##### Table of Contents



UNITED STATES
 SECURITIES AND EXCHANGE
    COMMISSION
 Washington, D.C.
    20549
      Form 10-K/A
 ANNUAL REPORT PURSUANT TO
    SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT
    OF 1934
  For the fiscal year ended December 31, 2005
  Commission file number: 1-11376
      The Allied Defense Group,
    Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware

04-2281015(State of
    incorporation)

(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
  o þ
  Regulation S-K Form 10-K Form 10-K/A. þ
    o þ o
  Rule 12b-2 o þ




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##### Table of Contents



EXPLANATORY
    NOTE
  Form 10-K/A Form 10-K 10-K
  Form 10-K/A Form 10-K Form 10-K/A Form 10-K Form 10-K
    
    Consolidated Financial Statements and Schedules 
    Report of Independent Registered Public Accounting Firm,
    page F-8
    Reference to the notes to the financial statements has been
    added to pages
    F-9 through
    F-13.
    The description of the totals on page
    F-10 have
    been corrected.    SIGNATURES
  Form 10-K/A
    By:
    /s/  John
    J. Marcello    President and Chief Executive Officer




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##### Table of Contents



SECURITIES
    AND EXCHANGE COMMISSION
    Washington, D.C. 20549
   CONSOLIDATED
    FINANCIAL STATEMENTS AND SCHEDULES
    December 31, 2005
   FORMING A
    PART OF
    ANNUAL REPORT PURSUANT TO
    THE SECURITIES EXCHANGE ACT OF 1934
   FORM 10-K/A
    OF
    The Allied Defense Group Inc.
  F-1




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##### 



THE
    ALLIED DEFENSE GROUP INC.
  
  INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
  PageManagements
    Report on Internal Controls Over Financial Reporting


F-3Report of
    Independent Registered Public Accounting Firm


F-5Report of
    Independent Registered Public Accounting Firm


F-7Report on
    Independent Registered Public Accounting Firm


F-8Consolidated
    Balance Sheets at December 31, 2005 and 2004


F-9Consolidated
    Statements of Operations for each of the three years in the
    period ended December 31, 2005


F-11Consolidated
    Statements of Stockholders Equity for each of the three
    years in the period ended December 31, 2005


F-12Consolidated
    Statements of Cash Flows for each of the three years in the
    period ended December 31, 2005


F-13Notes to
    Consolidated Financial Statements


F-14Schedules as of and for the three
    years ended December 31, 2005Schedule I 
    Condensed Financial Information of Registrant


F-52Schedule II
     Valuation and Qualifying Accounts


F-55Exhibit 18.1Exhibit 21Exhibit 23Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32   F-2




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MANAGEMENTS
    REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING                   F-3




---



##### Table of Contents



/s/  Robert
    P. DowskiRobert
    P. Dowski
    Chief Financial Officer
    October 5, 2006

/s/  John
    J. MarcelloJohn
    J. Marcello.
    Chief Executive Officer
    October 5, 2006  F-4




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REPORT
    OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM               F-5




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BDO Seidman LLP
    F-6




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REPORT
    OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM          ,
      Internal Control 
    Integrated Framework
  BDO Seidman, LLP
    F-7




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM               Grant Thornton LLP
    F-8




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##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.



CONSOLIDATED
    BALANCE SHEETS  December 31,2005


2004Restated(In Thousands of Dollars)ASSETSCurrent AssetsCash and cash equivalents

$
7,803


$
27,940Restricted cash


7,428



9,239Accounts receivable, net


18,547



34,980Costs and accrued earnings on
    uncompleted contracts


35,178



41,420Inventories, net


34,300



17,128Deferred tax asset


2,696



2,016Fair value of foreign exchange
    contracts


5



1,195Prepaid and other current assets


8,339



4,123Total current assets


114,296



138,041Property, Plant and Equipment,
    net


29,826



30,294Other AssetsRestricted cash






2,000Intangible assets, net


13,353



3,723Goodwill


16,698



14,401Deferred tax asset, non-current


5,672



2,461Other assets


1,101



1,31136,824



23,896TOTAL ASSETS

$
180,946


$
192,231 The accompanying notes are an integral part of these
    consolidated financial statements.
 F-9




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##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  CONSOLIDATED
    BALANCE SHEETS  (Continued)
  December 31,2005


2004Restated(In Thousands of Dollars)Current LiabilitiesBank overdraft facility

$
15,086


$
5,553Current maturities of long-term
    debt


4,342



2,788Convertible subordinated
    debenture, current






2,231Accounts payable


31,004



26,661Accrued liabilities


15,097



10,760Customer deposits


9,956



8,662Foreign exchange contracts


1,161



Deferred compensation






1,612Income taxes


1,288



811Total current liabilities


77,934



59,078Long-term ObligationsShort term debt to be refinanced


13,539



Long-term debt, less current
    maturities and unamortized discount


7,820



7,223Deferred compensation


160



37721,519



7,600TOTAL LIABILITIES


99,453



66,678Contingencies 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, 5,982,008 in 2005 and 5,601,101 in 2004


598



560Capital in excess of par value


34,354



27,910Retained earnings


34,466



73,386Accumulated other comprehensive
    income


12,075



23,697TOTAL STOCKHOLDERS EQUITY


81,493



125,553TOTAL LIABILITIES AND
    STOCKHOLDERS EQUITY

$
180,946


$
192,231  The accompanying notes are an integral part of these
    consolidated financial statements.
 F-10




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##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.



CONSOLIDATED
    STATEMENTS OF OPERATIONS  Years ended December 31,2005


2004


2003Restated


Restated(In Thousands of Dollars, exceptper share data)Revenues

$
112,222


$
146,201


$
153,774Cost and expensesCost of sales


94,154



105,819



114,904Selling and administrative


36,471



29,605



24,449Research and development


7,190



6,695



4,532Goodwill impairment


3,060







Total cost and expenses


140,875



142,119



143,885Operating income (loss)


(28,653
)


4,082



9,889Other income
    (expense)Interest income


580



549



460Interest expense


(2,568
)


(2,441
)


(2,491
)Other  net


(1,926
)


(511
)


(484
)Total other income (expense)


(3,914
)


(2,403
)


(2,515
)Earnings (loss) before income
    taxes and cumulative effect of change in the application of
    accounting principle


(32,567
)


1,679



7,374Income tax expense
    (benefit)


1,060



309



4,656Earnings (loss) before cumulative
    effect of accounting change


(33,627
)


1,370



2,718Cumulative effect of accounting
    change, net of tax benefit of $2,726


(5,293
)






Net Earnings (Loss)

$
(38,920
)

$
1,370


$
2,718Earnings (loss) per
    share:BasicEarnings (loss) before cumulative
    effect of accounting change

$
(5.84
)

$
0.25


$
0.49Cumulative effect of accounting
    change, net of income taxes


(0.92
)






Net earnings (loss)

$
(6.76
)

$
0.25


$
0.49DilutedEarnings (loss) before cumulative
    effect of accounting change

$
(5.84
)

$
0.24


$
0.48Cumulative effect of accounting
    change, net of income taxes


(0.92
)






Net earnings (loss)

$
(6.76
)

$
0.24


$
0.48Weighted average number of
    common shares:Basic


5,754,951



5,568,183



5,496,786Diluted


5,754,951



5,745,282



5,670,119  The accompanying notes are an integral part of these
    consolidated financial statements.
 F-11




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##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
 CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY  Years ended December 31, 2005, 2004 and 2003AccumulatedPreferred


Common Stock


Capital





other


TotalStock, no





$.10


in excess


Retained


comprehensive


stockholderspar value


Shares


par value


of par value


earnings


(loss) income


equity(In Thousands of Dollars, except per share data)Balance at January 1, 2003
    as previously reported

$




5,474,813


$
547


$
24,874


$
69,909


$
678


$
96,008Adjustment related to restatement














378



(611
)


(39
)


(272
)Balance at January 1, 2003,
    restated






5,474,813



547



25,252



69,298



639



95,736Common stock awards






6,000



1



110











111Employee stock purchase plan
    purchases






10,560



1



150











151Exercise of stock options






60,000



6



759











765Issue of stock options














429











429Comprehensive income:


























Net earnings for the year


















2,718







Currency translation adjustment,
    net of tax






















14,813



Total comprehensive income


























17,531Balance at December 31,
    2003 restated

$




5,551,373


$
555


$
26,700


$
72,016


$
15,452


$
114,723Common stock awards






5,753



1



105











106Employee stock purchase plan
    purchases






16,241



1



259











260Exercise of stock options






27,734



3



346











349Warrants issued














68











68Issue of stock options














432











432Comprehensive income:


























Net earnings for the year


















1,370







Currency translation adjustment,
    net of tax






















8,245



Total comprehensive income


























9,615Balance at December 31,
    2004 restated

$




5,601,101


$
560


$
27,910


$
73,386


$
23,697


$
125,553Common stock awards






54,729



5



399











404Common stock issued with acquisition






118,072



11



2,489











2,500Employee stock purchase plan
    purchases






5,507



1



107











108Exercise of stock options






202,599



21



2,671











2,692Warrants issued














488











488Directors deferred stock














290











290Comprehensive income:


























Net loss for the year


















(38,920
)






Currency translation adjustment,
    net of tax






















(11,622
)


Total comprehensive income


























(50,542
)Balance at December 31,
    2005

$




5,982,008


$
598


$
34,354


$
34,466


$
12,075


$
81,493  The accompanying notes are an integral part of these
    consolidated financial statements.
 F-12




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##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.



CONSOLIDATED
    STATEMENTS OF CASH FLOWS  Years ended December 31,2005


2004


2003Restated


Restated(In Thousands of Dollars)Cash flows from (used in)
    operating activitiesNet earnings (loss) for the year

$
(38,920
)

$
1,370


$
2,718Adjustments to reconcile net
    earnings (loss) to net cash from (used in) operating activitiesCumulative effect of accounting
    change


5,293







Goodwill impairment


3,060







In-process research &
    development


944







Unrealized (gains) losses on
    forward contracts


(4,798
)


4,758



(4,312
)Depreciation and amortization


6,082



4,551



4,036Gain on sale of fixed assets


(400
)


(44
)


(18
)Deferred income taxes


(3,975
)


(2,405
)


1,712Provision for estimated losses on
    contracts


39



662



255Amortization of debt issue costs
    and conversion feature


220



179



243Common stock and stock option awards


694



538



562(Increase) Decrease in operating
    assets and increase (decrease) in liabilitiesRestricted cash and restricted
    deposits


2,683



6,387



(4,786
)Accounts receivable


16,325



(5,741
)


2,052Cost and accrued earnings on
    uncompleted contracts


196



14,556



14,414Inventories


(19,363
)


(4,208
)


(1,241
)Prepaid expenses and assets


(3,909
)


1,275



(1,609
)Accounts payable and accrued
    liabilities


12,905



(15,965
)


13,783Customer deposits


2,334



3,340



(1,144
)Deferred compensation


(1,829
)


521



671Income taxes


190



(370
)


(2,569
)Net cash provided by (used in)
    operating activities


(22,229
)


9,404



24,767Cash flows from (used in)
    investing activitiesCapital expenditures


(8,167
)


(5,036
)


(4,373
)Acquisitions, net of cash acquired


(9,443
)


(525
)


Proceeds from sale of fixed assets






45



20Net cash used in investing
    activities


(17,610
)


(5,516
)


(4,353
)Cash flows from (used in)
    financing activitiesNet (decrease) increase in
    short-term borrowings


594



(14,013
)


5,781Repayment on capital lease
    obligations


(2,297
)


(2,357
)


(1,711
)Borrowings on bank overdraft
    facility


9,534



1,293



(273
)Principal payments on long-term
    debt and debenture


(2,478
)


(5,922
)


(632
)Proceeds from issuance of long-term
    debt


12,000



2,300



Debt issue costs






(860
)


Proceeds from employee stock
    purchase plan


108



261



151Proceeds from option exercises


2,692



348



765Restricted cash and restricted
    deposits






(2,000
)


Net cash provided by (used in)
    financing activities


20,153



(20,950
)


4,081Effects of exchange rates on
    cash


(451
)


1,625



4,006Net (decrease) increase in cash


(20,137
)


(15,437
)


28,501Cash at beginning of
    year


27,940



43,377



14,876Cash at end of year

$
7,803


$
27,940


$
43,377Supplemental Disclosures of
    Cash Flow Information:Cash paid during the year for
    Interest

$
1,338


$
1,516


$
1,492Income taxes


4,541



7,782



9,455Supplemental Non-Cash
    Investing and Financing Activities:Capital leases

$
850


$
2,481


$
1,989Non-cash consideration in
    connection with business acquisition


8,672







Warrants issued in conjunction with
    long term debt


488



68



  The accompanying notes are an integral part of these
    consolidated financial statements.
 F-13




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##### Table of Contents



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 (Limited), an inactive
    United Kingdom company,
    News/Sports Microwave Rental, Inc. (NSM), a California
    corporation,
    Titan Systems, Inc., (Titan), a Texas corporation,
    SeaSpace Corporation (SeaSpace), a California
    corporation, and
    Mecar USA, a Delaware corporation,
    Allied Technology, LLC (Allied Technology), a
    Maryland limited liability company
    Global Microwave Systems, Inc. (GMS), a California
    corporation.      Nature of Operations.
  Liquidity and Capital Resources
        
    The Company intends to have in place, and is in the process of
    negotiating, a domestic line of credit by year end that will
    provide $4,000 to $5,000 of immediate liquidity with a provision
    to accordion up to $20,000 based on financial performance in
    subsequent periods. F-14




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##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
   
    The Company is exploring possible asset backed financing from
    local banks at its US based AWE facilities that would be
    earmarked for capital improvement  buildings
    and/or
    equipment  at that site.
    The Company is evaluating the disposition of certain non
    strategic assets.
    The Company has the option of issuing dividends of excess cash
    from its Euro based ES operations at year end.
    The Company may further consolidate its California operations to
    further reduce operating expenses.  Restatements of Financial Results Form 10-K
    Form 10-K Form 10-Q
       F-15




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##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
  10-K/A Form 10-K/A
  Selected
    Consolidated Statements of Operations Data:
  Impact from


Impact from


As PreviouslyForeign


Compensation


ReportedRestated


Currency Translation (1)


Expense (2)


in 10-K/AYear Ended December 31,
    2004Revenues

$
146,201


$
(3,930
)

$



$
150,131Cost of Sales


105,819



117







105,936Operating income


4,082



(3,812
)


(433
)


8,327Earnings before income taxes


1,679



(3,511
)


(433
)


5,623Income taxes


309



(1,234
)


(146
)


1,689Net Earnings

$
1,370


$
(2,277
)


(287
)

$
3,934Earnings per shareBasic

$
0.25


$
(0.40
)

$
(0.06
)

$
0.71Diluted

$
0.24


$
(0.40
)

$
(0.06
)

$
0.70Weighted average shares
    outstanding:Basic


5,568,183











5,568,183Diluted


5,745,282











5,991,101   Impact from


As PreviouslyImpact from Foreign


Compensation


ReportedRestated


Currency Translation (1)


Expense (2)


in 10-K/AYear Ended December 31,
    2003Revenues

$
153,774


$
(163
)

$



$
153,937Cost of Sales


114,904



151







114,753Operating income


9,889



(314
)


(451
)


10,654Earnings before income taxes


7,374



(1,053
)


(451
)


8,878Income taxes


4,656



(307
)


(153
)


5,116Net Earnings

$
2,718


$
(747
)

$
(297
)

$
3,762Earnings per shareBasic

$
0.49


$
(0.14
)

$
(0.05
)

$
0.68Diluted

$
0.48


$
(0.13
)

$
(0.05
)

$
0.63Weighted Average
    Shares Outstanding:Basic


5,496,786











5,496,786Diluted


5,670,119











5,970,119  F-16




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##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
    (1)
    
    Impact of correcting for certain errors related to incorrect
    exchange rates to translate MECAR S.A.s U.S. Dollar
    denominated assets and liabilities into its functional currency
    and other adjustments related to foreign currency transactions.(2)
    
    Impact of correcting compensation expense related to the grant
    of stock options to certain officers and directors in 2002 for
    which the measurement date was incorrectly determined. These
    options were granted in February 2002 by the Compensation
    Committee of the Board of Directors of the Company, but were
    subject to subsequent stockholder approval, which was not
    obtained until June 2002.  Selected
    Consolidated Balance Sheet Data:
  Impact from


As PreviouslyImpact from Foreign


Compensation


ReportedRestated


Currency Translation (1)


Expense (2)


in 10-K/AYear Ended December 31,
    2004Restricted cash

$
9,239


$
(518
)

$




9,757Accounts receivable


34,980



6,739






$
28,241Costs and accrued earnings on
    uncompleted contracts


41,420



(13,457
)






54,877Deferred tax asset


2,016



958







1,058Total current assets


138,041



(6,579
)






144,352Deferred tax asset  non
    current


2,461



1,033



408



1,020Total assets


192,231



(4,495
)


408



196,318Accounts payable


26,661



(8,272
)






34,933Accrued liabilities


10,760



1,386







9,374Customer deposits


8,662



(46
)






8,708Total current liabilities


59,078



(1,378
)






60,456Total liabilities


66,678



(595
)






67,273Accumulated other comprehensive
    income (loss)


23,697



(514
)






24,211Total liabilities and
    stockholders equity

$
192,231


$
(4,495
)

$
408


$
196,318     (1)
    
    Impact of correcting for certain errors related to incorrect
    exchange rates to translate MECARs U.S. dollar
    denominated assets and liabilities into its functional currency
    and other adjustments related to foreign currency transactions.(2)
    
    Impact of correcting compensation expense related to stock
    options, noted above. F-17




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##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
  Cash Flow
    Information
    As PreviouslyRestated


Adjustment


Reported in 10K-AYear ended December 31, 2004Cash flows from operationsAccounts payable


(15,943
)


(1,293
)


(14,650
)*Cash flows from financingBorrowings on bank overdraft
    facility


1,293



1,293



Year ended December 31, 2003Cash flows from operationsAccounts payable


13,782



273



13,509
*Cash flows from financingBorrowings on bank overdraft
    facility


(273
)


(273
)


     *
    
      the as previously reported amount in the 10 K/A have
    been adjusted for the impact of the foreign currency translation
    described above of $7,772 and ($7,979) in 2004 and 2003
    respectively  Foreign Currency Translation.
  Reclassifications.
  Use of Estimates.
  Accounting Change.
  Cash and cash equivalents.
  Accounts Receivable.
 F-18




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##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
    Inventories.
  Property, Plant and Equipment.
  Buildings and improvements


20  30 yearsMachinery and equipment


3  10 yearsDemonstration Inventory


3  7 years         Intangibles/Goodwill. 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
 F-19




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
    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. Revenues from indefinite delivery/indefinite
    quantity (IDIQ) are also recognized on a percentage of
    completion methodology, measured based upon units delivered. 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 on the contracts in progress for 2005, 2004
    and 2003 were $81,301, $115,462 and $125,211, 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 and weather
    systems, which are billable upon completion, are carried as
    costs and accrued earnings on uncompleted contracts.
    Completed contract method  Revenues
    from the sale of traditional fire & security systems,
    as well as battlefield effects simulators, are recognized when
    the installation is completed. Security system maintenance
    contract revenues are recognized over the term of the contract
    on a straight-line basis. Revenues from service work rendered
    are recorded when performed. The elements of fire and security
    systems are separable into units of accounting in accordance
    with
    EITF 00-21,
    Accounting for Revenue Arrangements with Multiple Deliverables.
    The maintenance contracts are sold separately from the product
    and installation contracts and are priced at market value. There
    are no provisions related to performance, cancellation,
    termination or refunds.      Advertising.
  Research and Development.
 F-20




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
    Capitalization of Internally Developed
    Software. (SOP 98-1), Accounting for the Costs of Computer Software Developed or
    Obtained for Internal Use SOP 98-1.
  Warranties.
  Income Taxes.
  Earnings Per Common Share.
  Detachable Stock Purchase Warrants EITF 00-19
  EITF 00-27, Application of Issue
    No. 98-5
    to Certain Convertible Instruments
  Stock-Based Compensation Accounting
    for Stock Issued to Employees.
 F-21




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
      2005


2004


2003Restated


Restated(In Thousands, except per share data)Reported net earnings (loss)

$
(38,920
)

$
1,370


$
2,718Elimination of compensation costs
    recognized for options


24



286



297Stock-based compensation costs
    that would have been included in the determination of reported
    net earnings, if the fair value method was applied to all
    awards, net of tax


(457
)


(584
)


(471
)Pro forma net earnings (loss)

$
(39,353
)

$
1,072


$
2,544Basic earnings (loss) per share:Reported earnings per share


(6.76
)


0.25



0.49Compensation costs, net of tax


(0.08
)


(0.05
)


(0.03
)Pro forma basic earnings (loss)
    per share

$
(6.84
)

$
0.20


$
0.46Diluted earnings (loss) per share:Reported earnings (loss) per share


(6.76
)


0.24



0.48Compensation costs, net of tax


(0.08
)


(0.05
)


(0.03
)Pro forma basic earnings (loss)
    per share

$
(6.84
)

$
0.19


$
0.45     2005


2004


2003Risk free interest rate


3.93
%


3.63
%


2.86
%Expected volatility rate


41.05
%


33.90
%


47.00
%Expected lives  years


3



3



3Divided yield










     ) Share-Based Payment (as
    amended),
 F-22




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
    Major Customers.
  Concentrations of Credit Risk.
        Recent
    Accounting Pronouncements
  instrument-by-instrument
   F-23




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
      Share-Based Payment.
  No. FAS 109-2,
  Inventory
    Costs  An Amendment of ARB No. 43,
    Chapter 4.
  Note B 
    Acquisitions
  Global
    Microwave Systems, Inc.
   F-24




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
    Intangible WeightedAllocation


Average Useful LifeCurrent assets

$
4,714Property and equipment


500Other Assets


21IntangiblesDeveloped Technologies


5,272


10 yearsTrade Name


2,915


IndefiniteNon-Competition Agreement


1,705


3 yearsPurchased in-process
    research & development


944


Expensed in Research and
    Development in 2005Goodwill


5,964


IndefiniteTotal assets acquired

$
22,035Current liabilities


(2,299
)Net assets acquired

$
19,736   CMS
    Security Systems
    Intangible WeightedAllocation


Average Useful LifeCurrent assets

$
69Property and equipment


23Intangibles (Customer list)


50


7 yearsGoodwill


449


IndefiniteTotal assets acquired

$
591Current liabilities


(172
)Deferred tax liability


(19
)Net assets acquired

$
400  F-25




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
  Note C 
    Cumulative Effect of Change in Accounting Principle
    2005


2004


2003Pro forma amounts assuming
    change in application of accounting principle applied
    retroactively:Net earnings (loss), as
    restated for 2003 and 2004

$
(38,920
)

$
1,370


$
2,718Elimination of the cumulative
    effect of the change in accounting principle, net of taxes


5,293







Impact of change in MECAR revenue
    recognition based on total direct labor rather than total direct
    costs, net of taxes  unaudited






(1,691
)


1,650Pro Forma net earnings
    (loss)

$
(33,627
)

$
(321
)

$
4,368Pro Forma Earnings (loss) per
    share:Basic

$
(5.84
)

$
(0.06
)

$
0.80Diluted

$
(5.84
)

$
(0.06
)

$
0.77   Note D 
    Restricted Cash
    2005


2004Collateralized performance bonds
    and advance payment guarantees

$
5,393


$
9,227Senior secured facility deposit


2,000



2,000Other


35



12$
7,428


$
11,239Portion included in current assets


(7,428
)


(9,239
)Noncurrent portion

$



$
2,000    F-26




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
    Note E 
    Accounts Receivable and Costs & Accrued Earnings on
    Uncompleted Contracts
    2005


2004RestatedDirect and indirect receivables
    from governments

$
1,777


$
22,324Commercial and other receivables,
    less allowance for doubtful receivables of $214 in 2005 and $143
    in 2004


16,770



12,656$
18,547


$
34,980       Note F 
    Inventories
    2005


2004RestatedRaw materials

$
14,481


$
15,668Work in process


19,265



686Finished goods, less reserve for
    obsolescence of $882 in 2005 and $668 in 2004


554



774$
34,300


$
17,128  F-27




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
  Note G 
    Property, Plant & Equipment
    2005


2004Land

$
612


$
1,632Buildings and improvements


22,309



23,621Machinery and equipment


59,614



59,372Demonstration Inventory


1,107



$
83,642


$
84,625Less accumulated depreciation


(53,816
)


(54,331
)$
29,826


$
30,294     Capital Leases.
    2005


2004Leased equipment

$
10,823


$
13,721Less: accumulated amortization


(4,135
)


(4,170
)$
6,688


$
9,551     Year ending December 31,2006

$
2,2162007


1,6352008


6972009


3022010


72Total minimum lease payments


4,922Less: Amount representing interest


(315
)Present value of net minimum lease
    payments

$
4,607  F-28




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
  Note H 
    Intangible Assets
    December 31, 2005


December 31, 2004Gross


Accumulated





Gross


AccumulatedAmount


Amortization


Net


Amount


Amortization


NetIntangible assets subject to
    amortization:Capitalized Software

$
1,055


$
582


$
473


$
1,184


$
477


$
707Developed Technologies


5,272



81



5,191











Customer Lists


2,297



727



1,570



2,297



540



1,757Patents and Trade Name


1,225



392



833



1,189



235



954Other


2,228



162



2,066











Sub Total

$
12,077


$
1,944


$
10,133


$
4,670


$
1,252


$
3,418Intangible assets with indefinite
    lives:Trade Names


3,220







3,220



305







305Total

$
15,297


$
1,944


$
13,353


$
4,975


$
1,252


$
3,723     Year

Amount2006

$
1,3872007


1,4492008


1,3542009


8812010


803   Note I 
    Goodwill
   F-29




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
    Ammunition &


ElectronicWeapons Effects


Security


Other


TotalBalance as of January 1, 2003

$
1,345


$
5,936


$
3,323


$
10,604Goodwill acquired during the year










125



125Deferred tax asset adjustment


311



426



874



1,611Foreign exchange fluctuation






1,378







1,378Balance as of December 31,
    2003

$
1,656


$
7,740


$
4,322


$
13,718Goodwill acquired during the year






449



125



574Deferred tax asset adjustment


(261
)










(261
)Foreign exchange fluctuation






370







370Balance as of December 31,
    2004

$
1,395


$
8,559


$
4,447


$
14,401Goodwill acquired during the year






5,964







5,964Impairment loss










(3,060
)


(3,060
)Foreign exchange fluctuation






(607
)






(607
)Balance as of December 31,
    2005

$
1,395


$
13,916


$
1,387


$
16,698       Note J 
    Bank Overdraft Credit Facility
   F-30




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
    Note K 
    Accrued Losses on Contracts, Deferred Compensation and Warranty
    Reserves
  Accrued losses on contracts.
  Deferred compensation.
  Accrued Warranty Costs.
  Note L 
    Long-Term Debt
    2005


2004Notes payable, less unamortized
    discount

$
13,539


$
1,959Note related to GMS acquisition,
    less unamortized discount


6,173



Mortgage loan agreements


193



284Loan for CMS Security Systems
    acquisition


200



300Notes payable


618



54Capital leases and other


4,978



7,414Total Long-Term Debt obligations

$
25,701


$
10,011Less current maturities


4,342



2,788Long-Term Debt obligations, less
    current maturities and unamortized discount (including
    short-term debt to be refinanced)

$
21,359


$
7,223   Notes payable.
 F-31




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
    Note payable refinancing
  Note payable for GMS acquisition.
  Mortgage loan Agreements.
  Loan for CMS Security Systems acquisition.
  Notes Payable.
  Capital Leases and Other.
    Year

Amount2006

$
4,3422007


3,3372008


3,9782009


3092010


13,735  F-32




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
    Note M 
    Convertible Subordinated Debenture
  Convertible Subordinated Debenture.
  Note N 
    Benefit Plans
    Note O 
    Contingencies and Commitments
        Year

Amount2006

$
9982007


1,0132008


6362009


4022010


2782011 and after


885      F-33




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
  Note P 
    Fair Value of Financial Instruments
    2005


2004Carrying


Estimated


Carrying


EstimatedAmount


Fair Value


Amount


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

$
25,701


$
25,701


$
10,011


$
10,011Foreign exchange contracts


1,156



1,156



1,223



1,223Off-balance-sheet instruments
    Guarantees and performance bonds






28,123







26,781     
    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 fair value of foreign exchange contracts is based on the
    mark to market calculations performed at the end of each period.
    The balance sheet at December 31, 2005 and 2004 includes
    the fair value of MECARs forward contracts of $1,161
    liability and $1,195 asset, respectively. The fair value of
    VSKs forward contracts was $5 and $28 at December 31,
    2005 and 2004, respectively.
    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 Q 
    Derivative Financial Instruments
  Derivatives
    and hedging
    Fair
    value hedges
   F-34




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
    Cash flow
    hedges
    Derivatives
    not designated as hedges
    Counterparty
    credit risk
    Note R 
    Stockholders Equity
    2001 Equity Incentive Plan.
  1997 Incentive Stock Plan.
 F-35




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
    1992 Employee Stock Purchase Plan.
  Rights Agreement.
       F-36




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
    2005


2004


2003Weighted





Weighted





WeightedAverage





Average





AverageExercise





Exercise





ExerciseShares


Price


Shares


Price


Shares


PriceOptions outstanding at beginning
    of year


632,266


$
14.69



620,000


$
14.08



531,000


$
12.81Options granted


120,000



22.68



40,000



20.43



149,000



16.92Options exercised


(202,599
)


13.28



(27,734
)


9.21



(60,000
)


9.87Options forfeited






















Options expired


(42,000
)


17.19















Options outstanding at end of year


507,667


$
16.94



632,266


$
14.69



620,000


$
14.08Options exercisable at end of year


375,667







416,930







305,333Weighted-average fair value of
    options, granted during the year

$
8.42






$
7.59






$
7.73     WeightedAverage


ExercisableNumber


Range of

Weighted Average


Remaining


Number of


Weighted AverageOutstanding


Exercise Prices

Exercise Prices


Contractual Life


Options


Exercise Prices119,500


$ 7.88 to $ 8.63

$
8.53



4.27 Years



119,500


$
8.5340,000


$ 9.01 to $14.90

$
14.90



2.33 Years



24,000


$
14.90348,167


$16.40 to $25.00

$
20.07



4.46 Years



232,167


$
18.98507,667


$ 7.88 to $25.00

$
16.94







375,667



   Note S 
    Other  Net
    2005


2004


2003Restated


RestatedNet currency transaction gains
    (losses)

$
(721
)

$
(1,530
)

$
(1,404
)Miscellaneous  net


(1,205
)


1,019



920$
(1,926
)

$
(511
)

$
(484
)     Note T 
    Income Taxes
   F-37




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
      2005


2004


2003Restated


RestatedDomestic

$
(21,594
)

$
(6,066
)

$
(5,896
)Foreign


(10,973
)


7,745



13,270$
(32,567
)

$
1,679


$
7,374     2005


2004


2003Restated


RestatedCurrent (Benefit) ProvisionDomestic

$
(61
)

$
417


$
309Foreign


2,800



6,364



8,301Total Current Provision


2,739



6,781



8,610Deferred (Benefit) ProvisionDomestic


3,501



(2,995
)


(848
)Foreign


(5,180
)


(3,477
)


(3,106
)Total Deferred (Benefit)


(1,679
)


(6,472
)


(3,954
)Total tax provision

$
1,060


$
309


$
4,656     2005


2004


2003Restated


RestatedTaxes at statutory rate


(34.0
)%


34.0
%


34.0
%State taxes, net of federal benefit


(2.9
)


(4.9
)


(2.7
)Impact of international operations


0.4



127.6



(14.6
)Goodwill and other permanent
    differences


3.8







Other permanent differences


2.2



10.8



9.4Valuation allowance


33.8



(149.1
)


37.0Income taxes


3.3
%


18.4
%


63.1
%  F-38




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
    2005


2004RestatedDeferred tax assetsInventory

$
386


$
769Compensation accruals


152



113Valuation adjustments


598



198Accrued expenses


471



225Business tax credits


458



394Deferred compensation


476



536Capitalized R&D


2,013



1,309Derivatives


253



958Revenue recognition


2,223



Foreign tax credit carryforwards


2,368



1,295Net operating loss carryforwards


12,325



1,469Gross deferred tax asset


21,723



7,266Valuation allowance


(12,784
)


(1,466
)Total deferred tax assets

$
8,939


$
5,800Deferred tax liabilitiesDepreciation and amortization

$
(498
)

$
(1,250
)Deferred income


(73
)


(73
)Total deferred tax liabilities

$
(571
)

$
(1,323
)Net Deferred Tax Assets
    (Liabilities)

$
8,368


$
4,477        F-39




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
        Note U 
    Earnings Per Common Share
    2005


2004


2003Restated


RestatedEarnings (loss) before cumulative
    effect of accounting change

$
(32,567
)

$
1,370


$
2,718Cumulative effect of accounting
    change, net of taxes


(5,293
)






Net earnings after cumulative
    effect of accounting change

$
(38,920
)

$
1,370


$
2,718Weighted average number of basic
    shares


5,754,951



5,568,183



5,496,786Warrants






2,381



Stock Options






174,718



173,333Weighted average number of diluted
    shares


5,754,951



5,745,282



5,670,119Basic earnings (loss) per share
    before cumulative effect of accounting change

$
(5.84
)

$
0.25


$
0.49Cumulative effect of accounting
    change, net of taxes


(0.92
)






Basic earnings (loss) per share

$
(6.76
)

$
0.25


$
0.49Diluted earnings (loss) per share
    before cumulative effect of accounting change

$
(5.84
)

$
0.24


$
0.48Cumulative effect of accounting
    change, net of taxes


(0.92
)






Diluted earnings (loss) per share

$
(6.76
)

$
0.24


$
0.48    F-40




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
    Earnings Per
    Share
  Note V 
    Geographic Areas and Industry Segments
             F-41




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
    2005


2004


2003Restated


RestatedRevenues from external
    customersAmmunition & Weapons
    Effects

$
67,396


$
93,793


$
113,406Electronic Security


38,802



45,973



33,303Other


6,024



6,435



7,065$
112,222


$
146,201


$
153,774Interest expenseAmmunition & Weapons
    Effects

$
1,406


$
1,483


$
1,603Electronic Security


79



48



49Other


4



1



1Corporate


1,079



909



838$
2,568


$
2,441


$
2,491   2005


2004


2003Restated


RestatedInterest incomeAmmunition & Weapons
    Effects

$
258


$
203


$
221Electronic Security


222



275



167Other


23



21



36Corporate


77



50



36$
580


$
549


$
460Income tax expense
    (benefit)Ammunition & Weapons
    Effects

$
(4,481
)

$
614


$
3,274Electronic Security


2,707



2,694



654Other


1,094



(1,411
)


(200
)Corporate


1,740



(1,588
)


928$
1,060


$
309


$
4,656 F-42




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
  2005


2004


2003Restated


RestatedDepreciation and
    amortizationAmmunition & Weapons
    Effects

$
3,498


$
2,764


$
2,410Electronic Security


1,939



1,216



1,093Other


595



524



488Corporate


50



47



46$
6,082


$
4,551


$
4,037Segment profit (loss) before
    taxesAmmunition & Weapons
    Effects

$
(18,119
)

$
1,671


$
7,562Electronic Security


(2,041
)


6,987



2,618Other


(6,238
)


(3,283
)


(528
)Corporate


(6,169
)


(3,696
)


(2,278
)$
(32,567
)

$
1,679


$
7,374Segment
    assets(1)Ammunition & Weapons
    Effects

$
118,669


$
127,880Electronic Security


49,528



45,231Other


8,270



12,808Corporate


4,479



6,312$
180,946


$
192,231Capital Expenditure for Segment
    assetsAmmunition & Weapons
    Effects

$
6,706


$
2,271


$
2,941Electronic Security


1,041



1,525



747Other


411



1,230



682Corporate


9



10



3$
8,167


$
5,036


$
4,373     (1)
    
    Amounts net of intersegment receivables. F-43




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
    Geographic Segment Data2005


2004


2003Restated


RestatedRevenues from external
    customersUnited States(1)

$
45,216


$
56,932


$
78,330Belgium


19,229



25,694



24,378Saudi Arabia


24,010



33,657



13,051France


3,254



6,676



6,385Venezuela


8,348



8,900



18,042Cyprus


909







Germany


1,331



1,345



1,233Indonesia










549Brunei


598







378Kuwait


869







3,545Taiwan


1,570







338Japan


1,278



353



899Qatar


1,196



2,844



Other foreign countries


4,414



9,800



6,646$
112,222


$
146,201


$
153,774     (1)
    
    Includes foreign military sales for the benefit of Saudi Arabia.  Geographic Segment Data2005


2004RestatedSegment assetsBelgium

$
131,801


$
152,934United Kingdom


171



199United States(1)


48,974



39,098$
180,946


$
192,231     (1)
    
    Net of inter-segment receivables and investments.  2005


2004Property and
    equipmentBelgium

$
24,813


$
27,956United States


5,013



2,338$
29,826


$
30,294  F-44




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
  Note W 
    Quarterly Financial Data (Unaudited)
  First


Second


Third


Fourth2005 Restated

Quarter


Quarter


Quarter


Quarter


Total(Amounts in thousands, except per share data)Revenues

$
24,018


$
26,158


$
26,819


$
35,227


$
112,222Gross profit


4,101



7,904



(175
)


6,238



18,068Net earnings (loss)- before
    cumulative effect of change in the application of accounting
    principle


(3,656
)


(811
)


(6,761
)


(22,399
)


(33,627
)Net Earnings (Loss)


(9,233
)


(701
)


(6,666
)


(22,320
)


(38,920
)Per share Net Earnings (Loss):Basic

$
(1.64
)

$
(0.12
)

$
(1.15
)

$
(3.75
)

$
(6.76
)Diluted

$
(1.64
)

$
(0.12
)

$
(1.15
)

$
(3.75
)

$
(6.76
)     Impairment to SeaSpace Goodwill

$
3,060NSM physical inventory adjustment


1.157Write off of in process R&D
    expenses related to November 2005 acquisition


944Increase to corporate audit accrual


870SeaSpace physical inventory
    adjustment


422Total fourth quarter significant
    adjustments  pretax

$
6,453       F-45




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
  Impact fromForeign


Impact from


Impact of


As PreviouslyCurrency


Compensation


Revenue


Reported inMarch 31, 2005

Restated


Translation(1)


Expense(2)


Recognition(3)


10-Q/ARevenues

$
24,018


$
755


$
0


$
2,207


$
21,056Cost of Sales

$
19,917



(33
)

$
0



4,952



14,998Operating Income (loss)


(4,935
)


788



(36
)


(2,746
)


(2,941
)Earnings before income taxes and
    the cumulative effect of change in application of accounting
    principle


(5,800
)


81



(36
)


(2,745
)


(3,100
)Income tax expense (benefit)


(2,144
)


(5
)


(12
)


(934
)


(1,193
)Cumulative effect of change in the
    application of accounting principle


(5,577
)










(5,577
)


Net earnings (loss)


(9,233
)


76



(24
)


(7,388
)


(1,907
)Earnings (loss) per
    share  Basic & Diluted:Loss before cumulative effect of
    change in the application of accounting principle

$
(0.65
)

$
0.01


$
(0.00
)

$
(0.32
)

$
(0.34
)Cumulative effect of change in the
    application of accounting principle:

$
(0.99
)









$
(0.99
)


Net income (loss)

$
(1.64
)

$
0.01


$
(0.00
)

$
(1.31
)

$
(0.34
)Weighted Average number of common
    shares (4):Basic


5,620,634















5,609,351Diluted


5,620,634















5,609,351     (1)
    
    Impact of correcting for the failure to comply with the
    documentation requirements of FAS 133, hedge accounting,
    for changing the exchange rates to period end spot rates at the
    Companys MECAR subsidiary for its foreign currency
    transactions and other adjustments related to sales contracts.(2)
    
    Impact of correcting the measurement date for options granted in
    February 2002 by the Compensation Committee of the Board of
    Directors of the Company that were subject to subsequent
    stockholder approval that was obtained in June 2002.(3)
    
    Impact of change in accounting principle on revenue recognition
    at the Companys MECAR subsidiary.(4)
    
    Shares Outstanding for the period were restated to correct
    for deferred compensation for the outside directors that was
    stock based that had been incorrectly excluded from the earnings
    per share calculation in the period.  F-46




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
  Impact fromForeign


Impact from


Impact of


As PreviouslyCurrency


Compensation


Revenue


Reported inJune 30, 2005

Restated


Translation(1)


Expense(2)


Recognition(3)


10-Q/ARevenues

$
26,158


$
(1,733
)

$



$
6,790


$
21,101Cost of Sales

$
18,254



(1
)






2,577



15,678Operating Income (loss)


(2,098
)


(1,731
)






4,213



(4,580
)Earnings before income taxes and
    the cumulative effect of change in application of accounting
    principle


(1,851
)


(1,317
)






4,214



(4,748
)Income tax expense (benefit)


(1,040
)


(583
)






1,433



(1,890
)Cumulative effect of change in the
    application of accounting principle


110











110



Net earnings (loss)


(701
)


(734
)






2,891



(2,858
)Earnings (loss) per
    share  Basic & Diluted:Loss before cumulative effect of
    change in the application of accounting principle

$
(0.14
)

$
(0.12
)

$



$
.49


$
(0.51
)Cumulative effect of change in the
    application of accounting principle:

$
0.02






$



$
0.02



Net income (loss)

$
(0.12
)

$
(0.12
)

$



$
0.51


$
(0.51
)Weighted Average number of common
    shares (4):Basic


5,655,369















5,632,071Diluted


5,655,369















5,632,071     (1)
    
    Impact of correcting for the failure to comply with the
    documentation requirements of FAS 133, hedge accounting,
    for changing the exchange rates to period end spot rates at the
    Companys MECAR subsidiary for its foreign currency
    transactions and other adjustments related to sales contracts.(2)
    
    Impact of correcting the measurement date for options granted in
    February 2002 by the Compensation Committee of the Board of
    Directors of the Company that were subject to subsequent
    stockholder approval that was obtained in June 2002.(3)
    
    Impact of change in accounting principle on revenue recognition
    at the Companys MECAR subsidiary.(4)
    
    Shares Outstanding for the period were restated to correct
    for deferred compensation for the outside directors that was
    stock based that had been incorrectly excluded from the earnings
    per share calculation in the period.  F-47




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
  Impact fromForeign


Impact from


Impact of


As PreviouslyCurrency


Compensation


Revenue


Reported inSeptember 30, 2005

Restated


Translation(1)


Expense(2)


Recognition(3)


10-Q/ARevenues

$
26,819


$
(78
)

$



$
3,421


$
23,476Cost of Sales

$
26,994











6,717



20,277Operating Income (loss)


(8,734
)


(79
)






(3,295
)


(5,360
)Earnings before income taxes and
    the cumulative effect of change in application of accounting
    principle


(9,124
)


(353
)






(3,295
)


(5,476
)Income tax expense (benefit)


(2,363
)


(59
)






(1,120
)


(1,184
)Cumulative effect of change in the
    application of accounting principle


95











95



Net earnings (loss)


(6,666
)


(294
)






(2,080
)


(4,292
)Earnings (loss) per
    share  Basic & Diluted:Loss before cumulative effect of
    change in the application of accounting principle

$
(1.17
)

$
(0.05
)

$



$
(.39
)

$
(0.74
)Cumulative effect of change in the
    application of accounting principle:

$
0.02






$



$
0.02



Net income (loss)

$
(1.15
)

$
(0.05
)

$



$
(0.36
)

$
(0.74
)Weighted Average number of common
    shares (4):Basic


5,798,619















5,780,911Diluted


5,798,619















5,780,911     (1)
    
    Impact of correcting for the failure to comply with the
    documentation requirements of FAS 133, hedge accounting,
    for changing the exchange rates to period end spot rates at the
    Companys MECAR subsidiary for its foreign currency
    transactions and other adjustments related to sales contracts.(2)
    
    Impact of correcting the measurement date for options granted in
    February 2002 by the Compensation Committee of the Board of
    Directors of the Company that were subject to subsequent
    stockholder approval that was obtained in June 2002.(3)
    
    Impact of change in accounting principle on revenue recognition
    at the Companys MECAR subsidiary.(4)
    
    Shares Outstanding for the period were restated to correct
    for deferred compensation for the outside directors that was
    stock based that had been incorrectly excluded from the earnings
    per share calculation in the period.  F-48




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
  Impact fromForeign


Impact from


Impact of


ResultsCurrency


Compensation


Revenue


ExcludingDecember 31, 2005

Restated


Translation(1)


Expense(2)


Recognition(3)


ImpactRevenues

$
35,227


$
1,227


$



$
(12,091
)

$
46,091Cost of Sales

$
28,989











(15,061
)


44,050Operating Income (loss)


(12,886
)


1,227







2,970



(17,083
)Earnings before income taxes and
    the cumulative effect of change in application of accounting
    principle


(15,792
)


1,072







2,970



(19,834
)Income tax expense (benefit)


6,607



122







384



6,101Cumulative effect of change in the
    application of accounting principle


79











79



Net earnings (loss)


(22,320
)


950







2,665



(25,935
)Earnings (loss) per
    share  Basic & Diluted:Loss before cumulative effect of
    change in the application of accounting principle

$
(3.73
)

$
0.16


$



$
.43


$
(4.32
)Cumulative effect of change in the
    application of accounting principle:

$
0.01






$



$
0.01



Net income (loss)

$
(3.72
)

$
0.16


$



$
0.44


$
(4.32
)Weighted Average number of common
    shares (4):Basic


6,001,941















6,001,941Diluted


6,001,941















6,001,941     (1)
    
    Impact of correcting for the failure to comply with the
    documentation requirements of FAS 133, hedge accounting,
    for changing the exchange rates to period end spot rates at the
    Companys MECAR subsidiary for its foreign currency
    transactions and other adjustments related to sales contracts.(2)
    
    Impact of correcting the measurement date for options granted in
    February 2002 by the Compensation Committee of the Board of
    Directors of the Company that were subject to subsequent
    stockholder approval that was obtained in June 2002.
    (3) Impact of change in accounting principle on revenue
    recognition at the Companys MECAR subsidiary.
    (4) Shares Outstanding for the period were restated to
    correct for deferred compensation for the outside directors that
    was stock based that had been incorrectly excluded from the
    earnings per share calculation in the period.  First


Second


Third


Fourth2004, restated

Quarter


Quarter


Quarter


Quarter


Total(Amounts in Thousands, except per share data)Revenues

$
37,420


$
19,348


$
61,276


$
28,157


$
146,201Gross profit


13,352



(8,997
)


34,294



1,733



40,382Net earnings (loss)


3,363



(11,657
)


16,726



(7,062
)


1,370Per share Net Earnings (Loss):Basic

$
.61


$
(2.10
)

$
3.01


$
(1.27
)

$
0.25Diluted

$
.56


$
(2.10
)

$
2.81


$
(1.27
)

$
0.24   F-49




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
  First


Second


Third


Fourth2004 (As previously reported
    in 10-K/A)

Quarter


Quarter


Quarter


Quarter


Total(Amounts in Thousands, except per share data)Revenues

$
33,090


$
39,069


$
34,927


$
43,045


$
150,131Gross profit


9,023



10,723



7,945



16,504



44,195Net earnings (loss)


(6
)


1,608



(567
)


2,899



3,934Per share Net Earnings (Loss):Basic

$
(0.01
)

$
0.29


$
(0.10
)

$
0.52


$
0.71Diluted

$
(0.01
)

$
0.27


$
(0.10
)

$
0.49


$
0.70   Note X 
    Off-Balance Sheet Transaction
    Note Y 
    Subsequent Event
         F-50




---



##### Table of Contents



THE
    ALLIED DEFENSE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Thousands of Dollars)
         F-51




---



##### Table of Contents



SCHEDULE I 
    CONDENSED FINANCIAL INFORMATION OF REGISTRANT
    THE ALLIED DEFENSE GROUP, INC.
    (Parent Company)
    BALANCE SHEETS December 31,2005


2004Restated(Thousands of Dollars)ASSETSCash and equivalents

$
1,267


$
1,017Restricted cash


2,000



2,012Investment in subsidiaries


99,451



125,837Due from subsidiaries


322



1,202Deferred taxes






1,485Other


1,411



1,125Total assets

$
104,451


$
132,678LIABILITIES AND
    STOCKHOLDERS EQUITYLiabilitiesAccounts payable and accrued
    liabilities

$
2,811


$
1,995Income tax


102



4Deferred Compensation


160



376Long term debt, less unamortized
    discount


19,712



1,959Convertible Debenture, less
    unamortized discount






2,231Total liabilities


22,785



6,565Stockholders
    EquityCommon stock


598



560Capital in excess of par value


34,354



27,910Retained earnings


34,466



73,386Accumulated other comprehensive
    loss


12,248



24,25781,666



126,113$
104,451


$
132,678  F-52




---



##### Table of Contents



SCHEDULE I 
    CONDENSED FINANCIAL INFORMATION OF REGISTRANT 
    (Continued)
    THE ALLIED DEFENSE GROUP, INC.
    (Parent Company)
    STATEMENTS OF OPERATIONS
 Year ended December 31,2005


2004


2003Restated


Restated(Thousands of Dollars)IncomeIntercompany management fees

$
4,805


$
4,249


$
4,146Dividend from subsidiaries


10,430







14,186Other  net


20



45



9915,255



4,294



18,431Costs and expensesAdministrative and other


11,735



7,945



6,355Earnings (loss) before equity in
    operations of subsidiaries


3,520



(3,651
)


12,076Equity in operations of
    subsidiaries, less dividends received


(40,402
)


3,411



(8,680
)Earnings (loss) before income taxes


(36,882
)


(240
)


3,396Income taxes (benefit)


2,038



(1,610
)


678NET EARNINGS (LOSS)

$
(38,920
)

$
1,370


$
2,718Earnings per common shareBasic

$
(6.76
)

$
0.25


$
0.49Diluted

$
(6.76
)

$
0.24


$
0.48  F-53




---



##### Table of Contents



SCHEDULE I 
    CONDENSED FINANCIAL INFORMATION OF REGISTRANT 
    (Continued)
    THE ALLIED DEFENSE GROUP, INC.
    (Parent Company)
    STATEMENTS OF CASH FLOWS
 Year ended December 31,2005


2004


2003(Restated)


(Restated)Cash flows from operating
    activitiesNet earnings (loss) for the year

$
(38,920
)

$
1,370


$
2,718Adjustments to reconcile net
    earnings (loss) to net cash from (used in) operating activitiesEquity in operations of
    subsidiaries


29,972



(3,411
)


(5,506
)Dividend from subsidiary


10,430







14,186Depreciation and amortization


50



47



46Deferred taxes


1,485



(804
)


(528
)Amortization of debenture issue
    costs and conversion feature


220



179



243Common stock and stock option
    awards


404



539



561Changes in assets and liabilitiesRestricted Cash










Other assets


(497
)


(477
)


(546
)Due to subsidiaries


880



(1,605
)


(3,492
)Accounts payable and accrued
    liabilities


816



1,270



(30
)Deferred compensation


(216
)


(27
)


191Income taxes


98



4



43,642



(4,285
)


5,125Net cash provided by (used in)
    operating activities


4,722



(2,915
)


7,843Cash flows used in investing
    activitiesCapital expenditures


(9
)


(10
)


(3
)Equity infusions in subsidiaries


(7,353
)


(6,367
)


Acquisitions


(9,443
)


(125
)


Net cash used in investing
    activities


(17,266
)


(6,502
)


(3
)Cash flows from financing
    activitiesProceeds from issuance of
    long-term debt


12,000



2,000



Debt issue costs






(77
)


Principal payments on debenture


(2,478
)


(5,250
)


Proceeds from employee stock
    purchase plan


108



261



152Proceeds from option exercises


2,691



348



765Restricted cash


12



(1,887
)


Net cash provided by (used in)
    financing activities


12,333



(4,605
)


1,042Net increase (decrease) in cash
    and equivalents


250



(14,022
)


8,882Cash and equivalents at beginning
    of year


1,017



15,039



6,157Cash and equivalents at end of year

$
1,267


$
1,017


$
15,039Supplemental Disclosures of Cash
    Flow Information:Cash paid during the year for:Income taxes

$



$
45


$
Interest


496



641



590Supplemental of Non-Cash Investing
    and Financing Activities:Non-cash consideration in
    connection with business acquisition


8,672







Warrants issued in conjunction
    with long term debt


488



68



  F-54




---



##### Table of Contents



SCHEDULE II 
    VALUATION AND QUALIFYING ACCOUNTS
    THE ALLIED DEFENSE GROUP, INC.
    Valuation and Qualifying Accounts
    Years ended December 31, 2005, 2004 and 2003 AdditionsBalance at


Charged to


Charged





Balancebeginning


costs and


to other





at end ofDescription

of period


expenses


accounts


Deductions


period(In Thousands)Year ended December 31,
    2005Estimated losses on contracts

$
726


$
39


$



$
765
(1)

$
Allowance for doubtful receivables

$
143


$
334


$



$
263
(2)

$
214Valuation allowance on inventory

$
668


$
1,584


$



$
1,473


$
779Valuation allowances on deferred
    tax assets

$
1,466


$
11,318


$



$

(3)

$
12,784Warranty reserve

$
912


$
98


$



$
191


$
819Year ended December 31,
    2004Estimated losses on contracts

$
283


$
726


$



$
283
(1)

$
726Allowance for doubtful receivables

$
115


$
143


$



$
115
(2)

$
143Valuation allowance on inventory

$
214


$
454


$



$



$
668Valuation allowances on deferred
    tax assets

$
4,117


$
1,466


$



$
4,117
(3)

$
1,466Warranty reserve

$
944


$
61


$



$
93


$
912Year ended December 31,
    2003Estimated losses on contracts

$
313


$
283


$



$
313
(1)

$
283Allowance for doubtful receivables

$
233


$
115


$



$
233
(2)

$
115Valuation allowance on inventory

$
200


$
14


$



$



$
214Valuation allowances on deferred
    tax assets

$
1,244


$
2,873


$



$



$
4,117Warranty reserve

$
826


$
262


$



$
144


$
944     (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-55




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##### Table of Contents



EXHIBIT INDEX
  Number

Description of Exhibit

Page18
.1

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

E-221


List of Subsidiaries

E-323


Consent of Independent Registered
    Public Accounting Firm

E-423
.1

Consent of Independent Registered
    Public Accounting Firm

E-531
.1

Certification of Chief Executive
    Officer pursuant to Section 302 of Sarbanes-Oxley Act of
    2002, dated October 6, 2006

E-631
.2

Certification of Chief Financial
    Officer pursuant to Section 302 of Sarbanes-Oxley Act of
    2002, dated October 6, 2006

E-732


Certification of Chief Executive
    Officer and Chief Financial Officer pursuant to Section 906
    of Sarbanes-Oxley Act of 2002, dated October 6, 2006

E-8  E-1