<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                               ___________________

                                    FORM 10-K

   (Mark One)
     -----
       X    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     -----  SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2001

     -----
            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
     -----  SECURITIES EXCHANGE ACT OF 1934

             For the transition period from __________ to __________

                         Commission file number: 0-2545

                           ALLIED RESEARCH CORPORATION
             (Exact name of registrant as specified in its charter)

           Delaware                                    04-2281015
   (State of incorporation)               (I.R.S. Employer Identification No.)

  8000 Towers Crescent Drive                          (703) 847-5268
           Suite 260                         (Registrants' telephone number,
     Vienna, Virginia 22182                         including area code)
(Address of principal executive
  offices, including zip code)

          Securities registered pursuant to Section 12(b) of the Act:

     Title of Class                                     Name of Exchange
     --------------                                     ----------------
      Common Stock,                                 American Stock Exchange
     $0.10 Par Value

        Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.      YES    X     NO _____
                                             -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part II of this
Form 10-K or any amendment to this Form 10-K.    X
                                                ---

State the aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 1, 2002:

                Common Stock - Par Value $.10         $90,090,413

The number of shares of registrant's Common Stock outstanding as of March 1,
2002, was 5,157,438.

<PAGE>


                                      INDEX
<TABLE>
PART I
<S>                                                                                                      <C>
      Item 1.     Business.......................................................................         1
      Item 2.     Properties.....................................................................         7
      Item 3.     Legal Proceedings..............................................................         7
      Item 4      Submission of Matters to a Vote of Security Holders............................         7

PART II
      Item 5.     Market for Stock and Related Security Holder Matters...........................         8
      Item 6.     Selected Financial Data........................................................         9
      Item 7.     Management's Discussion and Analysis of Financial Condition and
                      Results of Operations......................................................        10
      Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.....................        19
      Items 8.    Financial Statements and Supplementary Data....................................        20
      Item 9.     Changes and Disagreements With Accountants on Accounting and
                      Financial Disclosure.......................................................        20

PART III
      Item 10.    Directors and Executive Officers of Allied.....................................        21
      Item 11.    Executive Compensation.........................................................        22
      Item 12.    Security Ownership of Certain Beneficial Owners and Management.................        26
      Item 13.    Certain Relationships and Related Transactions.................................        27

PART IV
      Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K...............        28

SIGNATURES.......................................................................................        30
</TABLE>

<PAGE>

ITEM 1. BUSINESS

General
-------

Allied  Research  Corporation  ("Allied" or the "Company") was  incorporated in
1962 under the name Allied Research Associates, Inc. Allied changed its
corporate name to Allied Research Corporation in 1988. Allied`s strategic
defense and security services businesses are primarily conducted through MECAR
S.A. ("MECAR") and a group of Belgian corporations acquired in 1994, 1995 and
1999 consisting of VSK Electronics, S.A., Tele Technique Generale, S.A., IDCS,
S.A. and VIGITEC, S.A. (collectively, the "VSK Group"). MECAR is located in
Petit-Roeulx-lez-Nivelles, Belgium; and the VSK Group operates from several
different locations in Belgium. On December 31, 2001, Allied acquired all of the
capital stock of News/Sports Microwave Rental, Inc. ("Microwave"). Microwave is
located in Spring Valley, California.

Description of Business
-----------------------

Allied.
------

         Allied provides management, marketing services and government relations
for its subsidiaries. In addition, Allied also provides export licensing,
procurement and logistic support services for its subsidiaries.

MECAR.
-----

         MECAR develops, designs, manufactures and sells ammunition and light
weapons for infantry use. Substantially all of MECAR's revenues are derived from
the sale of ammunition which is used with weapons that are generally considered
defensive weapons. From time to time, MECAR provides system integration services
pursuant to which it purchases and resells weapon systems and/or ammunition.

         MECAR designs, develops and manufactures a wide variety of ammunition
and grenades in the medium caliber, artillery, anti-tank and anti-personnel
categories. The following are the principal products produced and sold by MECAR:

         Mortar Ammunition. The 81mm family of mortar ammunition has recently
         -----------------
been modernized to compete with the latest generation of this product line.
Production quantities of this latest version have already been manufactured and
delivered to MECAR customers. The 120mm family is a state of the art ammunition
for standard field mortars and for the increased performance turreted AMS
mortar. The current version of this ammunition has successfully completed
qualification with the US Army, together with the 120mm AMS LAV-M(S) system.
This system is capable of direct as well as indirect fire. The MECAR ammunition
is the only one so far developed that has been designed to perform in the AMS
weapon high pressure and acceleration environment.

         90mm Weapon Systems for Light Armored Vehicles. MECAR has developed and
         ----------------------------------------------
produces complete families of ammunition that include APFSDS, HE, SMK and HESH
rounds for the COCKERILL Mk II and III and ENGESA EC-90, and DEFA F1 guns. Over
2000 of these guns are standard equipment on light APCs in the Far East and
South America alone. In the last five years, these families of ammunition have
been improved to meet the highest standards of safety and performance.

         The 90mm KENERGA Weapon System has been jointly developed by Cockerill
         ------------------------------
Mechanical Systems ("CMI") and MECAR to provide the modern APC with anti-tank
punch similar to that of tanks equipped with 105mm guns, without sacrifice to
the range, mobility and maintainability of the light APC. In this partnership,
CMI is responsible for the weapon and MECAR for the ammunition. The ammunition

                                        1

<PAGE>

family includes the APFSDS, HESH and SMK versions with their corresponding
training rounds. This system is currently undergoing qualification by the U.S.
Army.

     Tank Ammunition. MECAR produces the entire range of 105mm rounds of its own
     ---------------
design and which perform to NATO requirements, for use in the US M68, UK L7 and
French CN105F1 guns. These include the APFSDS, HEAT, HESH and SMK, with their
corresponding training rounds. Additionally, it has produced under license the
US Army M393A2 HEP-T and M724A1 TPDS-T rounds for the Belgian Army. MECAR has
produced 100mm APFSDS rounds for friendly pro western clients in the Far East.

     Artillery Ammunition. MECAR has produced 155mm HE, SMK(WP) and ILLUMINATING
     --------------------
rounds for various customers.

     Medium Caliber Round. The 25mm APFSDS-T ammunition round is MECAR's entry
     --------------------
into the medium caliber arena.

     76mm L23 Ammunition. MECAR manufactures HE, HESH and HESH-PRAC ammunition
     -------------------
for the L23 guns, which are in service with armored vehicles in several
countries in Europe, South America, Africa and the Far East. Even though this is
an established weapon, requirements for this ammunition are expected to continue
for the next several years.

     Universal Bullet Trap Rifle Grenades. The universal bullet trap rifle
     ------------------------------------
grenade is designed to be light, effective, accurate and simple to use. It is
fitted over the muzzle of any standard military rifle with a muzzle outer
diameter of 22mm and fired from the shoulder in the normal manner. This method
of firing a grenade is made possible by MECAR's development of the universal
bullet trap ("BTU"). The BTU is a device which can be used with all existing
makes of steel core or soft core bullets in calibers 7.62mm and 5.56mm,
including the latest round (SS109) used in the M-16 rifle. The BTU is fitted
within the tail of the grenade. When the bullet is fired, it lodges in the BTU
and the expanding gases released by the discharged round propel the grenade to
its target. MECAR manufactures several different bullet trap grenades including
high explosive fragmentation, anti-personnel, armor piercing, smoke generating,
white phosphorus, and parachute flare (night illuminating).

     84mm SAKR Recoilless Rifle. MECAR developed and manufactures this
     --------------------------
recoilless rifle and its associated family of ammunition. The SAKR fills the gap
between rifle grenades and the 90mm family of guns and ammunition. The SAKR
ammunition (HEAT, HE-T and HE-TP-T) is also interoperable with existing 84mm
systems.

     Hand Grenades. MECAR manufactures the M72 controlled fragmentation hand
     -------------
grenade.

VSK Group.
---------

     The VSK Group engages in the business of developing, manufacturing,
selling, installing and servicing security systems for government and private
industry. The systems marketed by the VSK Group include intrusion detection,
access control and fire detection systems. The principal products manufactured
by the VSK Group are central control panels; the other components are purchased
from other vendors. In May, 1995, the VSK Group acquired all of the outstanding
stock of IDCS, S.A., which markets an upscale line of security services products
principally in European markets. In late 1999, the VSK Group acquired all of the
outstanding stock of VIGITEC, S.A., which markets closed circuit television
systems and provides other communications services.

                                        2

<PAGE>

Microwave
---------

     Microwave engages in the development of sophisticated microwave
surveillance systems used in law enforcement, port security, border security,
airport security, high-end commercial security, and citywide surveillance
applications. The company's products and services are used for gathering,
transmitting, receiving and processing multiple signals from remote locations.
The company develops, assembles and sells electronic technology products and
systems for users to operate through the company's proprietary hardware,
software and communication links. Microwave's systems and products include
cameras, command/control systems, video concealments, microwave link solutions,
and other sensors. Microwave offers fixed observation/transmit surveillance
installations in addition to mobile command centers and airborne
camera/tracking/transmit packages.

Geographic Areas and Industry Segments
--------------------------------------

     See Note T to Allied's consolidated financial statements for information
concerning the geographic areas and industry segments of Allied which
information is incorporated herein by reference.

Market and Customers
--------------------

     Allied derives the principal portion of its revenues from direct and
indirect sales to foreign governments and prime contractors, primarily on fixed
price contracts. Two agencies of a foreign government and another foreign
government accounted for approximately 47%, 30% and 1% in 2001, 54%, 23% and 4%
in 2000, and 26%, 27%, and 6% in 1999, of Allied's revenues as detailed in Note
O to Allied's consolidated financial statements, the provisions of which are
incorporated herein. The addition of the VSK Group adds a non-military component
to company-wide operations. The VSK Group accounted for approximately 21%, 23%
and 35% of Allied's 2001, 2000 and 1999 revenues respectively.

     MECAR's sales to its principal foreign government customers have
historically been made with the assistance of an independent marketing
representative. Commencing in early 2000, MECAR designated an affiliate of this
representative as its independent distributor/value added reseller (the
"Distributor"). The Distributor obtains a contract from the end user customer
and subcontracts a portion of the work to MECAR. The products that MECAR
produces are sold to the Distributor for resale to the foreign government
agencies end users.

     MECAR's products are sold either directly or indirectly to the defense
departments of governments. MECAR is regulated by Belgian law regarding the
foreign governments with which it may do business.

     The sales by MECAR in any given period and its backlog at any particular
time may be significantly influenced by one or a few large orders. This is due
to the nature of its business. An order for MECAR's products is typically for a
large quantity and/or a substantial aggregate price, primarily because materials
required for the manufacture of the products cannot be economically purchased in
small quantities and because of the favorable economies of large volume
production. Most of the contracts received by MECAR require delivery in
approximately one year. Accordingly, MECAR's business is dependent upon its
ability to obtain such large orders. MECAR frequently accepts smaller orders in
an attempt to increase its customer base. MECAR's products are designed for
general military use by a variety of government customers.

     When MECAR obtains a contract for the sale of its products, it generally
receives down payment(s) and/or letter(s) of credit to be applied to the
purchase price upon shipment of the products. In such cases, MECAR is generally
required to provide advance payment guarantees and performance bonds issued by
its bank syndicate.

                                        3

<PAGE>

     MECAR has from time-to-time received foreign military sale ("FMS")
contracts from the U.S. Government for the manufacture of ammunition for the
benefit of a foreign government. Such contracts may be terminated for
convenience by the government or upon default by the manufacturer. The contracts
received by MECAR through the FMS system do not provide for down payments,
letters of credit, advance payment guarantees or performance bonds.

     The VSK Group derives substantially all of its revenue from sales and
services to private industry such as banks, hospitals, commercial businesses,
office buildings and to local governments. The VSK Group sells some of its
products/services directly to the end users; in other instances it sells its
systems to independent distributors and resellers for resale to the end users.
The customers of the VSK Group are located in Belgium and in neighboring
countries. While most of the orders received by the VSK Group are for work which
can be completed within one year, it has received multi-year orders for its
products and services. VSK Electronics and IDCS sell their products principally
in European markets. VIGITEC and Tele Technique Generale sell their products
principally in Belgium.

     Microwave customers include U.S. Government agencies as well as state and
local law enforcement agencies. The U.S. Government agencies have historically
accounted for a majority of Microwave's revenues.

Marketing
---------

     Most of the marketing activities of MECAR are handled by MECAR's staff of
sales engineers and executive personnel. In addition, MECAR advertises in trade
journals and participates in trade shows. MECAR is also represented by marketing
representatives in different markets and has designated the Distributor for
indirect sales to its principal end user customers.

     The marketing activities of the VSK Group are handled principally by its
staff of sales personnel. Marketing activities outside of Belgium are conducted
by independent distributors. In addition, the VSK Group advertises in trade
journals and participates in trade shows.

     Microwave's marketing activities are handled by both its sales personnel
and executive management.

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

     The development of ammunition and weapon systems requires knowledge and
experience in aerodynamics, mechanical engineering, chemistry, combustion,
materials behavior and ballistics. MECAR maintains an active research and
development staff, including a staff of design engineers, in order to determine
how materials can be used or combined in new ways to improve performance or to
solve new problems. In 2001, 2000 and 1999, MECAR expended $500,904, $736,764
and $793,916, respectively, for research and development activities. MECAR
designed most of the products which it currently manufactures. MECAR designs and
develops most of its special tooling, fixtures and special explosive loading and
testing systems.

     The business of the VSK Group requires continuous investment in research
and development to update and enhance its security systems. The VSK Group
employs a staff of design engineers specialized in the field of both electronic
hardware and software. During 2001, 2000 and 1999, the VSK Group expended
$1,003,358, $846,307 and $892,092, respectively, on research and development.

     Management anticipates that the business of Microwave will require
continuous investment in research and development.

                                        4

<PAGE>

Suppliers and Materials
-----------------------

         Production of ammunition requires an ample supply of chemicals,
pyrotechnical materials and metal component parts and casings. MECAR generally
attempts to ensure that several vendors will be available in the open market to
compete for all supply contracts. However, once the development phase is
complete and the design has been stabilized for certain products, the continued
availability of supplies can become critical to its ability to perform a
particular contract. MECAR seeks to protect itself against shortages and similar
risks by planning alternative means of production, by producing internally, and
by monitoring the availability and sources of supplies.

         Production of weapons requires a continuous supply of a variety of
components and materials. MECAR depends upon major suppliers to provide such
components and materials where in-house capability does not exist, and has
generally found such materials and supplies to be readily available.

         The VSK Group relies upon a number of selected subcontractors to supply
the requisite electronic hardware for its security systems. To date, the VSK
Group has found such subcontract materials to be readily available. Assembly of
the central control panels (including all computer software) is performed
internally by employees of the VSK Group.

         Microwave contracts with a number of vendors for components used in its
systems. Historically, such components have been found to be readily available.

Backlog
-------

         As of December 31, 2001 and December 31, 2000, Allied had backlog
orders believed to be firm, after giving effect to the percentage of completion
method of accounting, of approximately $56.0 million and $63.5 million,
respectively. A substantial portion of the backlog of orders as of December 31,
2001 is expected to be filled in 2002.

Competition
-----------

         The munitions business is highly competitive. MECAR has a number of
competitors throughout the world, including the United States. Many of its
competitors are substantially larger companies with greater capital resources
and experience. Many of its competitors have existing relationships with
governments and countries in which MECAR markets its products. For example, many
countries will only acquire ammunition and other military items from vendors
located in said countries. In many other countries, it is important to have an
independent marketing representative. Competition is mainly based upon
accessibility of potential markets, technical expertise, quality, capabilities
of the product and price.

         The nature of the competition encountered by the VSK Group depends upon
the segment of the security systems business. In the development and
manufacturing area, there are a number of larger competitors, many with greater
financial resources than the VSK Group. In the installation and services area,
the VSK Group competes with a number of smaller, local competitors.

         Microwave competes with niche suppliers of specialized security
products as well as much larger companies with substantially greater financial
and other resources.

                                        5

<PAGE>

Personnel
---------

     As of December 31, 2001, Allied, MECAR, VSK Group and Microwave had 501
full and part-time employees as follows:

                  ALLIED
                  ------

                  Salaried employees                       7

                  MECAR
                  -----

                  Technical and salaried employees        50
                  Hourly workers                         265
                  Technical consultants                    1

                  VSK GROUP
                  ---------

                  Technical salaried employees           120
                  Hourly workers                          23
                  Part-time employees                      5

                  MICROWAVE
                  ---------

                  Salaried employees                      18
                  Hourly workers                          12

     The classification of employees noted above for MECAR and the VSK Group is
in accordance with Belgian law.

Patents
-------

     Microwave holds a patent on a mechanical mast that is a key component of
certain security systems it supplies to law enforcement agencies. The patent was
filed in 1997. Neither Allied nor any of its other subsidiaries holds any other
significant patents.

Environmental Regulations
-------------------------

     Allied does not anticipate that compliance with any laws or regulations
relating to environmental protection will have a material effect on its capital
expenditures, earnings or competitive position.

Principal Customers
-------------------

     MECAR has historically received a large percentage of its revenue from two
(2) agencies of a foreign government. See Note O to Allied's consolidated
financial statements. MECAR now receives contracts for the benefit of these
customers via the Distributor and via the FMS program.

                                        6

<PAGE>

ITEM 2.   PROPERTIES

         Allied's principal executive offices are located in Vienna, Virginia,
where it leases approximately 3,700 square feet of office space. The lease
expires in September, 2007.

         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 was occupied by MECAR in 1989.
The manufacturing area is approximately 112,000 square feet and the
administration facility is approximately 28,000 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 owns 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. 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 2001, MECAR operated using one full and two partial shifts.
MECAR is currently operating near its productive capacity.

         The VSK Group operates from owned facilities containing approximately
49,400 square feet. Such facilities are currently operating at approximately 75%
of productive capacity.

         Microwave operates from a leased office, production and warehouse
facility consisting of approximately 8,400 square feet in Spring Valley,
California. The facility is leased on a month to month basis. Microwave operated
at 50% capacity of the facility in 2001. Microwave has adequate capacity at the
facility to operate at projected levels in 2002.

         Capital expenditure programs for facilities and equipment planned in
2002 will require funding of approximately $3.0 million.

ITEM 3.   LEGAL PROCEEDINGS

         There are no material pending legal proceedings, other than ordinary
routine litigation incidental to Allied's business, to which Allied or any of
its subsidiaries is a party or to which any of their property is subject.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         There were no matters submitted to a vote of security holders of Allied
during the fourth quarter of 2001.

                                       7

<PAGE>

                                     PART II

ITEM 5.   MARKET FOR STOCK AND RELATED SECURITY HOLDER MATTERS

Market Information
------------------

     Allied's Common Stock has been listed for trading on the American Stock
Exchange ("AMEX") since September 15, 1992.

     Its AMEX trading symbol is ALR. Its media listing is under the symbol
Allied Research. The table below shows the high and low sales prices of Allied's
Common Stock during 2001 and 2000 (as reported by AMEX):

              2001                     High                    Low
              ----                     ----                    ---

           1st Quarter                $ 8.94                 $ 6.15
           2nd Quarter                $ 9.31                 $ 7.30
           3rd Quarter                $16.59                 $ 7.80
           4th Quarter                $19.70                 $11.20

              2000                     High                    Low
              ----                     ----                    ---

           1st Quarter                $ 9.38                 $ 7.00
           2nd Quarter                $ 8.56                 $ 6.75
           3rd Quarter                $ 9.31                 $ 7.13
           4th Quarter                $ 9.19                 $ 7.75

Stockholders
------------

     There were approximately 1,114 holders of record of the Common Stock of
Allied as of February 15, 2002.

Dividends
---------

     Allied paid a 5% stock dividend in November, 1992 to holders of record of
its Common Stock on October 15, 1992. Cash was paid in lieu of the issuance of
fractional shares. There have been no dividends declared or paid by Allied in
1993-2001.

Stock Issuance
--------------

     On December 31, 2001, Allied acquired all of the outstanding capital stock
of Microwave in exchange for consideration which included 176,334 shares of
unregistered Common Stock. The company issued an additional 8,443 unregistered
shares of its Common Stock in satisfaction of an obligation of Microwave. All
shares issued in this transaction were exempt from registration pursuant to
Section 4(2) of the Securities Act.

                                        8

<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA

     The following selected financial data relates to Allied's consolidated
financial position and results of operations for 2001, 2000, 1999, 1998 and
1997:

<TABLE>
<CAPTION>
                                                     2001          2000        1999             1998           1997
                                                    -------      --------     -------         --------       --------
                                                                (000's omitted except per share amounts)
<S>                                                 <C>          <C>          <C>             <C>            <C>
Revenues                                            $96,947      $107,743     $59,033         $133,078       $123,935

Earnings (loss) from
- continuing operations                              10,367         8,705      (3,282)           8,629          8,147
- discontinued operation                                  -           517        (746)             437            418
                                                    -------      --------     -------         --------       --------

           Net earnings (loss)                       10,367         9,222      (4,028)           9,066          8,565
                                                    =======      ========     =======         ========       ========

Earnings (loss) per share

Basic:
- continuing operations                                2.11          1.79       (0.68)            1.83           1.79
- discontinued operation                                  -          0.11       (0.16)            0.09           0.09
                                                    -------      --------     -------         --------       --------

           Net income (loss)                           2.11          1.90       (0.84)            1.92           1.88
                                                    =======      ========     =======         ========       ========

Diluted:
- continuing operations                                2.10          1.79       (0.68)            1.81           1.76
- discontinued operation                                  -          0.11       (0.16)            0.09           0.09
                                                    -------      --------     -------         --------       --------

           Net income (loss)                           2.10          1.90       (0.84)            1.90           1.85
                                                    =======      ========     =======         ========       ========

           Total assets                              86,784        87,636      60,131          101,635         89,310

Long-term debt obligations and redeemable
    preferred stock                                   3,110         3,529       3,081            4,154          5,104

Cash dividends declared per common share                  -             -           -                -              -
</TABLE>

                                        9

<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

Overview
--------

     Allied provides management services to its subsidiaries. Allied's
consolidated statements have eliminated all significant intercompany
transactions. The following discussion refers to the financial condition,
liquidity and results of operations of Allied on a consolidated basis unless
otherwise stated. All dollars are in millions except per share amounts.

     In 2001, Allied operated in two (2) principal segments: the development and
production of ammunitions and weapon systems ("product sales"); and the
manufacture, distribution and service of an integrated line of industrial
security products ("security systems and services"). Product sales were provided
solely by MECAR and a related company, Sedachim. Security systems and services
were provided by the VSK Group. Accordingly, all references in this Item 7 to
(i) MECAR shall refer to the product sales segment and (ii) the VSK Group shall
refer to the security systems and services segment. All references herein to
Allied or the Company shall refer to Allied Research Corporation as a whole.

     An agreement to sell the stock of Barnes & Reinecke, Inc. ("BRI") was
executed in early December, 1999 and the stock of BRI was sold in March, 2000.
Accordingly, BRI's operations have been excluded from Allied's results from
continuing operations and the net results of such operations are reported
separately as results from discontinued operation.

     On December 31, 2001, Allied acquired all of the capital stock of
Microwave. This acquisition is reflected on Allied's year-end balance sheet.

     In 1999, Allied reorganized its European holdings. A Belgium holding
company, ARC Europe, S.A., now owns all of the capital stock of each of MECAR,
Sedachim and the VSK Group.

     Allied earned net profits of $10.4 ($2.11 per share-basic and $2.10 per
share - diluted) from continuing operations in 2001 compared to net profits of
$8.7 ($1.79 per share-basic and diluted) in 2000 and a net loss of $3.3 ($0.68
per share - basic and diluted) for 1999.

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

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

     Future Factors include substantial reliance on MECAR's principal customers
to continue to acquire MECAR's products on a regular basis; the cyclical nature
of the Company's military business; rapid technological developments and changes
and the Company's ability to continue to introduce competitive new products and
services on a timely, cost effective basis; the ability of the Company to
successfully continue to expand its business base; the mix of products/services;
domestic and foreign governmental fiscal affairs and public policy changes which
may affect the level of purchases made by

                                       10

<PAGE>

customers; changes in environmental and other domestic and foreign governmental
regulations; continued availability of financing, financial instruments and
financial resources in the amounts, at the times and on the terms required to
support the Company's future business. These are representative of the Future
Factors that could affect the outcome of the forward-looking statements. In
addition, such statements could be affected by general industry and market
conditions and growth rates; general domestic and international economic
conditions including interest rate and currency exchange rate fluctuations;
increasing competition by foreign and domestic competitors, including new
entrants; and other Future Factors.

Critical Accounting Policies
----------------------------

     Our significant accounting policies are described in Note A to the
consolidated financial statements included in Item 8 of this Form 10-K. We
believe our most critical accounting policies include revenue recognition and
cost estimation on fixed price contracts for which we use the percentage of
completion method of accounting. This method is used by MECAR for substantially
all of its sales contracts. Approximately 80%, 81% and 65% of consolidated
revenue was recognized under the percentage of completion method during 2001,
2000 and 1999, respectively. The value of contracts in process at December 31,
2001 and 2000 were $20.3 and $34.1 and the profits recognized on these contracts
through December 31, 2001 were approximately $11.1 and $10.4, respectively.

     Under the percentage of completion method revenue is recognized on these
contracts as work progresses during the period, based on the amount of actual
cost incurred during the period compared to total estimated cost to be incurred
for the total contract. Management reviews these estimates on a regular basis
and the effect of any change in cost estimates are reflected in cost of sales in
the period in which the change is identified. If the contract is projected to
create a loss, the entire estimated loss is charged to operations in the period
such loss first becomes known. A number of internal and external factors affect
our cost of sales estimates, including labor rates and efficiency variances,
material usage variances, delivery schedules and testing requirements.
Additionally, as inventory items increase in age, obsolete and excess items are
charged to cost of sales when such determination is made. While we believe that
the systems and procedures used by MECAR, coupled with the experience of its
management team, provide a sound basis for our estimates, actual result will
differ from management's estimates. The complexity of the estimation process and
issues related to the assumptions, risks and uncertainties inherent with the
application of the percentage of completion method affect the amounts reported
in our financial statements.

Trends In Operations
--------------------

     Each of MECAR and the VSK Group contributed to a very successful 2001. We
also took the first step in our plan to extend the reach of our strategic
defense and security businesses by acquiring Microwave.

     MECAR operated near capacity of its facilities throughout much of 2001. The
vast majority of MECAR's 2001 revenues resulted from orders from its traditional
customer base.

     MECAR's 2001 revenues included contracts for the benefit of its traditional
customers via the Foreign Military Sales Program ("FMS") as well as from direct
and indirect contracts with and for the benefit of the end user customers.

     MECAR has supplied both 90 mm ammunition and 120 mm mortar ammunition for
use in two (2) new weapon systems acquired by one of MECAR's traditional
customers via FMS contracts. The customer has indicated a need and desire for
additional rounds of each of the 90mm ammunition and 120 mm mortar ammunition.
In early March, 2002, Allied announced the award by such customer of a three (3)
year, $130.0 FMS contract for 90 mm ammunition.

                                       11

<PAGE>

         MECAR's 2001 results were positively impacted by a supplemental
contract awarded as part of an FMS contract for a new series of ammunition
developed by MECAR. The contract requires MECAR to correct deficiencies in the
ammunition detected by tests performed by the U.S. Government. The revenue from
the contract was recognized in the third and fourth quarters of 2001 since the
most critical tests performed by the U.S. Government only identified minimal
deficiencies. A $2.0 provision was established by MECAR to cover corrections and
other costs that might be incurred. This contract provided approximately forty
percent (40%) of Allied's 2001 profits. The final tests and MECAR's corrections
should be completed by mid-2002.

         The VSK Group recorded another excellent year in 2002. It contributed
approximately $19.9 in revenues and $2.1 in pre-tax profits.

         The reported earnings of each of MECAR and the VSK Group were adversely
impacted by the fluctuations of the Euro during 2001.

         Allied commenced 2002 with a consolidated backlog of approximately
$56.0 compared with a consolidated backlog at the beginning of 2001 of $63.5.
MECAR began 2002 with a backlog of approximately $47.0 compared with a 2001
beginning backlog of $54.3. VSK began 2002 with a backlog of approximately $7.6
compared with a 2001 beginning backlog of approximately $9.2. Microwave
commenced 2002 with a backlog of approximately $1.4.

         In future periods, Allied's operations will continue to be impacted by
MECAR's ability to obtain large orders on a periodic basis, Allied's ability to
successfully continue its expansion of other business and Allied's ability to
successfully integrate new acquisitions, such as Microwave.

Trends In Liquidity And Capital Resources
-----------------------------------------

         The Company's liquidity did not materially improve in 2001 despite the
excellent operating results and an increase in working capital.

         MECAR utilized a $9.0 line of credit and other short-term bank
facilities of up to $7.0 during 2001 to fund working capital requirements. While
the line of credit was repaid by December 31, 2001, MECAR required temporary
bank loans to cover overdrafts of approximately $2.5.

         In addition, Allied made advances of $4.0 to MECAR throughout 2001 to
supplement MECAR's working capital needs. These advances were repaid prior to
the end of 2001.

         In an effort to minimize the liquidity shortage at MECAR, in early 2001
the bank syndicate provided a partial waiver of the requirement to pledge cash
to collateralize performance bonds and advance payment guarantees. The waiver
expired in mid-2001 at which point MECAR was required to provide the full amount
of pledged cash, as collateral, as required by the bank syndicate agreement.

         Throughout 2001, Allied management engaged in a review and analysis of
its company-wide financing requirements. As a result, MECAR's bank syndicate
agreement has been recently modified as described below under Liquidity. Allied
                                                              ---------
anticipates that the modification will increase MECAR's credit facility, will
provide a maximum amount of pledged cash required for contracts and will
potentially provide Allied increased access to cash generated by MECAR.

         No liquidity shortages have been forecasted for 2002. For the long
term, the generation of positive cash flow from core operations will depend upon
MECAR's ability to continue to receive orders from its traditional customer
base, the ability of MECAR to broaden its revenue base and the ability of Allied
to successfully expand its group of strategic security businesses.

                                       12

<PAGE>

Liquidity
---------

         Working capital, which includes restricted cash, was approximately
$41.2 at December 31, 2001, which is an increase of $6.3 from the December 31,
2000 level. Allied's current working capital is required for operations and to
support credit facility agreements.

         Cash and equivalents at December 31, 2001 increased over year-end 2000
levels largely as a result of profitable operations. Accounts receivable at
December 31, 2001 increased over December 31, 2000 levels by $1.0 principally
due to the acquisition of Microwave. Costs and accrued earnings on uncompleted
contracts decreased by $13.8 from year-end 2000 levels as a result of decreased
amounts of work-in-progress at the end of 2001. Inventories at year-end 2001
were 5% higher than at the end of 2000. Prepaid expenses were essentially
unchanged from 2000 levels. Intangibles increased from 2000 levels due to the
Microwave acquisition. Deferred taxes increased in 2001 by $0.7 as a result of
the recognition of the tax benefit related to the net operating loss
carryforward from U.S. operations.

         Current liabilities decreased by $12.4 from December 31, 2000 levels
due to increased cash availability from operations which was used to reduce
payables.

         During 2001, 2000 and 1999, Allied funded its operations principally
with internally generated cash and back-up credit facilities required for
foreign government contracts. In addition, MECAR utilized a $9.0 line of credit
and other short-term bank facilities of up to $7.0 throughout 2001.

         MECAR typically obtains relatively large orders for its ammunition and
weapon systems which require credit facilities to provide import letters of
credit, advance payment guarantees and performance bonds. These needs have been
met in the last few years via agreements with a multi-member foreign bank
syndicate. While the bank syndicate agreement provides that MECAR is responsible
to repay the syndicate for amounts paid by the banks pursuant to the
guarantees/bonds, the financial terms stipulate that all such obligations be
secured, in part, by a cash pledge. At December 31, 2001, MECAR's lenders had
issued $18.0 of guarantees/performance bonds and MECAR had pledged $6.2 of cash.

         The bank syndicate agreement provides the banks the right to review and
approve each proposed MECAR contract before they agree to provide the necessary
guarantees/bonds. While management believes that it will be able to finance
additional MECAR contracts using the bank syndicate structure, there can be no
assurance that such financing will be provided.

         The bank syndicate agreement was amended and restated in mid-March,
2002. The revised bank syndicate agreement provides $20.0 increased credit
support over the previous bank syndicate agreement, which includes an $8.9
increase in the guarantee/bond facility, which increase does not require any
cash pledges. The new agreement provides (i) lines of credit aggregating $11.2
for tax prepayments and working capital and (ii) a facility for guarantees/bonds
to support customer contracts of $32.6.

         The revised bank syndicate agreement eliminates most restrictions on
payments by MECAR to Allied or other Allied group companies but substitutes
financial covenants requiring MECAR to maintain minimum net worth and working
capital levels.

         MECAR's obligations under the revised bank syndicate agreement
continues to be collateralized by a pledge of MECAR's assets and adds a second
mortgage on MECAR's facility. The revised agreement provides for the release of
the guarantee of ARC Europe and the pledge of the stock of the VSK Group but
retains Allied's agreement to support MECAR so that it remains in compliance
with its bank syndicate agreement obligations.

                                       13

<PAGE>

         MECAR has a mortgage loan with a foreign government agency which had an
outstanding balance of approximately $1.3 at December 31, 2001. Principal and
interest payments on the mortgage loan extend through January, 2004, and the
loan includes a prepayment penalty clause.

         The VSK Group operated throughout 2001 primarily from cash generated
from operations. The VSK Group is obligated on several mortgages and other
long-term obligations with December 31, 2001 balances aggregating $0.3. It is
also obligated on letters of credit required by a contract with a customer.

         On January 1, 1999, eleven member countries of the European Union
adopted the Euro as their common legal currency and established fixed conversion
rates between their existing sovereign currencies and the Euro. Between January
1, 2002, and July 1, 2002, the participating countries will introduce Euro notes
and coins and withdraw all legacy currencies so that they will no longer be
available.

         Allied will continue to evaluate all issues involving the introduction
of the Euro as further accounting, tax and governmental legal and regulatory
guidance becomes available. Based on current information and Allied's current
assessment, Allied does not expect that the Euro conversion will have a material
adverse effect on its business or financial condition. However, its operations
in 2001 were adversely impacted by the fluctuations in the value of the Euro
versus the U.S. Dollar.

         In September 1998, Allied's Board of Directors authorized the purchase
of up to 200,000 shares of Allied's common stock. During 2000 and 1999, Allied
repurchased 75,688 and 22,600 shares of its common stock in market transactions.
The Company did not repurchase shares in 2001 and does not anticipate
repurchasing shares of Company stock in calendar year 2002.

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

Capital Resources
-----------------

         Allied spent $3.1 in 2001 on capital equipment as compared with $3.9 in
2000 and $2.3 in 1999, respectively. The expenditures in 2001 were primarily for
operating machinery and building upgrades. Management currently anticipates that
it will spend approximately $3.0, across all the operations, on capital
expenditures in 2002 for additional upgrades to its facilities and equipment.

Contractual Obligations and Commercial Commitments
--------------------------------------------------

         As described herein and in the notes to the consolidated financial
statements, Allied has contractual obligations and commercial commitments that
may affect its financial condition. However, based on management's assessment of
the underlying provisions and circumstances of the material contractual
obligations and commercial commitments of Allied, there is no known trend,
demand, commitment, event or uncertainty that is reasonably likely to occur
which would have a material adverse effect on Allied's financial condition or
results of operations.

                                       14

<PAGE>

         The following tables identify material obligations and commitments as
of December 31, 2001:

                                                Payments Due By Period

        Contractual Obligations/1/         Total    1 Year  2-3 Years  4-5 Years
        -----------------------            -----    ------  ---------  ---------

        Debt and capital leases            $6.8      $3.7     $2.9        $0.2
        Operating leases                    0.5       0.1      0.2         0.2
                                            ---       ---      ---         ---

        Total contractual obligations      $7.3      $3.8     $3.1        $0.4
                                            ===       ===      ===         ===

                                              Total
                                             Amount
         Other Commercial Commitments       Committed
         ----------------------------       ---------

        Bank Guarantees                       $18.0
        Standby letters of credit               0.4
                                              -----

        Total commercial commitments          $18.4
                                              =====

Results of Operations
---------------------

         Allied had revenues from continuing operations of $96.9 in 2001
compared to $107.7 in 2000 and to $59.0 in 1999, respectively. Allied earned
profits from continuing operations of $10.4 in 2001 and $8.7 in 2000 compared to
a loss of $3.3 in 1999.

___________
/1/ Excluded are contracts made in the normal course of business for performance
of sales contracts or routine services, as well as commitments where contract
provisions allow for cancellation.

                                       15

<PAGE>

The following table sets forth, for the years ended December 31, 2001, 2000 and
1999, certain items from Allied`s consolidated statements of operations
expressed as a percentage of revenue:

<TABLE>
<CAPTION>
                                                                   2001         2000        1999
                                                                 --------     --------     ------
     <S>                                                         <C>          <C>          <C>
     Revenue                                                        100.0%       100.0%       100.0%

     Cost and expenses

         Cost of sales                                               65.2         74.2         86.2
         Selling and administrative                                  12.5         10.0         18.2
         Research and development                                     1.6          1.5          2.8
                                                                 --------     --------      -------
                Operating income (loss)                              20.7         14.3         (7.2)

     Other income (deductions)

         Interest income                                              0.7          0.6          1.4
         Interest expense                                            (1.7)        (1.4)        (1.9)
         Other - net                                                 (0.3)         0.4          1.3
                                                                 --------     --------      -------

                Earnings (loss) before discontinued operation and
                    income taxes                                     19.3         13.9         (6.4)

     Income tax expense (benefit)                                     8.6          5.8         (0.8)
                                                                 --------     --------      -------

                Earnings (loss) from continuing operations
                                                                     10.7          8.1         (5.6)

     Discontinued operation                                             -          0.5         (1.3)
                                                                 --------     --------      -------

                Net earnings (loss)                                  10.7          8.6         (6.9)
                                                                 ========     ========      =======
     </TABLE>

     The following discussion of the components of the results of operations
applies to Allied as a whole unless reference is made to a particular segment.

                                       16

<PAGE>

Revenues
--------

     Allied's consolidated revenues from continuing operations for 2001
decreased $10.8, or 10%, from 2000 revenues. Revenues from continuing operations
for 2000 increased $48.7, or 83%, over 1999 revenues.

                                        Revenues By Segment
                                        -------------------
                                            ($ Millions)
                             2001               1999               2000
                        --------------     ---------------    ---------------
                        Amount      %      Amount       %     Amount       %
                        ------     ---     ------      ---    ------      ---

        MECAR           $ 77.0      80%    $ 87.6       81%   $ 38.5       65%
        VSK               19.9      20%      20.1       19%     20.5       35%

     The fluctuation in MECAR's 2001 revenues from the amount realized in 2000
results principally from a change in MECAR's revenue base. In 2000, MECAR began
to receive subcontracts from the Distributor (as opposed to direct contracts
from the end user customer). As a result, in 2001 the majority of non-FMS
revenue was via the Distributor subcontracts. These subcontracts generally have
lower revenue value than MECAR's traditional direct end user sales contracts;
however, this subcontract arrangement does not reduce the Company's gross
margins since MECAR's cost of sales are reduced as a result of its agreement
with the Distributor. MECAR's revenues for 2000 increased by 127% over its 1999
revenues. The increase in 2000 revenues over 1999 revenues is attributable to
increased order levels for its products, after a downturn in business in 1999.

     Revenues at the VSK Group were essentially unchanged in 2001 as compared to
2000. In 2000, revenues at the VSK Group decreased approximately 2% from 1999
levels. If currency fluctuations are eliminated, 2001 and 2000 VSK Group
revenues were 2% and 16% greater than 2000 and 1999 revenues, respectively.

Cost of Sales
-------------

     Cost of sales as a percentage of sales for 2001 was approximately 65%
compared with 74% for 2000 and 86% for 1999. The improvement in cost of sales in
2001 and 2000 results primarily from cost reductions and the increase in
subcontracts via the Distributor as explained under Revenues. Certain fees,
selling expenses and other customer related expenses in connection with direct
sales to customers are not incurred on Distributor subcontracts. Costs in 1999
were higher than normal as a result of rework costs on orders for certain
customers.

Selling and Administrative Expenses
-----------------------------------

     Selling and general administrative expenses increased by 12% in 2001 over
expenses incurred in 2000 largely due to increased employment related charges at
the parent company and increased costs associated with the review of acquisition
opportunities.

     Selling and general administrative expenses in 2000 increased less than 1%
over 1999.

                                       17

<PAGE>

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

     Research and development costs incurred in 2001 decreased by 5% from 2000
levels as a result of work load associated with contracts in process during the
year.

     Research and development costs incurred in 2000 decreased by $0.1 (or 6%)
from 1999 levels. The reduction was also attributable to the work load
associated with contracts in process during the year.

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

     Interest income was essentially unchanged in 2001 from 2000. Interest
income decreased in 2000 by $0.2 (or 22%) from 1999 levels, principally due to
decreased amounts of cash invested.

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

     Interest expenses incurred in 2001 increased by approximately 9% compared
to the amount incurred in 2000 largely due to increased borrowings at MECAR.

     Interest expense increased in 2000 by $0.4 (or 38%) compared to the amount
incurred in 1999, principally as a result of an increase in borrowings at MECAR
via its line of credit.

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

     Other-net results were a $0.3 loss in 2001 and a $0.5 gain in 2000, largely
due to foreign currency transactions at MECAR and the VSK Group.

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

                                Pre-Tax Profit (Loss) By Segment
                                --------------------------------
                                         ($ Millions)
                                 2001         2000         1999
                                ------       ------       ------

        MECAR                   $ 17.4       $ 12.7       $ (7.7)
        VSK                        3.5          2.9          4.2
        Corporate and Other       (2.1)        (0.6)        (0.2)

     MECAR's 2001 pre-tax profit was favorably impacted by profits earned on the
supplemental contract described under Trends in Operations. MECAR's 2000 pre-tax
                                      --------------------
profit increase was largely attributable to the gross margins generated on
incremental revenue. MECAR's 1999 loss resulted primarily from unanticipated
costs to rework products for various customers.

     The VSK Group's pre-tax profit increase in 2001 from its 2000 level was due
to increased operating margins as a result of production efficiencies and lower
administrative expenses. The decrease in 2000 pre-tax profit from 1999 was due
to a long-term high margin project which was completed in 1999.

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

     The effective income tax expense attributable to continuing operations in
2001 and 2000 was 45% and 42%, respectively, primarily due to foreign rate
differentials and permanent tax differences.

                                       18

<PAGE>

     The Company reported a $0.5 tax benefit relating to continuing operations
in 1999 principally as a result of the deferred tax benefits of tax loss
carryforwards attributable to MECAR's 1999 operating losses, less Belgium taxes
attributable to the VSK Group's 1999 operations and domestic tax expenses.

Net Earnings From Continuing Operations
---------------------------------------

     The Company earned $10.4 profits in 2001 and $8.7 profits in 2000 from
continuing operations, compared with $3.3 loss in 1999.

Discontinued Operations
-----------------------

     All results from discontinued operations reported by Allied relate to the
operations of BRI and have been reported net of income tax expense or benefits.

     The Company's 2000 profit of $0.5 from discontinued operations is
principally comprised of gain on the sale of BRI.

     The Company's loss from discontinued operations of $0.7 in 1999 is from BRI
operations.

Impact of Year 2000
-------------------

     Through March 1, 2002, the Company has not experienced any significant
problems related to the Y2K issue.

Recent Accounting Pronouncements
--------------------------------

     See Note A to Allied's consolidated financial statements for a description
of recently issued accounting pronouncements. Except for the elimination of
periodic amortization of goodwill and the substitution therefore of periodic
goodwill impairment testing, Allied does not anticipate that any of such
pronouncements will have a material impact on its financial results.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity
-------------------------

     Allied manages its debt and its available cash considering available
investment opportunities and risks, tax consequences and overall financing
strategies.

     At year-end 2001, Allied had approximately $5.5 million of fixed-rate
indebtedness and approximately $1.3 million of variable-rate indebtedness.
Allied has not entered into any interest rate swaps or other derivatives with
respect to its indebtedness.

     Cash available for investment is typically invested in short term funds,
which generally mature in 30 days or money-market funds. In general, such funds
are not subject to market risk because the interest paid on such funds
fluctuates with the prevailing interest rate. The carrying amounts approximate
market value. It is the Company's practice to hold these investments to
maturity.

     Assuming year-end 2001 variable rate debt and cash available for
investment, a one percent change in interest rates would impact net interest
income by less than $0.2.

                                       19

<PAGE>

Exchange Rate Sensitivity
-------------------------

     Allied maintains operations in several foreign countries. Virtually all of
the Company's revenue from continuing operations was derived from Allied's
operations outside the United States. Accordingly, exposure exists to
potentially adverse movement in foreign currency rates. Allied uses foreign
exchange forward contracts to hedge the risk of change in foreign currency
exchange rates associated with some, but not all, of its contracts in which the
expenses for providing services are incurred in currency other than the
functional currency of Allied's foreign subsidiaries or payments on contracts
are made by the customer in another currency. The objective of these contracts
is to hedge fixed obligations to reduce the effect of foreign currency exchange
rate fluctuations on Allied's foreign subsidiaries' operating results.

     Additionally, Allied's consolidated financial statements are denominated in
U.S. dollars and, accordingly, changes in the exchange rates between the Allied
subsidiaries' local currency and the U.S. dollar will affect the translation of
such subsidiaries' financial results into U.S. dollars for purposes of reporting
the consolidated financial results. Allied does not hedge these matters because
cash-flows from international operations are generally re-invested locally. It
is estimated that a 10% change in foreign exchange rates would impact reported
net earnings by approximately $1.2.

     Allied does not use derivative financial instruments for speculative
trading purposes, nor does Allied hedge its foreign currency exposure in a
manner that entirely offsets the effects of changes in foreign exchange rates.

     Allied regularly reviews its hedging program and may as part of this review
determine at any time to change its hedging program.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements and supplementary financial information and data
required by this Item are set forth in the pages indicated in Item 14(a)(1) and
(2).

     See Note U to Allied's consolidated financial statements for supplementary
quarterly financial data required by this item.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURES

     There were no disagreements on any matter of accounting principles,
financial statement disclosure or auditing scope or procedure to be reported
under this item.

                                       20

<PAGE>

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF ALLIED

Directors
---------

     The following are the directors of Allied:

     J. H. Binford Peay, III, age 61, became a director in April, 2000 and was
elected Chairman of the Board, President and Chief Executive Officer in January,
2001. Since 1997, General Peay has been a consultant. General Peay retired in
1997 as Commander in Chief, United States Central Command, with responsibility
for operations in some 20 countries throughout Africa, the Middle East, Persian
Gulf and South Asia. Previously, he was Vice Chief of Staff, U.S. Army. General
Peay is currently a director of United Defense Industries, Inc., and a Trustee
of the George C. Marshall Foundation, the Virginia Military Institute Foundation
and the National Defense University.

     J. R. Sculley, age 61, became a director of Allied in 1991 and currently
serves as Chairman Emeritus. He served as Chairman of the Board and Chief
Executive Officer from December, 1992 until September, 1999; from April 1992
until December 1992 he served as President and Chief Operating Officer of
Allied. Between 1989 and April, 1992, Mr. Sculley was Director of Advanced
Studies and Technologies of Grumman Corporation, a defense company, and, prior
thereto, was Assistant Secretary of the Army (Research, Development and
Acquisition).

     Clifford C. Christ, age 54, became a director of Allied in 1993. He has
been the President and Chief Executive Officer of NavCom Defense Electronics,
Inc., a defense electronics company, since 1988.

     Harry H. Warner, age 66, became a director of Allied in early 1996.
Throughout the last five years, Mr. Warner has been a self-employed financial
consultant, investor and real estate developer. He is also a director of
Chesapeake Corporation and Virginia Management Investment Corporation.

     Ronald H. Griffith, age 63, became a director of Allied in April, 2000. Mr.
Griffith is Executive Vice President and Chief Operating Officer of MPRI, Inc.,
a professional services company, since 1998. Formerly, he served as Vice Chief
of Staff of the U.S. Army.

Executive Officers
------------------

     The following are the executive officers of Allied:

     J. H. Binford Peay, III was elected Chairman of the Board, President and
Chief Executive Officer of Allied in January, 2001.

     John G. Meyer, Jr., age 57, was elected Executive Vice President and Chief
Operating Officer in January, 2001. Mr. Meyer recently retired from the U.S.
Army having served as its most senior Public Affairs Officer for the last four
(4) years.

     Bruce W. Waddell, age 55, was elected Vice President for Strategic Planning
and Corporate Development in January, 2001. He served as a director of Allied
from April, 2000 through mid-January, 2001. Mr. Waddell was most recently
President of The Stonebridge Group, Inc., a management consulting firm
specializing in strategy and business development. He previously held management
positions with Avery Dennison and in General Electric's defense and lighting
businesses.

                                       21

<PAGE>


          Charles A. Hasper, age 47, was elected Treasurer and Chief Financial
Officer in August, 2001. Previously, Mr. Hasper served as a partner in CK
Capital Partners, an investment banking firm.


ITEM 11.  EXECUTIVE COMPENSATION

Compensation of Directors and Executive Officers.
-------------------------------------------------

          The following table sets forth information concerning all compensation
paid for services rendered in all capacities to Allied and its subsidiaries
during the years ended December 31, 2001, 2000 and 1999, to the chief executive
officer of Allied and to other executive officers of Allied whose total annual
salary and bonus exceeds $100,000:

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                       Long-Term
                                                                                                      Compensation
                                                                    Annual Compensation                  Awards
                                                           ----------------------------------------      ------
                                                                                                       Securities
            Name and                                                                       Other       Underlying
           Principal                                                                      Annual        Options/        All Other
            Position                              Year      Salary        Bonus        Compensation     SARs (#)      Compensation
------------------------------                    ----      ------        ------       ------------    ----------     ------------
<S>                                               <C>      <C>           <C>           <C>             <C>            <C>
J. H. Binford Peay, III,                          2001     $300,000      $150,000         $67,685/1/    100,000           86,250/6/
Chairman of the Board, President and
Chief Executive Officer since mid-January,
2001

John G. Meyer, Jr.,                               2001     $160,000      $ 76,000/2/                     40,000           21,563/6/
Executive Vice President and Chief Operating
Officer

Bruce W. Waddell,                                 2001     $145,000      $ 69,000/2/                     40,000           21,563/6/
Vice President for Strategic Planning and
Corporate Development

Charles A. Hasper, Treasurer                      2001     $ 66,667      $ 48,000/2/                     40,000           22,525/6/
and Chief Financial Officer since August,
2001

W. Glenn Yarborough, Jr.,                         2001     $200,000/3/                                                  $275,000/5/
President and Chief                               2000     $200,000      $ 50,000/4/
Executive Officer until mid-January, 2001         1999     $200,000
</TABLE>
_________________
/1/  The Company reimbursed Mr Peay for the premium paid for a $1 million life
     insurance policy, including the income tax payable thereon, as required by
     the terms of his employment agreement.
/2/  Includes a stock grant of approximately $20,000.
/3/  Mr. Yarborough was paid $200,000 in severance payments in 2001.
/4/  Mr. Yarborough was awarded a bonus of $50,000 for 2000 performance.
/5/  Mr. Yarborough is entitled to annual consultation payments of $55,000 for
     the 2002-2006 period.
/6/  Each of the executives who joined the Company in 2001 were granted stock
     awards in connection with their employment agreements.

                                       22

<PAGE>


Options Grants in Last Fiscal Year
----------------------------------

          The following table contains information concerning the stock option
grants made to each of the Named Executive Officers for the fiscal year ended
December 31, 2001.

<TABLE>
<CAPTION>
                                                                                                       Potential Realizable Value
                                                                                                       at Assumed Annual Rates of
                                                                                                       Stock Price Appreciation
                                    Individual Grants                                                    for Option Term /(1)/
----------------------------------------------------------------------------------------------        ---------------------------
                                 Number of     % of Total
                                Securities       Options
                                Underlying     Granted to      Exercise or
                                  Options     Employees in      Base Price         Expiration
         Name                     Granted      Fiscal Year        ($/Sh)              Date              5% ($)          10% ($)
         ----                  ------------    -----------   ---------------     -------------          ------          -------
<S>                            <C>            <C>            <C>                 <C>                  <C>             <C>
J. H. Binford Peay, III           100,000            45%             $8.63          12/31/10          $ 542,736       $ 1,375,400

John G. Meyer, Jr.                 40,000            18%             $8.63          12/31/05          $  95,372       $   210,748

Bruce W. Waddell                   40,000            18%             $8.63          12/31/05          $  95,372       $   210,748

Charles A. Hasper                  40,000            18%             $9.01          07/31/06          $  97,572       $   220,028
</TABLE>

(1)  Potential gains are net of exercise price, but before taxes associated with
     exercise. These amounts represent certain assumed rates of appreciation
     only, in accordance with the SEC's rule. Actual gains, if any, on stock
     option exercises are dependent on the future performance of the Common
     Stock, overall market conditions and the option holders continued
     employment through the vesting period. The amounts reflected in this table
     may not necessarily be achieved.

Aggregated Options Exercised in Last Fiscal Year and Fiscal Year-End Values
---------------------------------------------------------------------------

          The following tables sets forth information concerning option
exercises and option holdings by each of the Named Executive Officers for the
fiscal year ended December 31, 2001.

<TABLE>
<CAPTION>
                                                              Number of Securities Underlying      Value of Unexercised In-the-Money
                                                               Unexercised Options/SARsValue        Options/SARs at FY-End ($) /(1)/
                                                              -------------------------------      ---------------------------------
                                  Shares
                               Acquired on        Value
         Name                  Exercise (#)     Realized     Exercisable (#)     Unexercisable       Exercisable     Unexercisable
-----------------------        ------------     --------     ---------------     -------------       -----------     -------------
                                                                                      (#)
                                                                                      ---
<S>                            <C>              <C>          <C>                 <C>                 <C>             <C>
J. H. Binford Peay, III               -         $      -         20,000               80,000          $ 105,800        $ 423,200

John G. Meyer, Jr.                    -         $      -          8,000               32,000          $  42,320        $ 169,280

Bruce W. Waddell                  6,500         $ 44,668          8,000               32,000          $  42,320        $ 169,280

Charles A. Hasper                     -         $      -              -               40,000          $       -        $ 196,400
</TABLE>

(1)  Represents the closing price per share of the underlying shares on the last
     day of the fiscal year less the option exercise price multiplied by the
     number of shares. The closing price per share was $13.92 on the last
     trading day of the fiscal year as reported on the AMEX.

                                       23

<PAGE>

Director Compensation
---------------------

         Directors who are employees of Allied receive no additional
compensation for serving as a director.

         Each non-employee director (an "Outside Director") is compensated for
service as a director, including as a member of committees of the Board, at the
rate of $1,000 per month; an award of 1,000 shares of Common Stock on each July
1; an award as of each July 1 of an option to acquire 6,500 shares of common
stock (commencing in 2000); $1,000 for each Board meeting in excess of four (4)
personally attended during each calendar year; $500 for each committee meeting
attended which is not held in conjunction with a Board meeting; and $250 for
each teleconference Board meeting in excess of two (2) in which a director
participates during each calendar year. As Chairman Emeritus, Mr. Sculley is
entitled to an additional $500 per month.

         In 1992, the Board of Directors of Allied adopted the Allied Research
Corporation Outside Directors Retirement Plan (the "Directors Retirement Plan")
to provide retirement benefits for long-standing 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.
In the event that a director has breached any fiduciary or legal duty to Allied,
the director will forfeit any right to payment of benefits under the Directors
Retirement Plan. The Directors Retirement Plan is administered by the Board of
Directors. The Board of Directors has determined that no further benefits will
accrue under the plan to current or future Outside Directors. During 2001,
payments of $82,597 were made to former directors of Allied in consideration of
their accrued benefits under the Directors Retirement Plan. The other
individuals with accrued benefits under the Directors Retirement Plan agreed to
accept the following consideration in lieu thereof:

         Mr. Warner - 3,278 shares of Allied's stock upon his retirement from
         the Board.

         Mr. Christ - cash benefits as described above following his retirement
         from the Board.

         Mr. Sculley - $9,483 payable in cash commencing when Mr. Sculley
         reaches age 70.

         In 1991, the Board of Directors of Allied adopted the Allied Research
Corporation Outside Directors Stock Option Plan (the "Directors Option Plan").
None of the options granted pursuant to the Directors Option Plan are intended
to qualify as incentive stock options under Sections 422 through 424 of the
Internal Revenue Code. Options for an aggregate of 26,000 and 39,000 shares were
granted under the Directors Option Plan in 2001 and 2000, respectively, to
Allied's Outside Directors. The Directors Option Plan expired in 2001.

         In 2001, Mr. Sculley was paid approximately $100,000 in satisfaction of
his post-employment severance entitlement. Mr. Sculley is entitled to annual
payments of $80,000 through 2005.

Employment Contract and Change-In-Control Arrangements
------------------------------------------------------

         In 2001, General Peay and Allied entered into an employment agreement
which provides for an annual salary of $300,000 and the potential to earn an
annual bonus up to 50% of the annual salary upon satisfaction of certain
performance standards. Upon certain terminations of Mr. Peay's employment, he
will be entitled to receive his annual salary, bonus and benefits for a period
of up to three (3) years

                                       24

<PAGE>

following the termination of employment. Further, if the termination of
employment occurs within twelve (12) months of a change of control, the payments
may be accelerated into a lump sum payment at the election of Mr. Peay.

         In 2001, Mr. Meyer and Allied entered into an employment agreement
which provides for an annual salary of $160,000 and the potential to earn an
annual bonus up to 35% of the annual salary upon satisfaction of certain
performance standards. The annual salary was increased to $200,000 in early
2002. Upon certain terminations of Mr. Meyer's employment, he will be entitled
to receive his annual salary for one year following such termination. Further,
if the termination of employment occurs within twelve (12) months of a change of
control, the payments may be accelerated into a lump sum payment at the election
of Mr. Meyer.

         In 2001, Mr. Waddell and Allied entered into an employment agreement
which provides for an annual salary of $145,000 and the potential to earn an
annual bonus up to 35% of the annual salary upon satisfaction of certain
performance standards. The annual salary was increased to $160,000 in early
2002. Upon certain terminations of Mr. Waddell's employment, he will be entitled
to receive his annual salary for one year following such termination. Further,
if the termination of employment occurs within twelve (12) months of a change of
control, the payments may be accelerated into a lump sum payment at the election
of Mr. Waddell.

         In 2001, Mr. Hasper and Allied entered into an employment agreement
which provides for an annual salary of $160,000 and the potential to earn an
annual bonus up to 35% of the annual salary upon satisfaction of certain
performance standards. Upon certain terminations of Mr. Hasper's employment, he
will be entitled to receive his annual salary for one year following such
termination. Further, if the termination of employment occurs within twelve (12)
months of a change of control, the payments may be accelerated into a lump sum
payment at the election of Mr. Hasper.

         Mr. Yarborough's employment with Allied terminated in January, 2001.
Mr. Yarborough is entitled to consulting fees of $55,000 per year through 2006.

         Mr. Sculley's employment with Allied terminated in September, 1999. He
is entitled to post-employment payments of $80,000 per year through 2005. Such
amounts are subject to acceleration upon a change of control of Allied.

         In June, 2001, the Board of Directors of Allied adopted a new
shareholder rights plan (the "Rights Plan"). The Rights Plan provides each
stockholder of record on a dividend distribution one "right" for each
outstanding share of Allied's common stock. Rights become exercisable at the
earlier of ten days following: (1) a public announcement that an acquirer has
purchased or has the right to acquire 15% or more of Allied's common stock, or
(2) the commencement of a tender offer which would result in an offeror
beneficially owning 15% or more of the outstanding common stock of Allied. All
rights held by an acquirer or offeror expire on the announced acquisition date,
and all rights expire at the close of business on May 31, 2011. Each right
entitles a stockholder to acquire at a stated purchase price, 1/100 of a share
of Allied's preferred stock which carries voting and dividend rights similar to
one share of its common stock. Alternatively, a right holder may elect to
purchase for the stated price an equivalent number of shares of Allied's common
stock (or in certain circumstances, cash, property or other securities of
Allied) at a price per share equal to one-half of the average market price for a
specified period. In lieu of the purchase price, a right holder may elect to
acquire one-half of the common stock available under the second option. The
purchase price of the preferred stock fractional amount is subject to adjustment
for certain events as described in the Rights Plan. At the discretion of a
majority of the Board and within a specified time period, Allied may redeem all
of the rights at a price of $.01 per right. The Board may also amend any
provisions of the Rights Plan prior to exercise.

                                       25

<PAGE>

Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------

         The Compensation Committee of Allied consists of Messrs. Harry H.
Warner, Ronald H. Griffith and J. R. Sculley. Mr. Griffith is Executive Vice
President of MPRI, Inc. and General Peay previously served on the Board of
Directors of MPRI, Inc. Mr. Sculley was formerly Chairman of the Board and
President of Allied.


ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following information is furnished with respect to any person who
is known to Allied to be the beneficial owner of more than five percent (5%) of
its Common Stock and is based upon the most recent filings made by the
undersigned with the Securities and Exchange Commission:

<TABLE>
<CAPTION>
                  Name and Address of                 Amount and Nature of
Title of Class    Beneficial Owner                    Beneficial Ownership    Percent of Class/1/
--------------    --------------------                --------------------    -------------------

<S>               <C>                                 <C>                     <C>
Common            Bricoleur Capital                   558,700                         10.6%
                  Management, LLC/2/                  Owned directly
                  12230 El Camino Rd, Ste. 100
                  San Diego, CA 92130

Common            FMR Corp./3/                        445,000                          8.4%
                  82 Devonshire Street                Owned directly
                  Boston, MA 02109

Common            Dimensional Fund                    356,100                          6.7%
                  Advisors, Inc./4/                   Owned directly
                  1299 Ocean Ave., 11/th/ Floor
                  Santa Monica, CA 90401

Common            Berno, Gambal & Barbee, Inc./5/     267,200                          5.0%
                  1100 North Glebe Road               Owned directly
                  Suite 1040
                  Arlington, Virginia  22201
</TABLE>

___________________

/1/  Based upon 5,157,438 shares of common stock outstanding plus 138,000 shares
     which may be acquired within sixty (60) days pursuant to outstanding stock
     options.
/2/  Bricoleur Capital Management, LLC ("Bricoleur") filed an amended Schedule
     13G with the SEC on February 14, 2002. This Schedule 13G states that
     Bricoleur beneficially owned 558,700 shares of Common Stock as of December
     31, 2001.
/3/  FMR Corp, and its wholly-owned subsidiary, Fidelity Management & Research
     Company ("Fidelity"), Edward C. Johnson, 3rd and Abigail P. Johnson,
     jointly filed and amendment Schedule 13G with the SEC on February 13, 2002.
     This Schedule 13G states that Fidelity Low-Price Stock Fund owned 445,000
     shares of Common Stock as of December 31, 2001.
/4/  Dimensional Fund Advisors, Inc. ("Demensional"), a registered investment
     advisor, filed an amended Schedule 13G with the SEC on February 12, 2002.
     This Schedule 13G states that Demensional is deemed to have beneficial
     ownership of 356,100 shares, all of which shares are owned by advisory
     clients of Demensional. Demensional disclaims beneficial ownership of all
     such shares.
/5/  Berno, Gambal and Barbee, Inc. ("BGB") filed a Schedule 13G with the SEC on
     February 13, 2002. The Schedule 13G states that BGB beneficially owns
     267,200 shares of Common Stock as of December 31 2001.

                                       26

<PAGE>

         The following information is furnished as of March 1, 2002, with
respect to the beneficial ownership by management of Allied's Common Stock:

<TABLE>
<CAPTION>
                 Name and Address of           Amount and Nature of
Title of Class   Beneficial Owner              Beneficial Ownership       Percent of Class/1/
--------------   -----------------------       --------------------       -------------------
<S>              <C>                           <C>                        <C>
Common           J. H. Binford Peay, III       69,326/2/                            1.3%
                                               Owned directly

Common           Harry H. Warner               31,000/3/                              *
                                               Owned directly

Common           Clifford C. Christ            24,000                                 *
                                               Owned directly

Common           J. R. Sculley                 57,400/3/                            1.1%
                                               Owned directly

Common           Ronald H. Griffith            15,000/3/                              *
                                               Owned directly

Common           All executive officers and    241,954/4/                           4.6%
                 directors as a group (8)      Owned directly
</TABLE>


         Allied is aware of no arrangement the operation of which may at a
subsequent date result in a change in control of Allied.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Mr. Sculley's employment with the Company terminated in September,
1999. During 2001 and 2000, the Company paid Mr. Sculley approximately $100,000
and $194,000, respectively, in satisfaction of his post-employment severance
entitlement. He is entitled to post-employment payments of $80,000 per year
through 2005. Such amounts are subject to acceleration upon a change of control
of the Company.



_________________________

/1/  Based upon 5,157,438 shares of common stock outstanding plus 138,000 shares
     which may be acquired within sixty (60) days pursuant to outstanding stock
     options.
/2/  Includes stock options for 46,500 shares which may be exercised within
     sixty (60) days.
/3/  Includes stock options for 13,000 shares which may be exercised within
     sixty (60) days.
/4/  Includes stock options for 117,500 shares which may be exercised within
     sixty (60) days.
/*/  Less than 1%

                                       27

<PAGE>

                                     PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
           FORM 8-K

         For the purposes of complying with the amendments to the rules
governing Form S-8 under the Securities Act of 1933, the undersigned registrant
hereby undertakes as follows, which undertaking shall be incorporated by
reference into Allied's Registration Statements on Form S-8:

         Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Allied of
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, Allied will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

(a)(1)   Financial Statements:
         --------------------
            Report of Independent Certified Public                        F-3
            Accountants

            Consolidated Balance Sheets at December 31,                   F-4
            2001 and 2000

            Consolidated Statements of Operations for                     F-6
            each of the three years in the period ended
            December 31, 2001

            Consolidated Statements of Stockholders'                      F-7
            Equity for each of the three years in the period
            ended December 31, 2001

            Consolidated Statements of Cash Flows                         F-8
            for each of the three years in the period
            ended December 31, 2001

            Notes to Consolidated Financial Statements                    F-10

                                       28

<PAGE>

(a)(2)   Financial Statement Schedules:
         -----------------------------
         The following financial statement schedules are included in Part IV of
         this report:

         (a)(2)(a) As of December 31, 2001 and 2000 and for the three years
ended December 31, 2001:

         Schedule I - Condensed
         Financial Information of Allied                                   F-34

         Schedule II - Valuation
                       and Qualifying Accounts                             F-37

(a)(3)   Exhibits:
         --------

         Exhibit 3 - Certificate of Incorporation, as amended (Incorporated by
         reference from Form 10-K filed in March, 1992); Restated By-Laws
         (Incorporated by reference from Form 10-Q filed in July, 1999).

         Exhibit 10A - Employment agreement between Allied Research Corporation
         and J. H. Binford Peay, III (Incorporated by reference from Form 8-K
         filed in March, 2002 and Form 8-K filed in August, 2002.)

         Exhibit 10B - Employment agreement between Allied Research Corporation
         and John G. Meyer, Jr. (Incorporated by reference from Form 8-K filed
         in March, 2002 and Form 8-K filed in August, 2002.)

         Exhibit 10C - Employment agreement between Allied Research Corporation
         and Bruce W. Waddell (Incorporated by reference from Form 8-K filed in
         March, 2002 and Form 8-K filed in August, 2002.)

         Exhibit 10D - Employment agreement between Allied Research Corporation
         and Charles A. Hasper (Incorporated by reference from Form 8-K filed in
         August, 2002.)

         Exhibit 21 - List of Subsidiaries                                  E-3

         Exhibit 23 - Consent of Independent Certified Public Accountants   E-4

(b)      Reports on Form 8-K:
         -------------------

         No reports on Form 8-K were filed during the fourth quarter of 2001.

         Supplemental Information to be Furnished with Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Securities
Pursuant to Section 12 of the Act.

         No annual report or proxy material has as yet been sent to Allied's
stockholders, although it is expected that an annual report and proxy material
will be furnished to Allied's stockholders subsequent to the filing of this Form
10-K.
                                       29

<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Allied has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                               Allied Research Corporation

                               By:  /s/ J. H. Binford Peay, III
                                    ------------------------------------
                                    J. H. Binford Peay, III,
                                    Chairman of the Board, President
                                    and Chief Executive Officer
Date: March 21, 2002

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of Allied
and in the capacities and on the dates indicated.

                               By:  /s/ John G. Meyer, Jr.
                                    -----------------------------------
                                    John G. Meyer, Jr.,
                                    Executive Vice President, Chief Operating
                                    Officer
Date: March 21, 2002


                               By:  /s/ Charles A. Hasper
                                    -----------------------------------
                                    Charles A. Hasper,
                                    Treasurer and Chief Financial Officer
Date: March 21, 2002

                                             **********


                                    /s/ J. R. Sculley
                                    ------------------------------------
                                    J. R. Sculley, Director
Date: March 21, 2002


                                    /s/ Clifford C. Christ
                                    ------------------------------------
                                    Clifford C. Christ, Director

                                       30

<PAGE>

Date: March 21, 2002

                           /s/ Harry H. Warner
                           --------------------------------------------
                           Harry H. Warner, Director

Date: March 21, 2002

                           /s/ Ronald H. Griffith
                           --------------------------------------------
                           Ronald H. Griffith, Director

Date: March 21, 2002

                                       31

<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549



                       FINANCIAL STATEMENTS AND SCHEDULES

                                December 31, 2001



                                FORMING A PART OF
                            ANNUAL REPORT PURSUANT TO
                       THE SECURITIES EXCHANGE ACT OF 1934



                                    FORM 10-K
                                       OF
                           Allied Research Corporation


                                       F-1

<PAGE>

                           Allied Research Corporation

                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

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


                                                                           Page

Report of Independent Certified Public Accountants                        F - 3


Consolidated Balance Sheets at December 31, 2001 and 2000                 F - 4


Consolidated Statements of Operations for each of the three years in
the period ended December 31, 2001                                        F - 6


Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 2001                               F - 7


Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 2001                                        F - 8


Notes to Consolidated Financial Statements                                F - 10


Schedules as of and for the three years ended December 31, 2001

            Schedule I - Condensed Financial Information of Registrant    F - 34

            Schedule II - Valuation and Qualifying Accounts               F - 37


                                       F-2

<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
               --------------------------------------------------

Board of Directors
Allied Research Corporation

We have audited the accompanying consolidated balance sheets of Allied Research
Corporation and subsidiaries as of December 31, 2001 and 2000 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Allied Research
Corporation and subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.

We have also audited Schedules I and II for each of the three years in the
period ended December 31, 2001. In our opinion, these schedules present fairly,
in all material respects, the information required to be set forth therein.

/s/ Grant Thornton LLP

Baltimore, Maryland
February 8, 2002


                                       F-3

<PAGE>

                           Allied Research Corporation

                           CONSOLIDATED BALANCE SHEETS

                                  December 31,

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

<TABLE>
<CAPTION>
                                     ASSETS

                                                                      2001            2000
                                                                   -----------     -----------
<S>                                                                <C>             <C>
CURRENT ASSETS
   Cash and equivalents                                            $10,921,624     $ 7,570,358
   Restricted cash                                                   6,211,977       3,010,253
   Accounts and note receivable                                     19,655,881      18,661,105
   Costs and accrued earnings on uncompleted contracts              20,338,227      34,136,421
   Inventories                                                       6,190,410       5,910,906
   Prepaid and other current assets                                  2,902,891       2,996,142
                                                                   -----------     -----------

           Total current assets                                     66,221,010      72,285,185

PROPERTY, PLANT AND EQUIPMENT - AT COST
   Buildings and improvements                                       12,266,314      11,905,686
   Machinery and equipment                                          28,745,743      28,460,783
                                                                   -----------     -----------
                                                                    41,012,057      40,366,469
   Less accumulated depreciation                                    29,773,427      29,803,505
                                                                   -----------     -----------
                                                                    11,238,630      10,562,964
   Land                                                              1,060,074       1,112,356
                                                                   -----------     -----------
                                                                    12,298,704      11,675,320



OTHER ASSETS
   Intangibles, less accumulated amortization of
      $2,768,998 in 2001 and $2,538,365 in 2000                      7,144,427       3,251,404
   Deferred taxes                                                      935,035         285,313
   Other assets                                                        184,656         139,258
                                                                   -----------     -----------
                                                                     8,264,118       3,675,975
                                                                   -----------     -----------

                                                                   $86,783,832     $87,636,480
                                                                   ===========     ===========
</TABLE>

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

                                       F-4

<PAGE>

                           Allied Research Corporation

                     CONSOLIDATED BALANCE SHEETS - CONTINUED

                                  December 31,

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

<TABLE>
<CAPTION>
                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                                                        2001           2000
                                                                    -------------   ------------
<S>                                                                 <C>            <C>
CURRENT LIABILITIES
   Notes payable                                                     $2,478,199    $ 3,699,100
   Current maturities of long-term debt                               1,255,090      1,079,053
   Accounts payable                                                  10,306,055     22,008,658
   Accrued liabilities                                                6,783,641      4,320,612
   Customer deposits                                                  2,052,973      5,777,112
   Income taxes                                                       2,149,795        502,332
                                                                    -------------  -------------

           Total current liabilities                                 25,025,753     37,386,867


LONG-TERM DEBT, less current maturities                               3,109,873      3,529,539


CONTINGENCIES AND COMMITMENTS                                                 -              -


STOCKHOLDERS' EQUITY
   Preferred stock, no par value; authorized, 1,000,000
      shares; none issued                                                     -              -
   Common stock, par value, $.10 per share; authorized
      10,000,000 shares; issued and outstanding, 5,129,179
      in 2001 and 4,812,464 in 2000                                     512,918        481,246
   Capital in excess of par value                                    17,273,168     13,689,053
   Retained earnings                                                 50,672,524     40,305,945
   Accumulated other comprehensive loss                              (9,810,404)    (7,756,170)
                                                                    -----------    -------------
                                                                     58,648,206     46,720,074
                                                                    -----------    -------------

                                                                    $86,783,832    $87,636,480
                                                                    ===========    =============
</TABLE>

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

                                       F-5

<PAGE>

                           Allied Research Corporation

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                            Years ended December 31,

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                        2001              2000               1999
                                                                     -----------      ------------       -----------
<S>                                                                  <C>              <C>                <C>
Revenue                                                              $96,947,263      $107,742,815       $59,032,607

Cost and expenses
   Cost of sales                                                      63,253,073        79,974,464        50,863,772
   Selling and administrative                                         12,108,778        10,818,384        10,756,462
   Research and development                                            1,504,262         1,583,071         1,686,008
                                                                     -----------      ------------       -----------
                                                                      76,866,113        92,375,919        63,306,242
                                                                     -----------      ------------       -----------

           Operating income (loss)                                    20,081,150        15,366,896        (4,273,635)

Other income (deductions)
   Interest income                                                       644,093           654,504           835,496
   Interest expense                                                   (1,666,068)       (1,524,098)       (1,102,312)
   Other - net                                                          (315,592)          489,392           782,781
                                                                     -----------      ------------       -----------
                                                                      (1,337,567)         (380,202)          515,965
                                                                     -----------      ------------       -----------

           Earnings (loss) before discontinued
              operation and income taxes                              18,743,583        14,986,694        (3,757,670)

Income tax expense (benefit)                                           8,377,004         6,281,370          (475,803)
                                                                     -----------      ------------       -----------

           Earnings (loss) from continuing operations                 10,366,579         8,705,324        (3,281,867)

Discontinued operation - engineering and technical segment                    -            516,993          (746,414)
                                                                     -----------      ------------       -----------

           NET EARNINGS (LOSS)                                       $10,366,579      $  9,222,317       $(4,028,281)
                                                                     ===========     =============       ===========

Earnings (loss) per share
   Basic
      Continuing operations                                          $      2.11      $       1.79       $      (.68)
      Discontinued operation                                                  -                .11              (.16)
                                                                     -----------      ------------       -----------
           Net income (loss)                                         $      2.11      $       1.90       $      (.84)
                                                                     ===========      ============       ===========
   Diluted
      Continuing operations                                          $      2.10      $       1.79       $      (.68)
      Discontinued operation                                                  -                .11              (.16)
                                                                     -----------      ------------       -----------
           Net income (loss)                                         $      2.10      $       1.90       $      (.84)
                                                                     ===========      ============       ===========

Weighted average number of common shares:

   Basic                                                               4,905,114         4,844,267         4,818,857
                                                                     ===========      ============       ===========

   Diluted                                                             4,947,260         4,846,399         4,818,857
                                                                     ===========      ============       ===========
</TABLE>

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

                                       F-6

<PAGE>


                           Allied Research Corporation

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                  Years ended December 31, 2001, 2000 and 1999

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

<TABLE>
<CAPTION>
                                            Preferred         Common Stock                Capital
                                                       ----------------------------
                                            Stock, no                       $.10         in excess       Retained
                                            par value     Shares         par value     of par value      earnings
                                            ---------  ------------    ------------    ------------    ------------
<S>                                         <C>        <C>             <C>             <C>             <C>
Balance at January 1, 1999                   $      -      4,757,174    $    475,717    $ 13,391,099    $ 35,111,909
   Common stock awards                              -         66,048           6,605         440,597               -
   Employee stock purchase plan purchases           -         31,900           3,190         193,989               -
   Exercise stock options                           -          4,200             420          15,330               -
   Retirement of common stock                       -        (22,600)         (2,260)       (134,276)              -
   Comprehensive loss
      Net loss for the year                         -              -               -               -      (4,028,281)
      Currency translation adjustment               -              -               -               -               -
        Total comprehensive loss                    -              -               -               -               -
                                            ---------   ------------    ------------    ------------    ------------

Balance at December 31, 1999                        -      4,836,722         483,672      13,906,739      31,083,628
   Common stock awards                              -         17,000           1,700         139,550               -
   Employee stock purchase plan purchases           -         16,930           1,693         126,821               -
   Exercise stock options                           -         17,500           1,750         126,875               -
   Retirement of common stock                       -        (75,688)         (7,569)       (610,932)              -
   Comprehensive income
      Net earnings for the year                     -              -               -               -       9,222,317
      Currency translation adjustment               -              -               -               -               -
        Total comprehensive income                  -              -               -               -               -
                                            ---------   ------------    ------------    ------------    ------------

Balance at December 31, 2000                        -      4,812,464         481,246      13,689,053      40,305,945
   Common stock awards                              -         71,400           7,140         575,170               -
   Common stock issued                              -        184,777          18,478       2,428,522               -
   Employee stock purchase plan purchases           -         38,538           3,854         281,993               -
   Exercise stock options                           -         22,000           2,200         298,430               -
   Comprehensive income
      Net earnings for the year                     -              -               -               -      10,366,579
      Currency translation adjustment               -              -               -               -               -
        Total comprehensive income                  -              -               -               -               -
                                            ---------   ------------    ------------    ------------    ------------
Balance at December 31, 2001                 $      -      5,129,179    $    512,918    $ 17,273,168    $ 50,672,524
                                            =========   ============    ============    ============    ============
<CAPTION>
                                                Accumulated          Total

                                            other comprehensive   stockholders'
                                               income (loss)         equity
                                               -------------      ------------
                                            <C>                   <C>
Balance at January 1, 1999                  $    985,125          $ 49,963,850
   Common stock awards                                 -               447,202
   Employee stock purchase plan purchases              -               197,179
   Exercise stock options                              -                15,750
   Retirement of common stock                          -              (136,536)
   Comprehensive loss
      Net loss for the year                            -                     -
      Currency translation adjustment         (6,139,599)                    -
        Total comprehensive loss                       -           (10,167,880)
                                            ------------          ------------

Balance at December 31, 1999                  (5,154,474)           40,319,565
   Common stock awards                                 -               141,250
   Employee stock purchase plan purchases              -               128,514
   Exercise stock options                              -               128,625
   Retirement of common stock                          -              (618,501)
   Comprehensive income
      Net earnings for the year                        -                     -
      Currency translation adjustment         (2,601,696)                    -
        Total comprehensive income                     -             6,620,621
                                            ------------          ------------

Balance at December 31, 2000                  (7,756,170)           46,720,074
   Common stock awards                                 -               582,310
   Common stock issued                                 -             2,447,000
   Employee stock purchase plan purchases              -               285,847
   Exercise stock options                              -               300,630
   Comprehensive income
      Net earnings for the year                        -                     -
      Currency translation adjustment         (2,054,234)                    -
        Total comprehensive income                     -             8,312,345
                                            ------------          ------------
Balance at December 31, 2001                $ (9,810,404)         $ 58,648,206
                                            ============          ============
</TABLE>

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

                                       F-7

<PAGE>

                           Allied Research Corporation

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                            Years ended December 31,

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


<TABLE>
<CAPTION>
                                                                        2001            2000           1999
                                                                    ------------    ------------   -------------
<S>                                                                 <C>             <C>            <C>
Cash flows from (used in) operating activities
   Net earnings (loss) for the year                                 $ 10,366,579    $  9,222,317   $  (4,028,281)
   Adjustments to reconcile net earnings (loss) to net
      cash from continuing operating activities
        Depreciation and amortization                                  2,224,844       2,194,654       2,136,214
        Gain on sale of subsidiary                                            -         (462,893)             -
        (Income) loss from discontinued operation                             -          (54,100)        746,414
        Gain on sale of fixed assets                                          -               -          (45,808)
        Deferred income taxes                                           (702,243)      2,390,672      (2,578,217)
        Provision for estimated losses on contracts                     (329,691)        539,504        (159,795)
        Common stock awards                                              582,310         141,250         447,202
        Changes in assets and liabilities
           Accounts receivable                                          (494,411)     (4,913,544)      9,190,965
           Cost and accrued earnings on
              uncompleted contracts                                   12,324,767     (20,925,251)      4,098,209
           Inventories                                                 1,002,068      (2,633,890)       (609,352)
           Prepaid expenses and other assets                             992,182      (1,485,542)      7,830,017
           Accounts payable and accrued liabilities                  (10,633,608)     10,640,553     (11,630,667)
           Customer deposits                                          (3,489,764)      5,283,474     (14,145,053)
           Income taxes                                                1,688,021         (81,649)       (634,944)
                                                                    -------------   ------------   -------------
                                                                       3,164,475      (9,366,762)     (5,354,815)
                                                                    -------------   ------------   -------------

                Net cash provided by (used in) continuing
                   operating activities                               13,531,054        (144,445)     (9,383,096)

Cash flows from (used in) investing activities
   Capital expenditures                                               (3,108,281)     (3,893,026)     (2,256,305)
   Proceeds from sale of discontinued operations                              -        2,822,495              -
   Proceeds from sale of fixed assets                                    129,848          42,911         519,866
   Acquisitions                                                         (556,181)             -         (924,680)
                                                                    ------------    ------------   -------------

                Net cash used in investing activities                 (3,534,614)     (1,027,620)     (2,661,119)
</TABLE>

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

                                       F-8

<PAGE>

                           Allied Research Corporation

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                            Years ended December 31,

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


<TABLE>
<CAPTION>
                                                              2001          2000           1999
                                                          ------------   -----------   ------------
<S>                                                       <C>            <C>           <C>
Cash flows from (used in) financing activities
   Net (decrease) increase in short-term borrowings         (1,058,481)    2,864,172      1,286,882
   Principal payments on long-term debt                     (3,883,738)   (1,082,419)      (982,207)
   Proceeds from issuance of long-term debt                  1,307,430     1,346,594        153,403
   Retirement of common stock                                        -      (618,501)      (136,536)
   Proceeds from stock purchases                               586,577       257,139        212,929
   Restricted cash and restricted deposits                  (3,201,724)    1,497,829      9,505,823
                                                          ------------   -----------   ------------

                Net cash (used in) provided by
                   financing activities                     (6,249,936)    4,264,814     10,040,294

Cash flows provided by discontinued operation                        -             -        493,258

Effects of exchange rates on cash                             (395,238)   (1,490,245)    (2,754,139)
                                                          ------------   -----------   ------------

                Net increase (decrease) in cash
                   and equivalents                           3,351,266     1,602,504     (4,264,802)

Cash and equivalents at beginning of year                    7,570,358     5,967,854     10,232,656
                                                          ------------   -----------   ------------

Cash and equivalents at end of year                       $ 10,921,624   $ 7,570,358   $  5,967,854
                                                          ============   ===========   ============



Supplemental Disclosures of Cash Flow Information:
-------------------------------------------------
   Cash paid during the year for

      Interest                                            $  1,691,880   $ 1,425,688   $  1,255,594
      Income taxes                                           6,939,330     6,072,626      1,719,500

Supplemental of Non-Cash Investing and Financing
------------------------------------------------
  Activities:
------------
      Non-cash consideration in connection with business
        acquisition                                       $  6,833,311   $         -   $          -
</TABLE>

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

                                       F-9

<PAGE>

                          Allied Research Corporation

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  A summary of significant accounting policies consistently applied in the
  preparation of the accompanying consolidated financial statements follows.

  Basis of Presentation
  ---------------------

  The consolidated financial statements of the Company include the accounts of
  Allied Research Corporation (Allied), a Delaware corporation, and its
  wholly-owned subsidiaries, ARC Europe, S.A. (ARC Europe), a Belgian company,
  Allied Research Corporation Limited (Limited), an inactive United Kingdom
  company, and News/Sports Microwave Rental, Inc. (NS Microwave), a California
  corporation, which was acquired in a purchase transaction on December 31,
  2001. The operations of a former subsidiary, Barnes & Reinecke, Inc. (BRI), a
  Delaware corporation, are classified as discontinued operations.

  ARC Europe includes its wholly-owned subsidiaries Mecar S.A. (Mecar),
  Sedachim, S.I. (Sedachim) and VSK Electronics N.V. (the VSK Group). The VSK
  Group is comprised of VSK Electronics N.V. and its wholly-owned subsidiaries,
  Tele Technique Generale, S.A., I.D.C.S., N.V., Belgian Automation Units, N.V.
  and Vigitec S.A. (Vigitec), which was acquired in a purchase transaction on
  December 14, 1999. Vigitec's results of operations for the period from
  December 14, 1999 to December 31, 1999 were not significant and Vigitec's
  operations were consolidated effective January 1, 2000.

  Significant intercompany transactions have been eliminated in consolidation.

  Continuing Business Operations and Segments
  -------------------------------------------

  During 2001, 80 percent of Allied's revenues was attributable to the
  development and production of ammunitions and weapons systems in Belgium with
  sales to customers in Asia, the Middle East, the United States and Europe, and
  20 percent of the revenue is attributable to developing, manufacturing,
  distributing and servicing industrial security products in Belgium with
  industrial customers throughout Europe. Allied's operating subsidiaries are
  located in Belgium. On December 31, 2001, Allied purchased a domestic company,
  NS Microwave. NS Microwave is a manufacturer and distributor of specialty
  surveillance and video broadcast equipment and products. NS Microwave's
  operations will be consolidated effective January 1, 2002. A description of
  the current business segments and operations of Allied follows.

    Corporate
    ---------

    Allied provides management services to its wholly-owned subsidiaries. Allied
    has no direct domestic operating assets or business activity. Limited, which
    was formerly engaged in the marketing of military hardware, is inactive. ARC
    Europe has no direct operating assets or business activity and serves as a
    Belgian holding company.

    Product Sales
    -------------

    Mecar is primarily engaged in the development and production of ammunitions
    and weapons systems. Mecar derives substantially all of its revenue,
    primarily on fixed price contracts, from direct and indirect sales to
    foreign governments, including via U.S. Government sponsored foreign
    military sales contracts and subcontracts.

                                       F-10

<PAGE>

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    Security Systems and Services
    -----------------------------

    The VSK Group develops, manufactures, distributes and services an integrated
    line of industrial security products, including devices such as building
    access control, intrusion detection, fire detection and alarm systems.

  Foreign Currency Translation
  ----------------------------

  The assets and liabilities of ARC Europe, Mecar, the VSK Group and Limited are
  translated into U.S. dollars at year-end exchange rates. Resulting translation
  gains and losses are accumulated in a separate component of stockholders'
  equity. Income and expense items are converted into U.S. dollars at average
  rates of exchange prevailing during the year. Foreign currency transaction
  gains and losses are credited or charged directly to operations.

  Revenue and Cost Recognition
  ----------------------------

  Revenues under fixed price contracts are recognized on the
  percentage-of-completion method measured by costs incurred to total estimated
  costs 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.

  Costs and accrued profits on uncompleted direct and indirect fixed price
  contracts with foreign governments and direct and indirect U.S. Government
  foreign military sales contracts, which are billable upon completion, are
  carried as costs and accrued earnings on uncompleted contracts.

  Revenues from the sale of fire and security systems are recognized when the
  installation is completed, less a provision for anticipated service costs.
  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.

  In the normal course of the Company's business, it does not bill shipping and
  handling costs to customers. Shipping and handling costs are included in cost
  of sales.

  Use of Estimates
  ----------------

  In preparing financial statements in conformity with accounting principles
  generally accepted in the United States of America, management is required to
  make estimates and assumptions that affect the reported amounts of assets and
  liabilities and the disclosure of contingent assets and liabilities at the
  date of the financial statements and revenue and expenses during the reporting
  period. Actual results could differ from those estimates.

  Inventories
  -----------

  Inventories, which consist primarily of raw materials, are stated principally
  at the lower of cost or market. Cost is determined principally by the
  first-in, first-out method.

                                       F-11

<PAGE>

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

  Property, Plant and Equipment
  -----------------------------

  Depreciation is provided for in amounts sufficient to relate the cost of
  depreciable assets to operations over their estimated service lives, primarily
  on a straight-line basis. Accelerated depreciation methods are used for tax
  purposes on certain assets. The estimated service lives used in determining
  depreciation are as follows:

                  Buildings                            20 - 30 years
                  Machinery and equipment               3 - 10 years

  Maintenance and repairs are charged to expense as incurred; additions and
  betterments are capitalized. Upon retirement or sale, the cost and related
  accumulated depreciation of the disposed assets are removed and any resulting
  gain or loss is credited or charged to operations.

  Intangibles
  -----------

  Intangibles represent goodwill and intangibles acquired in connection with
  businesses acquired and have been amortized to operations on a straight-line
  basis over twenty years. The recoverability of carrying values of intangible
  assets is evaluated on a recurring basis. The primary indicators are current
  and forecasted profitability of the related business, cash flow and management
  estimates. There have been no adjustments to the carrying values of intangible
  assets resulting from these evaluations. Goodwill and intangibles acquired
  subsequent to June 30, 2001 have not been amortized.

  Derivative Financial Instruments
  --------------------------------

  Derivative financial instruments are utilized by the Company to hedge certain
  sales and purchase contracts. The Company does not hold or issue derivative
  financial instruments for trading or speculative purposes.

  The Company recognizes the fair value of hedge contracts to which it is a
  party on its balance sheet. Currency gains and losses on contracts designated
  as hedges of foreign currency commitments are deferred and recognized when the
  measurement of the related foreign currency transactions are recognized as a
  component of revenue or cost of sales in accordance with criteria established
  by SFAS No. 133 and SFAS No. 138.

  Stock-Based Compensation
  ------------------------

  Compensation costs for stock options is measured as the excess, if any, of the
  quoted market price of the Company's stock at the date of grant over the
  amount an employee must pay to acquire the stock. Compensation cost for stock
  awards is recorded based on the quoted market value of the Company's stock at
  the time of grant.

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

  Costs incurred in research and development activities are charged to
  operations as incurred.

  Warranties
  ----------

  The Company grants warranties on certain ammunition products for periods
  varying from one to five years. Provision is made for estimated losses arising
  from warranty claims as incurred. Provision is made for estimated warranty
  costs on the sale of security systems at the time of the sale.

                                       F-12

<PAGE>

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

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

  Income taxes are provided based on the liability method for financial
  reporting purposes. Deferred and prepaid taxes are provided for on temporary
  differences in the basis of assets and liabilities which are recognized in
  different periods for financial and tax reporting purposes.

  Earnings Per Common Share
  -------------------------

  Basic earnings (loss) per share amounts have been computed based on the
  weighted average number of common shares outstanding. Diluted earnings (loss)
  per share reflects the increase in weighted average common shares outstanding
  that would result from the assumed exercise of outstanding options, calculated
  using the treasury stock method, unless they are anti-dilutive.

  Statement of Cash Flows
  -----------------------

  For purposes of the Statement of Cash Flows, the Company considers all highly
  liquid debt instruments purchased with a maturity of three months or less to
  be cash equivalents.

  Reclassifications
  -----------------

  Certain items in the 2000 and 1999 financial statements have been reclassified
  to conform to the current presentation.

  Newly Issued Accounting Standards
  ---------------------------------

  On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
  Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
  and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
  business combinations completed after June 30, 2001. SFAS 142 is effective for
  fiscal years beginning after December 15, 2001; however, certain provisions of
  this Statement apply to goodwill and other intangible assets acquired between
  July 1, 2001 and the effective date of SFAS 142. Major provisions of these
  Statements and their effective dates for the Company are:

  .    All business combinations initiated after June 30, 2001 are required to
       use the purchase method of accounting. The pooling of interest method of
       accounting is prohibited except for transactions initiated before July 1,
       2001.

  .    Intangible assets acquired in a business combination are required to be
       recorded separately from goodwill if they arise from contractual or other
       legal rights or are separable from the acquired entity and can be sold,
       transferred, licensed, rented or exchanged, either individually or as
       part of a related contract, asset or liability.

  .    Goodwill, as well as intangible assets with indefinite lives, acquired
       after June 30, 2001, will not be amortized. Effective January 1, 2002,
       all previously recognized goodwill and intangible assets with indefinite
       lives will no longer be subject to amortization.

  .    All acquired goodwill must be assigned to reporting units for purposes of
       impairment testing and segment reporting.

                                       F-13

<PAGE>

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

  Newly Issued Accounting Standards - continued
  ---------------------------------

  .    Effective January 1, 2002, goodwill and intangible assets with indefinite
       lives will be tested for impairment annually and whenever there is an
       impairment indicator.

  In July, 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
  Obligations. This Statement addresses financial accounting and reporting for
  obligations associated with the retirement of tangible long-lived assets and
  the associated asset retirement costs. This Statement applies to all entities.
  It applies to legal obligations associated with the retirement of long-lived
  assets that result from the acquisition, construction, development and (or)
  the normal operation of a long-lived asset, except for certain obligations of
  lessees. This Statement is effective for financial statements issued for
  fiscal years beginning after June 15, 2002.

  In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
  Disposal of Long-Lived Assets. This statement addresses financial accounting
  and reporting for the impairment or disposal of long-lived assets and
  supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
  Assets and for Long-Lived Assets to Be Disposed Of. The provisions of the
  statement are effective for financial statements issued for fiscal years
  beginning after December 15, 2001.

  The Company's management has not completed its assessment of the impact of
  these statements, however, it does expect that a substantial portion of its
  intangible assets will no longer be amortized.

NOTE B - ACQUISITION

  On December 31, 2001, the Company acquired all of the common stock of
  News/Sports Microwave Rental, Inc. (NS Microwave) in a transaction accounted
  for as a purchase. This acquisition was undertaken to provide Allied with a
  strong position in a high-growth segment of the North America electronic
  security market.

  The assets acquired are summarized below:

         Current assets                           $2,919,000
         Property and equipment                      194,000
         Intangibles                               1,065,000
         Goodwill                                  3,211,000
                                                  ----------

             Assets acquired                      $7,389,000
                                                  ==========

  The purchase price included cash and expenses of approximately $556,000,
  shares of Allied Research Corporation common stock valued at $2,447,000, based
  on the market price of the shares, a note for $70,000 and the assumption of
  $4,316,000 of liabilities.

  The allocation of the purchase price will be finalized upon receipt of the
  final independent appraisal report. It is anticipated that approximately
  $760,000 of the purchase price is allocable to intangible assets, including
  patents, that will be amortized over a weighted average period of 7.7 years.
  The residual values of intangibles subject to amortization are not expected to
  be significant at this time. Intangibles not subject to amortization,
  including goodwill, are approximately $3,516,000.

                                       F-14

<PAGE>

NOTE B - ACQUISITION - Continued

  Goodwill arising from this transaction is related to security systems and
  service segment and is not deductible for tax purposes. The purchase price is
  subject to adjustment in the event adjustments are required or certain
  contractual provisions are breached.

  NS Microwave's 2001 revenues were approximately $6.2 million and it operated
  at a small loss, accordingly, pro forma results of operations have not been
  presented since they are not material to the Company's current operating
  results.

NOTE C - DISCONTINUED OPERATION

  On March 6, 2000, the Company sold the stock of BRI, the engineering and
  technical segment of its business. Summarized data relating to the
  discontinued operation of the engineering and technical segment for the years
  ended December 31, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                                                    2000             1999
                                                                                 ----------      -----------
                <S>                                                              <C>             <C>
                Results of operations
                   Revenue                                                       $1,492,501      $11,237,247
                   Income (loss) before taxes                                        72,494       (1,155,744)
                   Income taxes (benefit)                                            18,394         (409,330)
                   Net income (loss)                                                 54,100         (746,414)

                Net gain (loss) from discontinued operations
                    Gain on sale, net of taxes                                   $  462,893      $         -
                    Net income (loss)                                                54,100         (746,414)
                                                                                 ----------      -----------

                                                                                 $  516,993      $  (746,414)
                                                                                 ==========      ===========
</TABLE>

NOTE D - RESTRICTED CASH

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

  Restricted cash of $6,211,977 and $3,010,253 included in current assets at
  December 31, 2001 and 2000, respectively, was restricted or pledged as
  collateral for these agreements and other obligations.

                                      F-15

<PAGE>

NOTE E - ACCOUNTS AND NOTE RECEIVABLE

  Accounts and note receivable at December 31 are comprised as follows:

<TABLE>
<CAPTION>
                                                                                  2001            2000
                                                                                --------        ---------
      <S>                                                                       <C>             <C>
      Direct and indirect receivables from foreign governments                  $10,198,834     $ 9,409,943
      Commercial and other receivables, less allowance for doubtful
         receivables of $106,601 in 2001 and $153,840 in 2000                     9,457,047       9,251,162
                                                                                -----------     ----------

                                                                                $19,655,881     $18,661,105
                                                                                ===========     ===========
</TABLE>

  Included in commercial and other receivables at December 31, 2000 was a
  $900,000 note receivable bearing interest at 6.5% arising from the sale of
  BRI. The note was paid in full at maturity in September 2001.

NOTE F - PREPAID EXPENSES

  Advance payments on contracts in process in 2001 and 2000 of approximately
  $1,000,440 and $1,061,185, respectively, were included in prepaid expenses.

NOTE G - CREDIT FACILITY

  The Company is obligated under various credit agreements (the Agreements) with
  its foreign banks and its foreign banking syndicate that provide credit
  facilities primarily for letters of credit, bank guarantees, performance bonds
  and similar instruments required for specific sales contracts. The Agreements
  provide for certain bank charges and fees as the line is used, plus fees of 2%
  of guarantees issued and annual fees of 1.25% base on letters of credit and
  guarantees outstanding. These fees are charged to interest expense. As of
  December 31, 2001, guarantees and performance bonds of approximately $18
  million remain outstanding.

  Advances under the Agreements are secured by restricted cash of approximately
  $6.2 million at December 31, 2001. Amounts outstanding are also collateralized
  by the letters of credit received under the contracts financed, and a pledge
  of approximately $24 million on Mecar's assets. Certain Agreements provide for
  restrictions on payments or transfers to Allied and Limited for management
  fees, intercompany loans, loan payments, the maintenance of certain net worth
  levels and other provisions.

  Mecar also had a line-of-credit for working capital of approximately $9.2
  million at December 31, 2000, that was paid in full at maturity in February
  2001.

NOTE H - ACCRUED LOSSES ON CONTRACTS

  The Company provided for accrued losses of $382,385 at December 31, 2001 in
  connection with the completion of certain contracts in progress. These
  contracts are scheduled to be completed in 2002. Accrued contract losses at
  December 2000 were $712,076. These amounts are included in accrued expenses.

                                      F-16

<PAGE>

NOTE I - LONG-TERM DEBT

 Long-term obligations as of December 31 consist of the following:

                                                         2001            2000
                                                     -----------     -----------

          Mortgage loan agreements                   $ 1,547,279     $ 2,098,458
          Other                                        2,817,684       2,510,134
                                                     -----------     -----------
                                                       4,364,963       4,608,592
          Less current maturities                      1,255,090       1,079,053
                                                     -----------     -----------

                                                     $ 3,109,873     $ 3,529,539
                                                     ===========     ===========
 Mortgage Loan Agreements
 ------------------------

 The Company entered into a mortgage loan agreement in 1986, which was amended
 in 1994, to partially finance the construction of Mecar's manufacturing and
 administration facilities in Belgium, that had a balance due of $1,251,912 at
 December 31, 2001. The loan matures in January, 2004. As amended, the loan is
 payable in annual principal installments of $550,000. The loan bears interest
 at rates ranging from 5.60% to 6.95% per year, is collateralized by a mortgage
 on the Company's real estate and includes a prepayment penalty. The Company is
 also obligated on several mortgages on the VSK Group's buildings which have a
 total balance due of $295,367 at December 31, 2001. The mortgages mature at
 various dates through 2005 in annual installments of approximately $39,000,
 plus interest at rates ranging from 3.9% to 4.5% per year.

 Other
 -----

 The Company is also obligated on various vehicle, equipment, capital lease
 obligations and other loans. The notes and leases are generally secured by the
 assets acquired, bear interest at rates ranging from 3.50% to 8.00% and mature
 at various dates through 2006.

 Scheduled annual maturities of long-term obligations as of December 31, 2001
 are as follows:

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

                           2002              $ 1,255,090
                           2003                2,344,170
                           2004                  583,416
                           2005                   41,437
                           2006                   42,198

NOTE J - BENEFIT PLANS

 The Company instituted a simplified employee pension plan in 2000 for its
 domestic staff. Contributions to the plan in 2001 and 2000 were approximately
 $104,000 and $78,000, respectively.

 In June 1992, the Board of Directors adopted the Allied Research Corporate
 Outside Directors Retirement Plan. Future benefits under this plan were
 terminated during 2000. The net present value of benefits payable to currently
 eligible directors has been previously accrued and reflected as a charge to
 earnings.

 Under the terms of labor agreements at its Belgian subsidiaries, the Company
 contributes to certain governmental and labor organization employee benefit and
 retirement programs.

                                      F-17

<PAGE>

NOTE K - CONTINGENCIES AND COMMITMENTS

 U.S. Government contracts and subcontracts are by their terms subject to
 termination by the Government or the prime contractor either for convenience or
 for default.

 Mecar recognizes revenues under fixed price contracts using the percentage of
 completion method. Estimates of total costs at completion are used to determine
 the amount of revenue earned. The actual costs on these contracts may differ
 from the Company's estimate at completion.

 U.S. Government sponsored foreign military sales contracts are subject to U.S.
 Government review. It is not anticipated that adjustments, if any, with respect
 to determination of costs under these direct contracts or subcontracts will
 have a material effect on the Company's consolidated results of operations or
 financial position.

 The Company enters into foreign exchange contracts in the normal course of
 business primarily to hedge certain sales and purchase contracts. These
 contracts typically mature within twelve months, and forward exchange gains and
 losses are recognized upon final maturity or at the time the related foreign
 currency transaction is recognized. Contracts with a notional amount of $32
 million were outstanding as of December 31, 2001 ($37.8 million at December 31,
 2000).

 In connection with its commitment to provide management services to its
 subsidiaries, the Company has entered into consulting and employment agreements
 with certain management personnel for these subsidiaries. The Company has also
 entered into employment agreements and consulting agreements with certain
 domestic management personnel. Certain of these agreements provide for
 severance payments in the events of termination under certain conditions.

 In connection with the sale of BRI, the Company has agreed to indemnify the
 purchaser of BRI's stock in the event the purchaser suffers losses as a result
 of breaches of representations and warranties made by the Company in the sales
 agreement. The agreement to indemnify is subject to various conditions and
 limitations.

 The Company leases domestic office space and equipment under operating leases
 which expire at various dates through 2007. Certain leases also include
 escalation provisions for taxes and operating costs. The following is a
 schedule by year of base rentals due on operating leases that have initial or
 remaining lease terms in excess of one year as of December 31, 2001:

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

                    2002                        $123,611
                    2003                         120,000
                    2004                         120,000
                    2005                         120,000
                    2006                         120,000
                    Thereafter                   120,000

 Total rental expense charged to operations approximated $136,000, $137,000 and
 $122,000, for the years ended December 31, 2001, 2000 and 1999, respectively.

 The Company's domestic operations do not provide post employment benefits to
 its employees. Under Belgian labor provisions, the Company may be obligated for
 future severance costs for its employees. The Company has provided for known
 severance costs related to its workforce reductions. After giving effect to
 prior workforce reductions, current workloads, expected levels of future
 operations, severance policies and future severance costs, post employment
 benefits are not expected to be material to the Company's financial position.

                                      F-18

<PAGE>

NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS

  At December 31, 2001 and 2000, the Company's financial instruments include
  cash, cash equivalents, receivables, accounts payable, borrowings, forward
  exchange contracts, guarantees and performance bonds. The face value of cash,
  cash equivalents, receivables and payables approximate their carrying values
  because of the short-term nature of the instruments. The estimated fair value
  of the other financial instruments and off-balance-sheet credit obligations
  are as follows:

<TABLE>
<CAPTION>
                                                                    2001                           2000
                                                         ---------------------------      --------------------------
                                                          Carrying       Estimated         Carrying      Estimated
                                                            Amount       Fair Value          Amount      Fair Value
                                                         ----------     ------------      ----------    ------------
    <S>                                                  <C>            <C>               <C>           <C>
    Notes payable and long-term debt, including
      current maturities                                 $6,843,162      $ 6,843,162      $8,307,692     $ 8,307,692
    Foreign exchange contracts                              945,786          945,786               -      37,800,000
    Off-balance-sheet instruments
      Guarantees and performance bonds                            -       18,000,000               -      23,711,000
      Standby letters of credit                                   -          380,000               -         242,000
</TABLE>

  The following methods and assumptions were used to estimate the fair value of
  each class of financial instruments for which it is practicable to estimate
  that value.

  .   The fair value of notes payable and long-term debt 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 are based on quoted market
      prices for the same or similar instruments in 2001; the national covenant
      of the contracts in 2000 were used prior to the implementation of SFAS
      133.

  .   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 M - DERIVATIVE FINANCIAL INSTRUMENTS

  In the first quarter of the current calendar year, the Company adopted
  Statement of Financial Accounting Standards No. 133, "Accounting for
  Derivative Instruments and Hedging Activities" (SFAS 133), which establishes
  accounting and reporting standards for derivative instruments, including
  certain derivative instruments embedded in other contracts, and for hedging
  activities. SFAS 133 requires that an entity recognize all derivatives as
  either assets or liabilities in the statement of financial position and
  measure those instruments at fair value. The accounting for the changes in the
  fair value of the derivative depends on the intended use of the derivative and
  the resulting designation.

  The Company designates its derivatives based upon the criteria established by
  SFAS 133. For a derivative designated as a fair value hedge, the gain or loss
  is recognized in earnings in the period of change together with the offsetting
  loss or gain on the risk being hedged. For a derivative designated as a cash
  flow hedge, the effective portion of the derivative's gain or loss is
  initially reported as a component of accumulated other comprehensive income
  (loss) and is subsequently reclassified to earnings when the hedge exposure
  effects earnings. The ineffective portion of the hedge is reported in earnings
  immediately.

                                      F-19

<PAGE>

NOTE M - DERIVATIVE FINANCIAL INSTRUMENTS - Continued

  The Company uses derivatives to manage exposures to foreign currency exchange
  rate risks. The objective is to reduce the volatility of earnings and cash
  flows associated with changes in foreign currency exchange rates.

  The Company uses foreign currency future contracts to minimize the foreign
  currency exposures that arise from sales contracts with certain foreign
  customers and certain costs associated with these contracts. Under the terms
  of these sales contracts, the selling price and certain costs are payable in
  U.S. dollars rather than the Euro, which is Mecar's functional currency. These
  futures contracts are designated as fair value hedges since they are designed
  to lock in the net Euros that will be realized when the amounts due under the
  sales agreement are received. As a matter of policy, the Company does not
  enter into speculative hedge contracts or use other derivative financial
  instruments.

  As of December 31, 2001 futures contracts designated as fair value hedges with
  a $32 million notional amount were outstanding and the fair value of these
  contracts was $945,786. The Company estimates the fair value of outstanding
  hedge contracts based on quotes obtained from the counterparties to the
  derivative contracts. The Company recognizes the fair value of hedge contracts
  that expire in less than one year as current assets or liabilities. Those that
  expire in more than one year are recognized as long-term assets or
  liabilities.

  The adoption of SFAS 133 did not have a material impact on the Company's
  operating results. Gains and losses from settlements of derivative contracts
  are reported as a component of other income. Net changes in the fair value of
  derivative contracts prior to settlement are also reported as a component of
  other income. There were no net gains or losses realized during the year ended
  December 31, 2001 from hedge ineffectiveness, from firm commitments that no
  longer qualifies as fair value hedges, nor were any amounts excluded from the
  assessment of hedge effectiveness.

  The Company's foreign exchange forward and option contracts expose the Company
  to credit risks to the extent that the counter parties may be unable to meet
  the terms of the agreement. The company minimizes such risk by using major
  financial institutions as its counterparties. Management does not expect any
  material loss as result of default by counterparties.

NOTE N - CAPITAL STOCK

  During 1998, the Board of Directors authorized the repurchase of up to 200,000
  shares of the Company's common stock. During 2000 and 1999, 75,688 and 22,600
  shares were reacquired and retired, respectively. No shares were reacquired in
  2001.

  The Company may grant stock options, appreciation rights, incentive options,
  performance shares and other awards to key executives, management, directors
  and employees under various plans at prices equal to or in excess of the
  market price at the date of the grant. The options for common shares generally
  are exercisable over a five to ten year period and expire ten years from the
  date of grant. At December 31, 2001, options to acquire 286,000 shares of the
  Company's common stock were outstanding and 478,492 shares were reserved for
  future issuance under the following plans:

                                      F-20

<PAGE>

NOTE N - CAPITAL STOCK - Continued

  2001 Equity Incentive Plan
  --------------------------

  During 2001, the Board of Directors and shareholders approved and reserved
  240,000 shares of common stock for awards to key employees of the Company and
  its subsidiaries. The plan authorized the Compensation Committee of the Board
  of Directors to grant stock options, stock appreciation rights, restricted
  stock, performance shares and cash awards. Each type of grant places certain
  requirements and restrictions upon the Company and grantee. In 2001, options
  to acquire 135,496 shares were granted and 1,800 shares were also awarded
  under the plan. The plan expires in December 2010.

  1997 Incentive Stock Plan
  -------------------------

  During 1997, the Board of Directors and shareholders approved and reserved
  225,000 shares of common stock for awards to key employees of the Company and
  its subsidiaries in the form of stock options and stock awards. The Plan is
  administered by the Compensation Committee of the Board of Directors, and
  employees of the Company and its subsidiaries who are deemed to be key
  employees by the Committee are eligible for awards under the Plan. At December
  31, 2001, a total of 223,600 options and shares had been issued under the
  plan, including 98,104 and 10,000 shares in 2001 and 2000, respectively.

  1992 Allied Research Corporation Employee Stock Purchase Plan
  -------------------------------------------------------------

  During 1993, the Board of Directors and shareholders approved and reserved
  525,000 shares for the plan. The plan is voluntary and substantially all
  full-time employees are eligible to participate through payroll deductions.
  The purchase price of each share is equal to 85% of the closing price of the
  common stock at the end of each calendar quarter. The Plan is subject to
  certain restrictions and the Board may amend or terminate it at any time.
  During 2001, 2000 and 1999 - 38,538, 16,930 and 31,548 shares, respectively
  were issued under the Plan and $48,410, $21,822 and $29,570 was charged to
  operations, respectively. A total of 160,012 shares have been issued under the
  Plan.

  1988 Incentive Compensation Plan
  --------------------------------

  The Company reserved 410,900 shares of common stock for key employees of the
  Company and its subsidiaries. The plan permitted grants through 1998,
  authorized the Board to grant incentive stock options, non-statutory stock
  options, stock appreciation rights, stock awards, restricted stock,
  performance stock rights and cash awards. Each type of grant places certain
  requirements and restrictions upon the Company and grantee. As of December 31,
  2001, all options granted have been exercised or expired.

  1984 Incentive Stock Option Plan
  --------------------------------

  The Company reserved 315,000 shares of common stock for key employees of the
  Company and its subsidiaries. The plan permitted option grants through March
  31, 1994. In March 1994, the Company granted options to two officers and
  sixteen employees to purchase 217,500 shares at $8.25 per share. These options
  expire in 2004. At December 31, 2001, options for 20,500 shares remain
  outstanding.

                                      F-21

<PAGE>

NOTE N - CAPITAL STOCK - Continued

  1993 Allied Research Corporation Outside Directors Compensation Plan
  --------------------------------------------------------------------

  During 1993, the Board of Directors and shareholders approved a plan whereby
  each director is entitled to receive a cash payment of $1,000 per month, and
  an annual grant of 1,000 shares of the Company's common stock while serving as
  a board member. The Company has reserved 52,400 shares of common stock for the
  plan which is subject to certain restrictions. The plan will terminate upon
  the earlier of issuance of all reserved common shares or December 31, 2003. In
  2001, 2000 and 1999, the Company granted 4,000, 7,000 and 4,000 shares of
  common stock subject to the plan and charged $32,360, $52,500 and $24,500,
  respectively, to operations. To date a total of 43,000 shares were issued
  under the Plan.

  1991 Outside Directors Stock Option Plan
  ----------------------------------------

  During 1991, the Board of Directors and shareholders approved and reserved
  208,000 shares of common stock for the plan. Through 1996, the Company granted
  options to purchase a total of 115,000 shares all of which have been
  exercised. During 2001 and 2000, the Company granted options to purchase a
  total of 26,000 shares and 39,000 shares, respectively, at $8.00 and $7.88 per
  share. This plan expired in 2001, therefore no further grants can be made. At
  December 31, 2001, options for 45,500 shares remained outstanding.

  Other
  -----

  Stock grants for 52,000 and 48,746 shares of the Company's common stock were
  made to various employees during 2001 and 1999, respectively. These shares
  were issued outside of any existing plan and their value of $416,000 and
  $487,460, respectively, was charged to operations.

  Preferred Share Purchase Rights Agreement
  -----------------------------------------

  The Board of Directors has adopted a new Preferred Stock Purchase Rights
  Agreement in 2001. The Agreement provides each stockholder of record a
  dividend distribution of one "right" for each outstanding share of common
  stock. Rights become exercisable the earlier of ten days following: (1) a
  public announcement that an acquiring person has purchased or has the right to
  acquire 15% or more of the Company's common stock, or (2) the commencement of
  a tender offer which would result in an offeror beneficially owning 15% or
  more of the outstanding common stock. All rights held by an acquiring person
  or offeror expire on the announced acquisition date and all rights expire at
  the close of business on May 31, 2011.

  Each right under the Preferred Share Purchase Rights Agreement entitles a
  stockholder to acquire at a purchase price of $50, one-hundredth of a share of
  preferred stock which carries voting and dividend rights similar to one share
  of common stock. Alternatively, a right holder may elect to purchase for $50
  an equivalent number of common shares (or in certain circumstances, cash,
  property or other securities of the Company) at a price per share equal to
  one-half of the average market price for a specified period. In lieu of the
  purchase price, a right holder may elect to acquire one-half of the common
  shares available under the second option. The purchase price and the preferred
  share fractional amount are subject to adjustment for certain events as
  described in the Agreement.

  Rights also entitle the holder to receive a specified number of shares of an
  acquiring company's common stock in the event that the Company is not the
  surviving corporation in a merger or if 50% or more of the Company's assets
  are sold or transferred.

  At the discretion of a majority of the Board and within a specified time
  period, the Company may redeem all of the rights at a price of $.01 per right.
  The Board may also amend any provision of the Agreement prior to exercise of
  the rights.

                                      F-22

<PAGE>

NOTE N - CAPITAL STOCK - Continued

  The following table summarizes option activity:

<TABLE>
<CAPTION>
                                                          2001                    2000                      1999
                                                 ----------------------   ---------------------     ---------------------
                                                             Weighted                 Weighted                  Weighted
                                                             Average                  Average                   Average
                                                             Exercise                 Exercise                  Exercise
                                                  Shares       Price       Shares       Price        Shares       Price
                                                 --------   -----------   --------   -----------    --------   ----------
    <S>                                          <C>        <C>           <C>        <C>            <C>        <C>
    Options outstanding at beginning of year       62,000    $  7.83        50,750     $  7.72       127,350     $  7.49
    Options granted                               246,000       8.63        39,000        7.88             -           -
    Options exercised                             (22,000)      7.45       (17,500)       7.35        (4,200)       3.75
    Options forfeited                                   -          -             -           -       (56,000)       8.25
    Options expired                                     -          -       (10,250)       8.25       (16,400)       5.13
                                                 --------   -----------   --------   -----------    --------   ----------

    Options outstanding at end of year            286,000    $  8.54        62,000     $  7.83       5 0,750     $  7.72
                                                 ========   ===========   ========   ===========    ========   ==========

    Option price range at end of year            $   7.88                 $   3.75                  $   3.75
                                                      to                       to                        to
                                                 $   9.01                 $   8.25                  $   8.25

    Option price range for exercised shares      $   3.75                 $   3.75                  $   3.75
                                                      to                       to
                                                 $   8.00                 $   8.25

    Options exercisable at end of year            102,000                   62,000                    50,750

    Weighted-average fair value of options,
        granted during the year                  $   3.03                 $   3.57                         -
</TABLE>

  The following table summarizes options outstanding at December 31, 2001:

<TABLE>
<CAPTION>
                                                                                      Weighted Average
          Number                                           Weighted Average              Remaining
        Outstanding              Exercise Prices            Exercise Prices           Contractual Life
        -----------              ---------------            ---------------           ----------------
        <S>                      <C>                       <C>                        <C>
           45,000                 $7.88 to $8.00                 $7.93                      3.89
          200,500                 $8.25 to $8.63                 $8.29                      6.31
           40,000                 $9.01                          $9.01                      4.58
</TABLE>

  The fair value of each option grant is estimated on the date of grant using
  the Black-Scholes options pricing model. The weighted average assumptions used
  in the model were as follows.

                                                    2001       2000
                                                   ------     ------
            Risk free interest rate                 4.54%      6.46%
            Expected volatility rate               40.00%     60.00%
            Expected lives - years                     3          3
            Divided yield                              -          -

  There were no options granted in 1999.

                                      F-23

<PAGE>

NOTE N - CAPITAL STOCK - Continued

  The following table presents the pro forma decrease in income or increase in
  loss that would have been recorded had the fair values of options granted been
  recognized as compensation expense on a straight-line basis over the vesting
  period of the grant:

                                              2001         2000         1999
                                            --------     --------     --------


          Pro forma
             Net earnings decrease          $142,062     $85,459      $46,503
             Earnings per share decrease
               Basic                             .03         .02          .01
               Diluted                           .03         .02          .01

  The pro forma amounts may not be representative of future amounts since the
  estimated fair value of stock options is amortized to expense over the vesting
  period, and additional options may be granted in future periods.

NOTE O - MAJOR CUSTOMERS

  The Company derives the majority of its revenues directly or indirectly from
  foreign governments (some of which are through the U.S. government via the
  Foreign Military Sales program), primarily on fixed price contracts. Direct
  and indirect sales to two agencies of The Kingdom of Saudi Arabia and Belgium
  accounted for approximately 47%, 30% and 1% of revenue in 2001, 54%, 23% and
  4% of revenue in 2000 and 26%, 27% and 6% of revenue in 1999.

NOTE P - CONCENTRATIONS OF CREDIT RISK

  Financial instruments and related items which potentially subject the Company
  to concentrations of credit risk consist principally of temporary cash
  investments, trade receivables and costs and accrued earnings on uncompleted
  contracts. The Company places its temporary cash investments with high credit
  quality financial institutions. Credit risk with respect to trade receivables
  and costs and accrued earnings on uncompleted contracts are concentrated due
  to the nature of the Company's customer base. The Company generally receives
  guarantees and letters of credit from its foreign customers and performs
  ongoing credit evaluations of its other customers' financial condition. The
  Company's provision for doubtful accounts for 2001 and 2000 was not
  significant.

  The majority of ammunition sales are to or for the benefit of two agencies of
  The Kingdom of Saudi Arabia and other foreign governments. Mecar's ammunition
  sales in any given period and its backlog at any particular time may be
  significantly influenced by one or a few large orders. In addition, the
  production period required to fill most orders ranges from several months to a
  year. Accordingly, Mecar's business is dependent upon its ability to obtain
  such large orders and the required financing for these orders. As of December
  31, 2001 and 2000, backlog orders, believed to be firm, from continuing
  operations, approximated $56.0 and $63.5 million, respectively.

  Amounts in foreign banks at December 31, 2001 and 2000 were approximately
  $14.4 million and $9.1 million, respectively. Changes in the value of the U.S.
  dollar and other currencies affect the Company's financial position and
  results of operations since the Company has assets and operations in Belgium
  and sells its products on a worldwide basis.

                                       F-24

<PAGE>

NOTE Q - OTHER - NET

  Other income and (expense) included in the Company's consolidated statements
  of operations is comprised as follows:

<TABLE>
<CAPTION>
                                                         2001         2000         1999
                                                      ----------   ----------   ----------
          <S>                                         <C>          <C>          <C>
          Net currency transaction (losses) gains     $(436,612)   $ (42,183)    $ 664,042
          Miscellaneous - net                           121,020      531,575       118,739
                                                      ---------    ---------    ----------

                                                      $(315,592)   $ 489,392     $ 782,781
                                                      =========    =========    ==========
</TABLE>

NOTE R - INCOME TAXES

  The Company recognizes deferred tax liabilities and assets for the expected
  future tax consequences of events that have been included in the financial
  statements or tax returns. Under this method, deferred tax liabilities and
  assets are determined based on the difference between the financial statement
  and tax basis of assets and liabilities using enacted tax rates in effect for
  the year in which the differences are expected to reverse.

  Earnings (loss) from continuing operations before income taxes is comprised as
follows:

<TABLE>
<CAPTION>
                                      2001            2000            1999
                                  ------------     -----------    ------------
          <S>                     <C>              <C>            <C>
          Domestic                $ (1,975,063)    $  (572,025)   $  (334,165)
          Foreign                   20,718,646      15,558,719     (3,423,505)
                                  ------------     -----------    -----------

                                  $ 18,743,583     $14,986,694    $(3,757,670)
                                  ============     ===========    ===========
</TABLE>

  The Company's provision for income taxes is comprised as follows:

<TABLE>
<CAPTION>
                                                              2001         2000          1999
                                                           -----------  -----------  -----------
          <S>                                              <C>          <C>          <C>
          Currently (refundable) payable
            Domestic                                        $  158,644   $  (36,379)  $   448,206
            Foreign                                          8,920,896    3,677,622     1,436,918
                                                            ----------   ----------   -----------
                                                             9,079,540    3,641,243     1,885,124
          Deferred - net                                      (702,536)   2,640,127    (2,360,927)
                                                            ----------   ----------   -----------

              Total attributable to continuing operations    8,377,004    6,281,370      (475,803)

          Taxes related to discontinued operation                            18,394      (409,330)
                                                            ----------   ----------   -----------

              Total tax provision                           $8,377,004   $6,299,764   $  (885,133)
                                                            ==========   ==========   ===========
</TABLE>

                                      F-25

<PAGE>

NOTE R - INCOME TAXES - Continued

  The Company's provision for income taxes differs from the anticipated United
  States federal statutory rate. Differences between the statutory rate and the
  Company's provision are as follows:

<TABLE>
<CAPTION>
                                                        2001         2000       1999
                                                       ------       ------     ------
<S>                                                    <C>          <C>        <C>
          Taxes at statutory rate                      34.0%        34.0%      (34.0)%
          Foreign tax rate differential                 6.8          6.3        (5.8)
          Permanent differences                         2.8            -           -
          Amortization of intangibles                    .3          1.1        13.8
          Deemed dividend                                 -            -        11.2
          Other                                          .8         (0.9)       (3.2)
                                                       ----         ----       -----

                  Income taxes                         44.7%        40.5%      (18.0)%
                                                       ====         ====       =====
</TABLE>

  In 1999, the Company recognized the tax benefits of Mecar's net operating loss
  in the fourth quarter, when it became likely that it would realize the
  benefits of such losses in future periods, as a result of new contract awards
  in the latter part of 1999. These benefits were partially offset by taxes
  related to an intercompany dividend.

  Foreign loss carryforwards of $6.6 million were utilized in 2000 for tax
  reporting purposes.

  Foreign tax credit carryforwards of approximately $374,000 were available at
  December 31, 2001, which expire at various dates through 2004.

  Deferred tax liabilities have not been recognized for basis differences
  related to investments in the Company's Belgian and United Kingdom
  subsidiaries. These differences, which consist primarily of unremitted
  earnings intended to be indefinitely reinvested, aggregated approximately $46
  million at December 31, 2001. Determination of the amount of unrecognized
  deferred tax liabilities attributable to these unremitted earnings is not
  practicable.

                                      F-26

<PAGE>

NOTE R - INCOME TAXES - Continued

  Deferred taxes at December 31, 2001 and 2000 are comprised as follows:

<TABLE>
<CAPTION>
                                                                          2001           2000
                                                                      -----------     ----------
<S>                                                                   <C>             <C>
      Current deferred tax asset
         Deferred compensation                                        $    64,032     $        -
         Net unrealized exchange loss                                     (11,540)             -
                                                                      -----------     ----------
                                                                           52,492              -
      Noncurrent deferred tax asset (liability)
         Foreign tax credit carryforwards                                 270,661        288,399
         Foreign and domestic net operating loss carryforwards            942,812              -
         Depreciation and amortization                                     21,069        207,871
         Deferred compensation                                                  -        199,588
         Deferred income                                                 (199,988)      (120,772)
         Valuation adjustments                                            171,142              -
         Other                                                                  -         (1,374)
                                                                      -----------     ----------

              Noncurrent deferred tax asset                             1,205,696        573,712

      Valuation allowance                                                (270,661)      (288,399)
                                                                      -----------     ----------

              Total deferred tax asset before valuation allowance         935,035        285,313
                                                                      -----------     ----------

              Net deferred tax asset                                  $   987,527     $  285,313
                                                                      ===========     ==========
</TABLE>

  Deferred tax components are included in the following balance sheet accounts:

<TABLE>
<CAPTION>
                                                                          2001           2000
                                                                      -----------     ----------
<S>                                                                   <C>             <C>
      Prepaid expenses and other current assets                       $    52,492     $        -
      Noncurrent deferred tax asset                                       935,035        285,313
                                                                      -----------     ----------

                                                                      $   987,527     $  285,313
                                                                      ===========     ==========
</TABLE>

                                      F-27

<PAGE>

NOTE S - EARNINGS PER COMMON SHARE

  The average outstanding shares and dilutive stock options used in the basic
  and diluted earnings per share (EPS) computations are as follows:

<TABLE>
<CAPTION>
                                       2001                           2000                               1999
                             ----------------------- ------------------------------------ -------------------------------------
                             Income from              Loss from                           Income from
                             continuing               continuing Discontinued             continuing   Discontinued
                             operations   Net income  operation   operation    Net loss   operations    operation    Net income
                             -----------  ----------  ---------- ------------  ---------- -----------  ------------  ----------
<S>                          <C>          <C>         <C>        <C>           <C>        <C>          <C>           <C>
     Basic EPS
       Weighted average
         number of common
         shares outstanding    4,905,114   4,905,114   4,844,267    4,844,267   4,844,267   4,818,857     4,818,857   4,818,857
                             ===========  ==========  ========== ============  ========== ===========  ============  ==========

     Diluted EPS
       Weighted average
         number of common
         shares outstanding    4,905,114   4,905,114   4,844,267    4,844,267   4,844,267   4,818,857     4,818,857   4,818,857
       Effect of dilutive
         securities - stock
         options                  42,147      42,147       2,132        2,132       2,132          -             -           -
                             -----------  ----------  ---------- ------------  ---------- -----------  ------------  ----------

       Adjusted weighted
         average number of
         common shares
         outstanding           4,947,260   4,947,260   4,846,399    4,846,399   4,846,399   4,818,857     4,818,857   4,818,857
                             ===========  ==========  ========== ============  ========== ===========  ============  ==========
</TABLE>

  The incremental shares from assumed conversions of options, totaling 20,500
  and 44,750 in 2000 and 1999, respectively, are not included in computing the
  diluted per share amounts, since inclusion of such shares would be
  anti-dilutive.

NOTE T - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS

  The Company currently operates in two principal segments: Product sales
  (Mecar), and Security Systems and Services (The VSK Group). Product sales
  includes the production of ammunitions, weapons systems and ordnance products
  systems integration. Security Systems and Services includes sales and services
  to industrial and institutional customers of protection, fire and access
  control systems and services and the assets of NS Microwave acquired on
  December 31, 2001. Corporate costs are allocated to each segment's operations
  monthly and are included in the measure of each segments profit or loss.
  Corporate and Other includes unallocated corporate costs and Limited's costs.

                                       F-28

<PAGE>

NOTE T - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - Continued

  The Company's foreign operations are conducted by Mecar and the VSK Group.

<TABLE>
<CAPTION>
                                              2001           2000          1999
                                          ------------  -------------  -------------
<S>                                       <C>           <C>            <C>
Revenues from external customers, from
  continuing operations
    Product Sales                         $ 77,071,290  $  87,610,826  $  38,575,416
    Security Systems and Service            19,875,973     20,131,989     20,457,191
                                          ------------  -------------  -------------

                                          $ 96,947,263  $ 107,742,815  $  59,032,607
                                          ============  =============  =============

Interest expense
  Product Sales                           $  1,574,002  $   1,411,723  $     795,630
  Security Systems and Service                  91,911        112,184        130,535
  Corporate and Other                              155            191        176,147
                                          ------------  -------------  -------------

                                          $  1,666,068  $   1,524,098  $   1,102,312
                                          ============  =============  =============

Interest income
  Product Sales                           $    321,853  $     283,745  $     471,925
  Security Systems and Service                 184,742        130,196        104,787
  Corporate and Other                          137,498        240,563        258,784
                                          ------------  -------------  -------------

                                          $    644,093  $     654,504  $     835,496
                                          ============  =============  =============

Income tax expense (benefit)
  Product Sales                           $  7,347,311  $   5,180,113  $  (2,447,046)
  Security Systems and Service               1,431,554      1,270,993      1,645,356
  Corporate and Other                         (401,861)      (169,736)       325,887
                                          ------------  -------------  -------------

                                          $  8,377,004  $   6,281,370  $    (475,803)
                                          ============  =============  =============

Depreciation and amortization
  Product Sales                           $  1,297,356  $   1,449,062  $   1,520,183
  Security Systems and Service                 912,879        732,928        611,482
  Corporate and Other                           14,609         12,664          4,549
                                          ------------  -------------  -------------

                                          $  2,224,844  $   2,194,654  $   2,136,214
                                          ============  =============  =============

Segment profit (loss), from continuing
  operations before taxes
    Product Sales                         $ 17,378,954  $  12,703,260  $  (7,743,149)
    Security Systems and Service             3,497,515      2,855,459      4,172,136
    Corporate and Other                     (2,132,886)      (572,025)      (186,657)
                                          ------------  -------------  -------------

                                          $ 18,743,583  $  14,986,694  $  (3,757,670)
                                          ============  =============  =============
</TABLE>

                                       F-29

<PAGE>

NOTE T - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - Continued

                                        2001           2000           1999
                                     -----------    -----------    -----------
Segment assets
  Product Sales                      $59,264,836    $68,125,248    $40,499,173
  Security Systems and Service        25,797,810     16,458,039     13,116,269
  Corporate and Other/(1)/             1,721,186      3,053,193      2,316,845
                                     -----------    -----------    -----------

      Total reportable segments       86,783,832     87,636,480     55,932,287

  Discontinued operations                      -              -      4,198,644
                                     -----------    -----------    -----------

                                     $86,783,832    $87,636,480    $60,130,931
                                     ===========    ===========    ===========

Expenditure for segment assets
  Product Sales                       $2,170,480    $ 2,840,971    $ 1,685,305
  Security Systems and Service           937,801      1,013,477        571,000
  Corporate and Other                          -         38,578              -
                                     -----------    -----------    -----------

                                     $ 3,108,281    $ 3,893,026    $ 2,256,305
                                     ===========    ===========    ===========

           /(1)/ Net of intersegment receivables.

The following geographic area data includes trade revenues based on customer
location and assets based on physical location.

                                             Geographic Segment Data
                                        2001           2000           1999
                                     -----------    ------------   -----------
Revenues from external customers
  Saudi Arabia                       $57,111,737    $ 45,688,844   $19,864,608
  United States/(1)/                   1,548,402      25,726,688    13,632,279
  Belgium                             15,117,143      19,771,275    18,272,388
  Canada/(1)/                         15,522,751      11,320,304             -
  France                               3,467,574       3,069,015     4,116,046
  Other foreign countries              4,179,656       2,166,689     3,147,286
                                     -----------    ------------   -----------

                                     $96,947,263    $107,742,815   $59,032,607
                                     ===========    ============   ===========

           /(1)/ Foreign military sales for the benefit of Saudi Arabia.


                                       F-30

<PAGE>

NOTE T - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - Continued

<TABLE>
<CAPTION>
                                                                Geographic Segment Data
                                                         2001             2000              1999
                                                     -----------      -----------       -----------
<S>                                                  <C>              <C>               <C>
Segment assets
  Belgium                                            $74,528,030      $84,583,288       $53,615,442
  United Kingdom                                           3,411          185,326           256,652
  United States /(1)/                                 12,252,391        2,867,866         2,060,193
                                                     -----------      -----------       -----------

      Total reportable segments                       86,783,832       87,636,480        55,932,287

  Discontinued operation                                      -                -          4,198,644
                                                     -----------      -----------       -----------

                                                     $86,783,832      $87,636,480       $60,130,931
                                                     ===========      ===========       ===========

        /(1)/ Net of intersegment receivables and investments.

<CAPTION>
                                                         2001              2000            1999
                                                     -----------      -----------       -----------
<S>                                                  <C>              <C>              <C>
Property and equipment
  Belgium                                            $12,067,047      $11,623,114       $10,234,423
  United States                                          231,657           52,206            27,293
                                                     -----------      -----------       -----------

                                                     $12,298,704      $11,675,320       $10,261,716
                                                     ===========      ===========       ===========
</TABLE>

NOTE U - QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                                 (Amounts in thousands, except per share data)
                                                            First     Second        Third      Fourth         Total
             2001                                          Quarter    Quarter      Quarter     Quarter       For Year
---------------------------------------------              -------    -------      -------     -------       --------
<S>                                                        <C>        <C>          <C>         <C>           <C>
Revenue                                                    $17,010     $25,837      $26,847     $27,253       $96,947
Gross profit                                                 4,988       7,410       10,043      11,253        33,694
Earnings from continuing operations                          1,143       2,022        3,203       3,999        10,367
Net earnings                                                 1,143       2,022        3,203       3,999        10,367

Per share data:
  Basic
    Continuing operations                                  $   .23     $   .41      $   .65     $   .82       $  2.11
                                                           =======     =======      =======     =======       =======
  Diluted
    Continuing operations                                  $   .23     $   .41      $   .65     $   .81       $  2.10
                                                           =======     =======      =======     =======       =======
</TABLE>

                                      F-31

<PAGE>

                          Allied Research Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

NOTE U - QUARTERLY FINANCIAL DATA (UNAUDITED) - Continued

<TABLE>
<CAPTION>
                                                              (Amounts in thousands, except per share data)
                                                            First     Second      Third     Fourth      Total
                2000                                       Quarter    Quarter    Quarter    Quarter    For Year
--------------------------------------                     -------    -------    -------    -------    --------
<S>                                                        <C>        <C>        <C>        <C>        <C>
Revenue                                                    $23,474    $28,548    $25,308    $30,413    $107,743
Gross profit                                                 4,517      4,920      8,128     10,203      27,768
Earnings from continuing operations                            967      1,448      3,120      3,170       8,705
Discontinued operation                                         485         32          -          -         517
Net earnings                                                 1,452      1,480      3,120      3,170       9,222

Per share data:
  Basic
    Continuing operations                                  $   .20    $   .30    $   .64    $   .66    $   1.79
    Discontinued operation                                     .10        .01          -          -         .11
                                                           -------    -------    -------    -------    --------

        Net income                                         $   .30    $   .31    $   .64    $   .66    $   1.90
                                                           =======    =======    =======    =======    ========

  Diluted
    Continuing operations                                  $   .20    $   .30    $   .64    $   .66    $   1.79
    Discontinued operation                                     .10        .01          -          -         .11
                                                           -------    -------    -------    -------    --------

        Net income                                         $   .30    $   .31    $   .64    $   .66    $   1.90
                                                           =======    =======    =======    =======    ========
</TABLE>

                                      F-32

<PAGE>






                                    SCHEDULES



<PAGE>

           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                           Allied Research Corporation
                                (Parent Company)

                                 BALANCE SHEETS

                                  December 31,

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

<TABLE>
<CAPTION>
                                                           2001            2000
                                                       ------------    ------------
<S>                                                    <C>             <C>
                        ASSETS

Cash and equivalents                                   $  2,723,143    $  1,527,064
Investment in subsidiaries                               53,922,437      41,118,859
Due from subsidiaries                                     2,310,523       3,868,732
Deferred tax asset                                          995,303         274,258
Deposits and other                                          326,517       1,185,811
                                                       ------------    ------------

        Total assets                                   $ 60,277,923    $ 47,974,724
                                                       ============    ============

          LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
   Accounts payable and accrued liabilities            $  1,509,717    $  1,254,650
   Income taxes payable                                     120,000               -
                                                       ------------    ------------

        Total liabilities                                 1,629,717       1,254,650

STOCKHOLDERS' EQUITY
   Common stock                                             512,918         481,246
   Capital in excess of par value                        17,273,168      13,689,053
   Retained earnings                                     50,672,524      40,305,945
   Accumulated other comprehensive loss                  (9,810,404)     (7,756,170)
                                                       ------------    ------------
                                                         58,648,206      46,720,074
                                                       ------------    ------------

                                                       $ 60,277,923    $ 47,974,724
                                                       ============    ============
</TABLE>

                                      F-34

<PAGE>

     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED

                           Allied Research Corporation
                                (Parent Company)

                            STATEMENTS OF OPERATIONS

                             Year ended December 31,

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

<TABLE>
<CAPTION>
                                                             2001            2000            1999
                                                         ------------    ------------    ------------
<S>                                                      <C>             <C>             <C>
Income
   Intercompany management fees                          $  2,870,627    $  2,867,912    $  2,967,432
   Dividend from subsidiary                                         -               -      10,456,160
   Other - net                                                491,258         876,091         645,250
                                                         ------------    ------------    ------------
                                                            3,361,885       3,744,003      14,068,842

Costs and expenses
   Administrative and other                                 5,336,948       3,853,136       3,946,847
                                                         ------------    ------------    ------------

        (Loss) earnings before equity in operations of
         subsidiaries                                      (1,975,063)       (109,133)     10,121,995

Equity in operations of subsidiaries, less dividends
  received of $10,456,160 in 1999                          11,779,241       9,161,714     (13,824,389)
                                                         ------------    ------------    ------------

        Earnings (loss) before income taxes                 9,804,178       9,052,581      (3,702,394)

Income taxes (benefit)                                       (562,401)       (169,736)        325,887
                                                         ------------    ------------    ------------

        NET EARNINGS (LOSS)                              $ 10,366,579    $  9,222,317    $ (4,028,281)
                                                         ============    ============    ============

        Earnings (loss) per common share
         Basic                                           $       2.11    $       1.90    $       (.84)
                                                         ============    ============    ============

         Diluted                                         $       2.10    $       1.90    $       (.84)
                                                         ============    ============    ============
</TABLE>

                                      F-35

<PAGE>

     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED

                           Allied Research Corporation
                                (Parent Company)

                            STATEMENTS OF CASH FLOWS

                             Year ended December 31,

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

<TABLE>
<CAPTION>
                                                                             2001            2000            1999
                                                                         ------------    ------------    ------------
<S>                                                                      <C>             <C>             <C>
Cash flows from (used in) operating activities
   Net earnings (loss) for the year                                      $ 10,366,579    $  9,222,317    $ (4,028,281)
   Adjustments to reconcile net (loss) earnings to net cash
      from (used in) operating activities
        Equity in operations of subsidiaries                              (11,779,241)     (9,161,714)      3,368,229
        Dividend from subsidiary                                                    -               -      10,456,160
        Depreciation and amortization                                          14,609          13,663           4,549
        Deferred income taxes                                                (721,045)       (133,357)       (122,700)
        Common stock awards and grants                                        582,310         141,250         447,202
        Changes in assets and liabilities
           Other assets                                                       844,685        (912,363)         31,923
           Due to subsidiaries                                              1,552,209      (2,595,188)     (9,548,529)
           Accounts payable and accrued liabilities                           185,577         830,621        (515,170)
           Income taxes                                                       120,000         (81,649)       (244,748)
                                                                         ------------    ------------    ------------
                                                                           (9,200,896)    (11,898,737)      3,876,916
                                                                         ------------    ------------    ------------

              Net cash provided by (used in) operating activities           1,165,683      (2,676,420)       (151,365)

Cash flows from investing activities
   Capital expenditures                                                             -         (38,578)              -
   Proceeds from sale of subsidiary                                                 -       2,822,495               -
   Acquisition                                                               (556,181)              -               -
                                                                         ------------    ------------    ------------

           Net cash (used in) provided by investing activities               (556,181)      2,783,917               -

Cash flows from financing activities
   Proceeds from employee stock purchase plan shares                          586,577         257,139         212,929
   Retirement of common stock                                                       -        (618,501)       (136,536)
                                                                         ------------    ------------    ------------

              Net cash provided by (used in) financing activities             586,577        (361,362)         76,393
                                                                         ------------    ------------    ------------

              Net increase (decrease) in cash and equivalents               1,196,079        (253,865)        (74,972)

Cash and equivalents at beginning of year                                   1,527,064       1,780,929       1,855,901
                                                                         ------------    ------------    ------------

Cash and equivalents at end of year                                      $  2,723,143    $  1,527,064    $  1,780,929
                                                                         ============    ============    ============

Supplemental Disclosures of Cash Flow Information:
-------------------------------------------------
   Cash paid during the year for:
      Income taxes                                                       $     44,367    $     70,123    $     68,154
      Interest                                                                    155             191         221,973

Supplemental of Non-Cash Investing and Financing Activities:
-----------------------------------------------------------
   Non-cash dividend from subsidiary                                     $          -    $          -    $ 10,456,160
   Non-cash consideration in connection with business acquisition
                                                                            6,833,311               -               -
</TABLE>

                                      F-36

<PAGE>

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                           Allied Research Corporation

                        Valuation and Qualifying Accounts

                  Years ended December 31, 2001, 2000 and 1999
                  --------------------------------------------

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------

                                                     Additions
                                              ------------------------
                                 Balance at   Charged to     Charged                    Balance
                                  beginning    costs and    to other                   at end of
Description                      of period      expenses    accounts   Deductions        period
-----------                     ------------  -----------  ----------  -----------     ----------

Year ended December 31, 2001
----------------------------
<S>                              <C>          <C>          <C>        <C>              <C>
  Estimated losses on
    contracts                    $   712,076  $  382,385   $       -  $   712,076/(1)/ $    382,385
                                 ===========  ==========   =========  ===========      ============

  Allowance for doubtful
    receivables                  $   153,840  $        -   $       -  $    47,239/(2)/ $    106,601
                                 ===========  ==========   =========  ===========      ============

  Valuation allowances on
    deferred tax assets          $   288,399  $        -   $       -  $    17,738      $    270,661
                                 ===========  ==========   =========  ===========      ============


Year ended December 31, 2000
----------------------------

  Estimated losses on
    contracts                    $   172,572  $  712,076   $       -  $   172,572/(1)/ $    712,076
                                 ===========  ==========   =========  ===========      ============

  Allowance for doubtful
    receivables                  $   168,682  $        -   $       -  $    14,842/(2)/ $    153,840
                                 ===========  ==========   =========  ===========      ============

  Valuation allowances on
    deferred tax assets          $ 1,379,239  $        -   $       -  $ 1,090,840/(3)/ $    288,399
                                 ===========  ==========   =========  ===========      ============


Year ended December 31, 1999
----------------------------

  Estimated losses on
    contracts                    $   175,470  $  172,572   $       -  $   175,470/(1)/ $    172,572
                                 ===========  ==========   =========  ===========      ============

  Allowance for doubtful
    receivables                  $   213,362  $        -   $       -  $    44,680/(2)/ $    168,682
                                 ===========  ==========   =========  ===========      ============

  Valuation allowances on
    deferred tax assets          $   498,365  $  880,874   $       -  $        -       $  1,379,239
                                 ===========  ==========   =========  ===-=======      ============
</TABLE>

    /(1)/ Represents amount of reserve relieved through completion of contracts.

    /(2)/ Represents write-off of receivables.

    /(3)/ Reductions in deferred tax valuation allowance requirements in 2000.

                                       F-37

<PAGE>

                                    EXHIBITS

<PAGE>

                                  EXHIBIT INDEX

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

Number            Description of Exhibit                                Page
------            ----------------------                                ----


   21             List of Subsidiaries                                  E-3


   23             Consent of Independent Certified
                     Public Accountants                                 E-4