##### 





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
  Form 10-K
  ANNUAL REPORT PURSUANT TO
    SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
  For the fiscal year ended December 31, 2007
  Commission file
    number: 1-11376
  THE ALLIED DEFENSE GROUP,
    INC.
 (Exact name of registrant as
    specified in its charter)
  Delaware(State of
    incorporation)

04-2281015(I.R.S. Employer
    Identification No.)   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)
  Securities registered pursuant to Section 12(b) of the
    Act:
  Title of Class

Name of ExchangeCommon Stock, $0.10 Par Value

American Stock Exchange   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
  Large accelerated
    filer o

Accelerated
    filer o

Non-accelerated
    filer o
    (Do not check if a smaller reporting company)

Smaller reporting
    company þ   Rule 12b-2 o þ
  Form 10-K,




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##### 





INDEX
  PART IItem 1.


Business


1Item 1A.


Risk Factors


7Item 1B.


Unresolved Staff Comments


8Item 2.


Properties


8Item 3.


Legal Proceedings


8Item 4


Submission of Matters to a Vote of Security Holders


9PART IIItem 5.


Market for Registrants Common Equity, Related Stockholder
    Matters and Issuer Purchases of Equity Securities


9Item 6.


Selected Financial Data


10Item 7.


Managements Discussion and Analysis of Financial Condition
    and Results of Operations


10Item 7A.


Quantitative and Qualitative Disclosures About Market Risk


25Item 8.


Financial Statements and Supplementary Data


25Item 9.


Changes in and Disagreements With Accountants on Accounting and
    Financial Disclosure


26Item 9A (T).


Controls and Procedures


26Item 9B.


Other Information


27PART IIIItem 10.


Directors, Executive Officers and Corporate Governance


27Item 11.


Executive Compensation


29Item 12.


Security Ownership of Certain Beneficial Owners,
    Management & Related Stockholder Matters


32Item 13.


Certain Relationships and Related Transactions, and Director
    Independence


34Item 14.


Principal Accountant Fees and Services


34PART IVItem 15.


Exhibits and Financial Statement Schedules


34SIGNATURES


38




---



##### 



PART I  ITEM 1.
    BUSINESS      Acquisition Date

Company Involved

Disposition DateMay 31, 1994

VSK Electronics N.V. and Télé Technique
    Générale

September 18, 2007May 9, 1995

Intelligent Data Capturing Systems N.V.

September 18, 2007December 11, 1999

VIGITEC S.A.

September 18, 2007December 31, 2001

News/Sports Microwave Rental Inc.June 6, 2002

Titan Dynamic Systems, Inc.

March 17, 2008July 31, 2002

SeaSpace Corporation

July 23, 2007August 1, 2004

CMS Security Systems

January 1, 2008November 1, 2005

Global Microwave Systems, Inc.     Description
    of Business
  Allied.
  Ammunition &
    Weapons Effects Segment
   1




---



##### 



MECAR. and/or
  90mm Ammunition
  105mm Tank Ammunition
  120mm Tank Ammunition
  Mortar Ammunition
  Other Ammunition
  Grenades
  ALLIED TECHNOLOGY.
 2




---



##### 



MECAR USA. and/or
  Titan.
  Electronic
    Security Segment
    NSM.
  Global Microwave Systems.
  The VSK Group.
  Other
    Segment.
    Geographic
    Areas and Industry Segments
    Market
    and Customers
   3




---



##### 



and/or
  and/or U.S.-based
    Principal
    Customers
    Raw
    Materials and Suppliers
   4




---



##### 



Marketing
      Research
    and Development
     5




---



##### 



Backlog
    December 31,2007


2006Amount


AmountAmmunitions & Weapons Effects

$
108,958


$
37,274Electronic Security


1,864



5,335Total

$
110,822


$
42,609     Competition
      Seasonal
    Nature of Business
     6




---



##### 



Personnel
    Technical &


Hourly


Part-Time


TechnicalSalaried Employees


Workers


Employees


Consultants


TotalAllied


11











1



12MECAR


50



262



1



5



318NSM


31



10



2



1



44GMS


26



19







4



49MECAR USA


5



2











7Total


123



293



3



11



430     Patents
    and Trademarks
    Environmental
    Regulations
    Available
    Information
  www.allieddefensegroup.com.
     (703) 847-5268
  ITEM 1A.
    RISK
    FACTORS   7




---



##### 



ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS    ITEM 2.
    PROPERTIES    Square FootageLocation

Property


Owned


Leased


Industry SegmentNivelles, Belgium


Office/Mfg



399,068






Ammunition & Weapons Effects(1)Spring Valley, CA


Office/Mfg







22,597


Electronic Security(2)Carlsbad, CA


Office/Mfg







17,204


Electronic Security(3)Marshall, TX


Office/Mfg



16,151



36,000


Ammunition & Weapons Effects(4)     (1)
    
    MECARs principal factory is located approximately
    25 miles south of Brussels near Nivelles, Belgium. The
    factory principally consists of a manufacturing and
    administrative complex which has been occupied by MECAR since
    1989. The manufacturing and the administration facility area is
    approximately 339,000 square feet. There are a number of
    older buildings on the property that are still used in
    conjunction with the new complex. A small test firing range is
    maintained on this property. MECAR also previously owned
    600 acres in the vicinity of the Village of Marche in the
    Ardennes region of Belgium, which was previously used as a test
    range. MECAR ceased its use of the Ardennes firing range in
    2001, and sold the property at the end of 2005. MECAR is now
    utilizing other test ranges, including a test range owned by the
    Belgian Army, although it is also exploring the prospects of
    securing the use of a new test range. Throughout 2007, MECAR
    operated using partial shifts. At December 31, 2007, MECAR
    was operating at approximately 93% of its productive capacity,
    after being under utilized for the first half of 2007.(2)
    
    NSM operates from leased office, production and warehouse
    facilities in Spring Valley, California. In 2004, NSM expanded
    to a second warehouse facility in close proximity to its
    original facility providing an additional 10,000 square
    feet. The original facility is leased on a month to month basis
    while the additional 10,000 square feet are leased through
    June 30, 2008. Due to NSMs successful trend towards
    outsourcing that will continue in 2008, NSM plans to complete
    the process of consolidating its operations into one
    10,000 square foot building by March 31, 2008. NSM is
    currently operating at 60% of its productive capacity.(3)
    
    Global Microwave Systems operates from leased facilities in
    Carlsbad, CA. The original office lease expired in October 2007
    and has been renewed through September 2010. GMS is currently
    operating at 50% of its productive capacity.(4)
    
    MECAR USA operates from an office and manufacturing facility in
    Marshall, Texas, constructed in 2005 with assistance from the
    local development authority. In addition to the manufacturing
    facility, MECAR USA has leased 12,500 square feet of
    warehouse space since 2005 and increased that to
    36,000 square feet in 2007. The facilities at MECAR USA
    have been sized in anticipation of future period revenue growth.
    MECAR USA is currently operating at 50% of productive capacity.
    In addition upon disposition, Titan will continue leasing
    approximately 6,500 of MECAR USAs square footage on a
    short-term basis.    ITEM 3.
    LEGAL
    PROCEEDINGS   8




---



##### 



ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   PART II  ITEM 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES  Market Information.
  2007


2006High


Low


High


Low1st Quarter

$
21.00


$
7.72


$
23.45


$
20.452nd Quarter


10.45



6.01



23.30



20.773rd Quarter


10.43



3.75



21.98



16.004th Quarter


8.09



5.00



21.30



13.67   Stockholders.
  Dividends.
  Equity Compensation Plan Information.
 9




---



##### 



Number of Securities AvailableNumber of Securities to be


Weighted Average


for Future Issuance UnderIssued Upon Exercise of


Exercise Price of


Equity Compensation PlansOutstanding Options,


Outstanding Options,


(Excluding SecuritiesWarrants and Rights


Warrants and Rights


Reflected in Column (a))(a)


(b)


(c)Equity compensation plans approved by security holders


369,500


$
15.39



209,788Equity compensation plans not approved by security holders(1)


411,593


$
17.89



Total


781,093


$
16.71



209,788     (1)
    
    Consists of 349,297 warrants issued to purchaser of convertible
    notes as part of the 2007 Amended Restructuring and 62,296
    warrants issued to the financial advisor for the 2006 financing.  ITEM 6.
    SELECTED
    FINANCIAL DATA    ITEM 7.MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS (amounts in thousands of dollars, other than share
    data)
  Overview
      
    Ammunition & Weapons Effectssegment consists
    of MECAR, located in Belgium, and MECAR USA, located in
    Marshall, TX. MECAR develops and produces medium caliber, tank,
    mortar and other ammunition. MECAR USA became operational in
    late 2005 and pursues contracts from U.S. and foreign
    governments for ammunition and pyrotechnics devices with a focus
    on the 105MM market. More recently, MECAR USA has begun
    purchasing and selling weapon systems
    and/or
    ammunition manufactured by others, in the form of pass through
    contracts for the benefit of the U.S government and other
    foreign governments. MECAR and MECAR USA have similar products
    and services, similar production processes, similar methods to
    sell and distribute their products and operate in a similar
    regulatory environment.
    Electronic Securitysegment consists of News Sports
    Microwave (NSM) and Global Microwave Systems (GMS), both located
    near San Diego, California. NSM designs, manufactures,
    installs and services industrial 10




---



##### 



and law enforcement surveillance products and integrated systems
    for the law enforcement community and agencies of the Department
    of Homeland Security and the Department of Defense. GMS designs
    and manufactures miniature and sub-miniature FM and digital
    transmitters, receivers, and related equipment for
    investigative, surveillance, and security applications, and live
    TV news/sports/entertainment coverage.    Liquidity
    and Capital Resources
          Outlook
    for 2008.
   11




---



##### 




    Registration delay payments and interest premiums paid for
    failure to register the Companys common stock associated
    with the senior convertible notes of $1,200.
    Financing fees paid in conjunction with additional borrowings of
    senior convertible notes of $1,000.
    Additional legal costs associated with bondholder issues of $307.
    Cash funding of Subsidiaries that have been divested. SeaSpace
    Corporation (sold July 2007) and Titan Dynamics Systems,
    Inc. (sold March 2008) of $1,709.
    Restructuring consultants and advisors fees of $2,375.   12




---



##### 




    The Company will be successful securing new MECAR financing or
    restructuring its existing banking group at MECAR.
    The Company will be successful in taking necessary steps to be
    in a position to satisfy a potential put of its
    senior secured convertible notes which may be made in December
    2008 or January 2009.
    The Company will be successful in its restructuring and
    turnaround efforts at its subsidiaries.
    The Company will be able to meet the financial debt covenants of
    its debt instruments.    Results
    of Operations
      
    increased legal and professional fees at Corporate and MECAR of
    $2,682 mainly associated with restructuring activities,
    the write off of debt issue costs associated with the
    Companys 2006 financing and 2007 refinancing of $3,456 and,
    an increase in the loss from the fair value adjustment of the
    Companys convertible notes of $8,564 due primarily to the
    settlement provisions of the Amendment Agreement.   13




---



##### 



2007


2006For the Years Ended December 31,

Amount


%


Amount


%Revenues

$
55,618



100.0
%

$
87,015



100.0
%Cost and expensesCost of sales


49,949



89.8



81,097



93.2Selling and administrative


27,387



49.2



26,661



30.6Research and development


4,106



7.4



4,972



5.7Operating loss


(25,824
)


(46.4
)


(25,715
)


(29.5
)Other income (expense)Interest income


728



1.3



867



1.0Interest expense


(11,588
)


(20.8
)


(8,884
)


(10.2
)Net (loss) gain on fair value of Senior convertible notes and
    warrants


(6,663
)


(12.0
)


1,901



2.2Other  net


(550
)


(1.0
)


1,792



2.0Loss from continuing operations before income taxes


(43,897
)


(78.9
)


(30,039
)


(34.5
)Income tax expense


4







11,340



13.0Loss from continuing operations


(43,901
)


(78.9
)


(41,379
)


(47.5
)Income (loss) from discontinued operations, net of taxGain on sale of subsidiaries


29,314



52.7







Income (loss) from discontinued operations


(6,691
)


(12.0
)


282



0.322,623



40.7



282



0.3Net loss

$
(21,278
)


(38.2
)%

$
(41,097
)


(47.2
)%  14




---



##### 



2007
    compared to 2006
  Revenue.
  Revenue by Segment2007


2006Percentage





PercentageAmount


of Total


Amount


of TotalAmmunition & Weapons Effects

$
38,603



69
%

$
67,263



77
%Electronic Security


17,015



31



19,752



23Total

$
55,618



100
%

$
87,015



100
%       Cost of Sales.
  Cost of Sales as a Percentage of Revenue by Segment2007


2006% of





% ofSegment





SegmentAmount


Revenue


Amount


RevenueAmmunition & Weapons Effects

$
41,245



107
%

$
72,526



108
%Electronic Security


8,704



51



8,571



43Total

$
49,949



90
%

$
81,097



93
%    15




---



##### 



Selling and Administrative Expenses.
      
    Registration delay payments and interest premiums paid for
    failure to register common stock associated with senior
    convertible notes timely of $1,200,
    Financing fees paid in conjunction with additional borrowings of
    senior convertible notes of $1,000,
    Additional legal costs associated with bondholder issues of
    $307 and
    Restructuring consultants and advisors fees of $2,375.  Research and Development.
  Interest Income.
 16




---



##### 



Interest expense.
  Net (Loss) Gain on fair value of senior convertible notes and
    warrants.
  Other 
    Net. Other-Net
  Pre-Tax Loss.
  Pre-Tax Loss by Segment2007


2006% of Total





% of TotalAmount


Revenue


Amount


RevenueAmmunition & Weapons Effects

$
(18,545
)


(33
)%

$
(18,802
)


(22
)%Electronic Security


(1,456
)


(3
)


(669
)


(1
)Corporate


(23,896
)


(43
)


(10,568
)


(12
)Total

$
(43,897
)


(79
)%

$
(30,039
)


(35
)%         Income Taxes-Expense (Benefit).
  Income (loss) from discontinued operations, net of
    tax.
 17




---



##### 



Net Loss.
  Backlog.
  Backlog by Segment2007


2006Amount


%


Amount


%Ammunition & Weapons Effects

$
108,958



98
%

$
37,274



87
%Electronic Security


1,864



2



5,335



13Total

$
110,822



100
%

$
42,609



100
%        18




---



##### 



Balance
    Sheet.
    December 31,2007


2006ASSETSCash

$
34,802


$
24,798Accounts receivable, net


9,339



7,973Costs and accrued earnings on uncompleted contracts


39,313



25,534Inventories, net


24,706



21,092Other current assets


8,793



40,509Other Assets


43,298



48,123TOTAL ASSETS

$
160,251


$
168,029LIABILITIESBank overdraft facility

$
7,239


$
13,702Accounts payable and accrued liabilities


32,677



22,899Customer deposits


26,835



19,855Other current liabilities


14,038



13,585Senior convertible notes


19,392



26,907Other long-term liabilities


14,415



15,734TOTAL LIABILITIES


114,596



112,682STOCKHOLDERS EQUITY


45,655



55,347TOTAL LIABILITIES AND STOCKHOLDERS EQUITY

$
160,251


$
168,029     12/31/07.
     19




---



##### 



Cash
    Flows.
    2007


2006Net cash used in operating activities

$
(18,294
)

$
(2,400
)Net cash provided by (used in) investing activities


40,383



(6,189
)Net cash (used in) provided by financing activities


(16,044
)


19,492Effects of exchange rate on cash


1,429



802  20




---



##### 



Operating Activities.
    Investing Activities.
  Financing Activities.
  Effects of Exchange Rate.
  Allied.
  MECAR.
 21




---



##### 



Other Subsidiaries.
  Stock Repurchases.
  Future Liquidity.
      and/or
  Off-Balance Sheet Arrangements.
 22




---



##### 



Recent Accounting Pronouncements.
  Critical
    Accounting Policies
      
    Revenue recognition via the percentage of completion method
    Goodwill and intangible asset valuation
    Inventory reserves and allowance for doubtful accounts
    Foreign currency translations
    Derivative Instruments
    Valuation of deferred income taxes and income tax reserves.  Revenue Recognition via the Percentage of Completion
    Method.
     23




---



##### 



Goodwill and intangible asset valuation. Business Combinations Goodwill and Other Intangible
    Assets
    Inventory reserves and allowance for doubtful
    accounts.
  Foreign Currency Translation.
 24




---



##### 



Derivative Instruments. Accounting
    for Derivative Instruments and Hedging Activities
  Valuation of deferred income taxes.
  Forward-Looking
    Statements
    ITEM 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA   25




---



##### 



ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURES    ITEM 9A
    (T).
    CONTROLS
    AND PROCEDURES  Disclosure
    Controls and Procedures
  Rule 13a-15
  Managements
    Report on Internal Control over Financial
    Reporting
        Changes
    in Internal Control Over Financial Reporting
  Rule 13a-15)
   26




---



##### 



ITEM 9B.
    OTHER
    INFORMATION  Form 8-K
 PART III  ITEM 10.
    DIRECTORS
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE              2003-2006. 2000-2001 1998-2000.
   27




---



##### 



Executive
    Officers
            http://www.allieddefensegroup.com.
     (703) 847-5268
    28




---



##### 



ITEM 11.
    EXECUTIVE
    COMPENSATION  SUMMARY
    COMPENSATION TABLE
  Change inPensionValue andNonqualifiedNon-Equity

DeferredStock

Option

Incentive Plan

Compensation

All OtherAwards

Awards

Compensation

Earnings

Compensation

TotalName and Principal Position

Year

Salary

Bonus

($)(1)

($)(2)

($)

($)

($)(3)

($)John J. Marcello,


2007


$
299,000


$
55,000


$
81,462














$
115,152


$
550,614Chief Executive Officer


2006



294,817







147,879















32,800



475,496Monte L. Pickens,


2007


$
244,000


$
50,000


$
3


$
37,688










$
27,000


$
358,691Executive Vice President


2006



239,851







882



135,952











27,400



404,085Wayne Hosking,


2007


$
190,000


$
45,000


$
4,541


$
89,021










$
19,000


$
347,562Vice President


2006



186,132



56,525



9,774



89,021











18,000



359,452     (1)
    
    The amounts in this column reflect the expense recognized for
    financial statement reporting purposes for the year ended
    December 31, 2007, in accordance with FAS 123(R), from
    stock awards and restricted stock grants made under the 2001
    Equity Incentive Plan during and prior to 2006; and the portion
    paid by Allied (15%) for stock purchases made through the 1992
    Employee Stock Purchase Plan (ESPP) during 2007 and 2006.
    Assumptions used in the calculation of these amounts are
    included in Footnote A to the Companys audited financial
    statements included in this
    Form 10-K.(2)
    
    The amounts in this column reflect the expense recognized for
    financial statement reporting purposes for the year ended
    December 31, 2007 and 2006, in accordance with
    FAS 123(R), of option grants made under the 2001 Equity
    Incentive Plan during and prior to 2006. Assumptions used in the
    calculation of these amounts are included in Footnote A to the
    Companys audited financial statements included in this
    Form 10-K(3)
    
    This column includes the contribution to a participants
    401(K) plan account equal to 10% of an employees base
    salary. In 2007, this column includes $88,152 tax payment due to
    Belgium for Mr. Marcello based on income earned by
    Mr. Marcello in Belgium in the year 2005. For
    Mr. Marcello and Mr. Pickens this column also includes
    a payment of $4,000 each for premiums for life insurance
    policies.  OUTSTANDING
    EQUITY AWARDS AT FISCAL YEAR-END
    AS OF DECEMBER 31, 2007
  EquityStock Awards

IncentiveEquity

PlanOption Awards





Incentive

Awards:Equity









Plan

MarketIncentive









Awards:

or PayoutPlan







(3) Market

Number of

Value ofAwards:





Number of

Value of

Unearned

UnearnedNumber of

Number of

Number





Shares or

Shares or

Shares,

Shares,Securities

Securities

of Securities





Units of

Units of

Units, or

Units orUnderlying

Underlying

Underlying





Stock That

Stock That

Other Rights

Other RightsUnexercised

Unexercised

Unearned

Option

Option

Have Not

Have Not

That Have

That HaveOptions (#)

Options (#)

Options

Exercise

Expiration

Vested

Vested

Not Vested

Not VestedPosition

Exercisable

Unexercisable

(#)

Price

Date

(#)

($)

($)

($)John J. Marcello,






















8,000


$
46,160







Chief Executive OfficerMonte L. Pickens,


40,000










$
14.90



4/30/2008Executive Vice President


24,000



16,000
(1)





$
23.95



3/6/2010















Wayne Hosking,


32,000



8,000
(2)





$
20.43



4/30/2009



250


$
1,443







Vice President     (1)
    
    Options vest equally (8,000 annually) on January 1, 2008
    and 2009.(2)
    
    Options vest on January 1, 2008.(3)
    
    Based on closing price of common stock at December 31, 2007
    of $5.77 per share. 29




---



##### 



POTENTIAL
    PAYMENTS UPON TERMINATION OF CHANGE OF CONTROL
                       30




---



##### 



COMPENSATION
    OF DIRECTORS
  and/or
  DIRECTOR
    COMPENSATION
  Change inPensionValue andFees Earned








Non-Equity


Nonqualifiedor Paid


Stock


Option


Incentive Plan


Deferred


All Otherin Cash


Awards


Awards


Compensation


Compensation


Compensation


TotalName(1)

($)(2)


($)(3)


($)(4)


($)


Earnings(5)


($)(6)


($)J. H. Binford Peay, III

$
36,000


$
36,000














$
62,172


$
134,172John G. Meyer, Jr.

$
24,000


$
36,000


















$
60,000Ronald H. Griffith

$
24,000


$
36,000


















$
60,000Gilbert F. Decker

$
24,000


$
36,000


















$
60,000Charles S. Ream

$
24,000


$
36,000


















$
60,000Thomas R. Hudson

$
24,000


$
36,000


















$
60,000Frederick G. Wasserman

$
24,000


$
36,000


















$
60,000     (1)
    
    Mr. Marcello, Chief Executive Officer, does not receive
    additional compensation as a director. All of his compensation
    is reported in the Summary Compensation Table.(2)
    
    Mr. Meyer and Mr. Decker have elected to defer their
    cash and stock compensation received as directors until they
    cease to serve on the Board.(3)
    
    Cumulative stock compensation for each of the above as a
    non-employee member of the Companys Board of Directors are
    as follows: Mr. Peay, 10,882 shares; Mr. Meyer,
    7,879 shares with 6,318 deferred; Mr. Griffith,
    13,882 shares; Mr. Decker, 11,882 shares with
    9,882 deferred; Mr. Ream, 6,318 shares.
    Mr. Hudson, 4,681 shares and Mr. Wasserman,
    4,681 shares as of July 1, 2007.(4)
    
    Cumulative option compensation for each of the above as a
    non-employee member of the Companys Board of Directors are
    as follows: Mr. Peay, 6,500 options; Mr. Griffith,
    6,500 options; and Mr. Decker, 6,500 options Messrs. Meyer,
    Ream, Hudson and Wasserman were not members of the Board in
    2003, the last year that options were granted for service.(5)
    
    In 1992, the Board of Directors adopted the Outside Directors
    Retirement Plan (the Directors Retirement Plan) to
    provide retirement benefits for long-standing non-employee
    directors (Outside Directors). Under the Directors
    Retirement Plan, Outside Directors are eligible for a retirement
    benefit if they retire from the Board and have served as a
    member of the Board for a minimum of five (5) years. An
    eligible Outside Director who retires from the Board is entitled
    to receive, commencing on the last day of the first month
    following the month in which the director attains age seventy
    (70), monthly payments equal to the monthly cash compensation
    received from Allied at the time the director terminated service
    in such capacity. Such payments will cease upon the earlier of
    the expiration of a period of time equivalent to the period of
    time the director served as a member of the Board or the death
    of the director. The Directors Retirement Plan was suspended in
    2001. Messrs. Christ and Warner ceased to serve as members
    of the Board as of February 15, 2007. In accordance with
    the agreements reached with the Company upon the 2001 suspension
    of the Directors Retirement Plan, (i) Mr. Warner has
    received 3,278 shares of Allied stock, and
    (ii) Mr. Christ will receive monthly cash benefits
    commencing when he reaches the age 70 (starting in 2017),
    which could aggregate to a maximum of $136,000. No further
    benefits have accrued or will accrue under the plan since its
    suspension in 2001.(6)
    
    This is the annual payment for a $1 million life insurance
    policy including the
    gross-up for
    taxes. 31




---



##### 



ITEM 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS    Name and Address of

Amount and Nature ofTitle of Class

Beneficial Owner

Beneficial Ownership

Percent of Class(1)Common

Pirate Capital LLC(2)
    200 Connecticut Avenue
    Norwalk, Connecticut 06854

1,175,042
    Owned indirectly


14.66
%Common

Ironwood Investment Management, LLC(3)
    21 Custom House Street, Suite 240
    Boston, MA 02110

1,152,350
    Owned directly


14.38
%Common

Aegis Financial Corporation (4)
    1100 North Glebe Rd
    Suite 1040
    Arlington, Virginia 22201

612,490
    Owned directly


7.64
%Common

Wynnefield Capital Management, LLC(5)
    450 Seventh Avenue
    Suite 509
    New York, New York 10123

587,235
    Owned directly


7.33
%Common

Dimensional Fund(6)
    Advisors, Inc.
    1299 Ocean Ave.,
    11th
    Floor
    Santa Monica, California 90401

479,132
    Owned directly


5.98
%     (1)
    
    Based upon 8,013,161 shares of common stock outstanding.(2)
    
    Pirate Capital LLC and Thomas R. Hudson, Jr. filed a
    Schedule 13D/A with the SEC on June 27, 2007. Previous
    filings state that Pirate Capital LLC and Thomas R.
    Hudson, Jr. are deemed to have shared voting and shared
    dispositive power with respect to 1,175,042 shares, which
    shares are owned of record by Jolly Roger Fund LP and Jolly
    Roger Offshore Fund Ltd.(3)
    
    Ironwood Investment Management, LLC. filed an amendment to its
    Schedule 13G with the SEC on February 14, 2008.(4)
    
    Aegis Financial Corporation, William S. Berno, Paul Gamble, and
    Scott L. Barbee jointly filed an amendment to its
    Schedule 13G with the SEC on February 14, 2008.(5)
    
    Wynnefield Capital Management, LLC, Wynnefield Capital, Inc.,
    Joshua H. Landes, Wynnefield Partners Small Cap Value, L.P.,
    Wynnefield Partners Small Cap Value, L.P. I., and Wynnefield
    Small Cap Value Offshore Fund,Ltd., filed a Schedule 13D/A
    with the SEC on June 29, 2007.(6)
    
    Dimensional Fund Advisors, Inc. (Dimensional),
    a registered investment advisor, filed an amended
    Schedule 13G/A
    with the SEC on February 6, 2008. 32




---



##### 



Name and Address of

Amount and Nature ofTitle of Class

Beneficial Ownership

Beneficial Owner

Percent of Class(1)Common

Thomas R. Hudson, Jr.

1,175,042(2)

14.66%Owned indirectlyCommon

J. H. Binford Peay, III

284,802(3)

3.55%Owned directlyCommon

Monte L. Pickens

74,096(5)

0.92%Owned directlyCommon

John G. Meyer, Jr.

72,904(4)

0.91%Owned directlyCommon

Wayne F. Hosking

42,023(7)

*Owned directlyCommon

Ronald H. Griffith

29,956(8)

*Owned directlyCommon

Gilbert F. Decker

18,582(9)

*Owned directlyCommon

John J. Marcello

28,272

*Owned directlyCommon

Deborah F. Ricci

23,037(6)

*Owned directlyCommon

Luis Palacio

10,000

*Owned directlyCommon

Charles S. Ream

6,318

*Owned directlyCommon

Frederick G. Wasserman

4,681

*Owned directlyCommon

Tassos Recachinas

0

*Owned directlyCommon

All executive officers and

599,352(10)

7.48%directors as a group

Owned directly     (1)
    
    Based upon 8,013,161 shares of common stock outstanding
    plus any outstanding options, by director.(2)
    
    Pirate Capital LLC and Thomas R. Hudson, Jr. filed a
    Schedule 13D/A with the SEC on June 27, 2007. Previous
    filings state that Pirate Capital LLC and Thomas R.
    Hudson, Jr. are deemed to have shared voting and shared
    dispositive power with respect to 1,175,042 shares, which
    shares are owned of record by Jolly Roger Fund LP and Jolly
    Roger Offshore Fund Ltd.(3)
    
    Includes stock options for 206,500 shares which may be
    exercised within sixty (60) days.(4)
    
    Includes 6,318 shares issuable upon retirement from the
    Board pursuant to the Directors Deferred Compensation Plan.(5)
    
    Includes stock options for 72,000 shares which may be
    exercised within sixty (60) days.(6)
    
    Includes stock options for 12,000 shares which may be
    exercised within sixty (60) days.(7)
    
    Includes stock options for 40,000 shares which may be
    exercised within sixty (60) days.(8)
    
    Includes stock options for 6,500 shares which may be
    exercised within sixty (60) days.(9)
    
    Includes stock options for 6,500 shares which may be
    exercised within sixty (60) days and 9,882 shares
    issuable upon retirement from the Board pursuant to the
    Directors Deferred Compensation Plan.(10)
    
    This total includes stock options for 343,500 shares which
    may be exercised within sixty (60) days and
    16,200 shares issuable upon retirement from the Board.*
    
    Less than 0.90% 33




---



##### 



ITEM 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
    INDEPENDENCE.      ITEM 14.
    PRINCIPAL
    ACCOUNTING FEES AND SERVICE.    2007


2006Audit fees

$
1,296


$
2,613Audit-related fees






Tax fees






All other fees






Total

$
1,296


$
2,613         case-by-case
 PART IV  ITEM 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES  Exhibit No.

Description of Exhibits3
.1

Certificate of Incorporation, as amended (Incorporated by
    reference from
    Form 10-Q
    filed in August 2002).3
.2

Amended and restated By-Laws (Incorporated by reference from
    Form 10-Q
    filed in August 2004).4
.1

Rights Agreement between Allied and Mellon Investor Services,
    LLC (Incorporated by reference from
    Form 8-K
    filed in June 2001).4
.2

First Amendment To Rights Agreement, dated as of June 15,
    2006 (incorporated by reference from
    Form 8-A/A
    filed on June 21, 2006).4
.3

Second Amendment To Rights Agreement, dated as of
    November 30, 2006 (incorporated by reference from
    Form 8-K
    filed on December 7, 2006).5


Opinion of Baxter, Baker, Sidle, Conn & Jones, P.A.(a)10
.1

Employment Agreement between Allied and John J. Marcello
    (Incorporated by reference from
    Form 10-Q
    filed in August 2005). 34




---



##### 



Exhibit No.

Description of Exhibits10
.2

Employment Agreement between Allied and Deborah F. Ricci
    (Incorporated by reference from
    Form 10-Q
    filed in May 2007).10
.3

Employment Agreement between Allied and Monte L. Pickens
    (Incorporated by reference from
    Form 8-K
    filed in April 2003).10
.4

Employment Agreement letter amendment between Allied and Monte
    L. Pickens (Incorporated by reference from
    Form 10-Q
    filed in August 2004).10
.5

Employment Agreement between Allied and Wayne F. C. Hosking, Jr.
    (Incorporated by reference from
    Form 8-K
    filed in April 2004).10
.6

2001 Equity Incentive Plan, as amended (Incorporated by
    reference from Proxy Statements filed in April 2001, April 2002
    and May 2005).10
.7

8% Convertible Debenture, Series A and related
    documents (Incorporated by reference from
    Form 8-K
    filed in July 2002).10
.8

Credit Agreement for MECAR S.A. (Incorporated by reference from
    Form 10-Q
    filed in August 2002).10
.9

Award/Contract dated as of March 1, 2002, by and between
    MECAR S.A. and U.S. Government (Incorporated by reference from
    Form 10-Q
    filed in August 2002).10
.10

Employee Stock Purchase Plan, as amended (Incorporated by
    reference from
    Form 10-Q
    filed in November 2002).10
.11

Lease Agreement, as amended (Incorporated by reference from
    Form 10-Q
    filed in November 2002).10
.12

Amendment to Lease Agreement10
.13

Form of Indemnity Agreement for Directors and Executive Officers
    (Incorporated by reference from
    Form 10-Q
    filed in November 2002).10
.14

International Distribution Agreement (Incorporated by reference
    from
    Form 10-Q
    filed in November 2002).10
.15

Deferred Compensation Plan for Non-Employee Directors
    (Incorporated by reference from
    Form 10-Q
    filed in August 2004).10
.16

Loan and Security Agreement among Wilton Funding, LLC and Allied
    and certain of its subsidiaries (Incorporated by reference from
    Form 8-K
    filed in June 2004)10
.17

Amendment to Loan and Security Agreement among Wilton Funding,
    LLC and Allied and certain of its subsidiaries (Incorporated by
    reference from
    Form 10-K/A
    filed in March 2005)10
.18

Stock Option Agreement-Employee Form (Incorporated by reference
    from
    Form 10-Q
    filed in November 2004)10
.19

Directors Stock Option
    Agreement-Director
    Form (Incorporated by reference from
    Form 10-Q
    filed in November 2004)10
.20

Summary of Annual Compensation of Board Members10
.21

Restricted Stock Agreement (Incorporated by reference from
    Form 10-Q
    filed in May 2005)10
.22

7.5% Senior Subordinated Convertible Notes and related
    documents (Incorporated by reference from
    8-K filed in
    March 2006).10
.23

Purchase Agreement, dated as of December 12, 2006, between
    The Allied Defense Group, Inc. and the buyers named therein
    (Incorporated by reference from
    Form 8-K
    filed December 13, 2006).10
.24

Amended and Restated Securities Purchase Agreement, dated as of
    June 19, 2007, between The Allied Defense Group, Inc. and
    the Purchasers (Incorporated by reference from
    Form 8-K
    filed June 20, 2007).10
.25

Form of Notes (Incorporated by reference from
    Form 8-K
    filed June 20, 2007).10
.26

Form of Amended and Restated Registration Rights Agreement
    (Incorporated by reference from
    Form 8-K
    filed June 20, 2007).10
.27

MECAR Certificate dated July 11, 2007 (Incorporated by
    reference from
    Form 8-K
    filed July 12, 2007). 35




---



##### 



Exhibit No.

Description of Exhibits10
.28

Stock Purchase Agreement, dated as of September 6, 2007
    between Ving Holdings (Belgium) BVBA in incorporation
    (in oprichting), as purchaser and ARC Europe
    SA, as seller (Incorporated by reference from
    Form 8-K
    filed September 10, 2007).10
.29

Consolidated EBITDA Schedule(a)18
.1

Letter from independent public accountant related to change in
    application of accounting principle21


List of Subsidiaries(a)23


Consent of Independent Registered Public Accounting Firm(a)23
.1

Consent of Independent Registered Public Accounting Firm(a)24


Power of Attorney  (See signature page of
    Registration Statement(a)31
.1

Certification of Chief Executive Officer Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002(a)31
.2

Certification of Chief Financial Officer Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002(a)32


Certification Pursuant to 18 U.S.C Section 1350, as Adopted
    Pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002(a).     (a)
    
    Filed herewith  Reports
    on
    Form 8-K
  Form 8-K
  Form 8-K
  Form 8-K
  Form 8-K
  Form 8-K
  Form 8-K
  Form 8-K
  Form 8-K
  Form 8-K Form 8-K
  Form 8-K
  Form 8-K Form 8-K
 36




---



##### 



Form 8-K
  Form 8-K
  Form 8-K
  Form 8-K
  Form 8-K
  Form 8-K
 37




---



##### 



SIGNATURES      By:
    /s/  John
    J. Marcello         By:

/s/  Deborah
    F. RicciDeborah
    F. Ricci.,

Chief Financial Officer and Treasurer

Date: March 24, 2008**********/s/  Ronald
    H. GriffithRonald
    H. Griffith,

Director

Date: March 24, 2008/s/  Gilbert
    F. DeckerGilbert
    F. Decker,

Director

Date: March 24, 2008/s/  John
    G. Meyer, Jr.John
    G. Meyer, Jr.,

Director

Date: March 24, 2008/s/  J.H
    Binford Peay, IIIJ.H
    Binford Peay, III,

Director

Date: March 24, 2008/s/  Charles
    S. ReamCharles
    S. Ream,

Director

Date: March 24, 2008/s/  John
    J. MarcelloJohn
    J. Marcello,

Director

Date: March 24, 2008/s/  Tassos
    RecachinasTassos
    Recachinas,

Director

Date: March 24, 2008/s/  Frederick
    G. WassermanFrederick
    G. Wasserman,

Director

Date: March 24, 2008  38




---



##### 



SECURITIES AND EXCHANGE
    COMMISSION
  Washington, D.C.
    20549
  CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
  December 31, 2007
  FORMING A
    PART OF
 ANNUAL REPORT PURSUANT
    TO
 THE SECURITIES EXCHANGE ACT OF
    1934
  FORM 10-K
 OF
 The Allied Defense Group, Inc.
  F-1




---



##### 



The
    Allied Defense Group Inc.
  INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
  PageReport of Independent Registered Public Accounting Firm


F-3Consolidated Balance Sheets at December 31, 2007 and 2006


F-4Consolidated Statements of Operations for the years ended
    December 31, 2007 and 2006


F-5Consolidated Statements of Stockholders Equity and
    Comprehensive Income (Loss) for the years ended
    December 31, 2007 and 2006


F-6Consolidated Statements of Cash Flows for the years ended
    December 31, 2007 and 2006


F-7Notes to Consolidated Financial Statements


F-8Schedules as of and for the years ended December 31, 2007
    and 2006Schedule I  Condensed Financial Information of
    Registrant


F-41Schedule II  Valuation and Qualifying Accounts


F-44  F-2




---



##### 



Report of
    Independent Registered Public Accounting Firm          ,
        /s/ BDO Seidman LLP
    F-3




---



##### 



The
    Allied Defense Group, Inc.
  CONSOLIDATED BALANCE SHEETS
 December 31,
  2007


2006(Thousands of dollars, except per shareand share data)ASSETSCurrent AssetsCash and cash equivalents

$
21,750


$
16,397Restricted cash


13,052



8,401Accounts receivable, net


9,339



7,973Costs and accrued earnings on uncompleted contracts


39,313



25,534Inventories, net


24,706



21,092Prepaid and other current assets


4,194



2,829Assets held for sale


4,599



37,680Total current assets


116,953



119,906Property, Plant and Equipment, net


25,059



27,058Other AssetsIntangible assets, net


8,011



9,125Goodwill


9,932



9,932Other assets


296



2,008Total other assets


18,239



21,065TOTAL ASSETS

$
160,251


$
168,029CURRENT LIABILITIESCurrent maturities of senior secured convertible notes

$
13,610


$
Senior subordinated convertible notes






26,907Bank overdraft facility


7,239



13,702Current maturities of long-term debt


4,133



9,515Accounts payable


16,806



7,329Accrued liabilities


15,871



15,570Customer deposits


26,835



19,855Belgium social security


8,307



Income taxes


3,680



3,523Liabilities held for sale


2,051



10,062Total current liabilities


98,532



106,463LONG TERM OBLIGATIONSLong-term debt, less current maturities and unamortized discount


9,439



4,448Senior secured convertible notes, less current maturities


5,782



Derivative instrument


183



1,192Other long-term liabilities


660



579Total long-term obligations


16,064



6,219TOTAL LIABILITIES


114,596



112,682CONTINGENCIES 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, 8,013,161 in
    2007 and 6,440,944 in 2006


801



644Capital in excess of par value


55,355



43,312Accumulated deficit


(27,909
)


(6,631
)Accumulated other comprehensive income


17,408



18,022Total stockholders equity


45,655



55,347TOTAL LIABILITIES AND STOCKHOLDERS EQUITY

$
160,251


$
168,029    F-4




---



##### 



The
    Allied Defense Group, Inc.
 CONSOLIDATED
    STATEMENTS OF OPERATIONS
    Years ended December 31,  2007


2006(Thousands of dollars, except per share and share data)Revenues

$
55,618


$
87,015Cost and expensesCost of sales


49,949



81,097Selling and administrative


27,387



26,661Research and development


4,106



4,972Operating loss


(25,824
)


(25,715
)Other income (expenses)Interest income


728



867Interest expense


(11,588
)


(8,884
)Net (loss) gain on fair value of senior convertible notes and
    warrants


(6,663
)


1,901Other-net


(550
)


1,792(18,073
)


(4,324
)Loss from continuing operations before income taxes


(43,897
)


(30,039
)Income tax expense


4



11,340Loss from continuing operations


(43,901
)


(41,379
)Income (loss) from discontinued operations, net of taxGain on sale of subsidiaries


29,314



Income (loss) from discontinued operations


(6,691
)


28222,623



282NET LOSS

$
(21,278
)

$
(41,097
)Earnings (Loss) per share  basic and diluted:Net loss from continuing operations

$
(6.06
)

$
(6.83
)Net earnings from discontinued operations


3.12



0.05Total earnings (loss) per share  basic and diluted

$
(2.94
)

$
(6.78
)Weighted average number of common shares:Basic and Diluted


7,244,983



6,065,732    F-5




---



##### 



The
    Allied Defense Group, Inc.
 CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY AND

COMPREHENSIVE INCOME (LOSS)  Retained


AccumulatedPreferred


Common Stock


Capital


Earnings


Other


TotalStock, no





$.10


in Excess


Accumulated


Comprehensive


StockholdersPar Value


Shares


Par Value


of Par Value


(Deficit)


Income


Equity(Thousands of dollars, except per share and share data)Balance at January 1, 2006

$




5,982,008


$
598


$
34,354


$
34,466


$
12,075


$
81,493Common stock awards






16,584



2



761











763Retired stocks






(1,345
)






(29
)










(29
)Common stock issued in Private Placement






400,000



40



6,644











6,684Employee stock purchase plan purchases






7,530



1



151











152Exercise of stock options






36,167



3



397











400Warrants issued














373











373Directors deferred stock compensation














164











164Issue of stock options














497











497Comprehensive loss:Net loss for the year


















(41,097
)






(41,097
)Currency translation adjustment






















5,947



5,947Total comprehensive loss


























(35,150
)Balance at December 31, 2006






6,440,944



644



43,312



(6,631
)


18,022



55,347Common stock awards






59,986



6



710











716Retired stocks






(1,668
)






(14
)










(14
)Employee stock purchase plan purchases






47,431



4



358











362Common stock converted from Notes






150,500



15



1,392











1,407Common stock issued to noteholders






1,288,000



129



9,415











9,544Directors deferred stock compensation














(275
)










(275
)Issue of stock options














216











216Exercise of warrants






27,968



3



241











244Comprehensive loss:Net loss for the year


















(21,278
)






(21,278
)Currency translation adjustment related to sale of The VSK Group






















(4,491
)


(4,491
)Currency translation adjustment






















3,877



3,877Total comprehensive loss


























(21,892
)Balance at December 31, 2007

$




8,013,161


$
801


$
55,355


$
(27,909
)

$
17,408


$
45,655    F-6




---



##### 



The
    Allied Defense Group, Inc.
 CONSOLIDATED
    STATEMENTS OF CASH FLOWS
    Years ended December 31,  2007


2006(Thousands of dollars)Cash flows from operating activitiesNet loss

$
(21,278
)

$
(41,097
)Less: Gain on sale of subsidiaries


(29,314
)


Discontinued operations, net of tax


6,691



(282
)Loss from continuing operations


(43,901
)


(41,379
)Adjustments to reconcile net loss from continuing operations to
    net cash used in operating activities, net of divestitures:Depreciation and amortization


6,461



5,930Amortization of debt discount and debt issue costs


3,742



1,765Unrealized gains on forward contracts






(1,231
)Loss (gain) on sale of fixed assets


(15
)


33Net loss (gain) related to fair value of notes and warrants


6,663



(1,901
)Interest and penalties converted to debt principal


1,204



Provision for estimated losses on contracts


1,770



222Provision for warranty reserves, uncollectible accounts and
    inventory obsolescence


956



789Deferred taxes






8,891Common stock and stock option awards


1,229



1,255Deferred director stock awards


(275
)


164(Increase) decrease in operating assets and increase (decrease)
    in liabilities, net of effects from discontinued businesses
    Restricted cash


(3,444
)


(243
)Accounts receivable


(256
)


1,932Costs and accrued earnings on uncompleted contracts


(10,156
)


12,055Inventories


(2,712
)


12,470Prepaid and other current assets


(1,129
)


3,871Accounts payable and accrued liabilities


15,137



(20,503
)Customer deposits


4,422



9,471Deferred compensation


15



27Income taxes


(219
)


2,232Net cash used in operating activities  continuing
    operations


(20,508
)


(4,150
)Net cash provided by operating activities 
    discontinued operations


2,214



1,750Net cash used in operating activities


(18,294
)


(2,400
)Cash flows from investing activitiesCapital expenditures


(1,916
)


(5,068
)Payment for acquisitions






(473
)Proceeds from sale of subsidiaries


43,384



Proceeds from sale of fixed assets


18



1,306Net cash provided by (used in) investing activities 
    continuing operations


41,486



(4,235
)Net cash used in investing activities  discontinued
    operations


(1,103
)


(1,954
)Net cash provided by (used in) investing activities


40,383



(6,189
)Cash flows from financing activitiesBank overdraft payments


(7,488
)


(2,965
)Principal payments on long-term borrowing


(3,350
)


(14,000
)Principal payments on senior convertible notes


(20,816
)


Debt issue costs


(1,707
)


(1,908
)Repayment on capital lease obligations


(1,770
)


(2,129
)Proceeds from issuance of long-term debt


8,224



Net cash transferred to discontinued operations


(1,156
)


(1,623
)Net (decrease) increase in short-term borrowings


(4,661
)


3,481Proceeds from employee stock purchases


308



129Proceeds from issuance of senior convertible notes


15,376



30,000Proceeds from issuance of common stocks






6,684Retirement of stock


(14
)


(30
)Proceeds from option exercises






429Net cash (used in) provided by financing activities 
    continuing operations


(17,054
)


18,068Net cash used in financing activities  discontinued
    operations


1,010



1,424Net cash (used in) provided by financing activities


(16,044
)


19,492Net change in cash of discontinued operations


(2,121
)


(1,220
)Effects of exchange rate on cash


1,429



802Net increase in cash and cash equivalents


5,353



10,485Cash and cash equivalents at beginning of year


16,397



5,912Cash and cash equivalents at end of year

$
21,750


$
16,397Supplemental Disclosures of Cash Flow informationCash paid during the period forInterest

$
5,453


$
7,440Taxes

$
1,036


$
1,780Supplemental Disclosures of Non-Cash Investing and Financing
    ActivitiesWarrants issued in conjunction with long-term debt

$



$
2,387Issuance of common stock in exchange of convertible notes

$
9,544


$
Interest and financing charges converted to debt principal

$
1,580


$
Capital leases

$
2


$
2,157Conversion of notes

$
1,407


$
   See accompanying notes to
    consolidated financial statements.
 F-7




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (Thousands
    of Dollars)
  NOTE A 
    SUMMARY
    OF SIGNIFICANT ACCOUNTING POLICIES  Basis of Presentation.
  
    ARC Europe, S. A. (ARC Europe), a Belgian company,
    Allied Research Corporation Limited (ARC Limited), an inactive
    United Kingdom company,
    News/Sports Microwave Rental, Inc. (NSM), a California
    corporation,
    Titan Dynamics Systems, Inc., (Titan), a Texas corporation
    (Discontinued Operation),
    SeaSpace Corporation (SeaSpace), a California corporation
    (Discontinued Operation),
    MECAR USA, a Delaware corporation,
    Allied Technology, LLC (Allied Technology), a
    Maryland limited liability company (Discontinued Operation),
    Global Microwave Systems, Inc. (GMS), a California
    corporation.        Nature of Operations.
  Foreign Currency Translation.
  Reclassifications.
  Use of Estimates.
 F-8




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
  Cash and cash equivalents.
  Accounts Receivable.
  Costs and Accrued Earnings on Uncompleted
    Contracts.
  Inventories.
  Property, Plant and Equipment.
  Buildings and improvements


20 - 30 yearsMachinery and equipment


3 - 10 yearsDemonstration inventory


3 - 7 years         Impairment of Long-Lived Assets. Accounting for the Impairment or
    Disposal of Long-Lived Assets.
  Intangibles/Goodwill.
 F-9




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
  Goodwill and Other Intangible Assets. Accounting for the Impairment or Disposal of Long-Lived
    Assets.
  Derivative Financial Instruments. Accounting for Derivative
    Instruments and Hedging Activities
  Revenue
    and Cost Recognition.
  
    Percentage of Completion Method Revenues
    under fixed price contracts are recognized on the
    percentage-of-completion method measured by direct labor
    incurred to total estimated direct labor (MECAR) or on a total
    cost incurred to total estimated cost basis (NSM). The actual
    costs on these contracts may differ from the Companys
    estimate at completion. Provision for estimated losses and
    penalties on contracts are recorded when identified. Revenues
    under cost-plus-fixed-fee and time and material contracts are
    recognized on the basis of costs incurred during the period plus
    the fee earned. As contracts extend over one or more years,
    revisions in costs and earnings estimated during the course of
    the work are reflected in the accounting period in which the
    facts which require the revision become known. The revenue
    recognized during the year under the percentage of completion
    method for 2007 and 2006 were $45,141 and $79,746, respectively.
    Costs and accrued profits on uncompleted direct and indirect
    fixed price contracts with foreign governments, direct and
    indirect U.S. government foreign military sales (FMS)
    contracts, and custom designed domestic security systems, which
    are billable upon completion, are carried as costs and accrued
    earnings on uncompleted contracts.
    Other Method Revenues from the sale of
    traditional security systems are recognized upon shipment.
    Revenues from service work rendered are recorded when performed.
    Revenues from pass through contracts are evaluated based on the
    guidelines of
    EITF 99-19
    Reporting Revenue Gross as a Principal versus Net as an
    Agent. Accordingly, the Company bases its decision on
    whether to report revenue from such pass through contracts on a
    gross basis or net basis based on the relative strength of each
    of the following factors: whether the Company (1) is the
    primary obligor in the arrangement, (2) has general
    inventory risk, (3) has latitude in establishing price,
    (4) changes the product or performed part of the service,
    (5) has discretion in supplier selection and (6) is
    involved in the determination of product or service
    specifications. There are no provisions related to performance,
    cancellation, termination or refunds.     F-10




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
  Advertising.
  Research and Development.
  Capitalization of Software. 98-1 (SOP 98-1), Accounting for the Costs of Computer Software Developed or
    Obtained for Internal Use
  Warranties.
  Environmental Regulations.
  Income Taxes.
  Earnings Per Common Share.
  Stock-Based Compensation Share-Based Payments Accounting for Stock-Based
    Compensation, Statement of Cash Flows.
   F-11




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
              2006Risk free interest rate


4.63
%Expected volatility rate


31.79
%Expected lives  years


4Divided yield


     Major Customers.
 F-12




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
  Concentrations of Credit Risk.
        Recent Accounting Pronouncements. Business Combinations
  Noncontrolling Interests in Consolidated Financial
    Statements, an amendment of ARB 51
 F-13




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
  The Fair Value
    Option for Financial Assets and Financial
    Liabilities  Including an amendment of FASB Statement
    No. 115
  Fair Value
    Measurements
  NOTE B 
    LIQUIDITY
    AND CAPITAL RESOURCES         F-14




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
               F-15




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
      
    Registration delay payments and interest premiums paid for
    failure to register common stock associated with senior
    convertible notes timely of $1,200.
    Financing fees paid in conjunction with additional borrowings of
    senior convertible notes of $1,000.
    Additional legal costs associated with bondholder issues of $307.
    Cash funding of Subsidiaries that have been divested. SeaSpace
    Corporation (sold July 2007) and Titan Dynamics Systems,
    Inc. (sold March 2008) of $1,709.
    Restructuring consultants and advisors fees of $2,375.      
    The Company will be successful securing new MECAR financing or
    restructuring its existing banking group at MECAR.
    The Company will be successful in taking necessary steps to be
    in a position to satisfy a potential put of its
    senior secured convertible notes which may be made in December
    2008 or January 2009.
    The Company will be successful in its restructuring and
    turnaround efforts at its subsidiaries.
    The Company will be able to meet the financial debt covenants of
    its debt instruments. F-16




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
     NOTE C 
    RESTRICTED
    CASH    2007


2006Collateralized performance bonds and advance payment guarantees

$
12,920


$
8,317Other


132



84$
13,052


$
8,401     NOTE D 
    ACCOUNTS
    RECEIVABLE AND COSTS & ACCRUED EARNINGS ON UNCOMPLETED
    CONTRACTS    2007


2006Direct and indirect receivables from governments

$
3,529


$
6,752Commercial and other receivables


6,485



1,81310,014



8,565Less:Allowance for doubtful receivables


(675
)


(592
)$
9,339


$
7,973      F-17




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
   NOTE E 
    INVENTORIES    2007


2006Raw materials

$
13,902


$
13,319Work in process


11,582



7,615Finished goods


1,749



1,64427,233



22,578Less reserve for obsolescence


(2,527
)


(1,486
)$
24,706


$
21,092   NOTE F 
    PROPERTY,
    PLANT & EQUIPMENT    2007


2006Land

$
381


$
341Buildings and improvements


20,346



18,244Machinery and equipment


63,534



56,792Demonstration Inventory


5,793



5,27790,054



80,654Less accumulated depreciation


(64,995
)


(53,596
)$
25,059


$
27,058     Capital Leases.
    2007


2006Leased equipment

$
6,102


$
10,046Less: accumulated amortization


(3,021
)


(4,557
)$
3,081


$
5,489  F-18




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
    Year Ending December 31,2008

$
9272009


4522010


170Total minimum lease payments


1,549Less: Amount representing interest


(70
)Present value of net minimum lease payments

$
1,479   NOTE G 
    INTANGIBLE
    ASSETS    December 31, 2007


December 31, 2006Gross


Accumulated





Gross


AccumulatedAmount


Amortization


Net


Amount


Amortization


NetIntangible assets subject to amortization:Capitalized Software

$
190


$
(190
)

$



$
190


$
(190
)

$
Developed Technologies


5,272



(1,142
)


4,130



5,272



(615
)


4,657Customer Lists


275



(275
)






275



(275
)


Patents and Trade Name


295



(107
)


188



295



(89
)


206Other


1,705



(1,232
)


473



1,705



(663
)


1,042Sub Total


7,737



(2,946
)


4,791



7,737



(1,832
)


5,905Intangible assets with indefinite lives:Trade Names


3,220







3,220



3,220







3,220Total

$
10,957


$
(2,946
)

$
8,011


$
10,957


$
(1,832
)

$
9,125     Year

Amount2008

$
1,0192009


5452010


5452011


5452012


545   NOTE H 
    GOODWILL   F-19




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
    ElectronicSecurityBalance as of January 1, 2006

$
9,459Impairment loss


Goodwill acquired during the year


473Balance as of December 31, 2006

$
9,932Impairment loss


Balance as of December 31, 2007

$
9,932     NOTE I 
    BANK
    CREDIT FACILITY       F-20




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
    NOTE J 
    ACCRUED
    LOSSES ON CONTRACTS, DEFERRED COMPENSATION AND
    WARRANTY RESERVES  Accrued losses on contracts.
  Deferred compensation.
  Accrued Warranty Costs.
  NOTE K 
    LONG-TERM
    DEBT    2007


2006Fair value of senior secured convertible notes

$
19,392


$
Fair value of senior subordinated convertible notes






26,907Note related to GMS acquisition, less unamortized discount


3,252



6,431SOGEPA loan


8,837



Other notes payable


4



4,497Capital leases and other


1,479



3,035Total long-term debt


32,964



40,870Less current maturities


(17,743
)


(36,422
)Long-term debt, less current maturities and unamortized discount

$
15,221


$
4,448      F-21




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
      Senior subordinated convertible notes.
    Accounting
    for Certain Hybrid Instruments
  Senior secured convertible notes.
 F-22




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
   and/or and/or
        FSP 00-19-2 Accounting for Registration Payment Arrangements FSP 00-19-2, FSP 00-19-2, Accounting for Contingencies
  Accounting for Certain
 F-23




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
  Hybrid Instruments
  Warrants
  EITF 00-19, Accounting for Derivative Instruments Index to, and
    Potentially Settled in, a Companys Own Stock
  Loan for Global Microwave Systems
    acquisition. EITF 96-19 Debtors Accounting for a Modification or Exchange of
    Debt Instruments
    SOGEPA Loan. Société Wallonne de Gestion et de
    Participations
 F-24




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
    Other notes payable.
  Capital lease and other.
    Year

Amount(A)2008

$
4,1332009


2,4852010


21,7102011


2,2612012


2,375Total

$
32,964     (A)
    The senior secured convertible notes have a put feature that
    allows the holders to put the notes back to the Company on
    December 26, 2008 or January 19, 2009.    NOTE L 
    BENEFIT
    PLANS    NOTE M 
    CONTINGENCIES
    AND COMMITMENTS       F-25




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
    Year

Amount2008

$
9252009


8762010


7982011


6062012


5262013 and after


45Total

$
3,776       Indemnification
    provisions.
         F-26




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
      Tax
    Litigation
    Social
    Security Litigation
    NOTE N 
    FAIR
    VALUE OF FINANCIAL INSTRUMENTS    2007


2006Carrying


Estimated


Carrying


EstimatedAmount


Fair Value


Amount


Fair ValueNotes payable and long-term obligations, including current
    maturities

$
13,572


$
13,572


$
13,963


$
13,963Senior convertible notes


19,392



19,392



26,907



26,907Detachable warrants


183



183



1,192



1,192Off-balance-sheet instruments:Guarantees and performance bonds

$



$
37,606


$



$
31,399     
    The fair value of notes payable and long-term obligations is
    estimated based on approximate market prices for the same or
    similar issues or the current rates offered to the Company for
    debt of the same remaining maturities. The Company believes the
    aggregate carrying value approximates fair value.
    The senior secured convertible notes and the senior subordinated
    convertible notes are treated as derivatives and are carried at
    fair value in accordance with SFAS 155 Accounting for
    Certain Hybrid Instruments. The F-27




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
  fair value of convertible notes is estimated based on
    approximate market prices of the Company stock or the current
    rates offered to the Company for debt of the same remaining
    maturities.  
    The fair value of detachable warrants is estimated based on the
    Black Scholes model, the term, stock price and exercise price of
    the warrants. In addition, the interpolation of the
    3-year and
    5-year
    treasury rates as of December 31, 2007 and 2006,
    respectively, as reported by the Federal Reserve Bank for the
    period of time between the valuation date and the expiration
    date is used in the model.
    Estimated fair values for off-balance-sheet instruments, which
    include performance bonds and advance payment guarantees are
    reflected at the face value of these obligations, since
    management does not expect to have any claims against these
    obligations based on its past experience.  NOTE O 
    DERIVATIVE
    FINANCIAL INSTRUMENTS  Derivatives
    not designated as hedges
    Counterparty
    credit risk
    NOTE P 
    STOCKHOLDERS EQUITY
    2001 Equity Incentive Plan.
 F-28




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
    1997 Incentive Stock Plan.
  1992 Employee Stock Purchase Plan.
  Rights Agreement.
       F-29




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
  The
    following table summarizes option activity:
  2007


2006Weighted





WeightedAverage





AverageExercise





ExerciseShares


Price


Shares


PriceOptions outstanding at beginning of the year


501,500


$
17.20



507,667


$
16.94Options granted










30,000



15.05Options exercised










(36,167
)


11.87Options forfeited


(45,000
)


22.05







Options expired


(87,000
)


18.21







Options outstanding at end of year


369,500


$
15.39



501,500


$
17.20Options exercisable at end of year


327,500







384,500Weighted-average fair value of options, granted during the year

$







$
4.45   The
    following table summarizes options outstanding at
    December 31, 2007:
  Weighted


ExercisableWeighted


Average





WeightedRange of

Average


Remaining


Number


AverageNumber


Exercise

Exercise


Contractural


of


ExerciseOutstanding


Prices

Prices


Term


Options


Prices100,000


$8.63

$
8.63



3.51 Years



100,000


$
8.6340,000


$9.01 to $14.90

$
14.90



0.84 Years



40,000


$
14.90229,500


$15.05 to $23.95

$
18.42



3.84 Years



187,500


$
18.19369,500


$8.63 to $23.95

$
15.39







327,500


$
14.87     The following table summarizes restricted stock (nonvested)
    shares outstanding as of December 31,
  2007


2006Weighted-Average Grant





Weighted-Average GrantRestricted Stock

Shares


Date Fair Value


Shares


Date Fair ValueRestricted at January 1, 2007


43,299


$
22.25



51,793


$
22.99Granted


20,350


$
10.17



8,300


$
22.08Vested


(16,531
)

$
21.97



(14,330
)

$
22.62Forfeited


(3,700
)

$
21.77



(2,464
)

$
22.58Restricted shares at December 31, 2007


43,418


$
17.46



43,299


$
22.25    F-30




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
  NOTE Q 
    OTHER  NET
    2007


2006Net currency transaction gains (losses)

$
(252
)

$
1,055Miscellaneous  net


(298
)


737$
(550
)

$
1,792     NOTE R 
    INCOME TAXES
      2007


2006Domestic

$
(26,133
)

$
(12,681
)Foreign


(17,764
)


(17,358
)$
(43,897
)

$
(30,039
)     2007


2006Current ProvisionDomestic

$
4


$
4Foreign






2,445Total Current Provision


4



2,449Deferred Provision (Benefit)Domestic






Foreign






8,891Total Deferred Provision (Benefit)






8,891Total tax provision

$
4


$
11,340  F-31




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
    2007


2006Taxes at statutory rate


34.0
%


(34.0
)%State taxes, net of federal benefit






(0.4
)Impact of international operations


3.0



Goodwill and other permanent differences






Other permanent differences


(8.4
)


(1.6
)Valuation allowance


(28.6
)


75.2Income taxes



%


39.2
%     2007


2006Deferred tax assetsInventory

$
685


$
396Compensation accruals


34



136Valuation adjustments


376



421Accrued expenses


495



83Business tax credits


458



458Deferred compensation


579



559Capitalized R&D


486



520Foreign tax credit carryforwards


2,290



2,290Net operating loss carryforwards


45,684



28,311Gross deferred tax asset


51,087



33,174Valuation allowance


(43,486
)


(33,324
)Total deferred tax assets

$
7,601


$
(150
)Deferred tax liabilitiesDepreciation and amortization

$
864


$
603Fair value adjustment of financial instrument


(328
)


(453
)Accrued foreign dividends


(8,137
)


Total deferred liabilities

$
(7,601
)

$
150Net Deferred Tax Assets (Liabilities)

$



$
      F-32




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
              NOTE S 
    EARNINGS (LOSS) PER COMMON SHARE
    2007


2006Net loss from continuing operations

$
(43,901
)

$
(41,379
)Net earnings from discontinued operations


22,623



282Net loss

$
(21,278
)

$
(41,097
)Weighted average number of basic and diluted shares


7,244,983



6,065,732Basic and diluted net loss per share from continuing operations

$
(6.06
)

$
(6.83
)Basic and diluted net earnings per share from discontinued
    operations


3.12



0.05Total

$
(2.94
)

$
(6.78
)    F-33




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
  NOTE T 
    GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS
  Disclosure about
    Segments of an Enterprise and Related Information
          2007


2006Revenues from external customersAmmunitions & Weapons Effects

$
38,603


$
67,263Electronic Security


17,015



19,752$
55,618


$
87,015Interest expenseAmmunitions & Weapons Effects

$
2,820


$
3,377Electronic Security


13



37Corporate


8,755



5,470$
11,588


$
8,884Interest incomeAmmunitions & Weapons Effects

$
412


$
577Electronic Security


25



41Corporate


291



249$
728


$
867Income tax expense (benefit)Ammunitions & Weapons Effects

$
(1
)

$
11,336Electronic Security


4



22Corporate


1



(18
)$
4


$
11,340Depreciation and amortizationAmmunitions & Weapons Effects

$
4,544


$
4,312Electronic Security


1,533



1,425Corporate


384



193$
6,461


$
5,930 F-34




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
  2007


2006Segment earnings (loss) from continuing operations before
    taxesAmmunitions & Weapons Effects

$
(18,545
)

$
(18,802
)Electronic Security


(1,456
)


(669
)Corporate


(23,896
)


(10,568
)$
(43,897
)

$
(30,039
)Segment assetsAmmunitions & Weapons Effects

$
90,687


$
80,916Electronic Security


26,840



29,794Corporate


42,724



57,319$
160,251


$
168,029Capital expenditure for segment assetsAmmunitions & Weapons Effects

$
1,713


$
3,240Electronic Security


195



278Corporate


8



1,550$
1,916


$
5,068   Amounts
    Net of intersegment receivables.
    Geographic Segment Data2007


2006Revenues from external customers(A)Saudi Arabia

$
20,176


$
7,937United States(1)


17,876



53,416Kuwait


5,069



Venezuela


3,369



6,511Nigeria


2,652



778Qatar


2,586



Belgium


1,424



388Indonesia


854



1,906Germany


333



491Ireland


312



1,141Bahrain






4,177Botswana






559Tunisia






294Cyprus


(1,241
)


8,366Other Foreign Countries


2,208



1,051$
55,618


$
87,015     (A)
    
    Revenues are attributed to countries based on location of
    customers(1)
    
    Includes foreign military sales for the benefit of Saudi
    Arabia.  F-35




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
  Geographic Segment Data2007


2006Segment assetsBelgium

$
133,296


$
105,858United Kingdom


205



183United States(1)


26,750



61,988$
160,251


$
168,029     (1)
    
    Net of inter-segment receivables and investments.  2007


2006Property and equipmentBelgium

$
20,609


$
21,585United States


4,450



5,473$
25,059


$
27,058   NOTE U 
    QUARTERLY
    FINANCIAL DATA (UNAUDITED)  First


Second


Third


Fourth2007

Quarter


Quarter


Quarter


Quarter


TotalRevenues

$
9,439


$
4,761


$
13,838


$
27,580


$
55,618Gross margin (loss)


(1,048
)


(4,676
)


2,217



9,176



5,669Earnings (loss) from continuing operations


(14,603
)


(23,484
)


(6,097
)


283



(43,901
)Income (loss) from discontinued operations, net of tax


(3,250
)


(672
)


28,380



(1,835
)


22,623Net earnings (loss)


(17,853
)


(24,156
)


22,283



(1,552
)


(21,278
)Basic and diluted earnings (loss) per share:Net earnings (loss) from continuing operations

$
(2.26
)

$
(3.58
)

$
(0.77
)

$
0.04


$
(6.06
)Net earnings (loss) from discontinued operations


(0.50
)


(0.10
)


3.59



(0.23
)


3.12Total net earnings (loss) per share

$
(2.76
)

$
(3.68
)

$
2.82


$
(0.19
)

$
(2.94
)   F-36




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
  First


Second


Third


Fourth2006

Quarter


Quarter


Quarter


Quarter


TotalRevenues

$
27,931


$
22,206


$
15,738


$
21,140


$
87,015Gross margin (loss)


5,349



2,887



657



(2,975
)


5,918Earnings (loss) from continuing operations


(3,071
)


(4,823
)


(634
)


(32,851
)


(41,379
)Income (loss) from discontinued operations, net of tax


(640
)


(210
)


1,126



6



282Net earnings (loss)


(3,711
)


(5,033
)


492



(32,845
)


(41,097
)Basic and diluted earnings (loss) per share:Net loss from continuing operations

$
(0.51
)

$
(0.80
)

$
(0.11
)

$
(5.35
)

$
(6.83
)Net earnings (loss) from discontinued operations


(0.11
)


(0.03
)


0.19



0.00



0.05Total net earnings (loss) per share

$
(0.62
)

$
(0.83
)

$
0.08


$
(5.35
)

$
(6.78
)     NOTE V 
    OFF-BALANCE SHEET TRANSACTION
    NOTE W 
    DISCONTINUED OPERATIONS
  Accounting for the
    Impairment or Disposal of Long-Lived Assets.
 F-37




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
  SeaSpace
    Corporation
      The
    VSK Group
      CMS
    Security Systems
    Titan
    Dynamics Systems, Inc.
   F-38




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
        December 31, 2007TitanCash

$
74Accounts receivable, net


714Inventories, net


2,219Other assets


1,592Assets held for sale

$
4,599Accounts payable

$
883Accrued liabilities


241Customer deposits


922Other liabilities


5Liabilities held for sale

$
2,051     December 31, 2006CMS SecurityThe VSK Group


Systems


SeaSpace


Titan


TotalCash

$
2,704


$
51


$
247


$
342


$
3,344Accounts receivable, net


8,591



28



2,110



922



11,651Costs and accrued earnings on uncompleted contracts










211







211Inventories, net


1,701



53



572



1,546



3,872Prepaid and other assets


5,680



522



4,208



1,934



12,344Property, Plant and Equipment, net


4,686



54



481



1,037



6,258Assets held for sale

$
23,362


$
708


$
7,829


$
5,781


$
37,680Accounts payable

$
4,209


$



$
681


$
576


$
5,466Accrued liabilities


1,473







328



969



2,770Deferred revenue










421







421Customer deposits


52







309







361Other liabilities


364















364Long-term debt


418







262







680Liabilities held for sale

$
6,516


$



$
2,001


$
1,545


$
10,062  F-39




---



##### 



The
    Allied Defense Group, Inc.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
    For the Year Ended December 31, 2007CMS SecurityThe VSK Group


Systems


SeaSpace


Titan


TotalRevenues

$
23,162


$
149


$
2,947


$
5,107


$
31,365Income (loss) before taxes


3,361



(950
)


(4,312
)


(3,660
)


(5,561
)Income (loss) from discontinued operations, net of tax


2,237



(950
)


(4,313
)


(3,665
)


(6,691
)Gain on sale of subsidiaries, net of tax


29,314















29,314Discontinued operations, net of tax

$
31,551


$
(950
)

$
(4,313
)

$
(3,665
)

$
22,623   For the Year Ended December 31, 2006CMS SecurityThe VSK Group


Systems


SeaSpace


Titan


TotalRevenues

$
30,817


$
313


$
7,006


$
3,535


$
41,671Income (loss) before taxes


4,316



(540
)


(763
)


(1,496
)


1,517Income (loss) from discontinued operations, net of tax


3,058



(540
)


(740
)


(1,496
)


282Gain on sale of subsidiaries, net of tax


















Discontinued operations, net of tax

$
3,058


$
(540
)

$
(740
)

$
(1,496
)

$
282   NOTE X 
    SUBSEQUENT
    EVENTS     F-40




---



##### 



SCHEDULE I 
    CONDENSED FINANCIAL INFORMATION OF REGISTRANT  The
    Allied Defense Group, Inc.
 (Parent Company)
  BALANCE SHEETS
 December 31,
  2007


2006(Thousands of dollars)ASSETSCash and cash equivalents

$
5,528


$
3,938Restricted cash


132



84Investment in subsidiaries


78,736



48,620Assets Held for Sale


2,548



27,618Due from subsidiaries






8,825Other


1,128



3,877Total assets

$
88,072


$
92,962LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESAccounts payable and accrued liabilities

$
4,026


$
2,773Due to subsidiaries


15,248



Income tax


103



102Deferred compensation


201



186Long term debt, less unamortized discount


3,264



6,455Derivative instrument


183



1,192Senior convertible notes


19,392



26,907Total liabilities


42,417



37,615STOCKHOLDERS EQUITYCommon stock


801



644Capital in excess of par value


55,355



43,312Retained earnings (deficit)


(27,909
)


(6,631
)Accumulated other comprehensive income


17,408



18,02245,655



55,347$
88,072


$
92,962  F-41




---



##### 



SCHEDULE I 
    CONDENSED FINANCIAL INFORMATION OF REGISTRANT 
    (Continued)
  The
    Allied Defense Group, Inc.
 (Parent Company)
  STATEMENTS OF OPERATIONS
 Years ended December 31,
  2007


2006(Thousands of dollars)IncomeIntercompany management fees

$
4,136


$
4,285Dividends from subsidiaries






550Gain on fair value of Senior Notes and warrants






1,901Other  net


178



2464,314



6,982Costs and expensesAdministrative and other


21,766



15,810Loss on fair value of Senior Notes and warrants


6,663



Loss before equity in operations of subsidiaries


(24,115
)


(8,828
)Equity (loss) in continuing operations of subsidiaries, less
    dividends received


(19,785
)


(32,569
)Loss from continuing operations before income taxes


(43,900
)


(41,397
)Income taxes (benefit)


1



(18
)Equity (loss) from discontinued operations


22,623



282NET LOSS

$
(21,278
)

$
(41,097
)Earnings per common shareBasic and dilutedNet loss from continuing operations

$
(6.06
)

$
(6.83
)Net earnings (loss) from discontinued operations


3.12



0.05Total earnings (loss) per share  basic and
    diluted

$
(2.94
)

$
(6.78
)  F-42




---



##### 



SCHEDULE I 
    CONDENSED FINANCIAL INFORMATION OF REGISTRANT 
    (Continued)
  The
    Allied Defense Group, Inc.
 (Parent Company)
  STATEMENTS OF CASH FLOWS
  2007


2006(Thousands of dollars)Cash flows from operating activitiesNet loss for the year

$
(21,278
)

$
(41,097
)Adjustments to reconcile net earnings (loss) to net cash
    provided by (used in) operating activitiesEquity in operations of subsidiaries


(2,838
)


31,737Dividend from subsidiary






550Depreciation and amortization


384



193Discontinued Operations


4,151



Loss on sale of fixed assets


3



Gain on sale of subsidiaries


(3,973
)


Interest and penalties rolled into Notes


1,204



Amortization of debenture issue costs and conversion feature


3,742



1,765Net loss (gain) related to fair value of notes and warrants


6,663



(1,901
)Common stock and stock option awards


1,229



1,255Deferred director stock awards


(275
)


164Changes in assets and liabilitiesOther assets


(112
)


132Due to subsidiaries


22,398



(5,627
)Accounts payable and accrued liabilities


1,248



(896
)Deferred compensation


15



27Income taxes


1



(1
)Net cash provided by (used in) operating activities


12,562



(13,699
)Cash flows used in investing activitiesCapital expenditures


(8
)


(1,550
)Equity infusions in subsidiaries


(1,766
)


(4,855
)Proceeds from sale of subsidiaries


1,067



Acquisitions






(473
)Net cash used in investing activities


(707
)


(6,878
)Cash flows from financing activitiesProceeds from issuance of long-term debt


15,376



30,000Debt issue costs


(1,707
)


(1,908
)Principal payments on long-term obligations


(24,166
)


(14,000
)Repayment on capital lease obligations


(14
)


(8
)Proceeds from employee stock purchase plan


308



129Proceeds from option exercises






429Issuance of stock






6,684Retirement of stock


(14
)


(30
)Restricted cash


(48
)


1,952Net cash provided by (used in) financing activities


(10,265
)


23,248Net increase (decrease) in cash and equivalents


1,590



2,671Cash and equivalents at beginning of year


3,938



1,267Cash and equivalents at end of year

$
5,528


$
3,938Supplemental Disclosures of Cash Flow Information:Cash paid during the year for:Interest

$
3,363


$
3,843Supplemental of Non-Cash Investing and Financing Activities:Capital leases

$
2


$
24Issuance of common stock in exchange of convertible notes

$
9,544


$
Interest and financing charges converted to debt principal

$
1,580


$
Conversion of notes

$
1,407


$
Warrants issued in conjunction with long term debt

$



$
2,387  F-43




---



##### 



SCHEDULE II  VALUATION AND
    QUALIFYING ACCOUNTS
  The Allied Defense Group, Inc.
  Years ended December 31, 2007 and 2006
  AdditionsBalance at


Charged to


Charged





BalanceBeginning


Costs and


to Other





at End ofDescription

of Period


Expenses


Accounts


Deductions


Period(Thousands of dollars)Year ended December 31, 2007Estimated losses on contracts

$
222


$
1,680


$



$

(1)

$
1,902Allowance for doubtful receivables

$
592


$
302


$



$
219
(2)

$
675Valuation allowance on inventory

$
1,486


$
1,499


$



$
458


$
2,527Valuation allowances on deferred tax assets

$
33,324


$
10,162


$



$

(3)

$
43,486Warranty reserve

$
97


$



$



$
2


$
95Year ended December 31, 2006Estimated losses on contracts

$



$
222


$



$

(1)

$
222Allowance for doubtful receivables

$
119


$
551


$



$
78
(2)

$
592Valuation allowance on inventory

$
1,103


$
383


$



$



$
1,486Valuation allowances on deferred tax assets

$
12,784


$
20,540


$



$

(3)

$
33,324Warranty reserve

$
91


$
6


$



$



$
97     (1)
    
    Represents amount of reserve relieved through completion
    of contracts.(2)
    
    Represents write-off of receivables.(3)
    
    Represents amounts of valuation allowance relieved through
    use of deferred tax assets. F-44




---



##### 



EXHIBIT INDEX
   Number

Description of Exhibit

Page21


List of Subsidiaries


E-223


Consent of Independent Registered Public Accounting Firm


E-331
.1

Certification of Chief Executive Officer pursuant to
    Section 302 of Sarbanes-Oxley Act of 2002, dated
    March 24, 2008


E-431
.2

Certification of Chief Financial Officer pursuant to
    Section 302 of Sarbanes-Oxley Act of 2002, dated
    March 24, 2008


E-532


Certification of Chief Executive Officer and Chief Financial
    Officer pursuant to Section 906 of Sarbanes-Oxley Act of
    2002, dated March 24, 2008


E-610
.29

Consolidated EBITDA


E-7  E-1