    
    $
    0.07
    
    
    $
    (0.42
    )Net earnings (loss) from discontinued operations
    
    
    (0.10
    )
    
    
    0.20
    
    
    
    0.03
    
    
    
    0.12Total earnings (loss) per share  basic
    
    $
    0.14
    
    
    $
    0.11
    
    
    $
    0.10
    
    
    $
    (0.30
    )Earnings (Loss) per share  diluted:Net earnings (loss) from continuing operations
    
    $
    0.24
    
    
    $
    (0.09
    )
    
    $
    0.07
    
    
    $
    (0.42
    )Net earnings (loss) from discontinued operations
    
    
    (0.10
    )
    
    
    0.20
    
    
    
    0.03
    
    
    
    0.12Total earnings (loss) per share  diluted
    
    $
    0.14
    
    
    $
    0.11
    
    
    $
    0.10
    
    
    $
    (0.30
    )Weighted average number of common shares:Basic
    
    
    8,085,207
    
    
    
    8,021,755
    
    
    
    8,082,402
    
    
    
    8,017,418Diluted
    
    
    8,101,875
    
    
    
    8,021,755
    
    
    
    8,107,595
    
    
    
    8,017,418
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187
    
    
    
    
    
    
    
    
    
    
    
    187Employee stock purchase plan purchases
    
    
    
    
    
    
    10,546
    
    
    
    1
    
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    44Issue of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    32Directors deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    60Comprehensive income:Net income for the six months ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    842
    
    
    
    
    
    
    
    842Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    (33
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    809Balance at June 30, 2009
    
    $
    
    
    
    
    8,090,055
    
    
    $
    809
    
    
    $
    56,234
    
    
    $
    (37,509
    )
    
    $
    16,049
    
    
    $
    35,583
 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)
 Six Months Ended June 30,2009
    
    
    2008Cash flows from operating activitiesNet Income (loss)
    
    $
    842
    
    
    $
    (2,389
    )Less: Gain on sale of subsidiaries
    
    
    (1,811
    )
    
    
    (113
    )Discontinued operations, net of tax
    
    
    1,565
    
    
    
    (849
    )Income (Loss) from continuing operations
    
    
    596
    
    
    
    (3,351
    )Adjustments to reconcile net income (loss) from continuing operations to net cash
used in operating activities, net of divestitures:Depreciation and amortization
    
    
    2,069
    
    
    
    2,702Unrealized (gain) loss on forward contracts
    
    
    (569
    )
    
    
    144Loss on sale of fixed assets
    
    
    
    
    
    
    231Net (gain) loss related to fair value of notes and warrants
    
    
    (247
    )
    
    
    527Provision for estimated losses on contracts
    
    
    17
    
    
    
    43Provision for warranty reserves, uncollectible accounts and inventory obsolescence
    
    
    (194
    )
    
    
    383Common stock and stock option awards
    
    
    226
    
    
    
    178Deferred director stock awards
    
    
    60
    
    
    
    36(Increase) decrease in operating assets and increase (decrease) in liabilities, net
of effects from discontinued businessesRestricted cash
    
    
    (4,409
    )
    
    
    5,132Accounts receivable
    
    
    (1,708
    )
    
    
    (7,126
    )Costs and accrued earnings on uncompleted contracts
    
    
    (8,726
    )
    
    
    (25,071
    )Inventories
    
    
    (2,155
    )
    
    
    (5,559
    )Contracts in progress
    
    
    (4,603
    )
    
    
    (2,575
    )Prepaid and other current assets
    
    
    (1,537
    )
    
    
    (1,852
    )Accounts payable and accrued liabilities
    
    
    1,829
    
    
    
    5,281Customer deposits
    
    
    10,260
    
    
    
    8,736Deferred compensation
    
    
    598
    
    
    
    26Income taxes
    
    
    (278
    )
    
    
    321Net cash used in operating activities  continuing operations
    
    
    (8,771
    )
    
    
    (21,794
    )Net cash (used in) provided by operating activities  discontinued operations
    
    
    (152
    )
    
    
    1,822Net cash used in operating activities
    
    
    (8,923
    )
    
    
    (19,972
    )Cash flows from investing activitiesCapital expenditures
    
    
    (680
    )
    
    
    (946
    )Net proceeds from sale of subsidiaries
    
    
    422
    
    
    
    2,433Net cash (used in) provided by investing activities  continuing operations
    
    
    (258
    )
    
    
    1,487Net cash used in investing activities  discontinued operations
    
    
    
    
    
    
    (59
    )Net cash (used in) provided by investing activities
    
    
    (258
    )
    
    
    1,428
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The Allied Defense Group, Inc.  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited)  (Thousands of Dollars)
 Six Months Ended June 30,2009
    
    
    2008Cash flows from financing activitiesPrincipal payments on senior convertible notes
    
    $
    (928
    )
    
    $
    (481
    )Net borrowings (repayments) of debt and capital lease obligations
    
    
    3,057
    
    
    
    9,547Net cash transferred to discontinued operations
    
    
    (132
    )
    
    
    1,581Proceeds from employee stock purchases
    
    
    37
    
    
    
    65Retirement of stock
    
    
    
    
    
    
    (9
    )Net cash provided by financing activities  continuing operations
    
    
    2,034
    
    
    
    10,703Net cash provided by financing activities  discontinued operations
    
    
    131
    
    
    
    (1,621
    )Net cash provided by financing activities
    
    
    2,165
    
    
    
    9,082Net change in cash of discontinued operations
    
    
    22
    
    
    
    (142
    )Effects of exchange rate on cash
    
    
    (112
    )
    
    
    735NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (7,106
    )
    
    
    (8,869
    )Cash and cash equivalents at beginning of period
    
    
    8,816
    
    
    
    21,651Cash and cash equivalents at end of period
    
    $
    1,710
    
    
    $
    12,782Supplemental Disclosures of Cash Flow informationCash paid during the period forInterest
    
    $
    1,644
    
    
    $
    3,572Taxes
    
    $
    27
    
    
    $
    52Supplemental Disclosures of Non-Cash Investing and Financing ActivitiesCapital leases
    
    $
    22
    
    
    $
    15
 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
 June 30, 2009
 (Thousands of Dollars)
 NOTE 1  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      Liquidity and Capital Resources
  
    
    Implemented a plan to reduce the fixed operating cost base at Mecar and NSM;
 
    
    Engaged in cost-cutting measures at Corporate; and
 
    
    Committed to a plan to divest non-core subsidiaries and repay its convertible notes and
Mecars revolving cash line.
    7




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The Allied Defense Group, Inc.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2009
 (Thousands of Dollars)
     Reclassifications
  NOTE 2  PRINCIPLES OF CONSOLIDATION
  
    
    ARC Europe, S.A. (ARC Europe), a Belgian company,
    
    Allied Research BV (Limited), an inactive Dutch company,
    
    News/Sports Microwave Rental, Inc. (NSM), a California corporation (Discontinued Operation),
    
    Mecar USA, Inc. (Mecar USA), a Delaware corporation,
    8




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2009
 (Thousands of Dollars)
  
    
    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.
  NOTE 3  ACCOUNTS RECEIVABLE AND COSTS AND ACCRUED EARNINGS ON UNCOMPLETED CONTRACTS
  June 30,
    
    
    December 31,2009
    
    
    2008Direct and indirect receivables from governments
    
    $
    11,325
    
    
    $
    10,173Commercial and other receivables
    
    
    3,967
    
    
    
    3,51115,292
    
    
    
    13,684Less: Allowance for doubtful receivables
    
    
    (889
    )
    
    
    (1,038
    )$
    14,403
    
    
    $
    12,646
   NOTE 4  INVENTORIES
 Inventories at June 30, 2009 and December 31, 2008 are comprised as follows:
 June 30,
    
    
    December 31,2009
    
    
    2008Raw materials
    
    $
    9,583
    
    
    $
    10,714Work in process
    
    
    14,092
    
    
    
    10,670Finished goods
    
    
    2,774
    
    
    
    2,91926,449
    
    
    
    24,303Less: Reserve for obsolescence
    
    
    (2,717
    )
    
    
    (2,795
    )$
    23,732
    
    
    $
    21,508
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The Allied Defense Group, Inc.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2009
 (Thousands of Dollars)
  NOTE 5  CONTRACTS IN PROGRESS
  NOTE 6  BANK CREDIT FACILITY
     10




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The Allied Defense Group, Inc.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2009
 (Thousands of Dollars)
 NOTE 7  DEBT
  June 30,
    
    
    December 31,2009
    
    
    2008Fair value of senior secured convertible notes
    
    $
    
    
    
    $
    933SOGEPA loan
    
    
    8,429
    
    
    
    8,458Bank notes payable
    
    
    3,950
    
    
    
    289Capital leases and other
    
    
    325
    
    
    
    593Total debt
    
    
    12,704
    
    
    
    10,273Less: Current maturities
    
    
    (7,079
    )
    
    
    (3,592
    )Long-Term Debt, less current maturities
    
    $
    5,625
    
    
    $
    6,681
 Senior secured convertible notes.
 Accounting for Certain Hybrid Instruments
 Warrants. Accounting for Derivative Instruments Index to, and
Potentially Settled in, a Companys Own Stock
  11




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2009
 (Thousands of Dollars)
 SOGEPA Loan. Société Wallonne de Gestion et de Participations st st Debtors Accounting for a Modification or Exchange of Debt Instruments
 Bank notes payable.
 Capital lease and other.
  NOTE 8  DERIVATIVE FINANCIAL INSTRUMENTS
     12




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2009
 (Thousands of Dollars)
  Liability DerivativesBalance Sheet Location
    
    
    Fair ValueDerivatives not designated as hedging instruments under SFAS No. 133Foreign currency futures contracts
    
    Current maturities of foreign exchange contracts
    
    $
    293Foreign currency futures contracts
    
    Long-term foreign exchange contracts, less current maturities
    
    
    581Total derivatives not designated as hedging instruments under SFAS
No. 133
    
    
    
    
    
    $
    874
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,Statements of Operations Location
    
    
    2009
    
    
    2009Derivatives not designated as hedging instruments under SFAS No. 133Foreign currency futures contracts
    
    Gains (loss) from foreign exchange contracts
    
    $
    1,231
    
    
    $
    569
  NOTE 9  FAIR VALUE MEASUREMENTS
 Fair Value Measurements
   
 
 
  13




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2009
 (Thousands of Dollars)
   Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets or
    
    
    Observable Inputs
    
    
    UnobservableJune 30, 2009
    
    Liabilities (Level 1)
    
    
    (Level 2)
    
    
    Inputs (Level 3)
    
    
    TotalLiabilitiesDerivative instrument  warrants
    
    $
    
    
    
    $
    76
    
    
    
    
    
    
    $
    76Foreign exchange contract
    
    
    
    
    
    
    874
    
    
    
    
    
    
    
    874$
    
    
    
    $
    950
    
    
    $
    
    
    
    $
    950
 Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets or
    
    
    Observable Inputs
    
    
    UnobservableDecember 31, 2008
    
    Liabilities (Level 1)
    
    
    (Level 2)
    
    
    Inputs (Level 3)
    
    
    TotalLiabilitiesSenior secured convertible notes
    
    $
    
    
    
    $
    933
    
    
    $
    
    
    
    $
    933Derivative instrument  warrants
    
    
    
    
    
    
    318
    
    
    
    
    
    
    
    318Foreign exchange contract
    
    
    
    
    
    
    1,477
    
    
    
    
    
    
    
    1,477$
    
    
    
    $
    2,728
    
    
    $
    
    
    
    $
    2,728
  NOTE 10  EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,Income (loss):
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss) from continuing operations
    
    $
    1,969
    
    
    $
    (673
    )
    
    $
    596
    
    
    $
    (3,351
    )Effect of dilutive potential common shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted net income (loss) from continuing operations
    
    $
    1,969
    
    
    $
    (673
    )
    
    $
    596
    
    
    $
    (3,351
    )
  14




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##### Table of Contents



The Allied Defense Group, Inc.
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2009
 (Thousands of Dollars)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,Number of shares:
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Weighted-average shares outstanding
    
    
    8,085,207
    
    
    
    8,021,755
    
    
    
    8,082,402
    
    
    
    8,017,418Effect of dilutive potential common sharesUnvested stock awards
    
    
    16,668
    
    
    
    
    
    
    
    16,668
    
    
    
    Stock Options
    
    
    
    
    
    
    
    
    
    
    8,525
    
    
    
    Diluted weighted-average shares outstanding
    
    
    8,101,875
    
    
    
    8,021,755
    
    
    
    8,107,595
    
    
    
    8,017,418Basic net earnings (loss) per share from continuing operations
    
    $
    0.24
    
    
    $
    (0.09
    )
    
    $
    0.07
    
    
    $
    (0.42
    )Diluted net earnings (loss) per share from continuing operations
    
    $
    0.24
    
    
    $
    (0.09
    )
    
    $
    0.07
    
    
    $
    (0.42
    )
  NOTE 11  COMPREHENSIVE INCOME (LOSS)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    1,159
    
    
    $
    906
    
    
    $
    842
    
    
    $
    (2,389
    )Currency Translation Adjustment
    
    
    1,829
    
    
    
    12
    
    
    
    (33
    )
    
    
    2,486Comprehensive income
    
    $
    2,988
    
    
    $
    918
    
    
    $
    809
    
    
    $
    97
  NOTE 12  OTHER  NET
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net currency
transaction
(losses) gains
    
    $
    (795
    )
    
    $
    16
    
    
    $
    (1,096
    )
    
    $
    (53
    )Miscellaneous  net
    
    
    239
    
    
    
    60
    
    
    
    293
    
    
    
    62$
    (556
    )
    
    $
    76
    
    
    $
    (803
    )
    
    $
    9
   15




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Thousands of Dollars)
 NOTE 13  SHARE- BASED COMPENSATION
   June 30,2009
    
    
    2008Risk free interest rate
    
    
    0.80
    %
    
    
    1.53
    %Expected volatility rate
    
    
    70.71
    %
    
    
    92.11
    %Expected lives  years
    
    
    1
    
    
    
    1Divided yield
    
    
    
    
    
    
    
  NOTE 14  INDUSTRY SEGMENTS
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues from external customersMecar SA
    
    $
    22,971
    
    
    $
    31,987
    
    
    $
    49,713
    
    
    $
    57,674Mecar USA
    
    
    24,409
    
    
    
    8,335
    
    
    
    29,215
    
    
    
    9,443$
    47,380
    
    
    $
    40,322
    
    
    $
    78,928
    
    
    $
    67,117Segment earnings (loss) from
continuing operations before taxesMecar SA
    
    $
    1,416
    
    
    $
    1,268
    
    
    $
    1,244
    
    
    $
    2,615Mecar USA
    
    
    1,992
    
    
    
    243
    
    
    
    1,998
    
    
    
    173Corporate
    
    
    (1,634
    )
    
    
    (1,990
    )
    
    
    (2,841
    )
    
    
    (5,817
    )$
    1,774
    
    
    $
    (479
    )
    
    $
    401
    
    
    $
    (3,029
    )
  16




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Thousands of Dollars)
  June 30,
    
    
    December 31,2009
    
    
    2008Segment assetsMecar SA
    
    $
    98,726
    
    
    $
    86,161Mecar USA
    
    
    13,881
    
    
    
    9,324Corporate
    
    
    5,447
    
    
    
    8,214$
    118,054
    
    
    $
    103,699
  NOTE 15  PROVISION FOR TAXES
 Interim Financial
Reporting
    Accounting for Income
  17




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Thousands of Dollars)
 NOTE 16  COMMITMENTS AND CONTINGENCIES
       Indemnification provisions
    18




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Thousands of Dollars)
    Tax Litigation
  Social Security Litigation
  NOTE 17  DISCONTINUED OPERATIONS
 Accounting for the
Impairment or Disposal of Long-Lived Assets
  19




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Thousands of Dollars)
 Titan Dynamics Systems, Inc.
  Global Microwave Systems, Inc.
  NS Microwave Systems, Inc.
     20




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##### Table of Contents



The Allied Defense Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Thousands of Dollars)
  June 30,
    
    
    December 31,2009
    
    
    2008Cash
    
    $
    365
    
    
    $
    386Accounts receivable, net
    
    
    673
    
    
    
    1,312Costs and accrued earnings on uncompleted
contracts
    
    
    237
    
    
    
    689Inventories, net
    
    
    1,206
    
    
    
    1,107Other assets
    
    
    231
    
    
    
    980Assets held for sale
    
    $
    2,712
    
    
    $
    4,474Accounts payable
    
    $
    223
    
    
    $
    408Accrued liabilities
    
    
    692
    
    
    
    500Customer deposits
    
    
    47
    
    
    
    382Other liabilities
    
    
    25
    
    
    
    26Liabilities held for sale
    
    $
    987
    
    
    $
    1,316
  Three Months Ended
    
    
    Three Months EndedJune 30, 2009
    
    
    June 30, 2008NSM
    
    
    Titan
    
    
    GMS
    
    
    NSM
    
    
    TotalRevenue
    
    $
    838
    
    
    $
    
    
    
    $
    3,686
    
    
    $
    2,266
    
    
    $
    5,952Income (loss) before taxes
    
    
    (1,671
    )
    
    
    
    
    
    
    1,297
    
    
    
    281
    
    
    
    1,578Income (loss), net of tax
    
    
    (1,675
    )
    
    
    
    
    
    
    1,298
    
    
    
    281
    
    
    
    1,579Discontinued operations, net of tax
    
    $
    (1,675
    )
    
    $
    
    
    
    $
    1,298
    
    
    $
    281
    
    
    $
    1,579
 Six Months Ended
    
    
    Six Months EndedJune 30, 2009
    
    
    June 30, 2008NSM
    
    
    Titan
    
    
    GMS
    
    
    NSM
    
    
    TotalRevenue
    
    $
    2,579
    
    
    $
    668
    
    
    $
    5,658
    
    
    $
    3,600
    
    
    $
    9,926Income (loss) before taxes
    
    
    (1,561
    )
    
    
    (142
    )
    
    
    1,125
    
    
    
    (133
    )
    
    
    850Income (loss), net of tax
    
    
    (1,565
    )
    
    
    (142
    )
    
    
    1,125
    
    
    
    (134
    )
    
    
    849Discontinued operations, net of tax
    
    $
    (1,565
    )
    
    $
    (142
    )
    
    $
    1,125
    
    
    $
    (134
    )
    
    $
    849
  NOTE 18  SUBSEQUENT EVENTS
 Subsequent Events
    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
 June 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
  
    
    Implemented a plan to reduce the fixed operating cost base at Mecar and NSM;
 
    
    Engaged in cost-cutting measures at Corporate; and
 
    
    Committed to a plan to divest non-core subsidiaries and repay its convertible notes and
Mecars revolving cash line.
  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
June 30, 2009
(Thousands of Dollars)
(Unaudited)
       Results of Operations
     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
June 30, 2009
(Thousands of Dollars)
(Unaudited)
 Results of Operations for the Three Months Ended June 30, 2009 and 2008
 Revenue.
 Revenue by SegmentThree Months Ended June 30,2009
    
    
    2008% of
    
    
    
    
    
    
    % ofAmount
    
    
    total
    
    
    Amount
    
    
    totalMecar
    
    $
    22,971
    
    
    
    48
    %
    
    $
    31,987
    
    
    
    79
    %Mecar USA
    
    
    24,409
    
    
    
    52
    
    
    
    8,335
    
    
    
    21Total
    
    $
    47,380
    
    
    
    100
    %
    
    $
    40,322
    
    
    
    100
    %
   Cost of Sales.
 Cost of Sales as a Percentage of Revenue by SegmentThree Months Ended June 30,2009
    
    
    2008% of
    
    
    
    
    
    
    % ofsegment
    
    
    
    
    
    
    segmentAmount
    
    
    revenue
    
    
    Amount
    
    
    revenueMecar
    
    $
    18,458
    
    
    
    80
    %
    
    $
    25,538
    
    
    
    80
    %Mecar USA
    
    
    21,700
    
    
    
    89
    
    
    
    7,946
    
    
    
    95Total
    
    $
    40,158
    
    
    
    85
    %
    
    $
    33,484
    
    
    
    83
    %
    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
June 30, 2009
(Thousands of Dollars)
(Unaudited)
 Selling and Administrative Expenses.
 Selling and Administrative Expenses by SegmentThree Months Ended June 30,2009
    
    
    2008% of
    
    
    
    
    
    
    % ofAmount
    
    
    revenue
    
    
    Amount
    
    
    revenueMecar
    
    $
    2,391
    
    
    
    10
    %
    
    $
    2,663
    
    
    
    8
    %Mecar USA
    
    
    502
    
    
    
    2
    
    
    
    224
    
    
    
    3Corporate
    
    
    1,646
    
    
    
    
    
    
    
    2,388
    
    
    
    Total
    
    $
    4,539
    
    
    
    10
    %
    
    $
    5,275
    
    
    
    13
    %
  Research and Development.
 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.
  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
June 30, 2009
(Thousands of Dollars)
(Unaudited)
 Pre-Tax Income (Loss)
  Pre-Tax Income (Loss) by SegmentThree Months Ended June 30,2009
    
    
    2008% of
    
    
    
    
    
    
    % oftotal
    
    
    
    
    
    
    totalAmount
    
    
    revenue
    
    
    Amount
    
    
    revenueMecar
    
    $
    1,416
    
    
    
    3
    %
    
    $
    1,268
    
    
    
    3
    %Mecar USA
    
    
    1,992
    
    
    
    4
    
    
    
    243
    
    
    
    1Corporate
    
    
    (1,634
    )
    
    
    (3
    )
    
    
    (1,990
    )
    
    
    (5
    )Total
    
    $
    1,774
    
    
    
    4
    %
    
    $
    (479
    )
    
    
    (1
    )%
  Income Taxes. Accounting for Income Taxes in
Interim periods
 Net Income (Loss) from Discontinued Operations. (
 Three Months EndedJune 30,2009
    
    
    2008NSM
    
    $
    (1,675
    )
    
    $
    281GMS
    
    
    
    
    
    
    1,298Titan
    
    
    
    
    
    
    Income (loss) from discontinued operations
    
    
    (1,675
    )
    
    
    1,579Gain on sale of subsidiaries, net of tax
    
    
    865
    
    
    
    Net income (loss) from discontinued
operations
    
    $
    (810
    )
    
    $
    1,579
   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
June 30, 2009
(Thousands of Dollars)
(Unaudited)
 Net Income (Loss).
 Results of Operations for the Six Months Ended June 30, 2009 and 2008
 Revenue.
 Revenue by SegmentSix Months Ended June 30,2009
    
    
    2008% of
    
    
    
    
    
    
    % ofAmount
    
    
    total
    
    
    Amount
    
    
    totalMecar
    
    $
    49,713
    
    
    
    63
    %
    
    $
    57,674
    
    
    
    86
    %Mecar USA
    
    
    29,215
    
    
    
    37
    
    
    
    9,443
    
    
    
    14Total
    
    $
    78,928
    
    
    
    100
    %
    
    $
    67,117
    
    
    
    100
    %
   Cost of Sales.
 Cost of Sales as a Percentage of Revenue by SegmentSix Months Ended June 30,2009
    
    
    2008% of
    
    
    
    
    
    
    % ofsegment
    
    
    
    
    
    
    segmentAmount
    
    
    revenue
    
    
    Amount
    
    
    revenueMecar
    
    $
    40,691
    
    
    
    82
    %
    
    $
    45,527
    
    
    
    79
    %Mecar USA
    
    
    26,185
    
    
    
    90
    
    
    
    8,945
    
    
    
    95Total
    
    $
    66,876
    
    
    
    85
    %
    
    $
    54,472
    
    
    
    81
    %
   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
June 30, 2009
(Thousands of Dollars)
(Unaudited)
  Selling and Administrative Expenses.
 Selling and Administrative Expenses by SegmentSix Months Ended June 30,2009
    
    
    2008% of
    
    
    
    
    
    
    % ofAmount
    
    
    revenue
    
    
    Amount
    
    
    revenueMecar
    
    $
    4,825
    
    
    
    10
    %
    
    $
    5,279
    
    
    
    9
    %Mecar USA
    
    
    834
    
    
    
    3
    
    
    
    402
    
    
    
    4Corporate
    
    
    3,092
    
    
    
    
    
    
    
    4,567
    
    
    
    Total
    
    $
    8,751
    
    
    
    11
    %
    
    $
    10,248
    
    
    
    15
    %
  Research and Development.
 Interest Income.
 Interest Expense.
 Net Gain (Loss) on Fair Value of the Senior Convertible Notes and Warrants.
 Gain (Loss) from Foreign Exchange Contracts.
  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
June 30, 2009
(Thousands of Dollars)
(Unaudited)
 Other  Net.
 Pre-Tax Income (Loss)
  Pre-Tax Income (Loss) by SegmentSix Months Ended June 30,2009
    
    
    2008% of
    
    
    
    
    
    
    % oftotal
    
    
    
    
    
    
    totalAmount
    
    
    revenue
    
    
    Amount
    
    
    revenueMecar
    
    $
    1,244
    
    
    
    2
    %
    
    $
    2,615
    
    
    
    4
    %Mecar USA
    
    
    1,998
    
    
    
    3
    
    
    
    173
    
    
    
    Corporate
    
    
    (2,841
    )
    
    
    (4
    )
    
    
    (5,817
    )
    
    
    (9
    )Total
    
    $
    401
    
    
    
    1
    %
    
    $
    (3,029
    )
    
    
    (5
    )%
  Income Taxes. Accounting for Income Taxes in
Interim periods
 Net Income (Loss) from Discontinued Operations. (
 Six Months EndedJune 30,2009
    
    
    2008NSM
    
    $
    (1,565
    )
    
    $
    (134
    )GMS
    
    
    
    
    
    
    1,125Titan
    
    
    
    
    
    
    (142
    )Income (loss) from discontinued operations
    
    
    (1,565
    )
    
    
    849Gain on sale of subsidiaries, net of tax
    
    
    1,811
    
    
    
    113Net income from discontinued operations
    
    $
    246
    
    
    $
    962
  29




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##### Table of Contents



The Allied Defense Group, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2009
(Thousands of Dollars)
(Unaudited)
  Net Income (Loss).
 Backlog.
 Backlog by SegmentJune 30, 2009
    
    
    June 30, 2008Amount
    
    
    %
    
    
    Amount
    
    
    %Mecar
    
    $
    90,837
    
    
    
    77
    %
    
    $
    113,400
    
    
    
    76
    %Mecar USA
    
    
    27,094
    
    
    
    23
    
    
    
    35,954
    
    
    
    24Total
    
    $
    117,931
    
    
    
    100
    %
    
    $
    149,354
    
    
    
    100
    %
      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
June 30, 2009
(Thousands of Dollars)
(Unaudited)
 Balance Sheet
  June 30,
    
    
    December 31,2009
    
    
    2008ASSETSCash and cash equivalents
    
    $
    1,710
    
    
    $
    8,816Restricted cash
    
    
    14,272
    
    
    
    9,666Accounts receivable, net
    
    
    14,403
    
    
    
    12,646Costs and accrued earnings on uncompleted contracts
    
    
    31,104
    
    
    
    21,999Inventories, net
    
    
    23,732
    
    
    
    21,508Contracts in progress
    
    
    6,072
    
    
    
    1,469Other current assets
    
    
    8,228
    
    
    
    7,611Property, plant & equipment and other assets
    
    
    18,533
    
    
    
    19,984TOTAL ASSETS
    
    $
    118,054
    
    
    $
    103,699LIABILITIESAccounts payable and accrued liabilities
    
    
    35,240
    
    
    
    34,157Customer deposits
    
    
    27,350
    
    
    
    16,731Other current liabilities
    
    
    4,917
    
    
    
    5,610Senior convertible notes
    
    
    
    
    
    
    933Other long-term liabilities and debt
    
    
    14,964
    
    
    
    11,817TOTAL LIABILITIES
    
    
    82,471
    
    
    
    69,248STOCKHOLDERS EQUITY
    
    
    35,583
    
    
    
    34,451TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    118,054
    
    
    $
    103,699
       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
June 30, 2009
(Thousands of Dollars)
(Unaudited)
       Cash Flows
  2009
    
    
    2008Net cash used in operating activities
    
    $
    (8,923
    )
    
    $
    (19,972
    )Net cash (used in) provided by investing activities
    
    
    (258
    )
    
    
    1,428Net cash provided by financing activities
    
    
    2,165
    
    
    
    9,082Effects of exchange rate on cash
    
    
    (112
    )
    
    
    735
 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
June 30, 2009
(Thousands of Dollars)
(Unaudited)
  Investing Activities.
 Financing Activities.
 Effects of Exchange Rate.
 Allied .
 Mecar.
 Mecar USA.
 Stock Repurchases.
 Off-Balance Sheet Arrangements.
  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
June 30, 2009
(Thousands of Dollars)
(Unaudited)
   Critical Accounting Policies
   
    
    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,
  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
June 30, 2009
(Thousands of Dollars)
(Unaudited)
 Interim Disclosures about Fair
Value of Financial Instruments Disclosures about Fair Value of Financial
Instruments Interim Financial Reporting
 Disclosures about Derivative Instruments and
Hedging Activities  an amendment of FASB Statement No. 133
 Fair Value Measurements, Effective Date of FASB Statement No. 157,
 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 Exhibits31.1
    
    
    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: August 14, 2009
    
    /s/ Deborah F. Ricci

Deborah F. RicciChief Financial Officer and Treasurer
  38




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description of Exhibits31.1
    
    
    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.
  39