##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 Commission file number: 1-11376
 
 THE ALLIED DEFENSE GROUP, INC.
  Delaware
(State of incorporation)
    
    04-2281015
(I.R.S. Employer Identification No.)
 8000 Towers Crescent Drive, Suite 260
Vienna, Virginia 22182
 (703) 847-5268
 
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Class
    
    Name of ExchangeCommon Stock, $0.10 Par Value
    
    American Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act: None
 o þ
 o þ
 o þ
 þ
  o þ o
 o þ




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INDEX
 PART IItem 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    8Item 2. Properties
    
    
    15Item 3. Legal Proceedings
    
    
    15Item 4 Submission of Matters to a Vote of Security Holders
    
    
    16PART IIItem 5. Market for Stock and Related Stockholder Matters And Issuer Purchases of Equity Securities
    
    
    16Item 6. Selected Financial Data
    
    
    17Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 8. Financial Statements and Supplementary Data
    
    
    34Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    34Item 9A. Controls and Procedures
    
    
    34Item 9B. Other Information
    
    
    35PART IIIItem 10. Directors and Executive Officers
    
    
    35Item 11. Executive Compensation
    
    
    37Item 12. Security Ownership of Certain Beneficial Owners, Management & Related Stockholder Matters
    
    
    40Item 13. Certain Relationships and Related Transactions
    
    
    43Item 14. Principal Accounting Fees and Service
    
    
    43PART IVItem 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    43SIGNATURES
    
    
    46




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##### 



PART I
 ITEM 1. BUSINESS
   Date
    
    Company Involved
    
    EventMay 31, 1994
    
    VSK Electronics N.V. and Télé Technique Générale S.A.
    
    AcquiredMay 9, 1995
    
    Intelligent Data Capturing Systems N.V.
    
    AcquiredDecember 11, 1999
    
    VIGITEC S.A.
    
    AcquiredDecember 31, 2001
    
    News/Sports Microwave Rental Inc.
    
    AcquiredJune 6, 2002
    
    Titan Dynamic Systems, Inc.
    
    AcquiredJuly 31, 2002
    
    SeaSpace Corporation
    
    AcquiredAugust 1, 2004
    
    CMS Security Systems
    
    AcquiredNovember 1, 2005
    
    Global Microwave Systems, Inc.
    
    Acquired
  
    
    Stimulate organic growth by expanding product offerings, increasing market share in existing markets, and
penetrating new markets
 
    
    Enhance marketing and business development efforts between each subsidiary to increase sales and backlog
 
    
    Successfully integrate new subsidiaries to ensure profitability and accretion
 
    
    Make additional strategic acquisitions that complement existing operating segments
  Description of Business
 Allied th
  Ammunition & Weapons Effects Segment
  1




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##### 



MECAR.
 Mortar Ammunition
 90mm Tank Ammunition
 Tank Ammunition nd
 Other Ammunition
 Grenades
 MECAR USA.
 Titan.
 2




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##### 



Allied Technology.
 Electronic Security Segment
  VSK Group.
 NSM.
 Global Microwave Systems.
 Other Segment .
  SeaSpace. ®
 3




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##### 



Geographic Areas and Industry Segments
  Market and Customers
      Principal Customers
  4




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Raw Materials and Suppliers
     Marketing
    Research and Development
  5




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Backlog
 
 December 31, 2005
    
    December 31, 2004Ammunition & Weapons Effects
    
    $71.1 million
    
    $51.2 millionElectronic Security
    
    $20.0 million
    
    $24.6 millionOther
    
    $2.2 million
    
    $1.5 millionTotal
    
    $93.3 million
    
    $77.3 million
  Competition
    6




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##### 



Seasonal Nature of Business
   Personnel
 
 Technical & salaried
    
    Hourly
    
    Part-time
    
    Technicalemployees
    
    workers
    
    employees
    
    consultants
    
    TotalAllied
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10MECAR
    
    
    55
    
    
    
    295
    
    
    
    3
    
    
    
    4
    
    
    
    357VSK Group
    
    
    136
    
    
    
    15
    
    
    
    2
    
    
    
    
    
    
    
    153NSM
    
    
    41
    
    
    
    14
    
    
    
    
    
    
    
    5
    
    
    
    60GMS
    
    
    17
    
    
    
    18
    
    
    
    1
    
    
    
    
    
    
    
    36SeaSpace
    
    
    30
    
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    40Titan
    
    
    12
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    24MECAR USA
    
    
    7
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    18Total
    
    
    308
    
    
    
    370
    
    
    
    6
    
    
    
    14
    
    
    
    698
  Patents and Trademarks
  Environmental Regulations
  Available Information
  
 7




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##### 



ITEM 1A. RISK FACTORS
                 8




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##### 




    
    the timing and amount of, or cancellation or rescheduling of, orders for our products;
    
    our ability to develop, introduce, ship and support new products and product
enhancements and manage product transitions, announcements and new product introductions;
    
    our ability to achieve cost reductions;
    
    our ability to achieve and maintain production volumes and quality levels for our products;
    
    the volume of products sold and the mix of distribution channels through which they are sold;
    
    the loss of any one of our major customers or a significant reduction in orders from those customers; and
    
    increased competition, particularly from larger, better capitalized competitors.
   9




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##### 




    
    budgetary constraints affecting U.S. federal government spending generally, or specific
departments or agencies in particular, and changes in fiscal policies or available funding;
    
    changes in U.S. federal government programs or requirements;
    
    the adoption of new laws or regulations;
    
    technological developments;
    
    U.S. federal governmental shutdowns and other potential delays in the government appropriations process;
    
    delays in the payment of our invoices by government payment officers due to problems
with, or upgrades to, government information systems, or for other reasons;
    
    competition and consolidation in the relevant industries; and
    
    general economic conditions.
    10




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##### 




    
    make it more difficult for us to satisfy our obligations,
    
    require us to dedicate a substantial portion of our cash flow from operations to
payments on our debt, thereby reducing the amount of cash flow available for working
capital, capital expenditures, acquisitions and other general corporate purposes,
    
    limit our flexibility in planning for, or reacting to, changes in our lines of business,
    
    place us at a competitive disadvantage compared to competitors that have lower debt
service obligations and significantly greater operating and financing flexibility,
    
    limit, along with the financial and other restrictive covenants applicable to our
indebtedness, among other things, our ability to borrow additional funds,
    
    increase our vulnerability to general adverse economic and industry conditions, and
 11




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##### 




    
    result in an event of default upon a failure to comply with financial covenants
contained in any existing credit facilities which, if not cured or waived, could have a
material adverse effect on our business, financial condition, or results of operations.
    
    Should any significant combination of these risks materialize, we could run out of cash
as early as Q1 of 2007.
              12




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13




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14




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##### 



ITEM 2. PROPERTIES
  Square FootageLocation
    
    Property
    
    Owned
    
    Leased
    
    Industry SegmentNivelles, Belgium
    
    Office/Mfg
    
    140,000
    
    
    
    Ammunition & Weapons Effects (1)Harelbeke, Belgium
    
    Office/Mfg
    
    25,600
    
    
    
    Electronic Security (2)Heppignies, Belgium
    
    Office/Mfg
    
    9,600
    
    
    
    Electronic Security (2)Brussels, Belgium
    
    Office/Mfg
    
    8,700
    
    
    
    Electronic Security (2)Hasselt, Belgium
    
    Office/Mfg
    
    7,500
    
    
    
    Electronic Security (2)Huntington Beach, CA
    
    Office/Mfg
    
    
    
    3,100
    
    Electronic Security (2)Spring Valley, CA
    
    Office/Mfg
    
    
    
    18,400
    
    Electronic Security (3)Poway, CA
    
    Office/Mfg
    
    
    
    24,400
    
    Other (4)Carlsbad, CA
    
    Office/Mfg
    
    
    
    17,100
    
    Electronic Security (5)Marshall, TX
    
    Office/Mfg
    
    12,800
    
    4,300
    
    Ammunition & Weapons Effects (6)Marshall, TX
    
    Office/Mfg
    
    
    
    28,600
    
    Ammunition & Weapons Effects (7)
 
 (1)
    
    MECARs principal factory is located approximately 25 miles south of Brussels near Nivelles,
Belgium. The factory principally consists of a manufacturing and administrative complex which
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 previously owned 600 acres
in the vicinity of the Village of Marche in the Ardennes region of Belgium, which was
previously used as a test range. MECAR ceased its use of the Ardennes firing range in 2001,
and sold the property at the end of 2005. MECAR is now utilizing other test ranges, including
a test range owned by the Belgian Army, although it is also exploring the prospects of
securing the use of a new test range. Throughout 2005, MECAR operated using one full and two
partial shifts. MECAR is currently not operating near its productive capacity.(2)
    
    VSK operates from owned facilities throughout Belgium, as well as a leased facility in
California. Such facilities are currently operating at approximately 85% of productive
capacity.(3)
    
    NSM operates from leased office, production and warehouse facilities in Spring Valley,
California. In 2004, NSM expanded to a second warehouse facility in close proximity to its
original facility providing an additional 10,000 square feet. The original facility is leased
on a month to month basis while the additional 10,000 square feet are leased through June 30,
2008.(4)
    
    SeaSpace operates from leased office, production and warehouse facilities in Poway, CA. The
lease expires in June, 2009 and the facility is currently operating at approximately 70% of
productive capacity. In 2004, SeaSpace expanded its production and warehouse facilities in
close proximity to its original facility providing an additional 10,400 square feet at year
end.(5)
    
    Global Microwave Systems operates from leased facilities in Carlsbad, CA. The office lease
expires October 2007.(6)
    
    Titan operates from a facility in Marshall, TX that is 30% dedicated to office space and 70%
to production. Titan also leases an additional 3,800 sq feet of production space for which
the lease will not be renewed after the first quarter of 2006. . Included with the Titan
lease numbers is the 503 square feet of office space Allied Technology, LLC leases on the
Texas Tech University campus. The facilities at Titan have been sized in anticipation of
future period revenue growth and it is not currently operating at its productive capacity(7)
    
    MECAR USA operates from an office and manufacturing facility in Marshall, Texas, constructed
in 2005 with assistance from the local development authority. In addition to the
manufacturing facility, MECAR USA leased 12,500 square feet of warehouse space in 2005 and
increased that to 49,000 square feet in January 2006. Titan relocated its operations to share
this facility with MECAR USA and Allied Technology, LLC also shares 500 square feet of office
space in the facility. The facilities at MECAR USA have been sized in anticipation of future
period revenue growth and it is not currently operating at its productive capacity.  ITEM 3. LEGAL PROCEEDINGS
  15




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##### 



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  PART II
 ITEM 5. MARKET FOR STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 Market Information.
 2006
    
    2005
    
    2004High
    
    Low
    
    High
    
    Low
    
    High
    
    Low1st Quarter
    
    $
    23.45
    
    
    $
    20.45
    
    
    $
    24.85
    
    
    $
    21.55
    
    
    $
    23.97
    
    
    $
    18.252nd Quarter
    
    
    23.30
    
    
    
    20.77
    
    
    
    25.80
    
    
    
    20.12
    
    
    
    21.50
    
    
    
    16.503rd Quarter*
    
    
    21.98
    
    
    
    16.45
    
    
    
    25.06
    
    
    
    21.50
    
    
    
    19.66
    
    
    
    17.814th Quarter
    
    
    
    
    
    
    
    
    
    
    23.40
    
    
    
    19.80
    
    
    
    22.31
    
    
    
    18.56
 
 *
    
    2006 information is through September 29, 2006 Stockholders.
 Dividends.
 Stock Issuances.
 Equity Compensation Plan Information.
 Number of securities to be
    
    
    Weighted average exercise
    
    
    Number of securities availableissued upon exercise of
    
    
    price of outstanding
    
    
    for future issuance under equityoutstanding options,
    
    
    options,
    
    
    compensation plans (excludingwarrants and rights
    
    
    warrants and rights
    
    
    securities reflected in column (a)(a)
    
    
    (b)
    
    
    (c)Equity compensation plans
approved by security holders
    
    
    507,667
    
    
    $
    16.94
    
    
    
    148,024Equity compensation plans
not approved by security
holders(1)
    
    
    43,000
    
    
    $
    23.49
    
    
    
    Total
    
    
    550,667
    
    
    $
    17.45
    
    
    
    148,024
 
 (1)
    
    The 43,000 consists of 15,000 warrants and 28,000 warrants
issued to prior lenders of the Company. The 15,000 warrants were issued in June 2002 as part of a debt
financing. They expired in June 2006 and had a strike price of $28.75. The 28,000
warrants were issued in May 2004 (4,000) and November, 2005 (24,000) as
part of a debt financing. They are priced at $.01 and
expire in May, 2012. 16




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##### 



ITEM 6. SELECTED FINANCIAL DATA
  2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001RESTATED(1)
    
    
    RESTATED(1)
    
    
    RESTATED(1)(000s omitted except per share amounts)Operations data:Revenues
    
    $
    112,222
    
    
    $
    146,201
    
    
    $
    153,774
    
    
    $
    141,013
    
    
    $
    96,641Earnings (loss) before cumulative effect
of accounting change
    
    
    (33,627
    )
    
    
    1,370
    
    
    
    2,718
    
    
    
    18,625
    
    
    
    10,165Net earnings (loss)
    
    
    (38,920
    )
    
    
    1,370
    
    
    
    2,718
    
    
    
    18,625
    
    
    
    10,165Earnings (loss) per share:BasicEarnings (loss) before cumulative
effect of accounting change
    
    $
    (5.84
    )
    
    $
    0.25
    
    
    $
    0.49
    
    
    $
    3.51
    
    
    $
    2.07Cumulative effect of accounting change
    
    
    (0.92
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings (loss)
    
    $
    (6.76
    )
    
    $
    0.25
    
    
    $
    0.49
    
    
    $
    3.51
    
    
    $
    2.07DilutedEarnings (loss) before cumulative
effect of accounting change
    
    $
    (5.84
    )
    
    $
    0.24
    
    
    $
    0.48
    
    
    $
    3.32
    
    
    $
    2.05Cumulative
effect of accounting change(s)
    
    $
    (0.92
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings (loss)
    
    $
    (6.76
    )
    
    $
    0.24
    
    
    $
    0.48
    
    
    $
    3.32
    
    
    $
    2.05Balance sheet data:Working capital
    
    $
    36,362
    
    
    $
    78,963
    
    
    $
    83,987
    
    
    $
    69,273
    
    
    $
    40,996Total assets
    
    
    180,946
    
    
    
    192,231
    
    
    
    206,325
    
    
    
    167,282
    
    
    
    86,584Long-term obligations (2)
    
    
    25,701
    
    
    
    7,600
    
    
    
    12,110
    
    
    
    7,422
    
    
    
    3,110Stockholders equity
    
    
    81,493
    
    
    
    125,553
    
    
    
    114,723
    
    
    
    95,734
    
    
    
    58,449Cash dividends declared per common share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    The Consolidated Statements of Operations and the Consolidated Cash Flows for 2004,
2003 and 2002 have been restated to reflect adjustments that are described in Note A of the Notes
to Consolidated Financial Statements.(2)
    
    Long-term obligations include the Patriot facility of $13,539 which was reclassed
from Current to Long-term based on pay off that occurred in March of 2006.(3)
    
    In 2005 MECAR changed its basis for applying percentage
of completion accounting from total direct cost to direct labor cost. The
charge in 2005 for the cumulative effect of the accounting change was
$5,293, net of tax of $2,726. 
 17




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##### 



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (amounts in thousands of dollars, other than share data)
 Overview
   
    
    Ammunition & Weapons Effectssegment consists of MECAR, located in
Belgium, MECAR USA, located in Marshall, TX, and Titan, located in
Marshall, TX. MECAR develops and produces medium caliber, tank,
mortar and other ammunition. MECAR USA became operational in late
2005 and will pursue contracts from U.S. and foreign governments
for ammunition and pyrotechnics devices with a focus on the 105MM
market. Titan designs, manufactures and sells battlefield effects
simulators, minor pyrotechnics and other training devices. Titan
and Mecar USA are co-located at the same facilty, are operated
under a unified management team, share production facilities and
employees and have a fully integrated back office and support
service organization. MECAR, MECAR USA and Titan have similar
products and services, similar production processes, common
customers, similar methods to sell and distribute their products
and operate in a similar regulatory environment
    
    Electronic Securitysegment consists of VSK, located in Belgium
and California and NSM and Global Microwave Systems located near
San Diego, California. VSK consists of VSK Electronics N.V.,
which manufactures access control, intrusion protection, fire
detection and video systems; Télé Technique Générale S.A., which
installs security systems; Intelligent Data Capturing Systems
N.V., which manufacturers integrated video systems; VIGITEC S.A.,
which installs networked video surveillance systems; and CMS
Security Systems which manufactures access control systems. NSM
designs, manufactures, installs and services
industrial and law enforcement surveillance products and integrated systems for
the law enforcement community, agencies of the Department of Homeland Security
and the Department of Defense. GMS designs and manufactures miniature and
sub-miniature FM and digital transmitters, receivers, and related equipment for
investigative, surveillance, and security applications, and live TV
news/sports/entertainment coverage.
    
    The Othersegment consists of SeaSpace located near
San Diego, CA. It designs, manufactures, distributes
and services weather and environmental satellite
ground reception systems, and manufactures and
markets a line of antenna systems.
    18




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##### 



Restatements of Financial Results
        19




---



##### 



Condensed Consolidated Statements of Operations  Years Ended December 31,
 2004
    
    
    2003AsPreviously
    
    
    
    
    
    
    As PreviouslyRESTATED
    
    
    Reported in
    
    
    RESTATED
    
    
    Reported in10-K/A
    
    
    
    
    
    
    10-K/ARevenues
    
    $
    146,201
    
    
    $
    150,131
    
    
    $
    153,774
    
    
    $
    153,937Cost of Sales
    
    
    105,819
    
    
    
    105,936
    
    
    
    114,904
    
    
    
    114,753Operating income
    
    
    4,082
    
    
    
    8,327
    
    
    
    9,889
    
    
    
    10,654Earnings (loss) before
income taxes
    
    
    1,679
    
    
    
    5,623
    
    
    
    7,374
    
    
    
    8,878Income taxes
    
    
    309
    
    
    
    1,689
    
    
    
    4,656
    
    
    
    5,116Net Earnings
    
    $
    1,370
    
    
    $
    3,934
    
    
    $
    2,718
    
    
    $
    3,762Earnings per share:Basic
    
    $
    0.25
    
    
    $
    0.71
    
    
    $
    0.49
    
    
    $
    0.68Diluted
    
    $
    0.24
    
    
    $
    0.70
    
    
    $
    0.48
    
    
    $
    0.63
  Impact fromCompensationImpact From
    
    
    Expense Related
    
    
    As PreviouslyForeign
    
    
    to Stock Options
    
    
    Reported inAs Restated
    
    

Translation (1)
    
    
    (2)
    
    
    10-K/AYear Ended December 31, 2004Revenues
    
    $
    146,201
    
    
    $
    (3,930
    )
    
    $
    
    
    
    $
    150,131Operating income
    
    
    4,082
    
    
    
    (3,812
    )
    
    
    (433
    )
    
    
    8,327Earnings (loss) before income taxes
    
    
    1,679
    
    
    
    (3,512
    )
    
    
    (432
    )
    
    
    5,623Income taxes
    
    
    309
    
    
    
    (1,233
    )
    
    
    (147
    )
    
    
    1,689Net Earnings
    
    $
    1,370
    
    
    $
    (2,278
    )
    
    $
    (286
    )
    
    $
    3,934
 Impact fromCompensationImpact From
    
    
    Expense Related
    
    
    As PreviouslyForeign
    
    
    to Stock Options
    
    
    Reported inYear Ended December 31, 2003
    
    As Restated
    
    

Translation (1)
    
    
    (2)
    
    
    10-K/ARevenues
    
    $
    153,774
    
    
    $
    (163
    )
    
    $
    
    
    
    $
    153,937Operating income
    
    
    9,889
    
    
    
    (314
    )
    
    
    (451
    )
    
    
    10,654Earnings before income taxes
    
    
    7,374
    
    
    
    (1,053
    )
    
    
    (451
    )
    
    
    8,878Income taxes
    
    
    4,656
    
    
    
    (306
    )
    
    
    (154
    )
    
    
    5,116Net Earnings
    
    $
    2,718
    
    
    $
    (747
    )
    
    $
    (297
    )
    
    $
    3,762Cumulative Net Earnings
(2003  2004)
    
    $
    4,088
    
    
    $
    (3,024
    )
    
    $
    (584
    )
    
    $
    7,696
 20




---



##### 



(1)
    
    Impact of correcting for certain errors related to incorrect exchange rates to translate
Allieds Belgium subsidiary MECAR S.A.s U.S. Dollar denominated assets and liabilities into its
functional currency and other adjustments related to foreign currency transactions.(2)
    
    Impact of correcting compensation expense related to the grant of stock options to certain
officers in 2002 for which the measurement date was incorrectly determined. These
options were granted in February 2002 by the Compensation Committee of the Board of Directors of
the Company, but were subject to subsequent stockholder approval which was not obtained until June
2002.  Cash Flow Information
   As previouslyRESTATED
    
    
    ADJUSTMENT
    
    
    reported in 10K-AYear ended December 31, 2004Cash flows from operationsAccounts payable
    
    
    (15,943
    )
    
    
    (1,293
    )
    
    
    (14,650)
    *Cash flows from financingBorrowings on bank
overdraft facility
    
    
    1,293
    
    
    
    1,293
    
    
    
    Year ended December 31, 2003Cash flows from operationsAccounts payable
    
    
    13,782
    
    
    
    273
    
    
    
    13,509
    *Cash flows from financingBorrowings on bank
overdraft facility
    
    
    (273
    )
    
    
    (273
    )
    
    
    
 
 *
    
    - the as previously reported amount in the 10 K/A have been adjusted for the impact of the
foreign currency translation described above of $7,772 and ($7,979) in 2004 and 2003 respectively Trends in Operations
      
    
    Shifting its focus to two core operating segments;
    
    Emphasizing business development at both corporate and operating unit levels;
    
    Extending its planning horizon to incorporate a three year strategic plan for the Company;
    
    Prioritizing acquisitions to first complement its component strengths, then to focus on
market development and new market penetration; and
    
    Upgrading its financial systems and processes for effective and efficient operations and
to ensure regulatory compliance.
  21




---



##### 



Trends in Liquidity and Capital Resources
   Results of Operations
 The results were affected by several significant items that are outlined below:
    
    Foreign exchange impact on the operations of the Companys Euro-based business units:The results were positively
affected by the translation of the Companys European operations Euro-based income statements into dollars at more
favorable exchange rates. All Euro-based results of operations were converted at the average 2005, 2004 and 2003
exchange rates of 1.2454, 1.2439 and 1.1321 U.S. Dollar to 1 Euro, respectively.
    
    Use of non-hedge accounting for the Companys foreign currency hedge transactions:All 2003-2005 data contained in
this Managements Discussion and Analysis of Financial Consolidation and Results of Operation is based on the use
of non-hedge accounting. As disclosed by the Company in November 2005, the Company determined that it did not
qualify for the use of hedge accounting in 2005 due to insufficient documentation of its foreign currency hedge
transactions in addition to not qualifying in 2004 and 2003. Accordingly, all the financial data contained herein
has been prepared using non-hedge accounting for such transactions.
    
    Change in application of accounting principle (revenue recognition via the percentage of completion method):In
2005, MECAR changed its methodology of applying the percentage of completion method for its revenues in an effort
to better reflect the revenue recognized during the life of a sales contract. Previously, MECAR used total direct
costs as the basis for recognizing revenue. In 2005, MECAR changed the basis for recognition to direct labor
rather than total direct costs. Accordingly, the 2005 data contained herein shows the results under the new
application method. The 2004 and 2003 results are shown under the previous application method.
  For the years ended December 31,
    
    2005
    
    
    2004
    
    
    2003RESTATED
    
    
    RESTATED$
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %Revenues
    
    $
    112,222
    
    
    
    100.0
    %
    
    $
    146,201
    
    
    
    100.0
    %
    
    $
    153,774
    
    
    
    100.0
    %Cost and expensesCost of sales
    
    
    94,154
    
    
    
    83.9
    
    
    
    105,819
    
    
    
    72.4
    
    
    
    114,904
    
    
    
    74.7Selling and administrative
    
    
    36,471
    
    
    
    32.5
    
    
    
    29,605
    
    
    
    20.2
    
    
    
    24,449
    
    
    
    15.9Research and development
    
    
    7,190
    
    
    
    6.4
    
    
    
    6,695
    
    
    
    4.6
    
    
    
    4,532
    
    
    
    2.9Goodwill impairment
    
    
    3,060
    
    
    
    2.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    (28,653
    )
    
    
    (25.5
    )
    
    
    4,082
    
    
    
    7.4
    
    
    
    9,889
    
    
    
    6.4Other income (expense)Interest income
    
    
    580
    
    
    
    0.5
    
    
    
    549
    
    
    
    0.4
    
    
    
    460
    
    
    
    0.3
 22




---



##### 



For the years ended December 31,
    
    2005
    
    
    2004
    
    
    2003RESTATED
    
    
    RESTATED$
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %Interest expense
    
    
    (2,568
    )
    
    
    (2.3
    )
    
    
    (2,441
    )
    
    
    (1.7
    )
    
    
    (2,491
    )
    
    
    (1.6
    )Other  net
    
    
    (1,926
    )
    
    
    (1.7
    )
    
    
    (511
    )
    
    
    (0.3
    )
    
    
    (484
    )
    
    
    (0.3
    )Earnings (loss) before
income taxes
    
    
    (32,567
    )
    
    
    (29.0
    )
    
    
    1,679
    
    
    
    1.1
    
    
    
    7,374
    
    
    
    4.8Income tax expense (benefit)
    
    
    1,060
    
    
    
    0.7
    
    
    
    309
    
    
    
    0.2
    
    
    
    4,656
    
    
    
    3.0Earnings (loss) before
cumulative effect of
accounting change
    
    
    (33,627
    )
    
    
    (29.8
    )
    
    
    1,370
    
    
    
    0.9
    
    
    
    2,718
    
    
    
    1.8Cumulative effect of
accounting change
    
    
    (5,293
    )
    
    
    (4.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings (loss)
    
    $
    (38,920
    )
    
    
    (34.5
    )%
    
    $
    1,370
    
    
    
    0.9
    %
    
    $
    2,718
    
    
    
    1.8
    %
 2005 compared to 2004 compared to 2003
 Revenues.
 Revenues by Segment (Current Segments)2005
    
    
    2004
    
    
    2003RESTATED
    
    
    RESTATED$
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %Ammunition & Weapons Effects
    
    $
    67,396
    
    
    
    60.1
    %
    
    $
    93,793
    
    
    
    64.1
    %
    
    $
    113,406
    
    
    
    73.7
    %Electronic Security
    
    $
    38,802
    
    
    
    34.6
    %
    
    $
    45,973
    
    
    
    31.5
    %
    
    $
    33,303
    
    
    
    21.7
    %Other
    
    $
    6,024
    
    
    
    5.3
    %
    
    $
    6,435
    
    
    
    4.4
    %
    
    $
    7,065
    
    
    
    4.6
    %$
    112,222
    
    
    
    100.0
    %
    
    $
    146,201
    
    
    
    100.0
    %
    
    $
    153,774
    
    
    
    100.0
    %
  23




---



##### 



Cost of Sales.
   Selling and Administrative Expenses .
 Research and Development.
 24




---



##### 



Goodwill impairment.
 Interest Income.
 Interest expense.
 Other
 Net.
 Pre-Tax Profit.
 Pre-Tax Profit (Loss) by Segment (Current Segments)2005
    
    
    2004
    
    
    2003RESTATED
    
    
    RESTATEDAmmunition & Weapons Effects
    
    $
    (18,119
    )
    
    $
    1,670
    
    
    $
    7,562Electronic Security
    
    $
    (2,041
    )
    
    $
    6,987
    
    
    $
    2,618Other
    
    $
    (6,238
    )
    
    $
    (3,282
    )
    
    $
    (528
    )Corporate
    
    $
    (6,169
    )
    
    $
    (3,696
    )
    
    $
    (2,278
    )$
    (32,567
    )
    
    $
    1,679
    
    
    $
    7,374
    25




---



##### 



Income Taxes-Expense (Benefit).
 Cumulative Effect of Accounting Change (net of income taxes).
 Net Earnings (Loss  Before the Cumulative Effect of Change in Accounting Principle).
 Backlog.
 Backlog by Segment (Current Segments)2005
    
    
    2004RESTATEDAmount
    
    
    %
    
    
    Amount
    
    
    %Ammunition & Weapons Effects
    
    $
    71,142
    
    
    
    76
    %
    
    $
    51,149
    
    
    
    66
    %Electronic Security
    
    $
    20,040
    
    
    
    21
    %
    
    $
    24,601
    
    
    
    32
    %Other
    
    $
    2,194
    
    
    
    3
    %
    
    $
    1,523
    
    
    
    2
    %$
    93,376
    
    
    
    100
    %
    
    $
    77,273
    
    
    
    100
    %
 26




---



##### 



Liquidity and Capital Resources
      
    
    The Company intends to have in place, and is in the process of negotiating, a domestic
line of credit by year end that will provide $4,000 to $5,000 of immediate liquidity with a
provision to accordion up to $20,000 based on financial performance in subsequent periods.
    
    The Company is exploring possible asset backed financing from local banks at its US
based AWE facilities that would be earmarked for capital improvement  buildings and/or
equipment  at that site.
    
    The Company is evaluating the disposition of certain non strategic assets.
    
    The Company has the option of issuing dividends of excess cash from its Euro based ES
operations at year end.
    
    The Company may further consolidate its California operations to further reduce
operating expenses.
 Balance Sheet.
 27




---



##### 



Cash Flows.
  For the years ended December 312005
    
    2004
    
    2003RESTATED
    
    RESTATEDNet cash provided by (used in) operating activities
    
    $
    (22,229
    )
    
    $
    9,404
    
    
    $
    24,767Net cash used in investing activities
    
    
    (17,610
    )
    
    
    (5,516
    )
    
    
    (4,353
    )Net cash provided by (used in) financing activities
    
    
    20,153
    
    
    
    (20,950
    )
    
    
    4,081
 Operating
Activities.
 28




---



##### 



Investing Activities.
 Financing
Activities.
 Allied. Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Companys Own Stock
 MECAR.
 VSK Group.
 Other Subsidiaries.
 Stock Repurchases.
 Contractual Obligations and Commercial Commitments.
 29




---



##### 



Payments due by period (amount in 000s)Less than 1
    
    
    2  3
    
    
    4  5
    
    
    More than 5Contractual Obligations
    
    Total
    
    

year
    
    
    years
    
    
    Years
    
    
    yearsLong-Term Debt Obligations (1)
    
    $
    21,094
    
    
    $
    2,310
    
    
    $
    5,104
    
    
    $
    13,680
    
    
    $
    Capital Lease Obligations
    
    
    4,607
    
    
    
    2,032
    
    
    
    2,211
    
    
    
    364
    
    
    
    Operating Leases
    
    
    4,212
    
    
    
    998
    
    
    
    1,649
    
    
    
    680
    
    
    
    885Foreign exchange contracts (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Contractual Obligations
    
    $
    29,913
    
    
    $
    5,340
    
    
    $
    8,964
    
    
    $
    14,724
    
    
    $
    885
 Commercial Commitments
    
    TotalBank guarantees
    
    $
    27,538
    
    
    $
    27,538
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Interest payments on long-term debt (which are excluded above) are estimated to be $2,768,
$5,127, $4,501 and $563 for the above periods, assuming interest rates of 11.5%, 7.5% and 5.5%
for years thereafter. The impact of the March 2006 refinancing have also been estimated for
future periods. See Note Y  subsequent event of the
consolidated financial statements for a description
of the refinancing transaction.(2)
    
    MECAR enters into foreign exchange contracts to reduce the currency risk associated with
sales contracts that are set in a currency other than MECARs functional currency. Since
MECAR only enters these contracts to offset a sales contract amount, the Company consides
these obligations from foreign exchange contracts to be offset and thereby cash neutral and
not required to be included in this schedule. At December 31, 2005, the Company had a net
liability of $1,156 recorded for these contracts that will settle within nine months. Future Liquidity.
  Off-Balance Sheet Arrangements.
    30




---



##### 



Recent Accounting Pronouncements.
 Critical Accounting Policies
   
    
    Revenue recognition via the percentage of completion method
    
    Goodwill and intangible asset valuation
    
    Inventory reserves and allowance for doubtful accounts
    
    Derivative instruments
    
    Valuation of deferred income taxes and income tax reserves.
 Revenue Recognition via the Percentage of Completion Method.
    31




---



##### 



Goodwill and intangible asset valuation.
   Inventory reserves and allowance for doubtful accounts.
 Derivative Instruments. Accounting for Derivative
Instruments and Hedging Activities
 Valuation of deferred income taxes
  32




---



##### 



Forward-Looking Statements
   
    
    substantial reliance on MECARs principal customers to continue to acquire 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 ability of the Companys acquired businesses to mature and meet performance expectations;
    
    the mix of products/services;
    
    domestic and foreign governmental fiscal affairs and public policy changes which may affect the level of
purchases made by customers;
    
    changes in environmental and other domestic and foreign governmental regulations;
    
    changes in foreign currency exchange rates and interest rate fluctuation from market conditions;
    
    general risks associated with doing business outside the United States, including, without limitation,
import duties, tariffs, quotas and political and economic instability;
    
    the effects of terrorist actions on business activities, customer orders and cancellations, and the United
States and international governments responses to these terrorist actions;
    
    changes in government regulations;
    
    liability and other claims asserted against us;
    
    the ability to attract and retain qualified personnel; and
    
    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.
  ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 market risk credit risk
  Interest Rate Sensitivity.
 33




---



##### 



Exchange Rate Sensitivity.
  ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
  ITEM 9A. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
  34




---



##### 



Changes in Internal Control Over Financial Reporting
  ITEM 9B. OTHER INFORMATION
  PART III
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ALLIED
    35




---



##### 



Executive Officers
   36




---



##### 



ITEM 11. EXECUTIVE COMPENSATION
 Compensation of Directors and Executive Officers .
  37




---



##### 



SUMMARY COMPENSATION TABLE
 Long-TermCompensationAwardsAnnual Compensation
    
    
    
    
    
    SecuritiesName and
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    Restricted
    
    UnderlyingPrincipal
    
    
    
    
    
    
    
    
    
    
    
    
    
    Annual
    
    Stock
    
    Options/
    
    All OtherPosition
    
    Year
    
    Salary
    
    Bonus
    
    Compensation
    
    Awards ($)
    
    SARs (#)
    
    CompensationJohn J. Marcello, Chief
    
    
    2005
    
    
    $
    264,849
    
    
    $
    33,188
    
    
    $
    78,738
    1
    
    $
    379,360
    
    
    
    
    
    
    
    Executive Officer since
    
    
    2004
    
    
    $
    220,000
    
    
    $
    46,000
    
    
    $
    22,789
    1
    
    $
    10,001
    
    
    
    
    
    
    
    June, 2005
    
    
    2003
    
    
    $
    184,000
    
    
    
    
    
    
    $
    2,322
    
    
    
    
    
    
    
    
    
    
    
    John G. Meyer, Jr., Chief
    
    
    2005
    
    
    $
    136,500
    
    
    $
    50,000
    
    
    $
    2,079
    
    
    
    
    
    
    
    
    
    
    
    Executive Officer until
    
    
    2004
    
    
    $
    270,000
    
    
    $
    135,000
    
    
    $
    3,564
    
    
    
    
    
    
    
    
    
    
    
    June, 2005
    
    
    2003
    
    
    $
    243,333
    
    
    $
    85,167
    
    
    $
    2,322
    
    
    
    
    
    
    
    70,000
    
    
    
    Monte L. Pickens,
    
    
    2005
    
    
    $
    223,333
    
    
    $
    27,000
    
    
    $
    4,000
    
    
    
    
    
    
    
    40,000
    
    
    
    Executive Vice President
    
    
    2004
    
    
    $
    185,000
    
    
    $
    69,942
    
    
    $
    2,322
    
    
    
    
    
    
    
    
    
    
    
    2003
    
    
    $
    175,000
    
    
    $
    58,583
    
    
    $
    1,548
    
    
    
    
    
    
    
    40,000
    
    
    
    Robert P. Dowski, Chief
Financial Officer since
August, 2005
    
    
    2005
    
    
    $
    70,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80,000
    
    
    
    Charles R. Hasper, Chief
    
    
    2005
    
    
    $
    134,688
    
    
    
    
    
    
    $
    725
    
    
    
    
    
    
    
    
    
    
    
    Financial Officer until
    
    
    2004
    
    
    $
    180,000
    
    
    $
    74,550
    
    
    $
    1,242
    
    
    
    
    
    
    
    
    
    
    
    August, 2005
    
    
    2003
    
    
    $
    163,500
    
    
    $
    40,425
    
    
    $
    810
    
    
    
    
    
    
    
    
    
    
    
    Wayne Hosking, Vice President
    
    
    2005
    
    
    $
    174,167
    
    
    $
    49,163
    
    
    $
    540
    
    
    $
    6,011
    
    
    
    
    
    
    
    2004
    
    
    $
    123,141
    
    
    $
    63,099
    
    
    $
    355
    
    
    
    
    
    
    
    40,000
    
    
    
    
 
 1
    
    Principally relates to cost of living
adjustment from the prior year paid in the current year resulting from
Euro/U.S. Dollar fluctuations. OPTIONS GRANTS IN LAST FISCAL YEAR
  Individual Grants
    
    
    
    
    
    Potential RealizableNumber of
    
    % of Total
    
    
    
    
    
    
    
    
    
    Value at AssumedSecurities
    
    Options
    
    
    
    
    
    
    
    
    
    Annual Rates of StockUnderlying
    
    Granted to
    
    Exercise or
    
    
    
    
    
    Price Appreciation forOptions
    
    Employees in
    
    Base Price
    
    Expiration
    
    Option Term (1)Name
    
    Granted
    
    Fiscal Year
    
    ($/Sh)
    
    Date
    
    5% ($)
    
    10% ($)Monte L. Pickens
    
    
    40,000
    
    
    
    33 1/3
    %
    
    $
    23.95
    
    
    
    03-06-10
    
    
    
    216,612
    
    
    
    468,606Robert P. Dowski
    
    
    80,000
    
    
    
    66 2/3
    %
    
    $
    22.05
    
    
    
    08-31-10
    
    
    
    451,078
    
    
    
    988,189
 
 (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. 38




---



##### 



AGGREGATED OPTIONS EXERCISED IN LAST
FISCAL YEAR AND FISCAL YEAR-END VALUES
  Shares
    
    
    
    
    
    Number of Securities Underlying/
    
    Value of Unexercised In-the-MoneyAcquired on
    
    Value
    

Unexercised Options /SARs Value
    
    Options/SARs at FY-End ($) (2)Name
    
    Exercise (#)
    
    Realized(1)
    
    Exercisable (#)
    
    Unexercisable (#)
    
    Exercisable
    
    UnexercisableJohn G. Meyer, Jr.
    
    
    108,000
    
    
    $
    1,107,320
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Monte L. Pickens
    
    
    
    
    
    
    
    
    
    
    32,000
    
    
    
    48,000
    
    
    $
    188,880
    
    
    $
    125,920Robert P. Dowski
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    60,000
    
    
    $
    14,400
    
    
    $
    43,200Charles A. Hasper
    
    
    47,266
    
    
    $
    362,154
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Wayne Hosking
    
    
    
    
    
    
    
    
    
    
    16,000
    
    
    
    24,000
    
    
    $
    37,440
    
    
    $
    56,160
 
 (1)
    
    Represents the closing price per share on the date the option was exercised less the option
exercise price multiplied by the number of shares acquired upon exercise.(2)
    
    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 $22.77 on the last trading
day of the fiscal year as reported on the AMEX. Director Compensation
    Employment Contracts and Change-In-Control Agreements
  39




---



##### 



Compensation Committee Interlocks and Insider Participation
  ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  Amount and Nature ofTitle of Class
    

Name and Address of Beneficial Owner
    
    Beneficial Ownership
    
    Percent of Class1Common
    
    Pirate Capital LLC2
    
    882,300
    
    
    14.6
    %200 Connecticut Avenue
    
    Owned indirectlyNorwalk, Connecticut 06854Common
    
    Kings Road Investments Ltd3.
    
    566,999
    
    
    9.4
    %c/o Polygon Investment Partners LLP
    
    Owned directly598 Madison Avenue14th FloorNew York, New York  10022
 40




---



##### 



Amount and Nature ofTitle of Class
    

Name and Address of Beneficial Owner
    
    Beneficial Ownership
    
    Percent of Class1Common
    
    Wynnefield Capital Management,
LLC4
    
    523,235
    
    
    8.7
    %450 Seventh AvenueSuite 509New York, New York  10123Common
    
    Dimensional
Fund5
    
    479,018
    
    
    7.9
    %Advisors, Inc.
    
    Owned directly1299 Ocean Ave., 11th FloorSanta Monica, California 90401Common
    
    Wells Fargo &
Company6
    
    382,926
    
    
    6.3
    %420 Montgomery StreetSan Francisco, California  94104Common
    
    Tamarack Enterprise
Fund7
    
    365,900
    
    
    6.1
    %100 Fifth Street
    
    Owned directlySuite 2300Minneapolis, Minnesota  55402Common
    
    Aegis Financial
Corporation8
    
    306,950
    
    
    5.1
    %1100 North Glebe Road
    
    Owned directlySuite 1040Arlington, Virginia  22201
 
 1
    
    Based upon 6,041,465 shares of common stock outstanding.2
    
    Pirate Capital LLC and Thomas R. Hudson,
Jr. filed a Form 4 with the SEC on August 22, 2006. Previous filings state
that Pirate Capital LLC and Thomas R. Hudson, Jr. are deemed to have shared
voting and shared dispositive power with respect to 882,300 shares, which
shares are owned of record by Jolly Roger Fund LP and Jolly Roger Offshore Fund
Ltd.3
    
    Kings Road Investments Ltd. filed a
Schedule 13G with the SEC on March 22, 2006 reporting ownership of a note
convertible 472,499 shares and a stock purchase warrant exercisable into 94,500
shares.4
    
    Wynnefield Capital Management, LLC,
Wynnefield Capital, Inc., Wynnefield Partners Small Cap Value, L.P., Wynnefield
Partners Small Cap Value, L.P. I., and Wynnefield Small Cap Value Offshore
Fund,Ltd., filed a Schedule 13D/A with the SEC on July 18, 2006.5
    
    Dimensional Fund Advisors, Inc. (Dimensional),
a registered investment advisor, filed an amended Schedule 13G with the SEC on
February 6, 2006.6
    
    Wells Fargo & Company filed a Schedule 13G with the SEC on
January 24, 2006.7
    
    Tamarack Enterprise Fund filed a Schedule 13G with the SEC on
January 25, 2006.8
    
    Aegis Financial Corporation, William S. Berno, Paul Gamble,
and Scott L. Barbee jointly filed an amendment to its Schedule 13G
with the SEC on February 14, 2006. 41




---



##### 



Amount and Nature ofTitle of Class
    

Name and Address of Beneficial Owner
    
    Beneficial Ownership
    
    Percent of Class1Common
    
    J. H. Binford Peay, III
    
    256,1212
    
    4.1%Owned  directlyCommon
    
    J. R. Sculley
    
    70,4354
    
    1.2%Owned directlyCommon
    
    John G. Meyer, Jr.
    
    68,223
    
    1.1%Owned directlyCommon
    
    Harry H. Warner
    
    47,2533
    
    *Owned directlyCommon
    
    Clifford C. Christ
    
    44,2014
    
    *Owned directlyCommon
    
    Ronald H. Griffith
    
    31,7755
    
    *Owned directlyCommon
    
    Gilbert F. Decker
    
    20,4014
    
    *Owned directlyCommon
    
    John J. Marcello
    
    17,163
    
    *Owned directlyCommon
    
    Charles S. Ream
    
    1,637
    
    *Owned directlyCommon
    
    Zachary R. George
    
    1,637
    
    *Owned directlyCommon
    
    All executive officers
    
    644,4846
    
    10.1%and directors as a
    
    Owned directlygroup (12)
 
 1
    
    Based upon 6,031,465 shares of common stock outstanding
plus any outstanding options, by director.2
    
    Includes stock options for 206,500 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, 5,203 shares issuable upon retirement from the Board
pursuant to the Directors Deferred Compensation Plan and 3,278 shares
issuable upon retirement from the Board pursuant to the terminated Outside
Directors Retirement Plan.4
    
    Includes stock options for 13,000 shares which may be exercised within
sixty (60) days and 5,203 shares issuable upon retirement from the Board
pursuant to the Directors Deferred Compensation Plan.5
    
    Includes stock options for 13,000 shares which may be exercised within
sixty (60) days.6
    
    Includes stock options for 354,500 shares which may be exercised within
sixty (60) days and 24,090 shares issuable upon retirement from the Board.*
    
    Less than 1% 42




---



##### 



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
   ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICE.
  2005
    
    
    2004Audit fees
    
    $
    2,163,000
    
    
    $
    1,118,290Audit-related fees
    
    
    0
    
    
    
    0Tax fees
    
    
    0
    
    
    
    40,550All other fees
    
    
    0
    
    
    
    0Total
    
    $
    2,163,000
    
    
    $
    1,158,840
     PART IV
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 Exhibit No.
    
    Description of Exhibits3.1
    
    Certificate of Incorporation, as amended (Incorporated by reference from Form 10-Q filed in August 2002).3.2
    
    Amended and restated By-Laws (Incorporated by reference from Form 10-Q filed in August 2004).3.3
    
    Rights Agreement between Allied and Mellon Investor Services, LLC (Incorporated by reference
from Form 8-K filed in June 2001).10.1
    
    Employment Agreement between Allied and John J. Marcello (Incorporated by reference from Form
10-Q filed in August 2005).10.2
    
    Employment Agreement between Allied and Robert P. Dowski (Incorporated by reference from Form
10-Q filed in November 2005).
 43




---



##### 



Exhibit No.
    
    Description of Exhibits10.3
    
    Employment Agreement between Allied and Monte L. Pickens (Incorporated by reference from Form
8-K filed in April 2003).10.4
    
    Employment Agreement letter amendment between Allied and Monte L. Pickens (Incorporated by
reference from Form 10-Q filed in August 2004).10.5
    
    Employment Agreement between Allied and Wayne F. C. Hosking, Jr. (Incorporated by reference
from Form 8-K filed in April 2004).10.6
    
    2001 Equity Incentive Plan, as amended (Incorporated by reference from Proxy Statements filed
in April 2001, April 2002 and May 2005).10.7
    
    8% Convertible Debenture, Series A and related documents (Incorporated by reference from Form
8-K filed in July 2002).10.8
    
    Credit Agreement for MECAR S.A. (Incorporated by reference from Form 10-Q filed in August
2002).10.9
    
    Award/Contract dated as of March 1, 2002, by and between MECAR S.A. and U.S. Government
(Incorporated by reference from Form 10-Q filed in August 2002).10.10
    
    Employee Stock Purchase Plan, as amended (Incorporated by reference from Form 10-Q filed in
November 2002).10.11
    
    Lease Agreement, as amended (Incorporated by reference from Form 10-Q filed in November
2002).10.12
    
    Amendment to Lease Agreement10.13
    
    Form of Indemnity Agreement for Directors and Executive Officers (Incorporated by reference
from Form 10-Q filed in November 2002).10.14
    
    International Distribution Agreement (Incorporated by reference from Form 10-Q filed in
November 2002).10.15
    
    Deferred Compensation Plan for Non-Employee Directors (Incorporated by reference from Form
10-Q filed in August 2004).10.16
    
    Loan and Security Agreement among Wilton Funding, LLC and Allied and certain of its
subsidiaries (Incorporated by reference from Form 8-K filed in June 2004)10.17
    
    Amendment to Loan and Security Agreement among Wilton Funding, LLC and Allied and certain of
its subsidiaries (Incorporated by reference from Form 10-K/A filed in March 2005)10.18
    
    Stock Option Agreement-Employee Form (Incorporated by reference from Form 10-Q filed in
November 2004)10.19
    
    Directors Stock Option Agreement-Director Form (Incorporated by reference from Form 10-Q
filed in November 2004)10.20
    
    Summary of Annual Compensation of Board Members10.21
    
    Restricted Stock Agreement (Incorporated by reference from Form 10-Q filed in May, 2005)10.22
    
    7.5% Senior Subordinated Convertible Notes and related documents (Incorporated by reference
from 8-K filed in March 2006)18.1
    
    Letter from independent public accountant related to change in application of accounting principle21
    
    List of Subsidiaries23
    
    Consent of Independent Registered Public Accounting Firm (a)23.1
    
    Consent of Independent Registered Public Accounting Firm (a)31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (a)31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (a)32
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (a)
  Reports on Form 8-K
     44




---



##### 



45




---



##### 



SIGNATURES
   By:
    /s/ John J. Marcello.John J. MarcelloChief Executive Officer and President   By:
    /s/ Robert P. DowskiRobert P. Dowski,Chief Financial Officer and TreasurerDate: October 6, 2006
    By:
    /s/ Deborah F. RicciDeborah F. Ricci,Controller  **********/s/ J. R. SculleyJ. R. Sculley, DirectorDate: October 6, 2006/s/ Clifford C. ChristClifford C. Christ, DirectorDate: October 6, 2006/s/ Harry H. WarnerHarry H. Warner, DirectorDate: October 6, 2006/s/ Ronald H. GriffithRonald H. Griffith, DirectorDate: October 6, 2006/s/ Gilbert F. DeckerGilbert F. Decker, DirectorDate: October 6, 2006/s/ John G. Meyer, Jr.John G. Meyer, Jr., DirectorDate: October 6, 2006/s/ J. H. Binford Peay, IIIJ. H. Binford Peay, III, DirectorDate: October 6, 2006/s/ Zachary R. GeorgeZachary R. George, DirectorDate: October 6, 2006/s/ Charles S. ReamCharles S. Ream, DirectorDate: October 6, 2006/s/ John J. MarcelloJohn J. Marcello, DirectorDate: October 6, 2006
 46




---



##### 



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




---



##### 



The Allied Defense Group Inc.
 INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
 PageManagements Report on Internal Controls Over Financial Reporting
    
    
    F - 3Report of Independent Registered Public Accounting Firm
    
    
    F - 4Report of Independent Registered Public Accounting Firm
    
    
    F - 5Report on
Independent Registered Public Accounting Firm
    
    
    F - 6Consolidated Balance Sheets at December 31, 2005 and 2004
    
    
    F - 7Consolidated Statements of Operations for each of the three years in
the period ended December 31, 2005
    
    
    F - 8Consolidated Statements of Stockholders Equity for each of the three
years in the period ended December 31, 2005
    
    
    F - 9Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 2005
    
    
    F - 10Notes to Consolidated Financial Statements
    
    
    F - 12Schedules as of and for the three years ended December 31, 2005Schedule I  Condensed Financial Information of Registrant
    
    
    F - 38Schedule II  Valuation and Qualifying Accounts
    
    
    F - 41
 F-2




---



##### 



MANAGEMENTS REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
              /s/ Robert P. Dowski

Robert P. Dowski
    
    
    
    /s/ John J. Marcello

John J. Marcello.Chief Financial Officer
    
    
    
    Chief Executive OfficerOctober
5, 2006
    
    
    
    October 5, 2006
 F-3




---



##### 



Report of Independent Registered Public Accounting Firm
          
  F-4




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
   ,
   Internal
Control  Integrated Framework
    F-5




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      /s/ Grant Thornton LLP
Baltimore, Maryland
 F-6




---



##### 



The Allied Defense Group, Inc.
 CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
December 31,
 2005
    
    
    2004RESTATEDASSETSCurrent AssetsCash and
cash equivalents
    
    $
    7,803
    
    
    $
    27,940Restricted cash
    
    
    7,428
    
    
    
    9,239Accounts receivable, net
    
    
    18,547
    
    
    
    34,980Costs and accrued earnings on uncompleted contracts
    
    
    35,178
    
    
    
    41,420Inventories, net
    
    
    34,300
    
    
    
    17,128Deferred tax asset
    
    
    2,696
    
    
    
    2,016Fair value of foreign exchange contracts
    
    
    5
    
    
    
    1,195Prepaid and other current assets
    
    
    8,339
    
    
    
    4,123Total current assets
    
    
    114,296
    
    
    
    138,041Property, Plant and Equipment, net
    
    
    29,826
    
    
    
    30,294Other AssetsRestricted cash
    
    
    
    
    
    
    2,000Intangible assets, net
    
    
    13,353
    
    
    
    3,723Goodwill
    
    
    16,698
    
    
    
    14,401Deferred tax asset, non-current
    
    
    5,672
    
    
    
    2,461Other assets
    
    
    1,101
    
    
    
    1,31136,824
    
    
    
    23,896TOTAL ASSETS
    
    $
    180,946
    
    
    $
    192,231CURRENT LIABILITIESBank overdraft facility
    
    $
    15,086
    
    
    $
    5,553Current maturities of long-term debt
    
    
    4,342
    
    
    
    2,788Convertible subordinated debenture, current
    
    
    
    
    
    
    2,231Accounts payable
    
    
    31,004
    
    
    
    26,661Accrued liabilities
    
    
    15,097
    
    
    
    10,760Customer deposits
    
    
    9,956
    
    
    
    8,662Foreign exchange contracts
    
    
    1,161
    
    
    
    Deferred compensation
    
    
    
    
    
    
    1,612Income taxes
    
    
    1,288
    
    
    
    811Total current liabilities
    
    
    77,934
    
    
    
    59,078LONG-TERM OBLIGATIONSShort term debt to be refinanced
    
    
    13,539Long-term debt, less current maturities and unamortized discount
    
    
    7,820
    
    
    
    7,223Deferred compensation
    
    
    160
    
    
    
    37721,519
    
    
    
    7,600TOTAL LIABILITIES
    
    
    99,453
    
    
    
    66,678CONTINGENCIES AND COMMITMENTSSTOCKHOLDERS
EQUITYPreferred stock, no par value; authorized, 1,000,000
shares; none issued
    
    
    
    
    
    
    Common stock, par value, $.10 per share; authorized
30,000,000 shares; issued and outstanding,
5,982,008 in 2005 and 5,601,101 in 2004
    
    
    598
    
    
    
    560Capital in excess of par value
    
    
    34,354
    
    
    
    27,910Retained earnings
    
    
    34,466
    
    
    
    73,386Accumulated other comprehensive income
    
    
    12,075
    
    
    
    23,69781,493
    
    
    
    125,553TOTAL STOCKHOLDERS EQUITY
    
    $
    180,946
    
    
    $
    192,231
 F-7




---



##### 



The Allied Defense Group, Inc.
 CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of dollars, except per share data)
 Years ended December 31,
 2005
    
    
    2004
    
    
    2003RESTATED
    
    
    RESTATEDRevenues
    
    $
    112,222
    
    
    $
    146,201
    
    
    $
    153,774Cost and expensesCost of sales
    
    
    94,154
    
    
    
    105,819
    
    
    
    114,904Selling and administrative
    
    
    36,471
    
    
    
    29,605
    
    
    
    24,449Research and development
    
    
    7,190
    
    
    
    6,695
    
    
    
    4,532Goodwill impairment
    
    
    3,060
    
    
    
    
    
    
    
    Total cost and expenses
    
    
    140,875
    
    
    
    142,119
    
    
    
    143,885Operating income (loss)
    
    
    (28,653
    )
    
    
    4,082
    
    
    
    9,889Other income (expense)Interest income
    
    
    580
    
    
    
    549
    
    
    
    460Interest expense
    
    
    (2,568
    )
    
    
    (2,441
    )
    
    
    (2,491
    )Other  net
    
    
    (1,926
    )
    
    
    (511
    )
    
    
    (484
    )Total other income (expense)
    
    
    (3,914
    )
    
    
    (2,403
    )
    
    
    (2,515
    )Earnings (loss) before income taxes and cumulative effect of
change in the application of accounting principle
    
    
    (32,567
    )
    
    
    1,679
    
    
    
    7,374Income tax expense (benefit)
    
    
    1,060
    
    
    
    309
    
    
    
    4,656Earnings (loss) before cumulative effect of accounting change
    
    
    (33,627
    )
    
    
    1,370
    
    
    
    2,718Cumulative
effect of accounting change, net of tax benefit of $2,726
    
    
    (5,293
    )
    
    
    
    
    
    
    Net Earnings (Loss)
    
    $
    (38,920
    )
    
    $
    1,370
    
    
    $
    2,718Earnings (loss) per share:BasicEarnings (loss) before cumulative effect of accounting change
    
    $
    (5.84
    )
    
    $
    0.25
    
    
    $
    0.49Cumulative effect of accounting change, net of income taxes
    
    
    (0.92
    )
    
    
    
    
    
    
    Net earnings (loss)
    
    $
    (6.76
    )
    
    $
    0.25
    
    
    $
    0.49DilutedEarnings (loss) before cumulative effect of accounting change
    
    $
    (5.84
    )
    
    $
    0.24
    
    
    $
    0.48Cumulative effect of accounting change, net of income taxes
    
    
    (0.92
    )
    
    
    
    
    
    
    Net earnings (loss)
    
    $
    (6.76
    )
    
    $
    0.24
    
    
    $
    0.48Weighted average number of common shares:Basic
    
    
    5,754,951
    
    
    
    5,568,183
    
    
    
    5,496,786Diluted
    
    
    5,754,951
    
    
    
    5,745,282
    
    
    
    5,670,119
 F-8




---



##### 



The Allied Defense Group, Inc.
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands of dollars, except per share data)
 Years ended December 31, 2005, 2004 and 2003
 Preferred
    
    
    Common Stock
    
    
    Capital
    
    
    
    
    
    
    Accumulated
    
    
    TotalStock, no
    
    
    
    
    
    
    $.10
    
    
    in excess
    
    
    Retained
    
    
    other comprehensive
    
    
    Stockholderspar value
    
    
    Shares
    
    
    par value
    
    
    of par value
    
    
    earnings
    
    
    (loss) income
    
    
    EquityBalance at January 1, 2003 as previously reported
    
    $
    
    
    
    
    5,474,813
    
    
    $
    547
    
    
    $
    24,874
    
    
    $
    69,909
    
    
    $
    678
    
    
    $
    96,008Adjustment related to restatement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    378
    
    
    
    (611
    )
    
    
    (39
    )
    
    
    (272
    )Balance at January 1, 2003, RESTATED
    
    
    
    
    
    
    5,474,813
    
    
    
    547
    
    
    
    25,252
    
    
    
    69,298
    
    
    
    639
    
    
    
    95,736Common stock awards
    
    
    
    
    
    
    6,000
    
    
    
    1
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    111Employee stock purchase plan purchases
    
    
    
    
    
    
    10,560
    
    
    
    1
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    151Exercise of stock options
    
    
    
    
    
    
    60,000
    
    
    
    6
    
    
    
    759
    
    
    
    
    
    
    
    
    
    
    
    765Issue of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    429
    
    
    
    
    
    
    
    
    
    
    
    429Comprehensive income:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,718
    
    
    
    
    
    
    
    Currency translation adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,813
    
    
    
    Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,531Balance at December 31, 2003 RESTATED
    
    $
    
    
    
    
    5,551,373
    
    
    $
    555
    
    
    $
    26,700
    
    
    $
    72,016
    
    
    $
    15,452
    
    
    $
    114,723Common stock awards
    
    
    
    
    
    
    5,753
    
    
    
    1
    
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    106Employee stock purchase plan purchases
    
    
    
    
    
    
    16,241
    
    
    
    1
    
    
    
    259
    
    
    
    
    
    
    
    
    
    
    
    260Exercise of stock options
    
    
    
    
    
    
    27,734
    
    
    
    3
    
    
    
    346
    
    
    
    
    
    
    
    
    
    
    
    349Warrants issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    68Issue of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    432
    
    
    
    
    
    
    
    
    
    
    
    432Comprehensive income:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,370
    
    
    
    
    
    
    
    Currency translation adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,245
    
    
    
    Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,615Balance at December 31, 2004 RESTATED
    
    $
    
    
    
    
    5,601,101
    
    
    $
    560
    
    
    $
    27,910
    
    
    $
    73,386
    
    
    $
    23,697
    
    
    $
    125,553Common stock awards
    
    
    
    
    
    
    54,729
    
    
    
    5
    
    
    
    399
    
    
    
    
    
    
    
    
    
    
    
    404Common stock issued with acquisition
    
    
    
    
    
    
    118,072
    
    
    
    11
    
    
    
    2,489
    
    
    
    
    
    
    
    
    
    
    
    2,500Employee stock purchase plan purchases
    
    
    
    
    
    
    5,507
    
    
    
    1
    
    
    
    107
    
    
    
    
    
    
    
    
    
    
    
    108Exercise of stock options
    
    
    
    
    
    
    202,599
    
    
    
    21
    
    
    
    2,671
    
    
    
    
    
    
    
    
    
    
    
    2,692Warrants issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    488
    
    
    
    
    
    
    
    
    
    
    
    488Directors deferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    290
    
    
    
    
    
    
    
    
    
    
    
    290Comprehensive income:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,920
    )
    
    
    
    
    
    
    Currency translation adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,622
    )
    
    
    Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50,542
    )Balance at December 31, 2005
    
    $
    
    
    
    
    5,982,008
    
    
    $
    598
    
    
    $
    34,354
    
    
    $
    34,466
    
    
    $
    12,075
    
    
    $
    81,493
 F-9




---



##### 



The Allied Defense Group, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Years ended December 31,
 2005
    
    
    2004
    
    
    2003RESTATED
    
    
    RESTATEDCash flows from (used in) operating activitiesNet earnings (loss) for the year
    
    $
    (38,920
    )
    
    $
    1,370
    
    
    $
    2,718Adjustments to reconcile net earnings (loss) to net
cash from (used in) operating activitiesCumulative effect of accounting change
    
    
    5,293
    
    
    
    
    
    
    
    Goodwill impairment
    
    
    3,060
    
    
    
    
    
    
    
    In-process research & development
    
    
    944
    
    
    
    
    
    
    
    Unrealized (gains) losses on forward contracts
    
    
    (4,798
    )
    
    
    4,758
    
    
    
    (4,312
    )Depreciation and amortization
    
    
    6,082
    
    
    
    4,551
    
    
    
    4,036Gain on sale of fixed assets
    
    
    (400
    )
    
    
    (44
    )
    
    
    (18
    )Deferred income taxes
    
    
    (3,975
    )
    
    
    (2,405
    )
    
    
    1,712Provision for estimated losses on contracts
    
    
    39
    
    
    
    662
    
    
    
    255Amortization of debt issue costs and conversion feature
    
    
    220
    
    
    
    179
    
    
    
    243Common stock and stock option awards
    
    
    694
    
    
    
    538
    
    
    
    562(Increase) Decrease in operating assets and increase (decrease) in liabilitiesRestricted cash and restricted deposits
    
    
    2,683
    
    
    
    6,387
    
    
    
    (4,786
    )Accounts receivable
    
    
    16,325
    
    
    
    (5,741
    )
    
    
    2,052Cost and accrued earnings on uncompleted contracts
    
    
    196
    
    
    
    14,556
    
    
    
    14,414Inventories
    
    
    (19,363
    )
    
    
    (4,208
    )
    
    
    (1,241
    )Prepaid expenses and assets
    
    
    (3,909
    )
    
    
    1,275
    
    
    
    (1,609
    )Accounts payable and accrued liabilities
    
    
    12,905
    
    
    
    (15,965
    )
    
    
    13,783Customer deposits
    
    
    2,334
    
    
    
    3,340
    
    
    
    (1,144
    )Deferred compensation
    
    
    (1,829
    )
    
    
    521
    
    
    
    671Income taxes
    
    
    190
    
    
    
    (370
    )
    
    
    (2,569
    )Net cash provided by (used in) operating
activities
    
    
    (22,229
    )
    
    
    9,404
    
    
    
    24,767Cash flows from (used in) investing activitiesCapital expenditures
    
    
    (8,167
    )
    
    
    (5,036
    )
    
    
    (4,373
    )Acquisitions, net of cash acquired
    
    
    (9,443
    )
    
    
    (525
    )
    
    
    Proceeds from sale of fixed assets
    
    
    
    
    
    
    45
    
    
    
    20Net cash used in investing activities
    
    
    (17,610
    )
    
    
    (5,516
    )
    
    
    (4,353
    )Cash flows from (used in) financing activitiesNet (decrease) increase in short-term borrowings
    
    
    594
    
    
    
    (14,013
    )
    
    
    5,781Repayment on capital lease obligations
    
    
    (2,297
    )
    
    
    (2,357
    )
    
    
    (1,711
    )Borrowings on bank overdraft facility
    
    
    9,534
    
    
    
    1,293
    
    
    
    (273
    )Principal payments on long-term debt and debenture
    
    
    (2,478
    )
    
    
    (5,922
    )
    
    
    (632
    )Proceeds from issuance of long-term debt
    
    
    12,000
    
    
    
    2,300
    
    
    
    Debt issue costs
    
    
    
    
    
    
    (860
    )
    
    
    Proceeds from employee stock purchase plan
    
    
    108
    
    
    
    261
    
    
    
    151Proceeds from option exercises
    
    
    2,692
    
    
    
    348
    
    
    
    765Restricted cash and restricted deposits
    
    
    
    
    
    
    (2,000
    )
    
    
    Net cash provided by (used in) financing
activities
    
    
    20,153
    
    
    
    (20,950
    )
    
    
    4,081Effects of exchange rates on cash
    
    
    (451
    )
    
    
    1,625
    
    
    
    4,006Net (decrease) increase in cash
    
    
    (20,137
    )
    
    
    (15,437
    )
    
    
    28,501Cash at beginning of year
    
    
    27,940
    
    
    
    43,377
    
    
    
    14,876Cash at end of year
    
    $
    7,803
    
    
    $
    27,940
    
    
    $
    43,377
 F-10




---



##### 



2005
    
    
    2004
    
    
    2003RESTATED
    
    
    RESTATEDSupplemental Disclosures of Cash Flow Information:Cash paid during the year for
Interest
    
    $
    1,338
    
    
    $
    1,516
    
    
    $
    1,492Income taxes
    
    
    4,541
    
    
    
    7,782
    
    
    
    9,455Supplemental Non-Cash Investing and Financing Activities:Capital leases
    
    $
    850
    
    
    $
    2,481
    
    
    $
    1,989Non-cash consideration in connection with business
acquisition
    
    
    8,672
    
    
    
    
    
    
    
    Warrants issued in conjunction with long term debt
    
    
    488
    
    
    
    68
    
    
    
    
 F-11




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Thousands of Dollars)
  Basis of Presentation.
 
    
    ARC Europe, S. A. (ARC Europe), a Belgian company,
    
    Allied Research Corporation Limited (Limited), an inactive United Kingdom company,
    
    News/Sports Microwave Rental, Inc. (NSM), a California corporation,
    
    Titan Systems, Inc., (Titan), a Texas corporation,
    
    SeaSpace Corporation (SeaSpace), a California corporation, and
    
    Mecar USA, a Delaware corporation,
    
    Allied Technology, LLC (Allied Technology), a Maryland limited liability company
    
    Global Microwave Systems, Inc. (GMS), a California corporation.
   Nature of Operations.
 Liquidity
and Capital Resources
    
    
    The Company intends to have in place, and is in the process of negotiating, a domestic
line of credit by year end that will provide $4,000 to $5,000 of immediate liquidity with
a provision to accordion up to $20,000 based on financial performance in subsequent
periods.
    
    The Company is exploring possible asset backed financing from local banks at its US
based AWE facilities that would be earmarked for capital improvement  buildings and/or
equipment  at that site.
    
    The Company is evaluating the disposition of certain non strategic assets.
    
    The Company has the option of issuing dividends of excess cash from its Euro based ES
operations at year end.
    
    The Company may further consolidate its California operations to further reduce
operating expenses.
 Restatements of Financial Results
       Selected Consolidated Statements of Operations Data:
 Impact fromImpact From Foreign
    
    
    CompensationCurrency Translation
    
    
    Expense
    
    
    As Previously ReportedYear Ended December 31, 2004
    
    RESTATED
    
    
    (1)
    
    
    (2)
    
    
    in 10-K/ARevenues
    
    $
    146,201
    
    
    $
    (3,930
    )
    
    $
    
    
    
    $
    150,131Cost of Sales
    
    
    105,819
    
    
    
    117
    
    
    
    
    
    
    
    105,936Operating income
    
    
    4,082
    
    
    
    (3,812
    )
    
    
    (433
    )
    
    
    8,327Earnings before income taxes
    
    
    1,679
    
    
    
    (3,511
    )
    
    
    (433
    )
    
    
    5,623Income taxes
    
    
    309
    
    
    
    (1,234
    )
    
    
    (146
    )
    
    
    1,689Net Earnings
    
    $
    1,370
    
    
    $
    (2,277
    )
    
    
    (287
    )
    
    $
    3,934Earnings per shareBasic
    
    $
    0.25
    
    
    $
    (0.40
    )
    
    $
    (0.06
    )
    
    $
    0.71Diluted
    
    $
    0.24
    
    
    $
    (0.40
    )
    
    $
    (0.06
    )
    
    $
    0.70Weighted average shares
outstanding:Basic
    
    
    5,568,183
    
    
    
    
    
    
    
    
    
    
    
    5,568,183Diluted
    
    
    5,745,282
    
    
    
    
    
    
    
    
    
    
    
    5,991,101
 F-12




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Thousands of Dollars)
 Impact fromImpact From Foreign
    
    
    CompensationCurrency Translation
    
    
    Expense
    
    
    As Previously ReportedYear Ended December 31, 2003
    
    RESTATED
    
    
    (1)
    
    
    (2)
    
    
    in 10-K/ARevenues
    
    $
    153,774
    
    
    $
    (163
    )
    
    $
    
    
    
    $
    153,937Cost of Sales
    
    
    114,904
    
    
    
    151
    
    
    
    
    
    
    
    114,753Operating income
    
    
    9,889
    
    
    
    (314
    )
    
    
    (451
    )
    
    
    10,654Earnings before income taxes
    
    
    7,374
    
    
    
    (1,053
    )
    
    
    (451
    )
    
    
    8,878Income taxes
    
    
    4,656
    
    
    
    (307
    )
    
    
    (153
    )
    
    
    5,116Net Earnings
    
    $
    2,718
    
    
    $
    (747
    )
    
    $
    (297
    )
    
    $
    3,762Earnings per shareBasic
    
    $
    0.49
    
    
    $
    (0.14
    )
    
    $
    (0.05
    )
    
    $
    0.68Diluted
    
    $
    0.48
    
    
    $
    (0.13
    )
    
    $
    (0.05
    )
    
    $
    0.63Weighted Average Shares
Outstanding:Basic
    
    
    5,496,786
    
    
    
    
    
    
    
    
    
    
    
    5,496,786Diluted
    
    
    5,670,119
    
    
    
    
    
    
    
    
    
    
    
    5,970,119
 
 (1)
    
    Impact of correcting for certain errors related to incorrect exchange rates to translate
MECAR S.A.s U.S. Dollar denominated assets and liabilities into its
functional currency and other adjustments related to foreign currency transactions.(2)
    
    Impact of correcting compensation expense related to the grant of stock options to certain
officers and directors in 2002 for which the measurement date was incorrectly determined. These
options were granted in February 2002 by the Compensation Committee of the Board of Directors of
the Company, but were subject to subsequent stockholder approval, which was not obtained until June
2002. Selected Consolidated Balance Sheet Data:
 Impact fromImpact From Foreign
    
    
    CompensationCurrency Translation
    
    
    Expense
    
    
    As Previously ReportedYear Ended December 31,2004
    
    RESTATED
    
    
    (1)
    
    
    (2)
    
    
    in 10-K/ARestricted cash
    
    $
    9,239
    
    
    $
    (518
    )
    
    $
    
    
    
    
    9,757Accounts receivable
    
    
    34,980
    
    
    
    6,739
    
    
    
    
    
    
    $
    28,241Costs and accrued earnings on uncompleted contracts
    
    
    41,420
    
    
    
    (13,457
    )
    
    
    
    
    
    
    54,877Deferred tax asset
    
    
    2,016
    
    
    
    958
    
    
    
    
    
    
    
    1,058Total current assets
    
    
    138,041
    
    
    
    (6,579
    )
    
    
    
    
    
    
    144,352Deferred tax asset  non current
    
    
    2,461
    
    
    
    1,033
    
    
    
    408
    
    
    
    1,020Total assets
    
    
    192,231
    
    
    
    (4,495
    )
    
    
    408
    
    
    
    196,318Accounts payable
    
    
    26,661
    
    
    
    (8,272
    )
    
    
    
    
    
    
    34,933Accrued liabilities
    
    
    10,760
    
    
    
    1,386
    
    
    
    
    
    
    
    9,374Customer deposits
    
    
    8,662
    
    
    
    (46
    )
    
    
    
    
    
    
    8,708Total current liabilities
    
    
    59,078
    
    
    
    (1,378
    )
    
    
    
    
    
    
    60,456Total liabilities
    
    
    66,678
    
    
    
    (595
    )
    
    
    
    
    
    
    67,273Accumulated other comprehensive income (loss)
    
    
    23,697
    
    
    
    (514
    )
    
    
    
    
    
    
    24,211Total liabilities and stockholders equity
    
    $
    192,231
    
    
    $
    (4,495
    )
    
    $
    408
    
    
    $
    196,318
 
 (1)
    
    Impact of correcting for certain errors related to incorrect
exchange rates to translate MECARs U.S. dollar denominated assets and
liabilities into its functional currency and other adjustments
related to foreign currency transactions.(2)
    
    Impact of correcting compensation expense related to stock
options, noted above. Cash Flow Information
  As previouslyRESTATED
    
    
    ADJUSTMENT
    
    
    reported in 10K-AYear ended December 31, 2004Cash flows from operationsAccounts payable
    
    
    (15,943
    )
    
    
    (1,293
    )
    
    
    (14,650)
    *Cash flows from financingBorrowings on bank
overdraft facility
    
    
    1,293
    
    
    
    1,293
    
    
    
    Year ended December 31, 2003Cash flows from operationsAccounts payable
    
    
    13,782
    
    
    
    273
    
    
    
    13,509
    *Cash flows from financingBorrowings on bank
overdraft facility
    
    
    (273
    )
    
    
    (273
    )
    
    
    
 *
    
     the as previously reported amount in the 10 K/A have been adjusted for the impact of the
foreign currency translation described above of $7,772 and ($7,979) in 2004 and 2003 respectively F-13




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Thousands of Dollars)
 Foreign Currency Translation.
 Reclassifications.
 Use of Estimates.
 Accounting Change.
 Cash
and cash equivalents.
 F-14




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
 Accounts Receivable.
 Inventories.
 Property, Plant and Equipment.
 Buildings
and improvements
    
    20-30 yearsMachinery and equipment
    
    3-10 yearsDemonstration Inventory
    
    37 years
    Intangibles/Goodwill. Goodwill and Other Intangible Assets. Accounting for the Impairment
or Disposal of Long-Lived Assets.
  Derivative Financial Instruments. Accounting for Derivative
Instruments and Hedging Activities
 F-15




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
  Revenue and Cost Recognition.
 
    
    Percentage of Completion Method Revenues under fixed price contracts are recognized on
the percentage-of-completion method measured by direct labor incurred to total estimated
direct labor. Revenues from indefinite delivery/indefinite quantity
(IDIQ) are also recognized on a percentage of completion methodology,
measured based upon units delivered. The actual costs on these contracts may differ from the Companys estimate at
completion. Provision for estimated losses and penalties on contracts are recorded when
identified. Revenues under cost-plus-fixed-fee and time and material contracts are
recognized on the basis of costs incurred during the period plus the fee earned. As contracts
extend over one or more years, revisions in costs and earnings estimated during the course of
the work are reflected in the accounting period in which the facts which require the revision
become known. The revenue recognized on the contracts in progress for 2005, 2004 and 2003
were $81,301, $115,462 and $125,211, respectively. Costs and accrued profits on uncompleted
direct and indirect fixed price contracts with foreign governments, direct and indirect U.S.
government foreign military sales (FMS) contracts, and custom designed domestic security and
weather systems, which are billable upon completion, are carried as costs and accrued
earnings on uncompleted contracts.
 
    
    Completed contract method Revenues from the sale of traditional fire & security systems,
as well as battlefield effects simulators, are recognized when the installation is completed.
Security system maintenance contract revenues are recognized over the term of the contract
on a straight-line basis. Revenues from service work rendered are recorded when performed.
The elements of fire and security systems are separable into units of accounting in
accordance with EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.
The maintenance contracts are sold separately from the product and installation contracts and
are priced at market value. There are no provisions related to performance, cancellation,
termination or refunds.
   Advertising.
 Research and Development.
 Capitalization of Internally Developed Software Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use
 F-16




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
  Warranties.
 Income Taxes.
 Earnings Per Common Share.
 Detachable
Stock Purchase Warrants 
 Application of Issue No. 98-5 to Certain Convertible
Instruments
 Stock-Based
Compensation  Accounting for Stock Issued to Employees.
  F-17




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
 (in thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2003RESTATED
    
    
    RESTATEDReported net earnings (loss)
    
    $
    (38,920
    )
    
    $
    1,370
    
    
    $
    2,718Elimination of compensation costs
recognized for options
    
    
    24
    
    
    
    286
    
    
    
    297Stock-based compensation costs that would
have been included in the determination of
reported net earnings, if the fair value
method was applied to all awards, net of
tax
    
    
    (457
    )
    
    
    (584
    )
    
    
    (471
    )Pro forma net earnings (loss)
    
    $
    (39,353
    )
    
    $
    1,072
    
    
    $
    2,544Basic earnings (loss) per share:Reported earnings per share
    
    
    (6.76
    )
    
    
    0.25
    
    
    
    0.49Compensation costs, net of tax
    
    
    (0.08
    )
    
    
    (0.05
    )
    
    
    (0.03
    )Pro forma basic earnings (loss) per share
    
    $
    (6.84
    )
    
    $
    0.20
    
    
    $
    0.46Diluted earnings (loss) per share:Reported earnings (loss) per share
    
    
    (6.76
    )
    
    
    0.24
    
    
    
    0.48Compensation costs, net of tax
    
    
    (0.08
    )
    
    
    (0.05
    )
    
    
    (0.03
    )Pro forma basic earnings (loss) per share
    
    $
    (6.84
    )
    
    $
    0.19
    
    
    $
    0.45
  2005
    
    2004
    
    2003Risk free interest rate
    
    
    3.93
    %
    
    
    3.63
    %
    
    
    2.86
    %Expected volatility rate
    
    
    41.05
    %
    
    
    33.90
    %
    
    
    47.00
    %Expected lives  years
    
    
    3
    
    
    
    3
    
    
    
    3Divided yield
    
    
    
    
    
    
    
    
    
    
    
  ) Share-Based Payment (as amended),
 Major Customers.
 Concentrations of Credit Risk
  F-18




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
    Recent Accounting Pronouncements
    Share-Based Payment
  F-19




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
  Inventory Costs  An Amendment of ARB No. 43, Chapter
4.
 NOTE B  ACQUISITIONS
 Global Microwave Systems, Inc.
 Intangible WeightedAllocation
    
    
    Average Useful LifeCurrent assets
    
    $
    4,714Property and equipment
    
    
    500Other Assets
    
    
    21IntangiblesDeveloped Technologies
    
    
    5,272
    
    
    10 yearsTrade Name
    
    
    2,915
    
    
    IndefiniteNon-Competition Agreement
    
    
    1,705
    
    
    3 yearsPurchased in-process research & development
    
    
    944
    
    
    Expensed in Research and Development in 2005Goodwill
    
    
    5,964
    
    
    IndefiniteTotal assets acquired
    
    $
    22,035Current liabilities
    
    
    (2,299
    )Net assets acquired
    
    $
    19,736
 CMS Security Systems
 F-20




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Thousands of Dollars)
  Intangible WeightedAllocation
    
    
    Average Useful LifeCurrent assets
    
    $
    69Property and equipment
    
    
    23Intangibles (Customer list)
    
    
    50
    
    
    7 yearsGoodwill
    
    
    449
    
    
    IndefiniteTotal assets acquired
    
    $
    591Current liabilities
    
    
    (172
    )Deferred tax liability
    
    
    (19
    )Net assets acquired
    
    $
    400
 NOTE C
 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
  2005
    
    
    2004
    
    
    2003Pro forma amounts assuming change
in application of accounting principle
applied retroactively:Net
earnings (loss), as restated for 2003 and 2004
    
    $
    (38,920
    )
    
    $
    1,370
    
    
    $
    2,718Elimination of the cumulative
effect of the change in
accounting principle, net of
taxes
    
    
    5,293
    
    
    
    
    
    
    
    Impact of change in MECAR
revenue recognition based on
total direct labor rather than
total direct costs, net of
taxesunaudited
    
    
    
    
    
    
    (1,691
    )
    
    
    1,650Pro Forma net earnings (loss)
    
    $
    (33,627
    )
    
    $
    (321
    )
    
    $
    4,368Pro Forma Earnings (loss) per share:Basic
    
    $
    (5.84
    )
    
    $
    (0.06
    )
    
    $
    0.80Diluted
    
    $
    (5.84
    )
    
    $
    (0.06
    )
    
    $
    0.77
 F-21




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
 NOTE D  RESTRICTED CASH
  2005
    
    
    2004Collateralized performance bonds
and advance payment guarantees
    
    $
    5,393
    
    
    $
    9,227Senior secured facility deposit
    
    
    2,000
    
    
    
    2,000Other
    
    
    35
    
    
    
    12$
    7,428
    
    
    $
    11,239Portion included in current assets
    
    
    (7,428
    )
    
    
    (9,239
    )Noncurrent portion
    
    $
    
    
    
    $
    2,000
  NOTE E  ACCOUNTS RECEIVABLE AND COSTS & ACCRUED EARNINGS ON UNCOMPLETED CONTRACTS
  2005
    
    
    2004RESTATEDDirect and indirect receivables from governments
    
    $
    1,777
    
    
    $
    22,324Commercial and other receivables, less allowance for doubtful
receivables of $214 in 2005 and $143 in 2004
    
    
    16,770
    
    
    
    12,656$
    18,547
    
    
    $
    34,980
   F-22




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
 NOTE F
 INVENTORIES
  2005
    
    
    2004RESTATEDRaw materials
    
    $
    14,481
    
    
    $
    15,668Work in process
    
    
    19,265
    
    
    
    686Finished goods, less reserve for obsolescence of $882 in 2005
and $668 in 2004
    
    
    554
    
    
    
    774$
    34,300
    
    
    $
    17,128
 NOTE G
 PROPERTY, PLANT & EQUIPMENT
  2005
    
    
    2004Land
    
    $
    612
    
    
    $
    1,632Buildings and improvements
    
    
    22,309
    
    
    
    23,621Machinery and equipment
    
    
    59,614
    
    
    
    59,372Demonstration Inventory
    
    
    1,107
    
    
    
    $
    83,642
    
    
    $
    84,625Less accumulated depreciation
    
    
    (53,816
    )
    
    
    (54,331
    )$
    29,826
    
    
    $
    30,294
    2005
    
    
    2004Leased equipment
    
    $
    10,823
    
    
    $
    13,721Less: accumulated amortization
    
    
    (4,135
    )
    
    
    (4,170
    )$
    6,688
    
    
    $
    9,551
  Year ending December 31,2006
    
    $
    2,2162007
    
    
    1,6352008
    
    
    6972009
    
    
    3022010
    
    
    72Total minimum lease payments
    
    
    4,922Less: Amount representing interest
    
    
    (315
    )Present value of net minimum lease payments
    
    $
    4,607
 F-23




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
 NOTE H
 INTANGIBLE ASSETS
  December 31, 2005
    
    
    December 31, 2004Gross
    
    
    Accumulated
    
    
    
    
    
    
    Gross
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    NetIntangible assets
subject to
amoritization:Capitalized Software
    
    $
    1,055
    
    
    $
    582
    
    
    $
    473
    
    
    $
    1,184
    
    
    $
    477
    
    
    $
    707Developed Technologies
    
    
    5,272
    
    
    
    81
    
    
    
    5,191
    
    
    
    
    
    
    
    
    
    
    
    Customer Lists
    
    
    2,297
    
    
    
    727
    
    
    
    1,570
    
    
    
    2,297
    
    
    
    540
    
    
    
    1,757Patents and Trade Name
    
    
    1,225
    
    
    
    392
    
    
    
    833
    
    
    
    1,189
    
    
    
    235
    
    
    
    954Other
    
    
    2,228
    
    
    
    162
    
    
    
    2,066
    
    
    
    
    
    
    
    
    
    
    
    Sub Total
    
    $
    12,077
    
    
    $
    1,944
    
    
    $
    10,133
    
    
    $
    4,670
    
    
    $
    1,252
    
    
    $
    3,418Intangible assets
with indefinite lives:Trade Names
    
    
    3,220
    
    
    
    
    
    
    
    3,220
    
    
    
    305
    
    
    
    
    
    
    
    305Total
    
    $
    15,297
    
    
    $
    1,944
    
    
    $
    13,353
    
    
    $
    4,975
    
    
    $
    1,252
    
    
    $
    3,723
  Year
    
    Amount2006
    
    $
    1,3872007
    
    
    1,4492008
    
    
    1,3542009
    
    
    8812010
    
    
    803
 NOTE I  GOODWILL
   Ammunition &Weapons Effects
    
    
    Electronic Security
    
    
    Other
    
    
    TotalBalance as of January 1, 2003
    
    $
    1,345
    
    
    $
    5,936
    
    
    $
    3,323
    
    
    $
    10,604Goodwill acquired during the year
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    125Deferred tax asset adjustment
    
    
    311
    
    
    
    426
    
    
    
    874
    
    
    
    1,611Foreign exchange fluctuation
    
    
    
    
    
    
    1,378
    
    
    
    
    
    
    
    1,378Balance as of December 31, 2003
    
    $
    1,656
    
    
    $
    7,740
    
    
    $
    4,322
    
    
    $
    13,718Goodwill acquired during the year
    
    
    
    
    
    
    449
    
    
    
    125
    
    
    
    574Deferred tax asset adjustment
    
    
    (261
    )
    
    
    
    
    
    
    
    
    
    
    (261
    )Foreign exchange fluctuation
    
    
    
    
    
    
    370
    
    
    
    
    
    
    
    370Balance as of December 31, 2004
    
    $
    1,395
    
    
    $
    8,559
    
    
    $
    4,447
    
    
    $
    14,401Goodwill acquired during the year
    
    
    
    
    
    
    5,964
    
    
    
    
    
    
    
    5,964Impairment loss
    
    
    
    
    
    
    
    
    
    
    (3,060
    )
    
    
    (3,060
    )Foreign exchange fluctuation
    
    
    
    
    
    
    (607
    )
    
    
    
    
    
    
    (607
    )Balance as of December 31, 2005
    
    $
    1,395
    
    
    $
    13,916
    
    
    $
    1,387
    
    
    $
    16,698
 F-24




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
   NOTE J  BANK OVERDRAFT CREDIT FACILITY
  NOTE K  ACCRUED LOSSES ON CONTRACTS, DEFERRED COMPENSATION
 Accrued losses on contracts.
 Deferred compensation.
 Accrued Warranty Costs.
 F-25




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
 NOTE L  LONG-TERM DEBT
  2005
    
    
    2004Notes payable, less unamortized discount
    
    $
    13,539
    
    
    $
    1,959Note related to GMS acquisition, less unamortized discount
    
    
    6,173
    
    
    
    Mortgage loan agreements
    
    
    193
    
    
    
    284Loan for CMS Security Systems acquisition
    
    
    200
    
    
    
    300Notes payable
    
    
    618
    
    
    
    54Capital leases and other
    
    
    4,978
    
    
    
    7,414Total
Long-Term Debt obligations
    
    $
    25,701
    
    
    $
    10,011Less current maturities
    
    
    4,342
    
    
    
    2,788Long-Term
Debt obligations, less current maturities and unamortized discount
(including short-term debt to be refinanced)
    
    $
    21,359
    
    
    $
    7,223
 Notes payable.
 Note payable refinancing 
 Note payable for GMS acquisition.
 Mortgage loan Agreements.
 Loan for CMS Security Systems acquisition.
 Notes Payable.
 Capital Leases and Other.
  F-26




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
 Year
    
    Amount2006
    
    $
    4,3422007
    
    
    3,3372008
    
    
    3,9782009
    
    
    3092010
    
    
    13,735
  NOTE M  CONVERTIBLE SUBORDINATED DEBENTURE
 Convertible Subordinated Debenture.
 NOTE N  BENEFIT PLANS
  NOTE O  CONTINGENCIES AND COMMITMENTS
    Year
    
    Amount2006
    
    $
    9982007
    
    
    1,0132008
    
    
    6362009
    
    
    4022010
    
    
    2782011 and after
    
    
    885
  F-27




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
  NOTE P  FAIR VALUE OF FINANCIAL INSTRUMENTS
  2005
    
    2004Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueNotes payable and long-term
obligations, including current
maturities
    
    $
    25,701
    
    
    $
    25,701
    
    
    $
    10,011
    
    
    $
    10,011Foreign exchange contracts
    
    
    1,156
    
    
    
    1,156
    
    
    
    1,223
    
    
    
    1,223Off-balance-sheet instrumentsGuarantees and performance bonds
    
    
    
    
    
    
    28,123
    
    
    
    
    
    
    
    26,781
  
    
    The fair value of notes payable and long-term obligations is estimated based on
approximate market prices for the same or similar issues or the current rates offered to the
Company for debt of the same remaining maturities. The Company believes the aggregate
carrying value approximates fair value.
    
    The fair value of foreign exchange contracts is based on the mark to market calculations
performed at the end of each period. The balance sheet at December 31, 2005 and 2004
includes the fair value of MECARs forward contracts of $1,161 liability and $1,195 asset,
respectively. The fair value of VSKs forward contracts was $5 and $28 at December 31, 2005
and 2004, respectively.
    
    Estimated fair values for off-balance-sheet instruments, which include performance bonds
and advance payment guarantees are reflected at the face value of these obligations, since
management does not expect to have any claims against these obligations based on its past
experience.
 NOTE Q  DERIVATIVE FINANCIAL INSTRUMENTS
 Derivatives and hedging
  F-28




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
 Fair value hedges
  Cash flow hedges
  Derivatives not designated as hedges
  Counterparty credit risk
  NOTE R  STOCKHOLDERS EQUITY
  2001 Equity Incentive Plan.
 1997 Incentive Stock Plan.
 1992 Employee Stock Purchase Plan.
 F-29




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
  Rights Agreement.
    The following table summarizes option activity:
 2005
    
    
    2004
    
    
    2003Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOptions outstanding at beginning of year
    
    
    632,266
    
    
    $
    14.69
    
    
    
    620,000
    
    
    $
    14.08
    
    
    
    531,000
    
    
    $
    12.81Options granted
    
    
    120,000
    
    
    
    22.68
    
    
    
    40,000
    
    
    
    20.43
    
    
    
    149,000
    
    
    
    16.92Options exercised
    
    
    (202,599
    )
    
    
    13.28
    
    
    
    (27,734
    )
    
    
    9.21
    
    
    
    (60,000
    )
    
    
    9.87Options forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options expired
    
    
    (42,000
    )
    
    
    17.19
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options outstanding at end of year
    
    
    507,667
    
    
    $
    16.94
    
    
    
    632,266
    
    
    $
    14.69
    
    
    
    620,000
    
    
    $
    14.08Options exercisable at end of year
    
    
    375,667
    
    
    
    
    
    
    
    416,930
    
    
    
    
    
    
    
    305,333Weighted-average fair value of options,
granted during the year
    
    $
    8.42
    
    
    
    
    
    
    $
    7.59
    
    
    
    
    
    
    $
    7.73
 F-30




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
 The following table summarizes options outstanding at December 31, 2005:
 ExercisableWeighted AverageNumber
    
    Range of
    
    
    Weighted Average
    
    
    Remaining
    
    
    Number of
    
    
    Weighted averageOutstanding
    
    Exercise Prices
    
    
    Exercise Prices
    
    
    Contractual Life
    
    
    Options
    
    
    Exercise Prices119,500
    
    $
    7.88 to $8.63
    
    
    $
    8.53
    
    
    4.27 Years
    
    
    119,500
    
    
    $
    8.5340,000
    
    $
    9.01 to $14.90
    
    
    $
    14.90
    
    
    2.33 Years
    
    
    24,000
    
    
    $
    14.90348,167
    
    $
    16.40 to $25.00
    
    
    $
    20.07
    
    
    4.46 Years
    
    
    232,167
    
    
    $
    18.98507,667
    
    $
    7.88 to $25.00
    
    
    $
    16.94
    
    
    
    
    
    
    
    375,667
    
    
    
    
 NOTE S  OTHER  NET
  2005
    
    
    2004
    
    
    2003RESTATED
    
    
    RESTATEDNet currency transaction gains (losses)
    
    $
    (721
    )
    
    $
    (1,530
    )
    
    $
    (1,404
    )Miscellaneous  net
    
    
    (1,205
    )
    
    
    1,019
    
    
    
    920$
    (1,926
    )
    
    $
    (511
    )
    
    $
    (484
    )
  NOTE T  INCOME TAXES
   2005
    
    
    2004
    
    
    2003RESTATED
    
    
    RESTATEDDomestic
    
    $
    (21,594
    )
    
    $
    (6,066
    )
    
    $
    (5,896
    )Foreign
    
    
    (10,973
    )
    
    
    7,745
    
    
    
    13,270$
    (32,567
    )
    
    $
    1,679
    
    
    $
    7,374
  2005
    
    
    2004
    
    
    2003RESTATED
    
    
    RESTATEDCurrent (Benefit) ProvisionDomestic
    
    $
    (61
    )
    
    $
    417
    
    
    $
    309Foreign
    
    
    2,800
    
    
    
    6,364
    
    
    
    8,301Total Current Provision
    
    
    2,739
    
    
    
    6,781
    
    
    
    8,610Deferred (Benefit) ProvisionDomestic
    
    
    3,501
    
    
    
    (2,995
    )
    
    
    (848
    )Foreign
    
    
    (5,180
    )
    
    
    (3,477
    )
    
    
    (3,106
    )Total Deferred (Benefit)
    
    
    (1,679
    )
    
    
    (6,472
    )
    
    
    (3,954
    )Total tax provision
    
    $
    1,060
    
    
    $
    309
    
    
    $
    4,656
  F-31




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
 2005
    
    2004
    
    2003RESTATED
    
    RESTATEDTaxes at statutory rate
    
    
    (34.0
    )%
    
    
    34.0
    %
    
    
    34.0
    %State taxes, net of federal benefit
    
    
    (2.9
    )
    
    
    (4.9
    )
    
    
    (2.7
    )Impact of international operations
    
    
    0.4
    
    
    
    127.6
    
    
    
    (14.6
    )Goodwill and other permanent differences
    
    
    3.8
    
    
    
    
    
    
    
    Other permanent differences
    
    
    2.2
    
    
    
    10.8
    
    
    
    9.4Valuation allowance
    
    
    33.8
    
    
    
    (149.1
    )
    
    
    37.0Income taxes
    
    
    3.3
    %
    
    
    18.4
    %
    
    
    63.1
    %
  2005
    
    
    2004RESTATEDDeferred tax assetsInventory
    
    $
    386
    
    
    $
    769Compensation accruals
    
    
    152
    
    
    
    113Valuation adjustments
    
    
    598
    
    
    
    198Accrued expenses
    
    
    471
    
    
    
    225Business tax credits
    
    
    458
    
    
    
    394Deferred compensation
    
    
    476
    
    
    
    536Capitalized R&D
    
    
    2,013
    
    
    
    1,309Derivatives
    
    
    253
    
    
    
    958Revenue recognition
    
    
    2,223
    
    
    
    Foreign tax credit carryforwards
    
    
    2,368
    
    
    
    1,295Net operating loss carryforwards
    
    
    12,325
    
    
    
    1,469Gross deferred tax asset
    
    
    21,723
    
    
    
    7,266Valuation allowance
    
    
    (12,784
    )
    
    
    (1,466
    )Total deferred tax assets
    
    $
    8,939
    
    
    $
    5,800Deferred tax liabilitiesDepreciation and amortization
    
    $
    (498
    )
    
    $
    (1,250
    )Deferred income
    
    
    (73
    )
    
    
    (73
    )Total deferred tax liabilities
    
    $
    (571
    )
    
    $
    (1,323
    )Net Deferred Tax Assets (Liabilities)
    
    $
    8,368
    
    
    $
    4,477
   F-32




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
    NOTE U  EARNINGS PER COMMON SHARE
  2005
    
    
    2004
    
    
    2003RESTATED
    
    
    RESTATEDEarnings (loss) before cumulative effect of accounting change
    
    $
    (32,567
    )
    
    $
    1,370
    
    
    $
    2,718Cumulative effect of accounting change, net of taxes
    
    
    (5,293
    )
    
    
    
    
    
    
    Net earnings after cumulative effect of accounting change
    
    $
    (38,920
    )
    
    $
    1,370
    
    
    $
    2,718Weighted average number of basic shares
    
    
    5,754,951
    
    
    
    5,568,183
    
    
    
    5,496,786Warrants
    
    
    
    
    
    
    2,381
    
    
    
    Stock Options
    
    
    
    
    
    
    174,718
    
    
    
    173,333Weighted average number of diluted shares
    
    
    5,754,951
    
    
    
    5,745,282
    
    
    
    5,670,119Basic earnings (loss) per share before cumulative effect of
accounting change
    
    $
    (5.84
    )
    
    $
    0.25
    
    
    $
    0.49Cumulative effect of accounting change, net of taxes
    
    
    (0.92
    )
    
    
    
    
    
    
    Basic earnings (loss) per share
    
    $
    (6.76
    )
    
    $
    0.25
    
    
    $
    0.49Diluted earnings (loss) per share before cumulative effect
of accounting change
    
    $
    (5.84
    )
    
    $
    0.24
    
    
    $
    0.48Cumulative effect of accounting change, net of taxes
    
    
    (0.92
    )
    
    
    
    
    
    
    Diluted earnings (loss) per share
    
    $
    (6.76
    )
    
    $
    0.24
    
    
    $
    0.48
  F-33




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
 Earnings Per Share
 NOTE V  GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS
        2005
    
    
    2004
    
    
    2003RESTATED
    
    
    RESTATEDRevenues from external customersAmmunition & Weapons Effects
    
    $
    67,396
    
    
    $
    93,793
    
    
    $
    113,406Electronic Security
    
    
    38,802
    
    
    
    45,973
    
    
    
    33,303Other
    
    
    6,024
    
    
    
    6,435
    
    
    
    7,065$
    112,222
    
    
    $
    146,201
    
    
    $
    153,774Interest expenseAmmunition & Weapons Effects
    
    $
    1,406
    
    
    $
    1,483
    
    
    $
    1,603Electronic Security
    
    
    79
    
    
    
    48
    
    
    
    49Other
    
    
    4
    
    
    
    1
    
    
    
    1Corporate
    
    
    1,079
    
    
    
    909
    
    
    
    838$
    2,568
    
    
    $
    2,441
    
    
    $
    2,491
 F-34




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
 2005
    
    
    2004
    
    
    2003RESTATED
    
    
    RESTATEDInterest incomeAmmunition & Weapons Effects
    
    $
    258
    
    
    $
    203
    
    
    $
    221Electronic Security
    
    
    222
    
    
    
    275
    
    
    
    167Other
    
    
    23
    
    
    
    21
    
    
    
    36Corporate
    
    
    77
    
    
    
    50
    
    
    
    36$
    580
    
    
    $
    549
    
    
    $
    460Income tax expense (benefit)Ammunition & Weapons Effects
    
    $
    (4,481
    )
    
    $
    614
    
    
    $
    3,274Electronic Security
    
    
    2,707
    
    
    
    2,694
    
    
    
    654Other
    
    
    1,094
    
    
    
    (1,411
    )
    
    
    (200
    )Corporate
    
    
    1,740
    
    
    
    (1,588
    )
    
    
    928$
    1,060
    
    
    $
    309
    
    
    $
    4,656Depreciation and amortizationAmmunition & Weapons Effects
    
    $
    3,498
    
    
    $
    2,764
    
    
    $
    2,410Electronic Security
    
    
    1,939
    
    
    
    1,216
    
    
    
    1,093Other
    
    
    595
    
    
    
    524
    
    
    
    488Corporate
    
    
    50
    
    
    
    47
    
    
    
    46$
    6,082
    
    
    $
    4,551
    
    
    $
    4,037Segment profit (loss) before taxesAmmunition & Weapons Effects
    
    $
    (18,119
    )
    
    $
    1,671
    
    
    $
    7,562Electronic Security
    
    
    (2,041
    )
    
    
    6,987
    
    
    
    2,618Other
    
    
    (6,238
    )
    
    
    (3,283
    )
    
    
    (528
    )Corporate
    
    
    (6,169
    )
    
    
    (3,696
    )
    
    
    (2,278
    )$
    (32,567
    )
    
    $
    1,679
    
    
    $
    7,374Segment assets(1)Ammunition & Weapons Effects
    
    $
    118,669
    
    
    $
    127,880Electronic Security
    
    
    49,528
    
    
    
    45,231Other
    
    
    8,270
    
    
    
    12,808Corporate
    
    
    4,479
    
    
    
    6,312$
    180,946
    
    
    $
    192,231Capital Expenditure for Segment assetsAmmunition & Weapons Effects
    
    $
    6,706
    
    
    $
    2,271
    
    
    $
    2,941Electronic Security
    
    
    1,041
    
    
    
    1,525
    
    
    
    747Other
    
    
    411
    
    
    
    1,230
    
    
    
    682Corporate
    
    
    9
    
    
    
    10
    
    
    
    3$
    8,167
    
    
    $
    5,036
    
    
    $
    4,373
 (1)    Amounts net of intersegment receivables.
 F-35




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
  Geographic Segment Data2005
    
    
    2004
    
    
    2003RESTATED
    
    
    RESTATEDRevenues from external
customersUnited States (1)
    
    $
    45,216
    
    
    $
    56,932
    
    
    $
    78,330Belgium
    
    
    19,229
    
    
    
    25,694
    
    
    
    24,378Saudi Arabia
    
    
    24,010
    
    
    
    33,657
    
    
    
    13,051France
    
    
    3,254
    
    
    
    6,676
    
    
    
    6,385Venezuela
    
    
    8,348
    
    
    
    8,900
    
    
    
    18,042Cyprus
    
    
    909
    
    
    
    
    
    
    
    Germany
    
    
    1,331
    
    
    
    1,345
    
    
    
    1,233Indonesia
    
    
    
    
    
    
    
    
    
    
    549Brunei
    
    
    598
    
    
    
    
    
    
    
    378Kuwait
    
    
    869
    
    
    
    
    
    
    
    3,545Taiwan
    
    
    1,570
    
    
    
    
    
    
    
    338Japan
    
    
    1,278
    
    
    
    353
    
    
    
    899Qatar
    
    
    1,196
    
    
    
    2,844
    
    
    
    Other foreign countries
    
    
    4,414
    
    
    
    9,800
    
    
    
    6,646$
    112,222
    
    
    $
    146,201
    
    
    $
    153,774
 
 (1)
    
    Includes foreign military sales for the benefit of Saudi Arabia. Geographic Segment Data2005
    
    
    2004RESTATEDSegment assetsBelgium
    
    $
    131,801
    
    
    $
    152,934United Kingdom
    
    
    171
    
    
    
    199United States (1)
    
    
    48,974
    
    
    
    39,098$
    180,946
    
    
    $
    192,231
 
 (1)
    
    Net of inter-segment receivables and investments. 2005
    
    
    2004Property and equipmentBelgium
    
    $
    24,813
    
    
    $
    27,956United States
    
    
    5,013
    
    
    
    2,338$
    29,826
    
    
    $
    30,294
 NOTE W  QUARTERLY FINANCIAL DATA (UNAUDITED)
 2005 Restated
    
    First
    
    
    Second
    
    
    Third
    
    
    Fourth(Amounts in thousands, except per share data)
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    TotalRevenues
    
    $
    24,018
    
    
    $
    26,158
    
    
    $
    26,819
    
    
    $
    35,227
    
    
    $
    112,222Gross profit
    
    
    4,101
    
    
    
    7,904
    
    
    
    (175
    )
    
    
    6,238
    
    
    
    18,068Net earnings (loss)- before cumulative effect of change in the
application of accounting principle
    
    
    (3,656
    )
    
    
    (811
    )
    
    
    (6,761
    )
    
    
    (22,399
    )
    
    
    (33,627
    )Net Earnings (Loss)
    
    
    (9,233
    )
    
    
    (701
    )
    
    
    (6,666
    )
    
    
    (22,320
    )
    
    
    (38,920
    )Per share Net Earnings (Loss):Basic
    
    $
    (1.64
    )
    
    $
    (0.12
    )
    
    $
    (1.15
    )
    
    $
    (3.75
    )
    
    $
    (6.76
    )Diluted
    
    $
    (1.64
    )
    
    $
    (0.12
    )
    
    $
    (1.15
    )
    
    $
    (3.75
    )
    
    $
    (6.76
    )
  Impairment to SeaSpace Goodwill
    
    $
    3,060NSM physical inventory adjustment
    
    
    1.157Write off of in process R&D expenses related to November 2005 acquisition
    
    
    944Increase to corporate audit accrual
    
    
    870SeaSpace physical inventory adjustment
    
    
    422Total fourth quarter significant adjustments  pretax
    
    $
    6,453
           March 31, 2005
 Impact FromForeign
    
    
    
    
    
    
    Impact ofCurrency
    
    
    Impact from
    
    
    Revenue
    
    
    As PreviouslyTranslation
    
    
    Compensation
    
    
    Recognition
    
    
    Reported inRESTATED
    
    
    (1)
    
    
    Expense (2)
    
    
    (3)
    
    
    10-Q/ARevenues
    
    $
    24,018
    
    
    $
    755
    
    
    $
    0
    
    
    $
    2,207
    
    
    $
    21,056Cost of Sales
    
    $
    19,917
    
    
    
    (33
    )
    
    $
    0
    
    
    
    4,952
    
    
    
    14,998Operating Income (loss)
    
    
    (4,935
    )
    
    
    788
    
    
    
    (36
    )
    
    
    (2,746
    )
    
    
    (2,941
    )Earnings before income
taxes and the cumulative
effect of change in
application of accounting
principle
    
    
    (5,800
    )
    
    
    81
    
    
    
    (36
    )
    
    
    (2,745
    )
    
    
    (3,100
    )Income tax expense (benefit)
    
    
    (2,144
    )
    
    
    (5
    )
    
    
    (12
    )
    
    
    (934
    )
    
    
    (1,193
    )Cumulative effect of change
in the application of
accounting principle
    
    
    (5,577
    )
    
    
    
    
    
    
    
    
    
    
    (5,577
    )
    
    
    Net earnings (loss)
    
    
    (9,233
    )
    
    
    76
    
    
    
    (24
    )
    
    
    (7,388
    )
    
    
    (1,907
    )Earnings (loss) per share
 Basic & Diluted:Loss before cumulative
effect of change in the
application of accounting
principle
    
    
    ($0.65
    )
    
    $
    0.01
    
    
    
    ($0.00
    )
    
    
    ($0.32
    )
    
    
    ($0.34
    )Cumulative effect of change
in the application of
accounting principle:
    
    
    ($0.99
    )
    
    
    
    
    
    
    
    
    
    
    ($0.99
    )
    
    
    Net income (loss)
    
    
    ($1.64
    )
    
    $
    0.01
    
    
    
    ($0.00
    )
    
    
    ($1.31
    )
    
    
    ($0.34
    )Weighted Average number of
common shares (4):Basic
    
    
    5,620,634
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,609,351Diluted
    
    
    5,620,634
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,609,351
     June 30, 2005
 Impact FromForeign
    
    
    
    
    
    
    Impact ofCurrency
    
    
    Impact from
    
    
    Revenue
    
    
    As PreviouslyTranslation
    
    
    Compensation
    
    
    Recognition
    
    
    Reported inRESTATED
    
    
    (1)
    
    
    Expense (2)
    
    
    (3)
    
    
    10-Q/ARevenues
    
    $
    26,158
    
    
    
    ($1,733
    )
    
    $
    
    
    
    $
    6,790
    
    
    $
    21,101Cost of Sales
    
    $
    18,254
    
    
    
    (1
    )
    
    
    
    
    
    
    2,577
    
    
    
    15,678Operating Income (loss)
    
    
    (2,098
    )
    
    
    (1,731
    )
    
    
    
    
    
    
    4,213
    
    
    
    (4,580
    )Earnings before income
taxes and the cumulative
effect of change in
application of accounting
principle
    
    
    (1,851
    )
    
    
    (1,317
    )
    
    
    
    
    
    
    4,214
    
    
    
    (4,748
    )Income tax expense (benefit)
    
    
    (1,040
    )
    
    
    (583
    )
    
    
    
    
    
    
    1,433
    
    
    
    (1,890
    )Cumulative effect of change
in the application of
accounting principle
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    110
    
    
    
    Net earnings (loss)
    
    
    (701
    )
    
    
    (734
    )
    
    
    
    
    
    
    2,891
    
    
    
    (2,858
    )Earnings (loss) per share
 Basic & Diluted:Loss before cumulative
effect of change in the
application of accounting
principle
    
    
    ($0.14
    )
    
    
    ($0.12
    )
    
    $
    
    
    
    $
    .49
    
    
    
    ($0.51
    )Cumulative effect of change
in the application of
accounting principle:
    
    $
    0.02
    
    
    
    
    
    
    $
    
    
    
    $
    0.02
    
    
    
    Net income (loss)
    
    
    ($0.12
    )
    
    
    ($0.12
    )
    
    $
    
    
    
    $
    0.51
    
    
    
    ($0.51
    )Weighted Average number of
common shares (4):Basic
    
    
    5,655,369
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,632,071Diluted
    
    
    5,655,369
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,632,071
 September 30, 2005
 Impact FromForeign
    
    
    
    
    
    
    Impact ofCurrency
    
    
    Impact from
    
    
    Revenue
    
    
    As PreviouslyTranslation
    
    
    Compensation
    
    
    Recognition
    
    
    Reported inRESTATED
    
    
    (1)
    
    
    Expense (2)
    
    
    (3)
    
    
    10-Q/ARevenues
    
    $
    26,819
    
    
    
    ($78
    )
    
    $
    
    
    
    $
    3,421
    
    
    $
    23,476Cost of Sales
    
    $
    26,994
    
    
    
    
    
    
    
    
    
    
    
    6,717
    
    
    
    20,277Operating Income (loss)
    
    
    (8,734
    )
    
    
    (79
    )
    
    
    
    
    
    
    (3,295
    )
    
    
    (5,360
    )Earnings before income
taxes and the cumulative
effect of change in
application of accounting
principle
    
    
    (9,124
    )
    
    
    (353
    )
    
    
    
    
    
    
    (3,295
    )
    
    
    (5,476
    )Income tax expense (benefit)
    
    
    (2,363
    )
    
    
    (59
    )
    
    
    
    
    
    
    (1,120
    )
    
    
    (1,184
    )Cumulative effect of change
in the application of
accounting principle
    
    
    95
    
    
    
    
    
    
    
    
    
    
    
    95
    
    
    
    Net earnings (loss)
    
    
    (6,666
    )
    
    
    (294
    )
    
    
    
    
    
    
    (2,080
    )
    
    
    (4,292
    )Earnings (loss) per share
 Basic & Diluted:Loss before cumulative
effect of change in the
application of accounting
principle
    
    
    ($1.17
    )
    
    
    ($0.05
    )
    
    $
    
    
    
    
    ($.39
    )
    
    
    ($0.74
    )Cumulative effect of change
in the application of
accounting principle:
    
    $
    0.02
    
    
    
    
    
    
    $
    
    
    
    $
    0.02
    
    
    
    Net income (loss)
    
    
    ($1.15
    )
    
    
    ($0.05
    )
    
    $
    
    
    
    
    ($0.36
    )
    
    
    ($0.74
    )Weighted Average number of
common shares (4):Basic
    
    
    5,798,619
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,780,911Diluted
    
    
    5,798,619
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,780,911
     December 31, 2005
 Impact FromForeign
    
    
    
    
    
    
    Impact ofCurrency
    
    
    Impact from
    
    
    Revenue
    
    
    ResultsTranslation
    
    
    Compensation
    
    
    Recognition
    
    
    ExcludingRESTATED
    
    
    (1)
    
    
    Expense (2)
    
    
    (3)
    
    
    ImpactRevenues
    
    $
    35,227
    
    
    $
    1,227
    
    
    $
    
    
    
    
    ($12,091
    )
    
    $
    46,091Cost of Sales
    
    $
    28,989
    
    
    
    
    
    
    
    
    
    
    
    (15,061
    )
    
    
    44,050Operating Income (loss)
    
    
    (12,886
    )
    
    
    1,227
    
    
    
    
    
    
    
    2,970
    
    
    
    (17,083
    )Earnings before income
taxes and the cumulative
effect of change in
application of accounting
principle
    
    
    (15,792
    )
    
    
    1,072
    
    
    
    
    
    
    
    2,970
    
    
    
    (19,834
    )Income tax expense (benefit)
    
    
    6,607
    
    
    
    122
    
    
    
    
    
    
    
    384
    
    
    
    6,101Cumulative effect of change
in the application of
accounting principle
    
    
    79
    
    
    
    
    
    
    
    
    
    
    
    79
    
    
    
    Net earnings (loss)
    
    
    (22,320
    )
    
    
    950
    
    
    
    
    
    
    
    2,665
    
    
    
    (25,935
    )Earnings (loss) per share
 Basic & Diluted:Loss before cumulative
effect of change in the
application of accounting
principle
    
    
    ($3.73
    )
    
    $
    0.16
    
    
    $
    
    
    
    $
    .43
    
    
    
    ($4.32
    )Cumulative effect of change
in the application of
accounting principle:
    
    $
    0.01
    
    
    
    
    
    
    $
    
    
    
    $
    0.01
    
    
    
    Net income (loss)
    
    
    ($3.72
    )
    
    $
    0.16
    
    
    $
    
    
    
    $
    0.44
    
    
    
    ($4.32
    )Weighted Average number of
common shares (4):Basic
    
    
    6,001,941
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,001,941Diluted
    
    
    6,001,941
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,001,941
 F-36




---



##### 



The Allied Defense Group, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
 2004, RESTATED
    
    First
    
    
    Second
    
    
    Third
    
    
    Fourth(Amounts in thousands, except per share data)
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    TotalRevenues
    
    $
    37,420
    
    
    $
    19,348
    
    
    $
    61,276
    
    
    $
    28,157
    
    
    $
    146,201Gross profit
    
    
    13,352
    
    
    
    (8,997
    )
    
    
    34,294
    
    
    
    1,733
    
    
    
    40,382Net earnings (loss)
    
    
    3,363
    
    
    
    (11,657
    )
    
    
    16,726
    
    
    
    (7,062
    )
    
    
    1,370Per share Net Earnings (Loss):Basic
    
    $
    .61
    
    
    $
    (2.10
    )
    
    $
    3.01
    
    
    $
    (1.27
    )
    
    $
    0.25Diluted
    
    $
    .56
    
    
    $
    (2.10
    )
    
    $
    2.81
    
    
    $
    (1.27
    )
    
    $
    0.24
 2004 (as previously reported in 10-K/A)
    
    First
    
    
    Second
    
    
    Third
    
    
    Fourth(Amounts in thousands, except per share data)
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    TotalRevenues
    
    $
    33,090
    
    
    $
    39,069
    
    
    $
    34,927
    
    
    $
    43,045
    
    
    $
    150,131Gross profit
    
    
    9,023
    
    
    
    10,723
    
    
    
    7,945
    
    
    
    16,504
    
    
    
    44,195Net earnings (loss)
    
    
    (6
    )
    
    
    1,608
    
    
    
    (567
    )
    
    
    2,899
    
    
    
    3,934Per share Net Earnings (Loss):Basic
    
    $
    (0.01
    )
    
    $
    0.29
    
    
    $
    (0.10
    )
    
    $
    0.52
    
    
    $
    0.71Diluted
    
    $
    (0.01
    )
    
    $
    0.27
    
    
    $
    (0.10
    )
    
    $
    0.49
    
    
    $
    0.70
 NOTE X  OFF-BALANCE SHEET TRANSACTION
  NOTE Y  SUBSEQUENT EVENT
        F-37




---



##### 



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 The Allied Defense Group, Inc.
(Parent Company)
 BALANCE SHEETS
(Thousands of Dollars)
December 31,
 2005
    
    
    2004RESTATEDASSETSCash and equivalents
    
    $
    1,267
    
    
    $
    1,017Restricted cash
    
    
    2,000
    
    
    
    2,012Investment in subsidiaries
    
    
    99,451
    
    
    
    125,837Due from subsidiaries
    
    
    322
    
    
    
    1,202Deferred taxes
    
    
    
    
    
    
    1,485Other
    
    
    1,411
    
    
    
    1,125Total assets
    
    $
    104,451
    
    
    $
    132,678LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESAccounts payable and accrued liabilities
    
    $
    2,811
    
    
    $
    1,995Income tax
    
    
    102
    
    
    
    4Deferred Compensation
    
    
    160
    
    
    
    376Long term debt, less unamortized discount
    
    
    19,712
    
    
    
    1,959Convertible Debenture, less unamortized discount
    
    
    
    
    
    
    2,231Total liabilities
    
    
    22,785
    
    
    
    6,565STOCKHOLDERS EQUITYCommon stock
    
    
    598
    
    
    
    560Capital in excess of par value
    
    
    34,354
    
    
    
    27,910Retained earnings
    
    
    34,466
    
    
    
    73,386Accumulated other comprehensive loss
    
    
    12,248
    
    
    
    24,25781,666
    
    
    
    126,113$
    104,451
    
    
    $
    132,678
 F-38




---



##### 



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT  CONTINUED
 The Allied Defense Group, Inc.
(Parent Company)
 STATEMENTS
OF OPERATIONS
(Thousands of Dollars)
Year ended December 31,
 2005
    
    
    2004
    
    
    2003RESTATED
    
    
    RESTATEDIncomeIntercompany management fees
    
    $
    4,805
    
    
    $
    4,249
    
    
    $
    4,146Dividend from subsidiaries
    
    
    10,430
    
    
    
    
    
    
    
    14,186Other  net
    
    
    20
    
    
    
    45
    
    
    
    9915,255
    
    
    
    4,294
    
    
    
    18,431Costs and expensesAdministrative and other
    
    
    11,735
    
    
    
    7,945
    
    
    
    6,355Earnings (loss) before equity in operations of
subsidiaries
    
    
    3,520
    
    
    
    (3,651
    )
    
    
    12,076Equity in operations of subsidiaries, less dividends received
    
    
    (40,402
    )
    
    
    3,411
    
    
    
    (8,680
    )Earnings (loss) before income taxes
    
    
    (36,882
    )
    
    
    (240
    )
    
    
    3,396Income taxes (benefit)
    
    
    2,038
    
    
    
    (1,610
    )
    
    
    678NET
EARNINGS (LOSS)
    
    $
    (38,920
    )
    
    $
    1,370
    
    
    $
    2,718Earnings per common shareBasic
    
    $
    (6.76
    )
    
    $
    0.25
    
    
    $
    0.49Diluted
    
    $
    (6.76
    )
    
    $
    0.24
    
    
    $
    0.48
 F-39




---



##### 



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT  CONTINUED
 The Allied Defense Group, Inc.
(Parent Company)
STATEMENTS OF CASH FLOWS
Year ended December 31,
 2005
    
    
    2004
    
    
    2003(RESTATED)
    
    
    (RESTATED)Cash flows from operating activitiesNet earnings (loss) for the year
    
    $
    (38,920
    )
    
    $
    1,370
    
    
    $
    2,718Adjustments to reconcile net earnings (loss) to net cash
from (used in) operating activitiesEquity in operations of subsidiaries
    
    
    29,972
    
    
    
    (3,411
    )
    
    
    (5,506
    )Dividend from subsidiary
    
    
    10,430
    
    
    
    
    
    
    
    14,186Depreciation and amortization
    
    
    50
    
    
    
    47
    
    
    
    46Deferred taxes
    
    
    1,485
    
    
    
    (804
    )
    
    
    (528
    )Amortization of debenture issue costs and conversion
feature
    
    
    220
    
    
    
    179
    
    
    
    243Common stock and stock option awards
    
    
    404
    
    
    
    539
    
    
    
    561Changes in assets and liabilitiesRestricted Cash
    
    
    
    
    
    
    
    
    
    
    Other assets
    
    
    (497
    )
    
    
    (477
    )
    
    
    (546
    )Due to subsidiaries
    
    
    880
    
    
    
    (1,605
    )
    
    
    (3,492
    )Accounts payable and accrued liabilities
    
    
    816
    
    
    
    1,270
    
    
    
    (30
    )Deferred compensation
    
    
    (216
    )
    
    
    (27
    )
    
    
    191Income taxes
    
    
    98
    
    
    
    4
    
    
    
    43,642
    
    
    
    (4,285
    )
    
    
    5,125Net cash
provided by (used in) operating activities
    
    
    4,722
    
    
    
    (2,915
    )
    
    
    7,843Cash flows used in investing activitiesCapital expenditures
    
    
    (9
    )
    
    
    (10
    )
    
    
    (3
    )Equity infusions in subsidiaries
    
    
    (7,353
    )
    
    
    (6,367
    )
    
    
    Acquisitions
    
    
    (9,443
    )
    
    
    (125
    )
    
    
    Net cash used in investing activities
    
    
    (17,266
    )
    
    
    (6,502
    )
    
    
    (3
    )Cash flows from financing activitiesProceeds from issuance of long-term debt
    
    
    12,000
    
    
    
    2,000
    
    
    
    Debt issue costs
    
    
    
    
    
    
    (77
    )
    
    
    Principal payments on debenture
    
    
    (2,478
    )
    
    
    (5,250
    )
    
    
    Proceeds from employee stock purchase plan
    
    
    108
    
    
    
    261
    
    
    
    152Proceeds from option exercises
    
    
    2,691
    
    
    
    348
    
    
    
    765Restricted cash
    
    
    12
    
    
    
    (1,887
    )
    
    
    Net cash
provided by (used in) financing activities
    
    
    12,333
    
    
    
    (4,605
    )
    
    
    1,042Net increase
(decrease) in cash and equivalents
    
    
    250
    
    
    
    (14,022
    )
    
    
    8,882Cash and equivalents at beginning of year
    
    
    1,017
    
    
    
    15,039
    
    
    
    6,157Cash and equivalents at end of year
    
    $
    1,267
    
    
    $
    1,017
    
    
    $
    15,039Supplemental
Disclosures of Cash Flow Information:Cash paid during the year for:Income taxes
    
    $
    
    
    
    $
    45
    
    
    $
    Interest
    
    
    496
    
    
    
    641
    
    
    
    590Supplemental
of Non-Cash Investing and Financing Activities:Non-cash consideration in connection with business
acquisition
    
    
    8,672
    
    
    
    
    
    
    
    Warrants issued in conjunction with long term debt
    
    
    488
    
    
    
    68
    
    
    
    
 F-40




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##### 



SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
 The Allied Defense Group, Inc.
Valuation and Qualifying Accounts
(in thousands)
 Years ended December 31, 2005, 2004 and 2003
 AdditionsBalance at
    
    
    Charged to
    
    
    Charged
    
    
    
    
    
    
    Balancebeginning
    
    
    costs and
    
    
    to other
    
    
    
    
    
    
    at end ofDescription
    
    of period
    
    
    expenses
    
    
    accounts
    
    
    Deductions
    
    
    periodYear
ended December 31, 2005Estimated losses on
contracts
    
    $
    726
    
    
    $
    39
    
    
    $
    
    
    
    $
    765
    (1)
    
    $
    Allowance for doubtful
receivables
    
    $
    143
    
    
    $
    334
    
    
    $
    
    
    
    $
    263
    (2)
    
    $
    214Valuation allowance on
inventory
    
    $
    668
    
    
    $
    1,584
    
    
    $
    
    
    
    $
    1,473
    
    
    $
    779Valuation allowances on
deferred tax assets
    
    $
    1,466
    
    
    $
    11,318
    
    
    $
    
    
    
    $
    
    (3)
    
    $
    12,784Warranty reserve
    
    $
    912
    
    
    $
    98
    
    
    $
    
    
    
    $
    191
    
    
    $
    819Year
ended December 31, 2004Estimated losses on
contracts
    
    $
    283
    
    
    $
    726
    
    
    $
    
    
    
    $
    283
    (1)
    
    $
    726Allowance for doubtful
receivables
    
    $
    115
    
    
    $
    143
    
    
    $
    
    
    
    $
    115
    (2)
    
    $
    143Valuation allowance on
inventory
    
    $
    214
    
    
    $
    454
    
    
    $
    
    
    
    $
    
    
    
    $
    668Valuation allowances on
deferred tax assets
    
    $
    4,117
    
    
    $
    1,466
    
    
    $
    
    
    
    $
    4,117
    (3)
    
    $
    1,466Warranty reserve
    
    $
    944
    
    
    $
    61
    
    
    $
    
    
    
    $
    93
    
    
    $
    912Year
ended December 31, 2003Estimated losses on
contracts
    
    $
    313
    
    
    $
    283
    
    
    $
    
    
    
    $
    313
    (1)
    
    $
    283Allowance for doubtful
receivables
    
    $
    233
    
    
    $
    115
    
    
    $
    
    
    
    $
    233
    (2)
    
    $
    115Valuation allowance on
inventory
    
    $
    200
    
    
    $
    14
    
    
    $
    
    
    
    $
    
    
    
    $
    214Valuation allowances on
deferred tax assets
    
    $
    1,244
    
    
    $
    2,873
    
    
    $
    
    
    
    $
    
    
    
    $
    4,117Warranty reserve
    
    $
    826
    
    
    $
    262
    
    
    $
    
    
    
    $
    144
    
    
    $
    944
 
 (1)
    
    Represents amount of reserve relieved through completion of
contracts.(2)
    
    Represents write-off of receivables.(3)
    
    Represents amounts of valuation allowance relieved through use of
deferred tax assets. F-41




---



##### 



EXHIBIT INDEX
 Number
    
    Description of Exhibit
    
    Page18.1
    
    Letter from independent public accountant related to change in application of accounting principle
    
    
    E-321
    
    List of Subsidiaries
    
    
    E-423
    
    Consent of Independent Registered Public Accounting Firm
    
    
    E-523.1
    
    Consent of Independent Registered Public Accounting Firm
    
    
    E-631.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002, dated October 6, 2006
    
    
    E-731.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002, dated October 6, 2006
    
    
    E-832
    
    Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of Sarbanes-Oxley Act of 2002, dated October 6, 2006
    
    
    E-9