<PAGE>

                                 UNITED STATES

                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

                                   Form 10-Q



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

For the period ended                                               June 30, 2001
                                                                   -------------

                                      OR

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


For the transition period from ______________________ to _______________________

                                                          Commission File Number
                                                                   0-2545
                                                          ----------------------

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

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

8000 Towers Crescent Drive, Suite 260
Vienna, Virginia                                             22182
-------------------------------------                        -----
(Address of principal executive offices)                   (Zip Code)

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

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

           Yes  X     No
               ---

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of June 30, 2001: 4,910,228.
<PAGE>

                          ALLIED RESEARCH CORPORATION

                                     INDEX

================================================================================

PART I.        FINANCIAL INFORMATION - UNAUDITED                         PAGE
                                                                        NUMBER


      Item 1.  Financial Statements



               Condensed Consolidated Balance Sheets

                      June 30, 2001 and December 31, 2000................  2



               Condensed Consolidated Statements of Earnings

                      Three months and six months ended June 30, 2001
                      and 2000...........................................  3



               Condensed Consolidated Statements of Cash Flows

                      Six months ended June 30, 2001 and 2000............  4



               Notes to Condensed Consolidated Financial Statements......  5



      Item 2.  Management's Discussion and Analysis of Financial
               Condition and Results of Operations.......................  9



PART II.       OTHER INFORMATION......................................... 13
<PAGE>

                          Allied Research Corporation

                     CONDENSED CONSOLIDATED BALANCE SHEETS

                            (Thousands of Dollars)

                                    ASSETS

                                  (Unaudited)

================================================================================
<TABLE>
<CAPTION>
                                    ASSETS                                       June 30, 2001   December 31, 2000
                                                                                 -------------   -----------------

<S>                                                                              <C>             <C>
CURRENT ASSETS
 Cash and equivalents                                                                 $  9,298             $ 7,570
 Restricted cash                                                                        10,998               3,010
 Accounts and note receivable                                                           10,188              18,662
 Costs and accrued earnings on uncompleted contracts                                    31,574              34,136
 Inventories                                                                             5,602               5,911
 Fair value of forward exchange contracts                                                4,949                   -
 Prepaid expenses                                                                        3,419               2,996
                                                                                      --------             -------

      Total current assets                                                              76,028              72,285

PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation                          11,140              11,675

OTHER ASSETS
 Intangibles, net of accumulated amortization                                            2,836               3,252
 Deferred taxes                                                                            225                 406
 Other                                                                                     125                 139
                                                                                      --------             -------
                                                                                         3,186               3,797
                                                                                      --------             -------

                                                                                      $ 90,354             $87,757
                                                                                      ========             =======


        LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
 Notes payable                                                                        $  3,442             $ 3,699
 Current maturities of long-term debt                                                      844               1,079
 Accounts payable                                                                       12,886              22,009
 Accrued liabilities                                                                     8,974               4,823
 Customer deposits                                                                       9,177               5,777
 Forward exchange contract commitments                                                   4,949                   -
                                                                                      --------             -------

      Total current liabilities                                                         40,272              37,387

LONG-TERM DEBT, less current maturities                                                  3,058               3,529

DEFERRED INCOME TAXES                                                                        -                 121

STOCKHOLDERS' EQUITY
 Preferred stock, no par value; authorized, 10,000 shares; none issued                       -                   -
 Common stock, par value, $.10 per share; authorized 10,000,000 shares; issued
  and outstanding, 4,910,228 in 2001 and 4,812,464 in 2000                                 491                 481
 Capital in excess of par value                                                         14,422              13,689
 Retained earnings                                                                      43,471              40,306
 Accumulated other comprehensive loss                                                  (11,360)             (7,756)
                                                                                      --------             -------
                                                                                        47,024              46,720
                                                                                      --------             -------

                                                                                      $ 90,354             $87,757
                                                                                      ========             =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                       2
<PAGE>

                          Allied Research Corporation

                 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

                            (Thousands of Dollars)

                                  (Unaudited)

================================================================================

<TABLE>
<CAPTION>
                                                                Three months ended         Six months ended
                                                                     June 30,                  June 30,
                                                             -----------------------   -----------------------
                                                                   2001         2000         2001         2000
                                                             ----------   ----------   ----------   ----------
<S>                                                          <C>          <C>          <C>          <C>
Revenue                                                      $   25,837   $   28,548   $   42,847   $   52,022

Cost and expenses
 Cost of sales                                                   18,427       23,628       30,449       42,585
 Selling and administrative                                       2,899        2,266        5,601        4,603
 Research and development                                           380          353          833          749
                                                             ----------   ----------   ----------   ----------
                                                                 21,706       26,247       36,883       47,937
                                                             ----------   ----------   ----------   ----------

    Operating income                                              4,131        2,301        5,964        4,085

Other (income) deductions
 Interest income                                                   (139)        (201)        (274)        (315)
 Interest expense                                                   405          370          800          524
 Other                                                              211         (286)        (230)        (153)
                                                             ----------   ----------   ----------   ----------
                                                                    477         (117)         296           56
                                                             ----------   ----------   ----------   ----------


    Earnings before discontinued operation and income taxes       3,654        2,418        5,668        4,029

Income tax expense                                                1,632          969        2,503        1,613
                                                             ----------   ----------   ----------   ----------

    Earnings from continuing operations                           2,022        1,449        3,165        2,416

Discontinued operation -
 Engineering and technical segment
   Income from operations, net of income taxes                        -            -            -           54
   Gain on sale, net of income taxes                                  -           31            -          462
                                                             ----------   ----------   ----------   ----------
                                                                      -           31            -          516
                                                             ----------   ----------   ----------   ----------

      NET EARNINGS                                           $    2,022   $    1,480   $    3,165   $    2,932
                                                             ==========   ==========   ==========   ==========

Earnings per share
 Basic
   Continuing operations                                     $      .41   $      .30   $      .65   $      .50
   Discontinued operation                                             -          .01            -          .11
                                                             ----------   ----------   ----------   ----------
    Net income (loss)                                        $      .41   $      .31   $      .65   $      .61
                                                             ==========   ==========   ==========   ==========
 Diluted
   Continuing operations                                     $      .41   $      .30   $      .65   $      .50
   Discontinued operation                                             -          .01            -          .11
                                                             ----------   ----------   ----------   ----------
    Net income (loss)                                        $      .41   $      .31   $      .65   $      .61
                                                             ==========   ==========   ==========   ==========

Weighted average number of common shares:

 Basic                                                        4,906,717    4,753,513    4,888,716    4,849,812

 Diluted                                                      4,911,796    4,754,619    4,890,843    4,815,577
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                       3
<PAGE>

                          Allied Research Corporation

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                            (Thousands of Dollars)

                                  (Unaudited)

<TABLE>
<CAPTION>
========================================================================================================================

                                                                                              Six months ended June 30
                                                                                              --------------------------
Increase (decrease) in cash and equivalents                                                       2001          2000
                                                                                              -----------      ---------
<S>                                                                                           <C>              <C>

Cash flows from continuing operating activities
 Net earnings                                                                                 $     3,165      $  2,932
 Adjustments to reconcile net earnings to net cash provided by (used in) continuing
  operating activities
    Depreciation and amortization                                                                     729           754
    Gain on sale of discontinued operation                                                              -          (462)
    Loss from discontinued operation                                                                    -           (54)
    Common stock award                                                                                533             -
    Changes in assets and liabilities
      Accounts receivable                                                                           7,354        (1,204)
      Costs and accrued earnings on uncompleted contracts                                            (403)      (21,876)
      Inventories                                                                                    (214)         (576)
      Prepaid expenses and other assets                                                               687        (1,188)
      Accounts payable, accrued liabilities and customer deposits                                     747        16,011
      Income taxes                                                                                    (77)        1,861
                                                                                              -----------      --------

       Net cash provided by (used in) continuing operating activities                              12,521        (3,802)

Cash flows (used in) investing activities
 Capital expenditures                                                                              (1,368)       (2,084)
 Proceeds from sale of stock of subsidiary                                                              -         2,822
 Payment for acquisition, net of cash acquired                                                          -          (826)
 Proceeds from sale of fixed assets                                                                   159             -
                                                                                              -----------      --------

       Net cash (used in) provided by investing activities                                         (1,209)       (3,228)

Cash flows from financing activities
 Proceeds from long-term debt                                                                         359           429
 Principal payments on long-term debt                                                                (714)         (123)
 Net (decrease) increase in short-term borrowings                                                    (506)        7,712
 Proceeds from employee stock purchases                                                               209           172
 Options exercised                                                                                      -           116
 Retirement of common stock                                                                             -          (123)
 Restricted cash and restricted deposits                                                           (7,988)       (3,140)
                                                                                              -----------      --------

       Net cash (used in) provided by financing activities                                         (8,640)        8,183
                                                                                              -----------      --------

       Net increase in cash from continuing operations                                              2,672         1,153

 Effects of exchange rate changes on cash                                                            (944)        1,537
                                                                                              -----------      --------

       NET INCREASE IN CASH AND CASH EQUIVALENTS                                                    1,728         2,690

Cash and equivalents at beginning of year                                                           7,570         5,968
                                                                                              -----------      --------

Cash and equivalents at end of period                                                         $     9,298      $  8,658
                                                                                              ===========      ========

Supplemental Disclosures of Cash Flow Information
-------------------------------------------------
 Cash paid during the period for
   Interest                                                                                   $       459      $    513
   Taxes                                                                                              762           618
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.

                                       4
<PAGE>

                          ALLIED RESEARCH CORPORATION

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                 June 30, 2001

                            (Thousands of Dollars)

                                  (Unaudited)

================================================================================

NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  The condensed consolidated balance sheets as of June 30, 2001 and December 31,
  2000, the condensed consolidated statements of earnings for the three and six
  month periods ended June 30, 2001 and 2000 and the condensed consolidated
  statements of cash flows for the six months ended June 30, 2001 and 2000, have
  been prepared by the Company without audit. In the opinion of management, all
  adjustments (which include only normal recurring adjustments) necessary to
  present fairly the financial position, results of operations and changes in
  cash flows at June 30, 2001 and 2000 have been made.

  Certain information and footnote disclosures normally included in financial
  statements prepared in accordance with accounting principles generally
  accepted in the United States of America have been condensed or omitted. It is
  suggested that these condensed consolidated financial statements be read in
  conjunction with the financial statements and notes thereto included in the
  Company's December 31, 2000 Form 10-K filed with the Securities and Exchange
  Commission, Washington, D.C. 20549. The results of operations for the three
  and six month periods ended June 30, 2001 and 2000 are not necessarily
  indicative of the operating results for the full year.


NOTE 2 - PRINCIPLES OF CONSOLIDATION

  The condensed consolidated financial statements include the accounts of Allied
  Research Corporation (a Delaware Corporation) and its subsidiaries, ARC
  Europe, S.A. (ARC Europe), a Belgian company, Barnes & Reinecke, Inc. (BRI), a
  Delaware Corporation (which discontinued operations effective March 2000) and
  Allied Research Corporation Limited (Limited), a United Kingdom company and
  ARC International Sales Corporation, a Barbados corporation (both of which are
  inactive).

  ARC Europe includes its wholly-owned subsidiaries Mecar S.A. (Mecar) and the
  VSK Group of companies. Mecar includes a related Belgian subsidiary, Sedachim,
  S.I. The VSK Group is comprised of Tele Technique Generale, S.A., I.D.C.S.,
  N.V. and VSK Electronics N.V. and its wholly-owned subsidiaries, Belgian
  Automation Units, N.V. and Vigitec S.A. (Vigitec).


NOTE 3 - DERIVATIVE FINANCIAL INSTRUMENTS

  In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
  Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS
  No. 133 establishes accounting and reporting standards for derivative
  instruments, including certain derivative instruments embedded in other
  contracts and for hedging activities. It requires that an entity recognize all
  derivatives as either assets or liabilities in the statement of financial
  position and measure those instruments at fair value. It specifies necessary
  conditions to be met to designate a derivative as a hedge. As amended by SFAS
  No.'s 137 and 138, SFAS No. 133 is effective for all fiscal quarters of all
  fiscal years beginning after June 15, 2000. As a result, the Company
  implemented SFAS No. 133 effective January 1, 2001. Prior to adoption of SFAS
  No. 133, gains and losses arising from the use of derivative instruments were
  deferred until realized.

                                       5
<PAGE>

                          Allied Research Corporation

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

                                 June 30, 2001

                            (Thousands of Dollars)

                                  (Unaudited)

================================================================================

NOTE 3 - DERIVATIVE FINANCIAL INSTRUMENTS - Continued

  The Company estimates fair value based on quotes obtained from the
  counterparties to the derivative contracts. The Company recognizes the fair
  value of derivative contracts that expire in less than one year as current
  assets or liabilities. Those that expire in more than one year are recognized
  as long-term assets or liabilities. If the derivative is designated as a
  hedge, depending on the nature of the hedge, changes in fair value are either
  offset against the change in fair value of the hedged assets, liabilities, or
  firm commitments through earnings or recognized in other comprehensive income
  until the hedged item is recognized in earnings.

  Gains and losses from settlements of derivative contracts are reported as a
  component of other income. Changes in the fair value of derivative contracts
  prior to settlement are also reported as a component of other income.


NOTE 4 - RESTRICTED CASH

  Mecar is generally required under the terms of its contracts to provide
  performance bonds, advance payment guarantees and letters of credit. The
  credit facility agreements used to provide these financial guarantees place
  restrictions on cash deposits and other liens on Mecar's assets. The VSK Group
  has also pledged certain term deposits to secure outstanding bank guarantees.

  Restricted cash of $10,998 and $3,010 included in current assets at June 30,
  2001 and December 31, 2000, respectively, was restricted or pledged as
  collateral for these agreements and other obligations.


NOTE 5 - DISCONTINUED OPERATION

  On December 10, 1999, the Company contracted to sell the engineering and
  technical segment of its business. Settlement of the sale occurred on March
  10, 2000 and resulted in a gain of $462, net of taxes.


NOTE 6 - INVENTORIES

  Inventories are composed of raw materials and supplies.


NOTE 7 - NOTES PAYABLE

  Mecar has a line-of-credit of up to $7,221 for working capital. Approximately
  $3,442 of the line was used at June 30, 2001 and $2,800 was outstanding at
  December 31, 2000.

                                       6
<PAGE>

                          Allied Research Corporation

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

                                 June 30, 2001

                            (Thousands of Dollars)

                                  (Unaudited)

================================================================================

NOTE 8 - CREDIT FACILITY

  The Company is obligated under various credit agreements (the "Agreements")
  with its foreign banking pool that provide credit facilities primarily for
  letters of credit, bank guarantees, performance bonds and similar instruments
  required for specific sales contracts. The Agreements provide for certain bank
  charges and fees as the line is used, plus fees of 2% of guarantees issued and
  annual fees of 1.25% - 1.35% of letters of credit and guarantees outstanding.
  These fees are charged to interest expense. As of June 30, 2001 and December
  31, 2000, guarantees and performance bonds of $20,558 and $22,687,
  respectively, remain outstanding.

  Advances under the Agreements are secured by restricted cash at June 30, 2001
  and December 31, 2000 of $10,998 and $3,010, respectively. Amounts outstanding
  are also collateralized by the letters of credit received under the contracts
  financed, and a pledge of approximately $26 million on Mecar's assets. Certain
  Agreements provide for restrictions on payments or transfers to Allied and its
  affiliates for management fees, intercompany loans, loan payments, the
  maintenance of certain net worth levels and other provisions.


NOTE 9 - LONG-TERM FINANCING

  Mecar is obligated on a mortgage with a balance of approximately $1,200 on its
  manufacturing and administration facilities. The loan is payable in annual
  principal installments of approximately $422 and matures in 2004. The Company
  is also obligated on several mortgages on the VSK Group's buildings which have
  a balance of approximately $282 at June 30, 2001. These mortgages are payable
  in annual installments of approximately $49 plus interest.

  Scheduled annual maturities of long-term obligations as of June 30, 2001 are
  approximately as follows:

                   Year                     Amount
                   -----                    ------

                   2002                     $844
                   2003                      974
                   2004                      945
                   2005                      944
                   2006                      195


NOTE 10 - INCOME TAXES

  As of December 31, 2000, the Company had unused foreign tax credit
  carryforwards of approximately $288 which expire through 2004.

  Deferred tax liabilities have not been recognized for basis differences
  related to investments in the Company's Belgian and United Kingdom
  subsidiaries. These differences, which consist primarily of unremitted
  earnings intended to be indefinitely reinvested, aggregated approximately
  $10,700 at June 30, 2001. Determination of the amount of unrecognized deferred
  tax liabilities is not practicable.

                                       7
<PAGE>

                          Allied Research Corporation

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

                                 June 30, 2001

                            (Thousands of Dollars)

                                  (Unaudited)

================================================================================

NOTE 11 - EARNINGS (LOSS) PER SHARE

  Incremental shares from the assumed conversion of stock options outstanding
  have been included in the diluted per share computation.

                                       8
<PAGE>

                          Allied Research Corporation

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                                 June 30, 2001

                            (Thousands of Dollars)

                                  (Unaudited)

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

  The following is intended to update the information contained in the Company's
  Annual Report on Form 10-K for the year ended December 31, 2000 and the
  Quarterly Report on Form 10-Q for the period ended March 31, 2001 and presumes
  that readers have access to, and will have read, "Management's Discussion and
  Analysis of Financial Condition and Results of Operations" contained in such
  Forms 10-K and 10-Q.

  The Company conducts its business through its wholly-owned subsidiaries:
  Mecar, S.A. ("Mecar"), a Belgian corporation; and a group of Belgian
  corporations led by VSK Electronics, N.V., Tele Technique General, S.A.,
  Vigitec S.A. and IDCS, N.V. (collectively, the "VSK Group").  This discussion
  refers to the financial condition and results of operations of the Company on
  a consolidated basis.  All dollars are in thousands except per share amounts.

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

  This Management's Discussion and Analysis of Financial Condition and Results
  of Operations contains forward-looking statements that are based on current
  expectations, estimates and projections about the Company and the industries
  in which it operates.  In addition, other written or oral statements which
  constitute forward-looking statements may be made by or on behalf of the
  Company.  Words such as "expects", "anticipates", "intends", "plans",
  "believes", "seeks", "estimates", or variations of such words and similar
  expressions are intended to identify such forward-looking statements.  These
  statements are not guarantees of future performance and involve certain risks,
  uncertainties and assumptions ("Future Factors") which are difficult to
  predict.  Therefore, actual outcomes and results may differ materially from
  what is expressed or forecast in such forward-looking statements.  The Company
  undertakes no obligation to update publicly any forward-looking statements,
  whether as a result of new information, future events or otherwise.

  Future Factors include substantial reliance on Mecar's principal customers to
  continue to acquire Mecar's products on a regular basis; the cyclical nature
  of the Company's military business; rapid technological developments and
  changes and the Company's ability to continue to introduce competitive new
  products and services on a timely, cost effective basis; the ability of the
  Company to successfully continue to increase the commercial component of its
  business; the mix of products/services;  domestic and foreign governmental
  fiscal affairs and public policy changes which may affect the level of
  purchases made by customers; changes in environmental and other domestic and
  foreign governmental regulations; continued availability of financing,
  financial instruments and financial resources in the amounts, at the times and
  on the terms required to support the Company's future business.  These are
  representative of the Future Factors that could affect the outcome of the
  forward-looking statements.  In addition, such statements could be affected by
  general industry and market conditions and growth rates;  general domestic and
  international economic conditions including interest rate and currency
  exchange rate fluctuations;  increasing competition by foreign and domestic
  competitors, including new entrants;  and other Future Factors.

                                       9
<PAGE>

                          Allied Research Corporation

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

                                 June 30, 2001

                            (Thousands of Dollars)

                                  (Unaudited)

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

  Revenue
  -------

  Allied had revenue of $42,847 in the first six months of 2001, which was 82%
  of its revenue in the first six months of 2000.

                                       Revenues by Segment
                         1/st/ Six Months 2001     1/st/ Six Months 2000
                         ---------------------     ---------------------
                                   Percentage                Percentage
                         Amount     of total       Amount     of total
                         ------   ------------     ------   ------------

         Mecar          $32,885        77%        $41,850        80%
         VSK Group      $ 9,962        23%        $10,172        20%

  Revenue for the quarter ended June 30, 2001 was $25,837, a $2,711 decrease
  from revenue earned in the second quarter of 2000.  Mecar's second quarter
  2001 revenue was $21,000, a 9% decrease from revenue earned in the second
  quarter of 2000.  The reduction in sales from 2000 levels is attributable to
  an increase in revenue from the Company's independent distributor/value added
  reseller.  These contracts generally have lower sales values than Mecar's
  traditional direct sales, however, they do not adversely impact the Company's
  gross margins or profitability.  The VSK Group's revenue in the second three
  months of 2001 decreased by $500, or 9% from its revenue in the second three
  months of 2000.  In each instance, the 2001 results were adversely affected by
  currency fluctuations.

  Backlog
  -------

  As of June 30, 2001, the Company's backlog was $53,400 compared to $63,500 at
  December 31, 2000.  The June 30, 2001 backlog consists of backlog of
  approximately $44,600 and $8,800 at Mecar and the VSK Group, respectively.

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

  Cost of sales for the first six months of 2001 was approximately $30,449, or
  71% of revenue, as compared to $42,585, or 82% of revenue, for the first six
  months of 2000.

  Cost of sales as a percentage of sales for the second quarter of 2001 was
  approximately 71% compared with 83% for the same period in 2000.

  As previously discussed under Revenue, the reduction in cost of sales in 2001
  result primarily from cost reductions effected by increases in product sales
  to the Company's independent distributor.

  Selling and administrative expenses were approximately $5,601, or 13% of
  revenue, for the six months ended June 30, 2001, as compared to $4,603, or 9%
  or revenue, for the six months ended June 30, 2000.

  Selling and administrative expenses in the second quarter of 2001 were $633
  greater than those incurred in 2000.

                                       10
<PAGE>

                          Allied Research Corporation

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

                                 June 30, 2001

                            (Thousands of Dollars)

                                  (Unaudited)

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

  Selling and administrative expenses in the first half of 2001 were greater
  than in the same 2000 period in part due to increased acquisition search and
  analysis activities and costs incurred with respect to the new management team
  of the Company.

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

  Research and development costs incurred in the first six months of 2001
  increased by $84 over costs incurred in the same period of 2000.

  Research and development costs incurred in the second three months of 2001
  increased slightly over comparable 2000 levels.

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

  Interest income decreased in each of the first six months of 2001 and in the
  second quarter of 2001 from 2000 levels principally due to decreased interest
  rates and lower amounts of cash invested.

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

  Interest expense increased by 53% in the first six months of 2001 compared to
  the same period in 2000 and in the second quarter of 2001 increased by 9%
  compared to the amount incurred in 2000.

  Such increases were experienced principally as a result of an increase in
  borrowings at Mecar under its line-of-credit.

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

  Other-net represents primarily currency gains/currency losses, resulting from
  foreign currency transactions for the periods ending June 30, 2001 and 2000.

  Pre-Tax Profit From Continuing Operations
  -----------------------------------------

                                       Pre- Tax Profit by Segment
                                       --------------------------
                                           1/st/ Six Months
                                       --------------------------
                                        2001                2000
                                       ------              ------

                Mecar                  $4,600              $2,300
                VSK Group              $1,600              $1,500
                Corporate and other    $ (500)             $  200

                                       11
<PAGE>

                          Allied Research Corporation

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

                                 June 30, 2001

                            (Thousands of Dollars)

                                  (Unaudited)

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

  Mecar's pre-tax profit for the first six months of 2001 increased by $2,300,
  or 100% over its pre-tax profit for the comparable 2000 period.  Slightly more
  than half of Mecar's 2001 revenue was from indirect sales to its independent
  distributor/value added reseller.  Such contracts produce less revenue than
  direct sales but do not adversely affect profitability, since there is
  corresponding cost reduction.

  The VSK Group's 2001 pre-tax profit increased by $100, or 7%, over its 2000
  performance, notwithstanding substantial currency fluctuations, principally
  due to increased efficiency in operations.

  Income Taxes
  ------------

  The effective income tax expense in the first six months of 2001 was 44%
  compared to 40 % in the first half of 2000.

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

  The Company earned a $3,165 net profit from continuing operations ($.65 per
  share basic and diluted) in the first six months of 2001 compared with $2,416
  in the first half of 2000 ($.50 per share basic and diluted).

  In the second quarter of 2001, the Company earned $2,022 from continuing
  operations (or $.41 per share basic and diluted) compared with $1,449 (or $.30
  per share basic and diluted) in the second quarter of 2000.

  In addition, in the first quarter of 2000, the Company reported (i) a $462
  gain, net of income taxes, on the sale of its former subsidiary Barnes &
  Reinecke, Inc. ("BRI") and (ii) a $54 profit from discontinued operations
  (i.e., the operations of BRI prior to sale).

  Liquidity
  ---------

  Working capital, which includes restricted cash, was approximately $35,756 at
  June 30, 2001, which is an increase of $858 from the December 31, 2000 level.
  Allied's current working capital is required for operations and to support
  credit facility agreements.

  During the first six months of 2001, Allied funded its operations principally
  with internally generated cash and back-up credit facilities required for
  foreign government contracts.  In addition, Mecar utilized a $7,221 line-of-
  credit, which is scheduled to be repaid on or before October 31, 2001.

  As of June 30, 2001, the Company had unrestricted cash (i.e., cash not
  required by the terms of the bank pool agreement to collateralize contracts)
  of approximately $9,298 compared with approximately $7,570 at December 31,
  2000.  Restricted cash increased to almost $11,000 as of June 30, 2001 due in
  part to the expiration of the bank pool's partial waiver of the restricted
  cash requirement.

  Accounts receivable at June 30, 2001 decreased from December 31, 2000 levels
  by $8,474 due to collections in shipments made at year-end.  Costs and accrued
  earnings on uncompleted contracts decreased by $2,562 from December 31, 2000
  levels due to decreased levels of work-in-progress.  Inventories decreased
  from year-end levels by $309 due to decreased purchases during the first half
  of 2001.  Current liabilities increased by $2,885 from December 31, 2000
  levels principally as a result of increases in customer deposits and accrued
  expenses to meet increased production levels and FASB 133 reporting
  requirements.

                                       12
<PAGE>

                          Allied Research Corporation

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

                                 June 30, 2001

                            (Thousands of Dollars)

                                  (Unaudited)

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

  Allied's stockholders' equity as of June 30, 2001 was adversely affected by
  the deterioration of the value of the Euro verses the U.S. dollar during the
  first half of 2001, resulting in a $3,604 increase in "Accumulated other
  comprehensive loss".

  Allied is continuing to explore alternate methods of obtaining financing
  necessary to implement its growth plans.

  Allied's ability to cover its anticipated future operating and capital
  requirements is dependent upon its ability to generate positive cash flow from
  the operations of its subsidiaries, particularly the operations of Mecar.

  Quantitative and Qualitative Market Risk Disclosure
  ---------------------------------------------------

  No material changes have occurred in the quantitative and qualitative market
  risk disclosures of the Company as presented in the Company's Annual Report on
  Form 10-K for the year ended December 31, 2000.

                                       13
<PAGE>

                          Allied Research Corporation

                                 June 30, 2001

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

PART II.     OTHER INFORMATION

  Submission of Matters to a Vote of Security Holders
  ---------------------------------------------------

  On June 6, 2001, the Company held its annual meeting of shareholders.

  The Company's shareholders re-elected J. H. Binford Peay, III, J. R. Sculley,
  Clifford C. Christ, Harry H. Warner, and Ronald H. Griffith as members of the
  Board of Directors of the Company.

  The following votes were cast in connection with the election of directors:

               Nominees                      In Favor     Withheld
               --------                      --------     --------
               J. H. Binford Peay, III      3,872,495      111,138
               Clifford C. Christ           3,889,273       94,360
               Ronald H. Griffith           3,887,631       96,002
               J. R. Sculley                3,868,985      114,648
               Harry H. Warner              3,889,526       84,107

  The Company's shareholders approved the 2001 Equity Incentive Plan of the
  Company.  The following votes were cast in connection with such approval:


                    For          Against           Abstain
                    ---          -------           -------

                 3,294,233       682,198            7,202

  The Company's shareholders ratified the appointment of Grant Thornton LLP as
  the Company's independent auditors for 2001.  The following votes were cast in
  connection with such ratification:

                    For          Against           Abstain
                    ---          -------           -------

                 3,967,220        10,251            6,162

  Reports on Form 8-K
  -------------------

  On June 25, 2001, the Company filed a Form 8-K reporting the adoption of a new
  shareholders rights plan.

                                       14
<PAGE>

                          Allied Research Corporation

                                 June 30, 2001

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





SIGNATURE

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

                                  ALLIED RESEARCH CORPORATION



                                  /s/ John G. Meyer, Jr.
                                  --------------------------------
Date:  July 31, 2001              John G. Meyer, Jr.
                                  Executive Vice President,
                                  Chief Operating Officer and
                                  Acting Chief Financial Officer

                                       15