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                               Commission file number
    December 31, 1995                                      0-2545








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








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                                 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                               Commission file number
    December 31, 1995                                      O-2545

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

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

8000 Towers Crescent Drive
Suite 750
Vienna, Virginia                                                  22182
(Address of principal executive offices)                        (Zip Code)

Allied's telephone number, including area code: (703) 847-5268
Securities registered pursuant to Section 12(b) of the Act:  None

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

                         Common Stock - Par Value $.10
                                (Title of Class)

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

                                 Yes  X     No

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

         State  the  aggregate   market  value  of  the  voting  stock  held  by
non-affiliates of the registrant as of March 4, 1996:

                Common Stock - Par Value $.10       $16,805,665

The number of shares of  registrant's  Common Stock  outstanding  as of March 4,
1996, was 4,422,056.


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Item 1.  Business.

General.

         Allied Research  Corporation  ("Allied") was incorporated in 1962 under
the name Allied Research  Associates,  Inc. Allied changed its corporate name to
Allied Research  Corporation in 1988.  Allied's business is primarily  conducted
through its four (4) wholly-owned subsidiaries,  MECAR S.A. ("MECAR"),  Barnes &
Reinecke,  Inc. ("BRI"), Allied Research Corporation Limited ("Limited") and ARC
Services,  Inc. ("Services") as well as a group of Belgian corporations acquired
by MECAR in 1994 and 1995 lead by VSK Electronics, S.A., Teletechnique Generale,
S.A.  and IDCS,  S.A.  (collectively,  "The VSK  Group").  MECAR is  located  in
Petit-Roeulx-lez-Nivelles,  Belgium;  BRI is headquartered in Arlington Heights,
Illinois and has operations in East Moline, Illinois and Troy, Michigan; Limited
is located in the United Kingdom;  Services,  which  effectively  terminated its
operations at the end of 1995,  operated out of Allied's  headquarters office in
Vienna, Virginia; and The VSK Group operates from several different locations in
Belgium.

Description of Business.

Allied.

         Allied provides  management and marketing services to its subsidiaries.
Allied also provides export  licensing and freight  forwarding  services for its
subsidiaries.

MECAR.

         MECAR develops,  designs,  manufactures and sells ammunition and weapon
systems.  Substantially  all of MECAR's  revenues  are derived  from the sale of
ammunition  which is used with weapons that are generally  considered  defensive
weapons.

         MECAR designs and  manufactures a wide variety of shells,  grenades and
rockets in the  artillery,  anti-tank  and  anti-personnel  categories.  It also
produces two classes of weapons for light  infantry  use. The  following are the
principal products produced and sold by MECAR:

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                  105mm Tank - APFSDS-T M1060 (Armour Piercing  Discarding Sabot
         Fin Stabilized Tracer) Round. For use with 105mm tank guns - US M68, UK
         L7 and  French  CN105F1 - this  projectile  is used to  defeat  armored
         targets by means of the kinetic  energy (KE) of its  monobloc  tungsten
         alloy  long  rod  penetrator.  This  model  of KE  round  is a  product
         improvement of the current  in-service  MECAR 105mm TK APFSDS-T  M1050.
         Projectiles  consist of a sub-projectile  and sabot. The sub-projectile
         comprises an armour  piercing fin  stabilized  tungsten  alloy long rod
         penetrator,  and aluminum  windshield and a tracer assembled in the fin
         assembly. This is contained within a 3 piece aluminum discarding sabot,
         held in place  with a  plastic  band at the  forward  end and a plastic
         obturating band toward the sabot base. The projectile is crimped to the
         lined   cartridge   case   which   is   loaded   with   cool   burning,
         multi-perforated,  loose  propellant,  and is fitted  with an  electric
         primer. This round is comparable to the US model M833 APFSDS-T round.

                  90mm Anti-tank  APFSDS-T M562 Round.  This shell  developed by
         MECAR  consists of a tungsten  penetrator  weighing  1.7  kilograms,  a
         discardable  sabot of light alloy and a fin with  tracer.  This kinetic
         energy  shell,  weighing 2.8  kilograms  with the sabot,  is fired at a
         muzzle  velocity  of 1460 meters per second  with an  effective  combat
         range of 1800 meters. The penetration  capability of this shell against
         a 120mm thick armour plate  slanted at 60 degrees is achieved at ranges
         in excess of 2,000 meters.  MECAR has  developed  and designed  several
         versions of the 90 mm round which can be used by various  guns in usage
         around the world.

                  25mm APFSDS-T M935 Round.  This  ammunition  round is produced
         for use  against  light  armor  and  support  vehicles  and  was  first
         delivered to customers  starting in 1993.  This round was Mecar's first
         entry into the medium caliber  ammunition  market, and further expanded
         the  customer  base to include  infantry  fighting  and  reconnaissance
         vehicles.

                  Universal  Bullet Trap Rifle  Grenades.  The universal  bullet
         trap rifle  grenade is designed to be light,  effective,  accurate  and
         simple to use.  It is fitted over the muzzle of any  standard  military
         rifle with a muzzle outer  diameter of 22mm and fired from the shoulder
         in the normal manner.  This method of firing a grenade is made possible
         by MECAR's development of the universal bullet trap ("BTU"). The BTU is
         a patented  device which can be used with all  existing  makes of steel
         core or soft core bullets in calibers 7.62mm and 5.56mm,  including the
         latest round  (SS109) used in the M-16 rifle.  The BTU is fitted within
         the tail of the grenade. When the bullet is fired, it lodges in the BTU
         and the expanding  gases

                                       3

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         released by the  discharged  round propel the grenade to its target.
         MECAR manufactures several different bullet trap grenades including
         high explosive fragmentation, anti-personnel, armour piercing,  smoke
         generating,  white  phosphorus,  and parachute  flare (night
         illuminating).

                  Rifle Grenades.  A full range of rifle grenades  utilizing the
         ballistite  cartridge for launching can also be  manufactured by MECAR.
         These  include  anti-personnel,  armour and concrete  piercing,  smoke,
         illumination,  delay and other types. This type of grenade is no longer
         widely used due to the development of the bullet trap grenade.

                  60 to 202mm Ammunition. Other ammunition manufactured by MECAR
         for use in various gun systems  includes the kinetic energy  penetrator
         round, high explosive  anti-personnel  fragmentation  round,  anti-tank
         tracer projectile,  smoke tracer projectile,  anti-personnel  canister,
         and training devices.

                  84mm SAKR Recoilless  Rifle.  MECAR has recently  expanded its
         line of  anti-armor  munitions  with the  addition  of their  84mm SAKR
         recoilless  rifle and its  associated  family of  ammunition.  The SAKR
         fills the gap between  rifle  grenades  and the 90mm family of guns and
         ammunition.  Several large orders have already been received.  The SAKR
         ammunition (HEAT, HE-T and HE-TP-T) is also interoperable with existing
         84mm systems which has been sold extensively around the world. MECAR is
         now in a  position  to  provide  ammunition  to  support  the  existing
         inventory of weapons as well as further  expanding the use of this type
         of infantry  weapon with  countries that have already  purchased  MECAR
         rifle grenades.

BRI.

         On May 26, 1987, Allied purchased all of the outstanding  capital stock
of BRI, a Delaware corporation.

         BRI is an  engineering  and  manufacturing  firm  that  specializes  in
design, prototype fabrication, production, test and inspection documentation for
government  and  industry.  The major  portion of BRI's  business is in military
vehicle  technology and technical support of combat and support vehicles.  BRI's
capability  includes the design of heavy wheeled and tracked vehicles.  Military
and  commercial  technical  manuals are  prepared,  technical  data packages are
maintained,  and logistic  support  analysis  conducted.  BRI is the U.S. Army's
technical support contractor on the M109 self-propelled 155mm Howitzer family of
vehicles, M88 Recovery Vehicle and M55 Sheridan Light Tank.

                                       4

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         BRI's technical publications department provides documents and manuals
for the presentation and support of products.  This includes both commercial and
government department of defense customers.

Limited.

         Limited,  a  systems  integrator  in  the  ammunition   industry,   was
established  by Allied in 1989 to  augment  its  overseas  business  development
efforts. In 1991 and 1992, Limited procured and supplied end item munitions such
as artillery  projectiles and tank ammunition including cartridge cases, primers
and  propellants  pursuant  to two (2)  contracts  obtained  from one of MECAR's
principal  customers.  Limited has completed  these  contracts,  which comprised
Limited's  entire backlog.  In 1994, the London office of Limited was closed and
the  employment  of the  relevant  employees  was  terminated.  Allied and MECAR
continue to attempt to obtain additional systems integration  contracts.  If any
such  contracts  are  obtained  in the  name of  Limited,  such  entity  will be
appropriately staffed and supported to carry out the contracts.  At present, the
only  substantial  assets of Limited are a promissory note  evidencing  advances
made by Limited to MECAR and an intercompany  receivable in the aggregate amount
of $21,774,000 which have been eliminated in consolidation.

Services.

         Services was organized to provide  demilitarization  and  environmental
services to governments  and private  corporations.  No significant  revenue has
been earned by Services.  Its operations were effectively  terminated at the end
of 1995. No  significant  activity is expected in this area for the  foreseeable
future.

The VSK Group.

         On June 1, 1994, MECAR acquired all of the outstanding stock of The VSK
Group.  The VSK Group  engages in the  business  of  developing,  manufacturing,
selling,  installing and servicing  security systems for private  industry.  The
systems marketed by The VSK Group include  intrusion  detection,  access control
and fire detection systems. The principal products manufactured by The VSK Group
are central  control  panels;  the other  components  are  purchased  from other
vendors.  In May, 1995, The VSK Group acquired all of the  outstanding  stock of
IDCS,  S.A.,  which  markets  an  upscale  line of  security  services  products
principally in European markets.

                                       5

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Geographic Areas and Industry Segments.

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

Market and Customers.

         Allied  derives the  principal  portion of its revenues from direct and
indirect  sales to  foreign  governments,  U.S.  Government  agencies  and prime
contractors,  primarily on fixed price contracts.  The addition of The VSK Group
adds a  non-military  component to  company-wide  operations.  During 1995,  two
agencies of a foreign  government and another foreign  government  accounted for
approximately 12%, 31% and 27% of Allied's  revenues.  During 1994, 5%, 60%, 14%
and 7%,  of  Allied's  revenues  were  derived  from two  agencies  of a foreign
government  and two other  foreign  governments,  respectively.  During 1995 and
1994,  Allied derived  approximately  17% and 12%,  respectively,  of its annual
revenue from U.S. Government  agencies and contractors.  The VSK Group accounted
for approximately 28% and 10% of Allied's 1995 and 1994 revenues, respectively.

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

         The  sales  by  MECAR  in any  given  period  and  its  backlog  at any
particular  time may be  significantly  influenced by one or a few large orders.
This is due to the nature of its  business.  An order for  MECAR's  products  is
typically for a large quantity and/or a substantial  aggregate price,  primarily
because  materials  required  for the  manufacture  of the  products  cannot  be
economically  purchased  in  small  quantities  and  because  of  the  favorable
economies  of large  volume  production.  In  addition,  the  production  period
required  to fill most such  orders  may range  from  several  months to a year.
Accordingly, MECAR's business is dependent upon its ability to obtain such large
orders.  MECAR has no continuing  contract with any customer to purchase MECAR's
products.  MECAR does, of course, accept smaller orders when it is profitable to
do

                                       6

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so or when MECAR  management  believes that accepting such an order is otherwise
in the best  interests  of MECAR.  MECAR's  products  are  designed  for general
military use by a variety of government customers.

         When  MECAR  obtains  a  contract  for  the  sale of its  products,  it
generally  receives down payment(s)  and/or letter(s) of credit to be applied to
the purchase price upon shipment of the products.

         BRI's   engineering  and  technical   services  are  sold  directly  or
indirectly  to the United States  Department of Defense and to certain  civilian
customers.  BRI has a number of ongoing design and engineering  assignments with
U.S.  military  agencies,  however,  BRI has no  continuing  contract  with  any
customer  to provide  products  or  services.  The size of the  orders  vary and
completion  time  ranges  from  several  months to a few days.  U.S.  Government
contracts are subject to termination at the  convenience of the U.S.  Government
or for default. BRI has also begun to market its services to foreign governments
and in 1995 received its first foreign military sales contract from the U.S.
government to provide upgrade parts for a foreign government's military
hardware.

         Limited's system  integration  services have been marketed directly and
indirectly to the defense  departments of  governments.  In 1994,  Allied closed
Limited's  London  office  and  terminated  the  employment  of the  individuals
operating  from such  office.  Allied  and  MECAR  continue  to  market  systems
integration business.

         The VSK Group derives  substantially  all of its revenue from sales and
services to private  industry such as banks,  private  businesses,  quasi-public
office buildings, etc. The customers of The VSK Group are located in Belgium and
in neighboring countries. While most of the orders received by The VSK Group are
for work  which can be  completed  within  one  year,  it has  received  two (2)
multi-year  orders  for its  products  and  services.  IDCS  sells its  products
principally in European markets.

Marketing.

         Most of the  marketing  activities  of MECAR and Limited are handled by
MECAR's  staff of sales  engineers  and  executive  staff.  In  addition,  MECAR
advertises  in trade  journals and  participates  in trade shows.  MECAR is also
represented by marketing  representatives  in different  markets.  MECAR obtains
orders from the agencies of a foreign  government which constitute its principal
customers through an independent marketing representative.

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         BRI's   marketing   activities  are  conducted  by  its  executive  and
management  staff.  In addition,  BRI  participates  in various  trade shows and
advertises in trade journals.

         Some of  Limited's  marketing  is also  handled by  Allied's  executive
staff. The two (2) systems integration  contracts previously obtained by Limited
were  obtained  through  Allied's  efforts  via  MECAR's   principal   marketing
representative.

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

Research and Development.

         The development of ammunition and weapon systems requires knowledge and
experience  in  aerodynamics,  mechanical  engineering,  chemistry,  combustion,
materials  behavior  and  ballistics.  MECAR  maintains  an active  research and
development staff, including a staff of design engineers,  in order to determine
how materials can be used or combined in new ways to improve  performance  or to
solve new problems. In 1995, 1994 and 1993, MECAR expended $1,039,631,  $940,133
and  $671,685,  respectively,  for research and  development  activities.  MECAR
designed most of the products which it currently manufactures. MECAR designs and
develops most of its special tooling and fixtures and special  explosive loading
and testing systems.

         BRI conducts research and development under contract to both government
and commercial clients.  Generally,  full-size prototypes are supplied where the
research and development requirement calls for a working model or unit.

         Approximately $93,000, $322,200 and $170,000 was expended in 1995, 1994
and 1993,  respectively,  for research and  development  activities on behalf of
Services. No significant amounts are expected to be expended for such activities
in 1996.

         The  business  of The  VSK  Group  requires  continuous  investment  in
research and  development  to update and enhance the security  systems.  The VSK
Group  employs  a staff of  design  engineers  specialized  in the field of both
electronic  hardware and software.  During 1995, The VSK Group expended $954,363
on  research  and  development.  Prior to 1995, The VSK Group did not
separately account for its research and development costs.

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Suppliers and Materials.

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

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

         For its  manufacturing  and  assembly  operations,  BRI is dependent on
suppliers of raw materials and parts, some of which are  customer-directed  sole
source  procurement.  BRI has found such  supplies and materials to be generally
available.

         By the nature of its systems integration business,  Limited is required
to rely  extensively  upon  vendors  to  supply  end-use  items  required  under
Limited's contracts with its customer.  To date, Limited has found all necessary
items to be generally available.

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

Backlog.

         As of  December  31, 1995 and  December  31,  1994,  Allied had backlog
orders believed to be firm,  after giving effect to the percentage of completion
method of accounting,  of approximately  $68.1 (of which $21.1 relate to The VSK
Group) and $23.1 million, respectively. The backlog of orders as of December 31,
1995 are expected to be substantially filled in 1996.

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Competition.

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

         BRI is in a very  competitive  business and many of its competitors are
larger  companies  with  greater  capital  resources.  A large  portion of BRI's
business is obtained through the competitive bidding process.

         Limited has a number of  competitors  in its attempts to obtain systems
integration business,  many of which are larger companies with greater financial
resources.

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

                                       10

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Personnel.

         As of March 4,  1996,  Allied  had 5  employees.  As of March 4,  1996,
MECAR, BRI and The VSK Group had 519 full-time,  permanent employees  classified
as follows:

         MECAR

         Technical and salaried employees             50
         Hourly workers                              214
         Technical consultants                         2

         BRI

         Salaried employees                           70
         Hourly employees                             42

         The VSK Group

         Technical salaried employees                117
         Hourly workers                               24

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


Patents.

         MECAR  holds a number of patents  in many  countries  and with  varying
expiration dates covering certain of its products. Allied does not believe there
is a threat of a material  loss of revenue with the  expiration  of any of these
patents.


Environmental Regulations.

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

Principal Customers.

         MECAR has historically  received a large percentage of its revenue from
two (2) agencies of a foreign  government.  In 1991, 1992 and 1993, MECAR and in
1991 and 1992,  Limited had contract  revenue from these  agencies in amounts in
excess of those historically received.  Contract awards from these agencies from
1992 through 1994 were substantially reduced. Contract awards rebounded somewhat
in 1995, although well below the levels received in the 1991-1993 timeframe.

                                       11

<PAGE>

Item 2.  Properties.


         Allied's principal  executive offices are located in Vienna,  Virginia,
where it leases  approximately  4,300  square  feet of office  space.  The lease
expires in September, 2000.

         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 consists of  approximately  112,000 square feet and the
administration  facilities consist of 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 development  range is also maintained on
this property. MECAR also owns a 500 acre test range in the  vicinity  of the
Village of Marche in the Ardennes  region of Belgium,  which was acquired in
1985.  This property, which for several  years had been leased by MECAR,  was
acquired by S.A.  MECAR Immobiliere, a wholly-owned subsidiary of MECAR.

         Throughout  1995,  MECAR  operated  at an average of 50% of  productive
capacity of its  facility,  assuming the  operation of 3  manufacturing  shifts.
MECAR is currently  operating at approximately 45% of such productive  capacity.
MECAR is currently operating one full shift plus a partial  manufacturing second
shift.

         Capital expenditure programs for equipment planned in 1996 will require
funding of approximately $2.5 million.

         BRI  operates  from an office and  manufacturing  building in Arlington
Heights,  Illinois.  BRI has leased  approximately 57,500 square feet of office,
engineering  and  manufacturing  space through July 31, 1999.  Assuming one full
shift is maximum capacity,  BRI is currently  operating at approximately 100% of
the productive capacity of its Arlington Heights facility.

         BRI also operates from leased facilities located in Troy,  Michigan and
East Moline,  Illinois. The Troy operations are conducted from a leased facility
consisting of approximately  17,500 square feet of office and engineering space.
The Troy lease expires on January 31, 2000.  The East Moline  facility  contains
1,200  square feet of office and  engineering  space and is leased on a month to
month basis. Both facilities are used as bases to service  Department of Defense
customers in the vicinity.  BRI is currently  operating at approximately 100% of
the productive capacities of each of its Troy and East Moline facilities.

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<PAGE>

         The VSK Group operates from owned facilities  containing  approximately
43,000 square feet.  Such  facilities are currently  operating at  approximately
100% of productive capacity.


Item 3.  Legal Proceedings.

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


Item 4.  Submission of Matters to a Vote of Security Holders.

         There were no matters submitted to a vote of security holders of Allied
during the fourth quarter of 1995.

                                                        PART II

Item 5.  Market for Stock and Related Security Holder Matters.
Market Information.

         Allied's Common Stock has been listed for trading on the American Stock
Exchange  ("AMEX") since September 15, 1992. Its AMEX trading symbol is ALR. Its
media listing is under the symbol  Allied Rsrch.  The table below shows the high
and low sales prices of Allied's  Common Stock during 1995 and 1994 (as reported
by AMEX):

         1995                  High            Low

         1st Quarter         $5              $3-1/4
         2nd Quarter          4-1/4           2-9/16
         3rd Quarter          4-5/8           3-5/8
         4th Quarter          4-3/8           3-1/8

         1994                  High            Low

         1st Quarter         $9-1/4          $6-3/8
         2nd Quarter          7               4
         3rd Quarter          5               2-7/8
         4th Quarter          6-3/8           3-1/4

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<PAGE>

Stockholders.

         There were approximately 1,708 holders of record of the Common Stock of
Allied as of March 6, 1996.


Dividends.

         Allied  paid a 5% stock  dividend  on  November  6, 1992 to  holders of
record of its Common  Stock on October  15,  1992.  Cash was paid in lieu of the
issuance of fractional  shares.  There have been no cash  dividends  declared or
paid by  Allied  in 1993,  1994 or 1995.  The  banking  agreements  of MECAR and
Limited restrict the ability of such subsidiaries to transfer funds to Allied as
described in  Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations.

                                       14

<PAGE>

Item 6.  Selected Financial Data.

         The following selected financial data relates to Allied's  consolidated
financial  position and results of operations  for 1995,  1994,  1993,  1992 and
1991:


                       1995        1994        1993        1992        1991
                       ----        ----        ----        ----        ----

                          (000's omitted except per share amounts)

 Revenues            $65,769     $ 69,847    $147,097    $217,334    $174,677



 Net earnings (loss)  (2,013)     (10,941)      7,995      18,040      14,229

 Per Share:
 Net earnings (loss)    (.46)       (2.49)       1.73        3.99        3.21

 Total assets         94,253      107,386     163,591     116,236     128,330

 Long-term debt
 obligations and
 redeemable preferred
 stock                28,435       14,108      19,218       6,462       7,437

 Cash dividends
 declared per
 common share              -            -           -           -           -

NOTE: During 1993, Allied changed its method of accounting for income taxes as a
result of the  adoption  of FASB 109.  This  change  did not have a  significant
effect on the  comparability  of the above selected  financial data. See Notes A
and P to the  accompanying  financial  statements for Allied.  Per share amounts
have been retroactively restated to reflect the 1992 stock dividend.


Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations.


Overview

                  Allied  provides   management  services  to  its  wholly-owned
subsidiaries.   Its  principal   assets  are  the  stock  of  its   wholly-owned
subsidiaries: MECAR, BRI, Limited and Services. Allied's consolidated statements
have eliminated intercompany  trans-

                                       15

<PAGE>

actions.  The following discussion refers to the  financial  condition,
liquidity  and results of  operations of Allied on a consolidated  basis unless
otherwise stated.  All dollars are in millions except per share amounts.

                  Allied  incurred a net loss of $2.01 ($.46 per share) for 1995
compared  with a net loss of $10.94  ($2.49 per share) for 1994 and a net profit
of $8 ($1.73 per share) for 1993 (after a provision for  restructuring  costs of
$2.1 net of taxes or $0.44 per share).

                  Allied's 1995 loss resulted  principally  from a loss incurred
at MECAR. The loss at MECAR was primarily  attributable to insufficient  revenue
from MECAR's traditional customer base. MECAR historically relies upon contracts
from two agencies of a foreign  government for the major portion of its revenue.
In 1994, MECAR received orders from such customers for only $22. While the level
of such orders increased to $48 in 1995, such orders were not received until the
second half of 1995 and did not provide  sufficient  revenue in the last half of
1995 to offset the losses incurred during the first half of 1995.

Trends In Operations

                  Allied's results from operations are uneven as a result of the
volatility  of the overseas  military  business of MECAR.  While  management  is
encouraged  by the  increase  in orders  received  by MECAR in 1995,  MECAR must
continue to obtain  similar or larger  orders on a timely  basis.  The losses of
1994-1995 have eroded the profits earned in the 1991-1993 period.

                  Management continues to attempt to broaden its revenue base in
several respects.  First, MECAR continues to attempt to open new markets for its
products.  These  efforts  resulted  in revenue  from  first-time  customers  of
approximately  $2.6 in 1995.  Second, the acquisition of The VSK Group (in 1994)
and IDCS  (in  1995)  constitute  an  attempt  to  mitigate  the  impact  of the
volatility   of  the  overseas   military   operations   on  Allied's   results.
Notwithstanding  these  efforts,  at present,  Allied's  results  continue to be
principally driven by the results of MECAR and more specifically by the business
generated from MECAR's traditional customer base.

                  MECAR began 1996 with a backlog of approximately $34.7. It has
also  received  $15.4 of new  orders in early  1996.  While it  anticipates  the
receipt of additional  orders in 1996 from other sources,  the most  substantial
orders  anticipated  by MECAR  are  from its  traditional  customer  base.  Such
contracts  come at irregular  intervals  and have proven  impossible to predict.
Given the lead  time  between  receipt  of such  contracts  and  recognition  of
significant  amounts  of  revenue  therefrom,  the timing of receipt of any such
contracts is critical for Allied's 1996 results and liquidity.

                                       16

<PAGE>


Trends In Liquidity And Capital Resources


                  Allied  experienced  liquidity  problems  during  1990 and the
first portion of 1991 due to substantial  operating  losses  experienced  during
1988 and 1989 as well as the  pledge  of cash  needed  to  accommodate  the then
increasing backlog of orders. The liquidity improved significantly in 1991-1993.
The  substantial  losses  incurred in 1994 caused a decline in  liquidity  which
decline  continued  throughout  1995 due to the more modest  losses  incurred in
1995. A further  decline in liquidity is forecast for 1996 unless MECAR  obtains
and finances  substantial  contracts  from its principal  customer base or other
customers.  If such contracts are not timely obtained,  the continued decline in
liquidity will cause Allied to continue its reduction of operating  costs,  seek
additional  capital and/or take other currently  unidentified  actions to remedy
the liquidity deficiency.

Liquidity.

                  Allied's liquidity  continued to decline in 1995,  principally
as  a  result  of  non-profitable  operations  at  MECAR.  Working  capital  was
approximately $13.98 at December 31, 1995, which is a decrease of $2.47 from the
December 31, 1994 level.  The working  capital is required for operations and to
support credit facility agreements.

                  Accounts  receivable  at  December  31,  1995  decreased  from
December 31, 1994 by $.7 due to larger collections at the end of 1995. Costs and
accrued  earnings on  uncompleted  contracts  decreased  by $2.08 from 1994 as a
result of lower levels of work in process at 1995 year-end.  Inventory increased
by $2.01 over 1994,  generally as a result of longer production  times.  Prepaid
expenses and  deposits  decreased  $.11 due to a decline in new orders.  Current
liabilities  decreased by $26.07 from 1994 levels as a result of the  completion
and final delivery of various contracts and an increase in long-term debt.

                  During  1995,  1994 and 1993,  Allied  funded  its  operations
principally  with  internally  generated  cash  and  back-up  credit  facilities
required for foreign government contracts.

                  Allied  and  its  subsidiaries  implemented  substantial  cost
cutting  initiatives  in 1995.  Allied  reduced its  general and  administrative
expenditures by 17%; similarly, MECAR reduced its expenditures by 2%. The London
office of Services was closed in late 1994 which  resulted in  substantial  cost
savings  in 1995.  Services  projects  were  wound  down  throughout  1995 which
resulted in a reduction in costs of 45%. Selling and administrative expenses for
Allied  increased by $.13 in 1995 over 1994 since the 1995  expenses  included a
full year of such  expenses  at VSK (as  opposed to seven (7) months in 1994) as
well as almost eight (8) months of such expenses at IDCS.

                                       17

<PAGE>

                  Except for a modest line of credit to support  the  operations
of each of MECAR and BRI,  neither Allied nor any of its subsidiaries has a line
of credit or other bank  facility to provide  liquidity.  Accordingly,  Allied's
ability to cover its anticipated  future  operating and capital  requirements is
dependent upon its ability to generate positive cash flow from operations. Given
the relative size of the  operations  of its  subsidiaries,  Allied's  continued
ability to generate sufficient cash flow is currently dependent principally upon
MECAR's operations.

                  MECAR  typically  obtains  relatively  large  orders  for  its
ammunition and weapon systems which require a credit  facility to provide import
letters of credit,  advance bank guarantees and performance  bonds.  These needs
have  been met in the last few  years via an  agreement  with a four (4)  member
foreign bank pool (the "Bank  Agreement"),  supplemented by a term loan supplied
by some of the bank pool  participants (the "Term Loan") and a partial guarantee
by  the  regional   government  in  Belgium  (the  "Walloon  Region").   MECAR's
obligations  under the Bank  Agreement  are also  supported by a $3.0  guarantee
provided by Allied.  The credit facility was last amended in 1995 to finance the
orders received by MECAR from its principal  customers.  The bank agreement must
be further amended to provide  appropriate  financing for new orders as they are
received  by  MECAR.  To date,  MECAR has not had to  refuse a  contract  due to
inability to obtain  appropriate  financing.  While management  believes that it
will  be able  to  finance  additional  MECAR  contracts  using  the  bank  pool
structure, there can be no assurance that such financing will be provided.

                  The Bank  Agreement  and other loan  agreements  continues  to
impose certain restrictions on MECAR. MECAR's obligations were collateralized at
December  31, 1995 by base cash  deposits of $10.56  (plus the Term Loan deposit
proceeds of $18.49) and a pledge on MECAR's assets of $27.6. As a result, $10.56
of the $15.74 cash balance  reflected on the December 31, 1995 balance  sheet is
not available for general  corporate use. The Bank Agreement  further  precludes
MECAR from making  payments  to any company in the Allied  group in excess of $2
per year. At December 31, 1995, MECAR had  unrestricted  cash of $5.18. The Bank
Agreement also requires Allied to increase MECAR's capital by approximately $8.6
in early 1996 by agreeing to contribute certain intercompany indebtedness.

                  MECAR has a  mortgage  loan with a foreign  bank  which had an
outstanding  balance of  approximately  $6.2 at December 31, 1995.  The loan was
payable  during  1995  on an  interest-only  basis;  commencing  January,  1996,
principal and interest payments commenced which extend through January, 2004.

                  BRI  operated   throughout   1995  from  cash  generated  from
operations  supplemented by a credit  facility.  The credit  facility  initially
consisted  of a $1.0 line of credit  which was  converted  during 1995 to: (i) a
$750,000 line of credit;  (ii) a $500,000 term loan (repayable over a three year
period)  to  reimburse  BRI for  capital  expenditures  in  1994;  and  (iii) an

                                       18

<PAGE>

additional  $500,000 term loan  (repayable  over a three year period) to finance
additional capital expenditures. The line of credit expires in July, 1996 and is
renewable  at the  discretion  of the bank on an  annual  basis  thereafter.  At
December 31, 1995, the line of credit had an outstanding balance of $0.45.

                  VSK  operated   throughout   1994  primarily from  cash
generated  from operations.  IDCS,  which was  acquired  by VSK in the  second
quarter of 1995, similarly operated from cash generated from operations.

                  Limited's  minimal  activities in 1995 were funded solely from
cash generated from the 1991-1993 period and from funds supplied by MECAR.

                  The  operations  of Services were funded by cash supplied from
Allied. Services effectively ceased operations at the end of 1995.

                  In May, 1995,  The VSK Group  acquired all of the  outstanding
stock of IDCS, S.A. for a purchase price of $2.97. The purchase price was funded
by a combination of bank and seller financings and thus did not adversely affect
Allied's cash flow.

Capital Resources.

                  Allied spent $2.92 in 1995 on capital  equipment  expenditures
as  compared  with  $3.62  and  $3.65  in  1994  and  1993,  respectively.   The
expenditures  in 1995 were  primarily  for repairing  facilities  damaged by the
spring, 1995 explosion and for new equipment and upgrading  facilities at MECAR.
Management  currently  anticipates  that it  will  spend  approximately  $2.5 on
capital  expenditures in 1996,  principally for additional upgrades to the MECAR
facility and for the benefit of BRI and The VSK Group.

Results of Operations

                  Allied had  revenues  of $65.8 in 1995 as compared to revenues
of $69.8 and $147.1 in 1994 and 1993,  respectively.  Allied  incurred a loss of
$2.01 in 1995 compared to a loss of $10.94 in 1994 and a profit of $8.0 in 1993.

                                       19

<PAGE>

                 The following  table sets forth,  for the  years ended December
31, 1995, 1994 and 1993, certain items from Allied's consolidated  statements of
operations expressed as a percentage of net sales:

                                          1995      1994      1993
                                          ----      ----      ----

Revenue                                  100.0%    100.0%    100.0%

Costs and Expenses
  Cost of sales                           75.9      91.6      80.8
  Selling and administrative              24.0      22.4       7.9
  Research and development                 3.1       1.8        .6
  Restructuring charge                    ----        .5       2.0

           Operating income (loss)        (3.0)    (16.3)      8.7

Other income (deductions)
  Interest income                          2.7       5.1       2.9
  Interest expense                        (4.6)     (5.4)     (2.8)
  Other - net                              3.0       1.9       (.6)

           Earnings before
           income taxes (loss)            (1.9)    (14.7)      8.2

Income taxes                               1.1       1.0       2.8

           Net earnings (loss)            (3.0)    (15.7)      5.4

Revenues

                 Revenues for 1995 decreased $4.1, or 5.8% as compared to 1994. 
Revenues at MECAR decreased by approximately 41% from the prior year  due to the
completion  of several  contracts  and the delay in  receipt  of substantial new
orders.  Further,  MECAR's  1995  revenues  included  a $1.3 net  recovery  from
insurance arising from an explosion at one of the storage bunkers. Such revenues
partially  offset  overhead  and  operating  costs of MECAR  during the shutdown
period.  Revenues at Limited continue to be generated largely by interest earned
on  inter-company   loans  made  to  MECAR,  which  revenue  was  eliminated  in
consolidation. Revenues at BRI increased 60% from 1994 levels principally due to
the receipt by BRI of a foreign  military sales  contract with an  international
customer. Revenues at The VSK Group increased approximately $11.1, or 156%, over
the seven (7) month period reported for 1994. The 1995 revenue for The VSK Group
included $1.6 revenue  reported by IDCS for the eight (8) month period following
its acquisition in early May, 1995.

                 Revenues  for 1994  decreased  $77.3,  or 52.6% as compared to
1993. Revenues at MECAR decreased by approximately 60.5% from the prior year due
to the  completion of several large  contracts and the lack of  substantial  new
orders.  In  addition,  MECAR did

                                       20

<PAGE>

not  complete as  originally  forecast:  (1) a contract from one of its
principal  customers due to a delay in the provision by such  customer  of a
letter  of credit to  secure  the  purchase  price and (ii) another contract as
a result of difficulty encountered in receipt of a necessary component.
Revenues at Limited  decreased from 1993 levels since Limited has no remaining
customer  contracts;  its revenue was generated largely from interest earned on
inter-company  loans made to MECAR,  which revenue was  eliminated in
consolidation.  Revenues at BRI decreased 12.6% from 1993 levels principally due
to  the  delay  in  receipt  of  substantial  orders.  Such  orders,  originally
anticipated  for receipt in early to mid 1994,  were delayed and received in the
last quarter of 1994.  Accordingly,  only minimal  revenue from these orders was
recognized  in 1994.  Revenues at The VSK Group were $7.2 for the last seven (7)
months of 1994.

Cost of Sales

                  Cost of sales as a  percentage  of  sales  for 1995  decreased
15.9% over 1994 due to the product mix manufactured,  the high costs incurred in
1994 due to delays  and loss  provisions  no  longer  required  on a  terminated
contract.

                  Cost of sales as a  percentage  of  sales  for 1994  increased
10.8% in 1994 over 1993 due to the product  mix  manufactured.  MECAR's  cost of
sales as a percentage of sales for 1994 increased 12.5% in 1994 compared to 1993
principally  due to the product mix produced and some  problems  experienced  in
obtaining certain components of its products.

Selling and Administrative Expenses

                  Selling and general administrative  expenses in 1995 increased
from 1994 levels due to a full year of  operations  at The VSK Group,  and eight
(8) months of operations at IDCS which were offset by cost containment  measures
implemented  company-wide.  Further,  The VSK Group incurred  approximately $0.8
expenses in 1995 due to a failed attempt to establish an operation in France.

                  Selling and general administrative  expenses in 1994 increased
over 1993 due to the acquisition of The VSK Group,  increased  marketing efforts
targeted to expand the Company's  customer base as well as due diligence efforts
in connection with several proposed acquisitions.

Research and Development

                  Research  and  development  costs  increased in 1995 over 1994
levels due to additional  efforts by MECAR in  broadening  its product lines and
VSK's accounting for research and development costs beginning in 1995.

                                       21

<PAGE>

                  Research  and  development  costs  increased in 1994 over 1993
levels due to additional  efforts by MECAR in broadening its product  lines.  In
addition,  Services  continued  to  expend  funds in its  efforts  to bring  its
demilitarization and water purification efforts to market.

Interest Income

                  Interest  income  decreased  in  1995  from  1994  due  to the
utilization  of cash for  unprofitable  operations  and  reduced  cash  deposits
associated with the Term Loan agreement.

                  Interest  income  decreased  in  1994  from  1993  due  to the
utilization of cash for  unprofitable  operations and the acquisition of The VSK
Group.

Interest Expense

                  Interest expense  decreased in 1995 from 1994 as a result of a
decrease in outstanding debt and credit facilities fees.

                  Interest expense  decreased in 1994 from 1993 as a result of a
decrease in outstanding debt and credit facilities fees.

Other - Net

                  Allied  had a  gain  in  1995  of  $2.0  from  other  sources,
principally  consisting  of net currency  gains  occasioned by the weakened U.S.
dollar.

                  Allied  had a  gain  in  1994  of  $1.3  from  other  sources,
principally  consisting  of net currency  gains  occasioned by the weakened U.S.
dollar.  In 1993, Allied had a net loss of $1.0 including a net currency loss of
$1.2.

Income Taxes

                  The 1996  effective  tax rate was 58.6%  primarily  due to the
losses  incurred at MECAR  (which can only be carried  forward)  and foreign tax
rate differentials in the U.S.

                  The  1994  effective  tax  rate  was  6.5%  due to the  losses
incurred at MECAR (which can only be carried forward) and in the U.S.

Net Earnings (Loss)

                  The Company incurred a $2.01 loss in 1995 compared with a loss
of $10.94 in 1994. BRI and The VSK Group operated at a profit in 1995; MECAR and
Services  operated at a loss.  The loss

                                       22

<PAGE>

incurred by MECAR was minimized due to approximately  $1.3 attributable  to the
excess of  insurance proceeds  received by MECAR over direct costs and expenses
incurred as a result of the spring, 1995 explosion.

                  The Company incurred a $10.94 loss in 1994 compared with a
profit of $8 in 1993.  All subsidiaries (except The VSK Group) operated at a
loss in 1994.


                                    PART III


Item 10.  Directors and Executive Officers of Allied.

Directors.

         The following are the directors of Allied:

         J. R.  Sculley,  age 55,  became a director  of Allied in 1991.  He has
served as president and chief operating officer of Allied since April, 1992, and
was named chairman of the board and chief executive  officer in December,  1992.
He is also a director of MECAR,  BRI,  Limited and  Services.  Between  1989 and
April,  1992, Mr. Sculley was Director of Advanced  Studies and  Technologies of
Grumman  Corporation,  a defense  company,  and,  prior  thereto,  was Assistant
Secretary of the Army (Research, Development and Acquisition).

         Charles T. Scott,  age 74, became a director of Allied in 1991. He is a
retired  business  executive.  From 1978 to 1990,  Mr.  Scott was  president  of
Management Services  Corporation,  a subsidiary of Lear Siegler Corp., a defense
company.

         Clifford C. Christ, age 48, became a director of Allied in 1993. He has
been the president and chief  executive  officer of NavCom Defense  Electronics,
Inc., a defense electronics company, since 1988.

         Earl P. Smith,  age 57, became a director of Allied in 1993.  Mr. Smith
has been a principal  of Earl Smith &  Associates,  a defense  consulting  firm,
since  1990.  During  1990  he  was  vice  president-commercial   operations  of
Management  Services  Corporation,  a subsidiary of Lear Siegler Corp., and from
1986 to  1990 he was  vice  president  marketing  and  contracts  of  Management
Services Corporation.

         Robert W.  Hebel,  age 72,  became a director  of Allied in early 1996.
Throughout the last five years, Mr. Hebel has been a private investor.

         Harry H.  Warner,  age 60,  became a director  of Allied in early 1996.
Throughout the last five years,  Mr. Warner has been a  self-employed  financial
consultant,  investor  and  real  estate

                                       23

<PAGE>

developer.  He is also a  director  of Chesapeake  Corporation,  Pulaski
Furniture  Corporation  and American  Filtrona Corporation.

Executive Officers.

         The following are the executive officers of Allied:

         J. R. Sculley, age 55, was elected chairman of the board and chief
executive officer of Allied in December, 1992, and has served as Allied's
president and chief operating officer since April, 1992.  He served as Director
of Advanced Studies and Technologies of Grumman Corporation, a defense company,
from 1989 to April, 1992, and previously was Assistant Secretary of the Army
(Research, Development and Acquisition).  Mr. Sculley also serves as a director
of MECAR, BRI, Limited and Services.

         W. Glenn Yarborough, Jr., age 55, was elected vice president of Allied
in January, 1995.  Since February, 1993, Mr. Yarborough has served as vice
president of Services.  Previously, he served as director of business
development of Grumman Corporation, a defense company.  Mr. Yarborough also
serves as a director of The VSK Group.

                                       24

<PAGE>


Item 11.  Executive Compensation

Compensation of Directors and Executive Officers
         The following table sets forth information  concerning all compensation
paid for  services  rendered in all  capacities  to Allied and its  subsidiaries
during the years ended December 31, 1995,  1994 and 1993, by the chief executive
officer of Allied and by other  executive  officers of Allied whose total annual
salary and bonus exceeds $100,000:

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                              Long Term Compensation
                          Annual Compensation                   Awards              Payouts
(a)         (b)    (c)         (d)            (e)           (f)          (g)          (h)       (i)
                                             Other                                              All
Name                                         Annual         Restricted   Securities             Other
and                                          Compen-        Stock        Underlying   LTIP      Compen-
Principal                                    sation         Award(s)     Options/     Payouts   sation
Position    Year   Salary($)   Bonus($)      ($)            ($)          SARs (#)     ($)       ($)
---------   ----   ---------   --------      -------        ----------   --------     -------   ------
<S>         <C>    <C>       <C>          <C>               <C>          <C>          <C>       <C>
J. R.       1995   $235,000
Sculley,    1994   $235,000  1\$103,125   2\$ 82,762.85                  3\56,000
Chief       1993   $225,000               4\  44,654
Executive
Officer

W. Glenn    1995   $144,500
Yarborough, 1994   $130,000  6\$ 26,250                                  7\14,000
Jr., Vice
President\5

Michael W.  1995   $132,000
Owen, Vice
President\8
</TABLE>
---------------
                                       25

<PAGE>
<TABLE>
<S>  <C>
1.   Mr. Sculley was granted 25,000 shares of Company stock which had a market
     value of $4.125 per share on the date of grant.
2.   Mr. Sculley was paid $82,762.85 in payment of federal and state taxes paid
     as a result of the 1994 stock award.
3.   Mr. Sculley was granted incentive stock options to acquire up to 56,000
     shares of Company stock in March, 1994.  The options first become
     exercisable in March, 1996 at  which  point  they  become  exercisable  at
     the  rate of 20% of the underlying shares per year.
4.   Mr. Sculley was paid $44,654 in partial payment of federal and state taxes
     paid as a result of the 1992 stock award.
5.   Mr. Yarborough first became an executive officer of the Company in April,
     1992.
6.   Mr. Yarborough was granted 6,000 shares of Company stock which had a market
     value of $4.375 per share on the date of grant.
7.   Mr. Yarborough was granted incentive stock options to acquire up to 13,000
     shares of Company stock in March, 1994.  The options first become
     exercisable in March, 1996 at which point they become exercisable at the
     rate of 20% of the underlying shares per year.
8.   Mr. Owen resigned all positions with the Company in early 1996.
</TABLE>

                                       26

<PAGE>

               Aggregated Option/SAR Exercises in Last Fiscal Year
                           and FY-End Option/SAR Value

<TABLE>
<CAPTION>
              (a)                (b)                (c)                (d)                (e)

                                                                  Number of
                                                                  Securities           Value of
                                                                  Underlying           Unexercised
                                                                  Unexercised          In-the-Money
                                                                  Options/SARS at      Options/SARs at
                                                                  FY-End (#)           FY-End ($)


                             Shares Acquired     Value            Exercisable/         Exercisable/
Name                         on Exercise (#)     Realized ($)     Unexercisable        Unexercisable
----                         ---------------     ------------     -------------        -------------
<S>                          <C>                 <C>              <C>                  <C>
J.R. Sculley                         0                  0             0/56,000               0\1

W. Glenn Yarborough, Jr.             0                  0             0/14,000               0\1
</TABLE>


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

1.  At December 31, 1995, the Company common stock traded at $3.125 per share;
    the exercise price was $8.25 per share.

                                       27

<PAGE>


Director Compensation


         Each director of Allied is currently compensated for services as a
director,  including as a member of  committees  of the Board,  as follows:  (i)
each director who is also an employee of Allied is  compensated in the  amount
of $1,000  per  month;  and (ii)  each  director  who is not also an employee of
Allied  ("Outside  Director") is compensated in accordance  with the Allied
Research Corporation Outside Directors  Compensation Plan (the "Directors
Compensation  Plan") by which Allied pays each of its Outside  Directors  $1,000
per month  during such  Outside  Director's  tenure and awards  1,000  shares of
Allied's  Common Stock to each  individual who serves as an Outside  Director on
each July 1. As  initially  adopted  by the Board of  Directors,  the  Directors
Compensation Plan authorized the issuance of up to 50,000 shares of Common Stock
of Allied;  as a result of the 5% stock  dividend paid on November 6, 1992,  the
48,000 shares remaining to be issued  automatically  increased to 50,400 shares.
In addition, Outside Directors are compensated (a) $1,000 for each Board meeting
in excess of four (4)  personally  attended  during each calendar year, (b) $500
for each committee  meeting  attended  which is not held in  conjunction  with a
Board meeting,  and (c) $250 for each teleconference  Board meeting in excess of
two (2) in which a director participates during each calendar year.

         In 1992, the Board of Directors of Allied  adopted the Allied  Research
Corporation Outside Directors Retirement Plan (the "Directors  Retirement Plan")
to provide retirement  benefits for long-standing  Outside Directors.  Under the
Directors  Retirement  Plan,  Outside  Directors  are  eligible for a retirement
benefit if they  retire  from the Board and have served as a member of the Board
for a minimum of five (5) years. An eligible  Outside  Director who retires from
the Board is entitled to receive,  commencing on the last day of the first month
following  the month in which the  director  attains age seventy  (70),  monthly
payments equal to the monthly cash compensation received from Allied at the time
the director terminated service in such capacity.  Such payments will cease upon
the earlier of the  expiration  of a period of time  equivalent to the period of
time the director  served as a member of the Board or the death of the director.
In the event that a director has breached any fiduciary or legal duty to Allied,
the director  will forfeit any right to payment of benefits  under the Directors
Retirement  Plan. The Directors  Retirement Plan is administered by the Board of
Directors.

         In 1991, the Board of Directors of Allied  adopted the Allied  Research
Corporation Outside Directors Stock Option Plan (the "Directors Option Plan") by
which Allied may grant options for up to 208,000 shares of Allied's Common Stock
to its Outside  Directors  (which amount  includes the 5% stock dividend paid on
November 6, 1992).  None of the options granted pursuant to the Directors Option
Plan are  intended to qualify as  incentive  stock

                                       28

<PAGE>

options  under  Sections 422 through 424 of the Internal  Revenue Code.  The
purpose of the Directors  Option Plan is to advance the  interests of Allied by
providing  its Outside  Directors with financial incentives in the form of
non-statutory stock options in order to attract,  retain and motivate  such
Outside  Directors.  No options were granted under the Directors  Option Plan in
1994 and 1995 and no options are outstanding under the Directors Option Plan.


Employment Contracts and Change-In-Control Arrangements

         J. R. Sculley and Allied have entered into an Employment Agreement (the
"Sculley  Agreement") which extends through March 31, 1998, and is automatically
renewable from year to year thereafter unless either Allied or Mr. Sculley gives
the other timely notice of its or his intent not to renew. In consideration  for
his services as an officer of Allied and as a director of Allied and each of its
subsidiaries,  Mr.  Sculley is entitled to receive an aggregate  sum of not less
than $235,000 per calendar year.  The Sculley  Agreement  further  provides that
upon the death or disability of Mr. Sculley,  the Company will make  installment
payments  to or for the  benefit  of Mr.  Sculley  in an  amount  not to  exceed
$250,000.

         W. Glenn  Yarborough,  Jr. and Allied have entered  into an  Employment
Agreement (the "Yarborough  Agreement") which extends through July, 1996, and is
automatically renewable from year to year thereafter unless either Allied or Mr.
Yarborough  gives the other timely notice of its or his intent not to renew.  In
consideration  for his services as an officer of Allied and as a director of the
entities  comprising  The VSK Group,  Mr.  Yarborough  is entitled to receive an
aggregate  sum of not less  than  $144,500.  The  Yarborough  Agreement  further
provides that in the event Mr.  Yarborough ceases to serve in any capacity as an
officer of the Company as a result of a  voluntary  or  involuntary  termination
within a period  of twelve  (12)  months  following  a change  in  control,  Mr.
Yarborough shall be entitled to a lump sum payment equal to the aggregate amount
of compensation  payable to Mr. Yarborough  throughout the remaining term of the
Yarborough Agreement.

         In June,  1991,  the Board of Directors of Allied adopted the Preferred
Share  Purchase  Rights  Agreement  (the  "Agreement").  The Board  amended  the
Agreement in April,  1993, to reduce the acquisition  threshold  described below
from 25% to 10%. The Agreement  provides each  stockholder of record on June 20,
1991,  a dividend  distribution  of one  "right" for each  outstanding  share of
Allied's  common  stock.  Rights become  exercisable  at the earlier of ten days
following:  (1) a public  announcement that an acquiror has purchased or has the
right to acquire 10% or more of Allied's common stock,  or (2) the  commencement
of a tender  offer

                                       29

<PAGE>

which would result in an offeror  beneficially  owning 30% or more of the
outstanding  common stock of Allied.  All rights held by an acquiror or offeror
expire on the announced  acquisition  date, and all rights expire at the close
of business on June 20, 2001.  Each right  entitles a  stockholder  to acquire
at a stated purchase price, 1/100 of a share of Allied's preferred stock which
carries  voting and  dividend  rights  similar to one share of its common stock.
Alternatively,  a right holder may elect to purchase for the stated price an
equivalent  number  of  shares  of  Allied's  common  stock  (or in  certain
circumstances,  cash,  property  or other  securities  of Allied) at a price per
share equal to one-half of the average market price for a specified  period.  In
lieu of the purchase price, a right holder may elect to acquire  one-half of the
common  stock  available  under the second  option.  The  purchase  price of the
preferred stock fractional amount is subject to adjustment for certain events as
described in the  Agreement.  At the  discretion  of a majority of the Board and
within a specified  time period,  Allied may redeem all of the rights at a price
of $.01 per right.  The Board may also  amend any  provisions  of the  Agreement
prior to exercise.


Compensation Committee Interlocks and Insider Participation

         The  Compensation  Committee  of Allied  during the  fiscal  year ended
December 31, 1995 consisted of Messrs.  Charles T. Scott, Clifford C. Christ and
Earl P. Smith.  None of such individuals has served as an officer or employee of
Allied  nor  is  there  any  other  relationship   between  any  member  of  the
Compensation  Committee  and Allied  which is  required  to be  disclosed  under
applicable regulations.


Item 12.  Security Ownership of Certain Beneficial Owners and Management.

                  The  following  information  is furnished as of March 4, 1996,
with respect to any person who is known to Allied to be the beneficial  owner of
more than five percent (5%) of its Common Stock:

                                       30

<PAGE>


                                      Amount and
Title                                 nature of
of          Name and address of       beneficial       Percent of
class       beneficial owner          ownership        class\1
------      --------------------      -------------    -------
Common      Lindner Growth Fund/       424,620           9.45%
            Ryback Management         Owned directly
            Corporation
            7711 Carondelet Avenue
            P.O. Box 16900
            St. Louis, MO  63105

Common      Fidelity Low-Priced        248,110           5.52%
            Stock Fund/Fidelity       Owned directly
            Management & Research
            Company
            82 Devonshire Street
            Boston, MA  02109
--------------------------

1.  Based upon 4,422,056 shares of common stock outstanding plus 72,500 shares
    which may be acquired within 60 days pursuant to outstanding stock options.

                                       31

<PAGE>

                  The  following  information  is furnished as of March 4, 1996,
with respect to the beneficial ownership by management of Allied's Common Stock:


                                      Amount and
Title                                 nature of
of        Name of                     beneficial       Percent of
class     beneficial owner            ownership        class   \1

Common    Charles T. Scott            2,000             *
                                      Owned
                                      directly

Common    Harry H. Warner             1,000             *
                                      Owned
                                      directly

Common    Earl P. Smith               1,110             *
                                      Owned
                                      directly

Common    Clifford C. Christ          8,000             *
                                      Owned
                                      directly

Common    J. R. Sculley              76,336\2          1.7%
                                      Owned
                                      directly

Common    W. Glenn Yarborough, Jr.   15,664\3           *
                                      Owned
                                      directly

Common    All executive officers    104,110            2.3%
          and directors as a          Owned
              group (7)               directly


*Less than 1%

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

1.       Based upon 4,422,056 shares of common stock outstanding plus 72,750
         shares which may be acquired within 60 days pursuant  to outstanding
         stock options.

2.       Includes 12,000 shares which may be acquired with 60 days pursuant to
         outstanding stock options.

3.       Includes 7,000 shares which may be acquired within 60 days pursuant to
         outstanding stock options.

                                       32

<PAGE>

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


Item 13. Certain Relationships and Related Transactions.

         None.


                                    PART IV

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

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

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

(a)(1)   Financial Statements:

         Report of Independent Certified Public               F-3
         Accountants

         Consolidated Balance Sheets at December 31,          F-4
         1995 and 1994

                                       33

<PAGE>

         Consolidated Statements of Operations for            F-6
         the three years ended December 31, 1995

         Consolidated Statements of Stockholders'             F-7
         Equity for the three years ended
         December 31, 1995

         Consolidated Statements of Cash Flows                F-8
         for the three years ended December 31, 1995

         Notes to Consolidated Financial Statements           F-10

(a)(2)   Financial Statement Schedules:


                  The following  financial  statement  schedules are included in
Part IV of this report:

         (a)(2)(a) As of December 31, 1995 and 1994 and for the
                   three years ended December 31, 1995:

                           Schedule I - Condensed             F-31
                           Financial Information of
                           Allied

                           Schedule II - Valuation            F-34
                           and Qualifying Accounts


(a)(3)   Exhibits:

            Exhibit  3 - Certificate of Incorporation, as
                         amended  (Incorporated  by reference
                         from Form 10-K filed in March, 1992)
                         and  Amended  and  Restated  By-Laws
                         (Incorporated by reference from Form
                         8-K filed in November, 1992)

            Exhibit 10 -

                         (a)  Executive Employment Agreement between Allied
                              Research Corporation and J. R. Sculley
                              (Incorporated by reference from Form 8-K filed in
                              April, 1992)

                         (b)  Executive Employment Agreement between Allied
                              Research Corporation and W. Glenn Yarborough, Jr.
                              (In-

                                       34

<PAGE>

                              corporated by reference from Form 10-K filed in
                              March, 1995.)

            Exhibit 11 - Computation of
                         Earnings Per
                         Common and Common
                         Equivalent Shares

            Exhibit 21 - List of Subsidiaries


            Exhibit 23 - Consent of Independent Certified
                         Public Accountants

(b)      Reports on Form 8-K:

              No reports  on Form 8-K were filed  during the fourth quarter of
1995.

                                       35

<PAGE>

                                   SIGNATURES

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

                          Allied Research Corporation
(Allied) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

                                       /s/ J. R. Sculley
By (Signature and Title) . . . . . . . . . . . . . . . . . . . .
                                    J. R. Sculley, President

Date:  March 29, 1996

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

                                       /s/ J. R. Sculley
By (Signature and Title) . . . . . . . . . . . . . . . . . . . .
                                    J. R. Sculley,
                                    Chief Financial Officer

Date:  March 29, 1996

                                 * * * * * * *

                                       /s/ J. R. Sculley
By (Signature and Title). . . . . . . . .  . . .  . . .  . . . .
                                    J. R. Sculley, Director

Date:  March 29, 1996

                                 * * * * * * *

                                       /s/ Charles T. Scott
By (Signature and Title). . . . . . . . .  . . .  . . .  . . . .
                                     Charles T. Scott, Director

Date:  March 29, 1996

                                 * * * * * * *

                                       36

<PAGE>

                                       /s/ Clifford C. Christ
By (Signature and Title). . . . . . . . .  . . .  . . .  . . . .
                                    Clifford C. Christ, Director

Date:  March 29, 1996

                                 * * * * * * *

                                       /s/ Earl P. Smith
By (Signature and Title). . . . . . . . .  . . .  . . .  . . . .
                                     Earl P. Smith, Director

Date:  March 29, 1996

                                 * * * * * * *

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

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

                                       37

<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C.  20549




                       FINANCIAL STATEMENTS AND SCHEDULES

                               December 31, 1995




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





                                   FORM 10-K
                                       OF
                          ALLIED RESEARCH CORPORATION


<PAGE>

                          Allied Research Corporation


                  INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

-----------------------------------------------------------------------------
                                                                         Page


Report of Independent Certified Public Accountants                        F-3


Consolidated Balance Sheets at December 31, 1995 and 1994                 F-4


Consolidated Statements of Operations for the three years
  ended December 31, 1995                                                 F-6


Consolidated Statements of Stockholders' Equity for the three years
  ended December 31, 1995                                                 F-7


Consolidated Statements of Cash Flows for the three years ended
  December 31, 1995                                                       F-8

Notes to Consolidated Financial Statements                               F-10


Schedules as of and for the three years ended December 31, 1995

Schedule I - Condensed Financial Information of Registrant               F-31

Schedule II - Valuation and Qualifying Accounts                          F-34


<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors
Allied Research Corporation

We have audited the accompanying  consolidated balance sheets of Allied Research
Corporation  and  subsidiaries  as of December 31, 1995 and 1994 and the related
consolidated  statements of operations,  stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1995.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial position of Allied Research
Corporation  and  subsidiaries  as of  December  31,  1995  and  1994,  and  the
consolidated  results of their operations and their  consolidated cash flows for
each of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.

We have also audited the consolidated  financial  statement  schedules listed on
the accompanying index at Item 14(a)(2). In our opinion, these schedules present
fairly,  in all  material  respects,  the  information  required to be set forth
therein.


/s/ Grant Thornton LLP

Baltimore, Maryland
March 15, 1996


<PAGE>

                          Allied Research Corporation

                          CONSOLIDATED BALANCE SHEETS

                                  December 31,


                                     ASSETS

                                                      1995             1994
                                                   ---------------------------

CURRENT ASSETS
  Cash and equivalents, including restricted cash
    (notes A, C and F)                             $15,744,145    $  43,605,879
  Accounts receivable (notes A, D and F)            21,090,945       21,804,818
  Costs and accrued earnings
    on uncompleted contracts (note A)                6,311,705        8,390,976
  Inventories (notes A and F)                        6,336,821        4,333,416
  Prepaid expenses and deposits                      1,112,711        1,003,480
                                                   -----------    -------------

           Total current assets                     50,596,327       79,138,569





PROPERTY, PLANT AND EQUIPMENT - AT COST
  (notes A and H)
    Buildings and improvements                      14,247,986       11,410,826
    Machinery and equipment                         35,189,034       31,118,331
                                                    ----------       ----------
                                                    49,437,020       42,529,157
    Less accumulated depreciation                   33,330,357       28,154,693
                                                    ----------       ----------
                                                    16,106,663       14,374,464
    Land                                             1,544,737        1,323,456
                                                    ----------       ----------
                                                    17,651,400       15,697,920


OTHER ASSETS
  Deposits - restricted cash (notes C, F and H)     18,492,000        6,400,000
  Intangibles, less accumulated amortization of
    $1,751,020 and $1,341,984 in 1995 and 1994,
    respectively (notes A and B)                     7,085,401        5,918,858
  Other                                                428,145          230,962
                                                   -----------     ------------
                                                    26,005,546       12,549,820
                                                   $94,253,273     $107,386,309
                                                   ===========     ============

The accompanying notes are an integral part of these statements.

                                      F-4

<PAGE>

                          Allied Research Corporation

                    CONSOLIDATED BALANCE SHEETS - CONTINUED

                                  December 31,




                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                            1995               1994
                                                        -------------      ------------
<S>                                                     <C>                <C>
CURRENT LIABILITIES
  Notes payable (note E)                                $     485,330      $    593,536
  Current maturities of long-term debt                      2,786,383        25,802,048
  Accounts and trade notes payable                         17,786,258        21,451,907
  Accrued liabilities                                       4,857,776        10,553,803
  Accrued losses on contracts (note G)                        431,215         1,873,008
  Customer deposits                                         9,900,120         1,534,149
  Income taxes                                                370,878           883,883
                                                         ------------        ----------

           Total current liabilities                       36,617,960        62,692,334


LONG-TERM DEBT, less current maturities (note H)           28,434,776        14,107,904


DEFERRED INCOME TAXES (notes A and P)                         846,953           765,293


MINORITY INTEREST                                               -               123,104


CONTINGENCIES AND COMMITMENTS (notes I, J, M and N)             -                 -


STOCKHOLDERS' EQUITY (note L)
  Preferred stock, no par value; authorized,
     10,000 shares; none issued                                 -                 -
  Common stock, par value, $.10 per share; authorized,
    10,000,000 shares; issued and outstanding, 4,422,056
    in 1995 and 4,398,448 in 1994                             442,206           439,845
  Capital in excess of par value                           10,745,295        10,658,174
  Retained earnings                                        12,676,000        14,689,271
  Accumulated foreign currency translation
    adjustment (note A)                                     4,490,083         3,910,384
                                                          -----------        ----------
                                                           28,353,584        29,697,674
                                                           ----------        ----------

                                                          $94,253,273      $107,386,309
                                                           ==========       ===========
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-5

<PAGE>

                          Allied Research Corporation

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                            Year ended December 31,

<TABLE>
<CAPTION>
                                                    1995              1994              1993
                                                -----------      -------------      ------------
<S>                                             <C>              <C>                <C>
Revenue (note M)                                $65,768,907      $  69,846,845      $147,097,482

Costs and expenses
  Cost of sales                                  49,896,794         63,976,951       118,897,942
  Selling and administrative                     15,758,673         15,631,256        11,655,229
  Research and development                        2,087,278          1,262,333           841,685
  Restructuring charge (note R)                         -              326,831         2,883,289
                                                 ----------       ------------       -----------
                                                 67,742,745         81,197,371       134,278,145
                                                 ----------       ------------       -----------

                 Operating income (loss)         (1,973,838)       (11,350,526)       12,819,337

Other income (deductions)
  Interest income                                 1,770,278          3,539,888         4,327,313
  Interest expense                               (3,034,537)        (3,768,788)       (4,108,053)
  Other - net (note O)                            1,968,478          1,306,083        (1,003,059)
                                               ------------      -------------     -------------
                                                    704,219          1,077,183          (783,799)
                                               ------------      -------------     -------------

                 Earnings (loss) before
                    income taxes                 (1,269,619)       (10,273,343)       12,035,538

Income taxes (notes A and P)                        743,652            667,763         4,040,416
                                               ------------     --------------     -------------

                 NET LOSS (EARNINGS)           $ (2,013,271)     $ (10,941,106)    $   7,995,122
                                                ===========       ============     =============


Earnings (loss) per common share (note S)             $( .46)            $(2.49)           $1.73
                                                       =====              =====             ====
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-6

<PAGE>


                          Allied Research Corporation

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                  Years ended December 31, 1995, 1994 and 1993

<TABLE>
<CAPTION>
                                                                                                     Accumulated
                                                                                                       foreign
                                             Preferred     Common      Capital in      Retained        currency        Total
                                              stock no   stock $.10     excess of      earnings      translation    stockholders'
                                             par value   par value      par value      (deficit)      adjustment       equity
<S>                                         <C>           <C>         <C>            <C>             <C>            <C>
Balance at December 31, 1992                $      -      $458,953    $10,712,729    $22,438,580     $3,417,531      37,027,793
  Common stock awards                              -           976        147,774            -              -           148,750
  Common stock options exercised                   -         6,040        227,667            -              -           233,707
  Employee stock purchase plan purchases           -           154         22,204            -              -            22,358
  Purchase and retirement of shares                -       (13,000)      (309,864)    (1,836,497)           -        (2,159,361)
  Currency translation adjustment                  -          -               -              -       (2,093,471)     (2,093,471)
  Net earnings for the year                        -          -               -        7,995,122            -         7,995,122
                                            ----------    --------    -----------    -----------     ----------      ----------

Balance at December 31, 1993                       -       453,123     10,800,510     28,597,205      1,324,060      41,174,898
  Common stock awards                              -         7,236        318,014            -              -           325,250
  Employee stock purchase plan purchases           -         1,486         64,186            -              -            65,672
  Purchase and retirement of shares                -       (22,000)      (524,536)    (2,966,828)           -        (3,513,364)
  Currency translation adjustment                  -          -               -              -        2,586,324       2,586,324
  Net loss for the year                            -          -               -      (10,941,106)           -       (10,941,106)
                                            ----------    --------    -----------    -----------     ----------      ----------

Balance at December 31, 1994                       -       439,845     10,658,174     14,689,271      3,910,384      29,697,674
  Common stock awards                              -           300         10,950            -              -            11,250
  Employee stock purchase plan purchases           -         2,061         76,171            -              -            78,232
  Currency translation adjustment                  -          -               -              -          579,699         579,699
  Net loss for the year                            -          -               -       (2,013,271)           -        (2,013,271)
                                            ----------    --------    -----------    -----------     ----------      ----------
Balance at December 31, 1995                $      -      $442,206    $10,745,295    $12,676,000     $4,490,083     $28,353,584
                                            ==========    ========    ===========   ============    ===========      ==========
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-7

<PAGE>

                          Allied Research Corporation

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                            Year ended December 31,

<TABLE>
<CAPTION>

Increase (decrease) in cash and equivalents                     1995              1994              1993

<S>                                                        <C>                <C>               <C>
Cash flows from (used in) operating activities
  Net earnings (loss) for the year                         $  (2,013,271)     $(10,941,106)     $  7,995,122
  Adjustments to reconcile net earnings (loss) to
    net cash from (used in) operating activities
      Depreciation and amortization                            2,751,867         2,411,029         2,727,662
      (Gain) loss on sale of fixed assets                         (8,381)           (2,558)             -
      Deferred income taxes                                      376,550           390,233          (290,915)
      Provision for estimated losses on contracts             (1,178,475)          721,937         3,127,574
      Common stock awards                                         11,250           325,250           148,750
      Changes in assets and liabilities
        Accounts receivable                                    2,746,237        48,367,325       (49,655,997)
        Costs and accrued earnings on
           uncompleted contracts                               2,709,185         9,910,050        13,388,974
        Inventories                                             (983,917)        1,570,129        (1,525,982)
        Prepaid expenses and other assets                     (1,451,796)        8,832,706        (5,747,608)
        Accounts payable and accrued liabilities             (12,291,397)      (34,244,206)       15,621,110
        Customer deposits                                      7,959,923       (20,288,705)        2,106,147
        Income taxes                                            (552,009)       (4,410,959)       (3,825,904)
                                                           -------------       -----------      ------------
                                                                  89,037        13,582,231       (23,926,189)
                                                           -------------       -----------      ------------

                 Net cash (used in) provided by
                     operating activities                     (1,924,234)        2,641,125       (15,931,067)

Cash flows (used in) investing activities
  Capital expenditures                                        (2,920,728)       (3,617,518)       (3,645,786)
  Proceeds from sale of fixed assets                             183,470            16,650              -
  Payment for acquisitions, net of cash acquired              (1,083,571)       (4,387,925)             -
                                                           -------------       -----------      ------------

                 Net cash (used in) investing
                     activities                               (3,820,829)       (7,988,793)       (3,645,786)
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-8

<PAGE>

                          Allied Research Corporation

               CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                            Year ended December 31,

<TABLE>
<CAPTION>
                                                              1995               1994                1993
                                                        ---------------     -------------       -------------
<S>                                                        <C>                <C>                 <C>
Cash flows from financing activities
  Net increase (decrease) in short-term borrowings            (114,514)       (4,011,549)          5,393,106
  Principal payments on long-term debt                     (23,979,845)       (9,296,733)           (559,671)
  Proceeds from issuance of long-term debt                  12,252,705         8,533,958          28,339,261
  Deposits - restricted cash                               (12,092,000)        7,467,000         (13,867,000)
  Proceeds from exercise of stock options                           -                 -              233,707
  Proceeds from employee stock purchases                        78,232            65,672              22,358
  Common shares purchased and retired                               -         (3,513,360)         (2,159,361)
                                                        ---------------     -------------       -------------

                 Net cash provided by (used in)
                     financing activities                  (23,855,422)         (755,012)         17,402,400

Effects of exchange rates on cash                            1,738,751         5,067,494          (2,666,356)
                                                        ---------------     -------------       -------------

                 Net increase (decrease) in cash
                   and equivalents                         (27,861,734)       (1,035,186)         (4,840,809)

Cash and equivalents at beginning of year                   43,605,879        44,641,065          49,481,874
                                                        ---------------     -------------       -------------

Cash and equivalents at end of year                      $  15,744,145      $ 43,605,879        $ 44,641,065
                                                        ===============     =============       =============


Supplemental Disclosures of Cash Flow Information

  Cash paid during the year for
    Interest                                             $   4,461,871      $  4,428,708        $  3,035,446
    Income taxes                                             1,638,984         4,784,980           7,977,993
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-9

<PAGE>

                          Allied Research Corporation

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - SUMMARY OF ACCOUNTING POLICIES

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

  Basis of Presentation

  The consolidated  financial  statements of the Company include the accounts of
  Allied  Research  Corporation  (Allied),  a  Delaware  corporation,   and  its
  wholly-owned subsidiaries, Mecar S.A., a Belgian company, and its wholly-owned
  subsidiaries (Mecar),  Barnes & Reinecke,  Inc. (BRI), a Delaware corporation,
  Allied Research  Corporation  Limited (ARCL), a United Kingdom company and ARC
  Services, Inc. (Services), a Delaware corporation.

  Mecar,  S.A.'s wholly owned Belgian  subsidiaries  include,  Mecar  Immobliere
  S.A.,  Sedachim,  S.I., Tele Technique  Generale,  Management Export Services,
  N.V.,  I.D.C.S.,  N.V., VSK France (a French Company which was formed in 1995)
  and  VSK  Electronics  N.V.  and  its  wholly-owned  subsidiaries,   Classics,
  B.V.B.A.,   Detectia,   N.V.  and Belgian Automation  Units, N.V.
  (collectively  the "VSK Group").  A minority interest owned by VSK Electronics
  in Building Control  Services,  N.V. is accounted for under the equity method.

  The VSK Group was acquired  during 1994 and was  accounted  for as a purchase,
  and revenue and results of operations from June 1, 1994 (date of acquisition),
  have been consolidated.  I.D.C.S.,  N.V. was accounted for as a purchase,  and
  revenue and results of operations from May 9, 1995 (date of acquisition), have
  been consolidated.

  During 1995, Mecar's wholly-owned  subsidiaries  Management Export Services,
  N.V. and its minority interest in Building Control Services, N.V. were
  liquidated. In addition, the Company ceased operations of its wholly-owned
  subsidiary ARC Services,  Inc. in December,  1995. VSK France is also being
  liquidated effective December 31, 1995.

  Significant intercompany transactions have been eliminated in consolidation.

  Business Operations

  The Companies operate  primarily in the United States,  Belgium and the United
  Kingdom.  During 1995,  fifty-five  percent of the business activity is in the
  development  and production of ammunitions and weapons systems in Belgium with
  sales to customers in Asia, the Middle East and Europe.  Twenty-eight  percent
  of the  business  activity  is  developing,  manufacturing,  distributing  and
  servicing  industrial  security products in Belgium with industrial  customers
  throughout  Europe.  Seventeen  percent of the business  activity is providing
  engineering  and  technical  support  services in the United States with sales
  directly or indirectly with the United States Military Agencies and government
  prime  contractors.  A description of the business  operations of each company
  follows.

  Allied provides management services to its wholly-owned  subsidiaries.  Allied
  had no direct domestic operating assets or business activity.

  Mecar is primarily  engaged in the  development  and production of ammunitions
  and weapons  systems.  Mecar  derives  substantially  all of its revenue  from
  direct and  indirect  sales to foreign  governments,  primarily on fixed price
  contracts.

  BRI provides engineering and technical support services and sells directly and
  indirectly  primarily to United States Military  Agencies and government prime
  contractors.

                                      F-10

<PAGE>

                          Allied Research Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued

  Business Operations - continued

  ARCL is engaged in the  marketing  of  military  hardware on behalf of Allied,
  Mecar and BRI.

  ARC Services,  Inc. was formed in 1993, and continued until December 31, 1995,
  to market and provide  demilitarization  and environmental  clean-up services.
  Services has undertaken  certain research and development  projects and had no
  other significant operations since its formation.

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

  Foreign Currency Translation

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

  Revenue and Cost Recognition

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

  Recoverable costs plus accrued profits not billed and amounts withheld and due
  upon completion of U.S.  Government  contracts and subcontracts are carried as
  unbilled  receivables.  These  amounts will be billed on the basis of contract
  terms and are expected to be collected within one year.

  Costs and accrued  profits on uncompleted  fixed price  contracts with foreign
  governments,  which are  billable  upon  completion,  are carried as costs and
  accrued earnings on uncompleted contracts.

  Revenues from the sale of fire and security  systems are  recognized  when the
  installation  is completed,  less a provision for  anticipated  service costs.
  Security system maintenance  contract revenues are recognized over the term of
  the contract on a straight-line basis.

  Use of Estimates

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

                                      F-11

<PAGE>

                          Allied Research Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued

  Inventories

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

  Property, Plant and Equipment

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

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

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

  Intangibles

  Intangibles  represent  costs in excess of net assets  acquired in  connection
  with  businesses   acquired  and  are  being  amortized  to  operations  on  a
  straight-line  basis over twenty years. The  recoverability of carrying values
  of intangible assets is evaluated on a recurring basis. The primary indicators
  are current or forecasted  profitability of the related  business.  There have
  been no adjustments to the carrying values of intangible assets resulting from
  these evaluations.

  Research and Development

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

  Warranties

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

  Income Taxes

  Income  taxes  are  provided  based  on the  liability  method  for  financial
  reporting  purposes,  in  accordance  with  the  provisions  of  Statement  of
  Financial  Accounting  Standards  No.  109,  "Accounting  for  Income  Taxes".
  Deferred and prepaid  taxes are provided for on items which are  recognized in
  different periods for financial and tax reporting purposes.

  Statement of Cash Flows

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

                                      F-12

<PAGE>

                          Allied Research Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued

  Restatement

  Certain items in the 1994 and 1993 financial  statements have been restated to
  conform to the current presentation.

  Newly Issued Accounting Standards

  In October 1995,  Statement of Financial  Accounting  Standards (SFAS No. 123,
  Accounting for Stock-Based  Compensation,  was issued.  As permitted by SFAS
  No. 123, the Company will  continue to follow the  accounting  provisions  of
  Accounting  Principles  Board (APB)  Opinion No. 25,  Accounting  for Stock
  Issued to Employees,  for applicable  transactions with employees.  The
  Company will adopt the accounting  provisions of SFAS No. 123 for transactions
  entered into after December 15, 1995 with  individuals or  organizations
  other than  employees.  The Company plans to adopt the disclosure
  requirements  of SFAS No. 123 in 1996. Management believes that adoption of
  SFAS No. 123 will not have a material effect on the Company's financial
  statements.

  Management  does not anticipate  that the provisions of Statement of Financial
  Accounting  Standard No. 121,  Accounting  for the  Impairment  of  Long-Lived
  Assets and for  Long-Lived  Assets to be Disposed Of,  which is effective  for
  years beginning after December 15, 1995, will have a material effect on the
  Company's financial statements.


NOTE B - ACQUISITION

  On May 31, 1994, the Company's wholly-owned  subsidiary,  Mecar S.A., acquired
  the VSK Group, a group of Belgian  companies,  as well as, a minority interest
  in a Belgian company, for approximately  $6,071,900 and on May 9, 1995 the VSK
  Group acquired I.D.C.S., N.V., a Belgian company for approximately $2,972,000.

  These  companies  manufacture,  distribute  and service an integrated  line of
  industrial  security  products,  including  devices such as  buildings  access
  control, parking control,  intrusion and fire detection and intrusion and fire
  alarms.

  The acquisitions  have been accounted for as a purchase and the purchase price
  in excess of the net assets  acquired has been reflected in  intangibles.  The
  financial  statements  include  the  result  of  operations  since the date of
  acquisition. Pro forma financial data for these acquisitions prior to the date
  of acquisition would not have a material affect on reported results.

                                               I.D.C.S., N.V.     VSK Group
                                                May 9, 1995     May 31, 1994
                                               --------------   ------------

    Fair value of tangible assets acquired       $2,587,000      $7,720,900
    Liabilities assumed                             855,000       6,285,200
                                                 ----------       ---------
    Net assets acquired                           1,732,000       1,435,700
    Purchase price                                2,972,000       6,071,900
                                                  ---------       ---------

    Excess of cost over assets acquired          $1,240,000      $4,636,200
                                                  =========       =========

                                      F-13

<PAGE>

                          Allied Research Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE C - RESTRICTED CASH

  Mecar is  generally  required  under the terms of its  contracts  with foreign
  governments  to provide  performance  bonds,  advance  payment  guarantees and
  letters  of credit.  The  credit  facility  agreements  used to provide  these
  financial  guarantees  generally place restrictions on cash deposits and other
  liens on Mecar's assets.  Cash and long-term deposits at December 31, 1995 and
  1994 are restricted or pledged as collateral  for various bank  agreements and
  are comprised as follows:

                                                           1995         1994
                                                       ------------  -----------
Cash
   Credit facility and related term loan arrangements  $ 7,755,000   $28,142,000
   Other bank guarantees and letters of credit           1,769,000     1,222,000
   Notes payable and line-of-credit                      1,035,000        84,000
                                                         ---------   -----------
                                                        10,559,000    29,448,000
Deposit restricted cash - long-term
   Credit facility and related term loan arrangements   18,492,000     6,400,000
                                                        ----------   -----------

                                                       $29,051,000   $35,848,000
                                                        ==========    ==========

NOTE D - ACCOUNTS RECEIVABLE

  Accounts receivable at December 31 are comprised as follows:

<TABLE>
<CAPTION>
                                                                          1995           1994
                                                                       -----------   ------------
  <S>                                                                  <C>           <C>
  Receivables under U.S. Government contracts and subcontracts
    Amounts billed                                                     $ 1,715,818   $  1,110,337
    Unbilled amounts due upon completion of contracts,
      recoverable costs and accrued profits                              1,670,042        765,304
                                                                       -----------   ------------
                                                                         3,385,860      1,875,641

  Receivables from foreign governments                                  10,618,736     13,819,927
  Commercial and other receivables, less allowance for
    doubtful receivables of $330,077 in 1995 and $141,000 in 1994        7,086,349      6,109,250
                                                                       -----------   ------------

                                                                       $21,090,945    $21,804,818
                                                                       ===========    ===========
</TABLE>

  Unbilled  receivables are comprised of progress billing holdbacks,  terminated
  contracts receivable and other unbilled costs and fees.


NOTE E - NOTES PAYABLE

  At December 31, 1995 and 1994, secured short-term loans of $40,330 and $93,536
  were outstanding  with certain banks.  Notes payable at December 31, 1995 bear
  an average interest rate of 9.75%.

                                      F-14

<PAGE>

                          Allied Research Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE E - NOTES PAYABLE - Continued

  The  Company  is also  obligated  under a  $750,000  revolving  line-of-credit
  agreement  which had an  outstanding  balance of $445,000  as of December  31,
  1995. Borrowings under a similar line-of-credit agreement at December 31, 1994
  were  $500,000.  The current line bears  interest at prime,  plus 1.5% (10% at
  December 31, 1995) and expires in July, 1996.  Borrowings are secured by BRI's
  eligible accounts receivable,  Allied's guarantee and are subject to covenants
  requiring the maintenance of certain financial ratios and other provisions.

  The Company has a $1,035,000  line-of-credit  agreement  with a foreign  bank,
  which was unused at December 31,  1995.  The line is secured by a cash deposit
  pledge equal to the full amount of the line.


NOTE F - CREDIT FACILITY

  The Company is  obligated  under a credit  agreement  (the  Agreement)  with a
  banking pool that provided credit facilities  primarily for letters of credit,
  bank  guarantees,  performance  bonds and  similar  instruments  required  for
  specific  sales  contracts,  which was amended in July,  1995.  The  Agreement
  provides for certain bank charges and fees as the line is used, plus an annual
  fee of  approximately  2% of guarantees  issued.  As of December 31, 1995, the
  credit  facility had been fully utilized and guarantees of $17,413,000  remain
  outstanding.

  Advances under the credit facility are secured by cash deposits of $7,755,000,
  plus  long-term  deposits  of  $18,492,000.   Amounts   outstanding  are  also
  collateralized by the letters of credit received under the contracts  financed
  and a pledge of  approximately  $27,600,000 on Mecar's  assets.  The Agreement
  provides  for  restrictions  on payments or  transfers  to Allied and ARCL for
  management fees, intercompany loans, loan payments, the maintenance of certain
  net worth levels and other  provisions.  The Agreement also requires Allied to
  increase  Mecar's  capital by  approximately  $8.6  million  during  1996,  by
  agreeing to cancel certain intercompany indebtedness.

  The term deposits used to secure the agreement were borrowed under a term loan
  agreement with two of the institutions in the banking pool (see note H).

  The Company is also liable for guarantees and other instruments  issued on its
  behalf by other banks which approximate $2,881,000 at December 31, 1995, which
  are collateralized by $1,769,000 of time deposits.


NOTE G - ACCRUED LOSSES ON CONTRACTS

  The Company has provided  for accrued  losses of $431,215 at December 31, 1995
  ($1,873,008 at December 31, 1994) in connection with the completion of certain
  contracts in progress at December 31, 1995. These contracts are expected to be
  completed in 1996. The provision for contract losses charged to operations was
  $721,937 in 1994 and a credit of $1,178,475  in 1995,  primarily due to a loss
  provision no longer required on a rescinded order.

                                      F-15

<PAGE>

                          Allied Research Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE H - LONG-TERM DEBT

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

                                            1995              1994
                                         -----------      -----------

      Term loan agreement                $18,492,000      $31,360,000
      Mortgage loan agreements             8,022,113        6,041,600
      Notes payable bank                     967,146            -
      Note payable - I.D.C.S., N.V.          603,750            -
      Other                                3,136,150        2,508,352
                                         -----------      -----------
                                          31,221,159       39,909,952
      Less current maturities              2,786,383       25,802,048
                                         -----------      -----------
                                         $28,434,776      $14,107,904
                                         ===========      ===========


  The Company is  obligated  under a  $18,492,000  ($31,360,000  at December 31,
  1994) term loan agreement with two of the  institutions in its foreign banking
  pool.  The proceeds were placed in deposit  accounts as collateral  for credit
  facility  advances made by the Company's  foreign banking pool. The note bears
  interest at 7.5% (9.2% at December  31,  1994),  payable  quarterly.  The loan
  matures on December 31, 1997 or upon the expiration of the  guarantees  issued
  under the Credit  Facility  Agreement  with the Company's  banking  pool.  The
  agreement  provides  for the  maintenance  of certain net worth levels and the
  payment of certain commissions.

  The term loan is  collateralized  by a pledge of $33,810,000 on Mecar's assets
  and the  deposit  accounts,  subject to the  priority  position of the banking
  pool. The regional  government where Mecar is located (the Walloon region) has
  guaranteed 50% of the term credit subject to certain priority pledges.

  The Company entered into a mortgage loan agreement in 1986,  which was amended
  in 1994, to partially  finance the construction of Mecar's  manufacturing  and
  administration  facilities in Belgium which has a balance due of $6,210,000 at
  December 31, 1995. The first principal installment is due in January, 1996 and
  the loan matures in January,  2004. As amended,  the loan is payable in annual
  principal   installments  of  $655,500   (except  for  the  annual   principal
  installment  in the year 2000 which is $966,000).  The loan bears  interest at
  10.4%  annually  and is  collateralized  by a mortgage on the  Company's  real
  estate.  The Company is also obligated on several mortgages on the VSK Group's
  buildings  which have a total  balance due of $1,812,113 at December 31, 1995.
  The mortgages  mature at various dates through 2005 in annual  installments of
  approximately  $254,000,  plus interest at rates ranging from 6.6% to 8.5% per
  year.

  BRI is obligated on two notes  payable of $500,000  each to its bank, of which
  $477,569 and $489,577 were  outstanding  at December 31, 1995.  The notes bear
  interest at the prime rate plus 2% (10.5% at December  30, 1995) and mature in
  September and October,  1998. The notes are payable in monthly installments of
  principal  and  interest of $16,383 and $16,400,  respectively.  The notes are
  secured by the assets of the Company and  Allied's  guarantee.  The  agreement
  contains covenants  requiring BRI to maintain certain financial ratios,  among
  other matters.

  The Company is obligated in the amount of $603,750 at December 31, 1995 to the
  former owner of I.D.C.S.  in connection with the  acquisition of I.D.C.S.  The
  note bears interest at 7.5% and is payable in monthly  installments of $34,500
  through June, 1997.

                                      F-16

<PAGE>

                          Allied Research Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE H - LONG-TERM DEBT - Continued

  The  Company  is also  obligated  on  various  vehicle,  equipment  and  other
  operating loans which have an aggregate  balance of $3,136,150  outstanding at
  December 31, 1995  ($2,508,352 at December 31, 1994).  The notes are generally
  secured by the assets  acquired,  bear  interest at rates ranging from 4.4% to
  10.75% and mature at various dates through 2000.

  Scheduled annual  maturities of long-term  obligations as of December 31, 1995
  are as follows:

                   Year                         Amount

                   1996                      $  2,786,383
                   1997                        21,020,195
                   1998                         1,629,058
                   1999                         1,162,305
                   2000                           995,325
                   Thereafter                   3,627,893


NOTE I - BENEFIT PLANS

  In June, 1992, the Board of Directors adopted the Allied Research  Corporation
  Outside Directors  Retirement Plan. The plan provides  retirement  benefits at
  age 70 to any board  member who retires as a director  after a minimum of five
  years of service. A retired director is entitled to receive an amount equal to
  the  monthly  cash  compensation  received  prior to  retirement  for a period
  equivalent  to the  time  served  as a  board  member.  The  Board  may  cease
  retirement  payments for cause and modify or  terminate  the plan at any time.
  Currently,  one former  director is  receiving  retirement  benefits.  The net
  present  value of  benefits  anticipated  to be payable to current  and former
  directors have been reflected as a charge to earnings.

  In June,  1992,  the Board of Directors  approved  the  Officers  Nonqualified
  Deferred  Compensation  Plan and the Officers  Deferred  Compensation  Grantor
  Trust.  Certain  officers of the Company are  eligible to  participate  in the
  plan,  which permits a deferral of a percentage  of future base  compensation.
  Amounts  deferred  will be invested by the trustee of the Grantor  Trust.  The
  Company may terminate  the plan at any time. No eligible  officers had elected
  to participate in the plan as of December 31, 1995.

  BRI  instituted a retirement  savings plan in 1989 which  received a favorable
  determination letter from the Internal Revenue Service dated January 12, 1992.
  Contributions to the Plan are at the discretion of BRI. No contributions  were
  made by the Company for the years ended December 31, 1995, 1994 and 1993.

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


NOTE J - CONTINGENCIES AND COMMITMENTS

  Cost-plus  contracts  and  subcontracts  are subject to  government  audit and
  review.  It is not  anticipated  that  adjustments,  if any,  with  respect to
  determination  of  reimbursability  of  costs  under  cost-plus  contracts  or
  subcontracts will have a material effect on the Company's consolidated results
  of operations or financial position.

                                      F-17

<PAGE>

                          Allied Research Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE J - CONTINGENCIES AND COMMITMENTS - Continued

  At December 31, 1995,  Mecar has provided for estimated losses on contracts of
  $431,215.  In addition,  Mecar and BRI  recognize  revenues  under fixed price
  contracts using the percentage of completion method.  Estimates of total costs
  at completion are used to determine the amount of revenue earned. It is likely
  that actual costs on these  contracts will differ from the Company's  estimate
  at completion  and losses could exceed the provision  established  at December
  31, 1995.

  The Company  enters into foreign  exchange  contracts in the normal  course of
  business  primarily to hedge sales and  purchase  contracts.  These  contracts
  typically  mature within twelve months,  and forward exchange gains and losses
  are recognized upon maturity. No contracts were outstanding as of December 31,
  1995.

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

  In  connection  with its  commitment  to provide  management  services  to its
  subsidiaries,   the  Company  has  entered  into   consulting  and  employment
  agreements  with certain  management  personnel  for these  subsidiaries.  The
  Company has also entered into employment  agreements and consulting agreements
  with certain domestic management personnel.

  The  Company  leases  office  space,  other  facilities  and  equipment  under
  operating  leases which expire at various  dates  through  2000.  BRI's office
  lease  provides  that the Company is  responsible  for real estate taxes which
  approximated  $38,600,  $133,700,  and $151,500,  respectively,  for the years
  ended December 31, 1995, 1994 and 1993.  Allied's lease also includes  certain
  escalation  provisions  for taxes and  operating  costs.  The  following  is a
  schedule by year of base rentals due on operating  leases that have initial or
  remaining lease terms in excess of one year as of December 31, 1995.

                   Year                       Amount

                   1996                      $416,100
                   1997                       399,100
                   1998                       368,900
                   1999                       273,000
                   2000                        79,300

  Total rental expense charged to operations approximated $444,000, $660,000 and
  $611,000, for the years ended December 31, 1995, 1994 and 1993.

  Services  entered  into a three year  $675,000  agreement  in 1993 to fund the
  development of certain reverse  osmosis  products in exchange for an exclusive
  marketing  license.  Product  development  costs  charged to  operations  were
  $100,000, $185,000 and $93,000 for 1993, 1994 and 1995, respectively. Services
  terminated this agreement in July, 1995.

  The Company's domestic  operations do not provide post employment  benefits to
  their employees.  Under Belgian labor provisions, the Company may be obligated
  for future  severance  costs for its  employees.  The Company has provided for
  known severance  costs related to its 1993 workforce  reduction as part of its
  restructuring  charge (see note R). After giving effect to the 1993  workforce
  reduction,  current work loads, expected levels of future operations,  planned
  redeployment  of workers and severance  policies,  future  severance costs and
  post  employment  benefits  are not  expected to be material to the  Company's
  financial position at this time.

                                      F-18

<PAGE>

                          Allied Research Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS

  The  estimated  fair  value of the  Company's  financial  instruments  and off
  balance sheet credit obligations are as follows:

<TABLE>
<CAPTION>
                                                    1995                              1994
                                         ----------------------------      ---------------------------
                                         Carrying          Estimated         Carrying        Estimated
                                          Amount          Fair Value          Amount        Fair Value
  <S>                                   <C>              <C>              <C>              <C>
  Financial assets
    Cash and equivalents                $ 15,744,145     $ 15,744,145     $ 43,605,879     $ 43,605,879
    Deposits - restricted cash            18,492,000       18,492,000        6,400,000        6,400,000
    Long-term debt, including current    (31,221,159)     (31,221,159)     (39,909,952)     (39,909,952)
      maturities
  Notes payable                              485,330          485,330          593,536          593,536
  Off-balance-sheet instruments
    Guarantees and letters of credit              -       (20,294,000)              -       (13,163,000)
    Foreign exchange contracts                    -                -                -        (3,000,000)
</TABLE>

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

  (bullet) The  carrying  amounts  of cash and  equivalents  and  notes  payable
           approximates fair value because of the short maturity of these.

  (bullet) The carrying amounts of deposit - restricted cash  approximates  fair
           value because of the underlying  nature of this deposit which secures
           a term loan of equal value.

  (bullet) Thefair  value of long-term  debt is estimated  based on  approximate
           market  prices for the same or similar  issues or the  current  rates
           offered to the Corporation for debt of the same remaining maturities.
           The Company believes the aggregate  carrying value  approximates fair
           value.

  (bullet) Estimated fair values for off-balance-sheet  instruments (performance
           bonds,   advance  payment  guarantees  and   letters-of-credit)   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.

  (bullet) Estimated fair value for forward and future hedge contracts are based
           on the total contract position outstanding.


NOTE L - CAPITAL STOCK

  At December 31, 1995,  options to acquire 227,000 shares of the Company common
  stock were  outstanding  and 766,795  shares were reserved under the following
  plans:

                                      F-19

<PAGE>

                          Allied Research Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE L - CAPITAL STOCK - Continued

  1992 Allied Research Corporation Employee Stock Purchase Plan

  During 1993,  the Board of Directors  and  shareholders  approved and reserved
  525,000  shares for the plan.  The plan is  voluntary  and  substantially  all
  full-time  employees  with  greater than six months of service are eligible to
  participate  through payroll  deductions.  The purchase price of each share is
  equal  to 85% of the  closing  price  of the  common  stock at the end of each
  calendar  quarter.  The plan is subject to certain  restrictions and the Board
  may amend or  terminate it at any time.  During 1995,  1994 and 1993 - 20,608,
  14,859 and 1,538  shares,  respectively,  subject to the plan were  issued and
  $11,736,  $9,808 and $3,341 was charged to  operations  during 1995,  1994 and
  1993.

  1988 Incentive Compensation Plan

  The Company has reserved  410,900  shares of common stock for key employees of
  the  Company  and its  subsidiaries.  The plan  authorizes  the Board to grant
  incentive  stock  options,  non-statutory  stock options,  stock  appreciation
  rights,  stock awards,  restricted  stock,  performance  stock rights and cash
  awards.  Each type of grant places certain  requirements and restrictions upon
  the Company and grantee. As of December 31, 1995, options had been granted for
  215,400  shares at prices of $2.125 to $14.875 per share,  which have all been
  exercised  except for 10,000  which expire at the earlier of 30 days after the
  termination of employment of the  optionholder  or 2003.  During 1994,  30,100
  shares were issued as stock awards to two officers and one employee. The value
  of the award that was charged to  operations  is $129,937.  As of December 31,
  1995,  94,000 shares of restricted  common stock subject to the plan have been
  awarded.  These  sales  were  awarded  prior  to  1993  and the  value  of the
  incentives  were  charged  to  operations  in  the  year  they  were  awarded.
  Restricted  stock  may be issued  to a  grantee  for an amount  less than fair
  market value and may require the grantee to remain in the continuous employ of
  the  Company  for a  specified  period  before  such  shares  can be  sold  or
  transferred.  At December 31, 1995 there were 71,400 shares still reserved and
  unsecured under the plan.

  1984 Incentive Stock Option Plan

  The Company has reserved  315,000  shares of common stock for key employees of
  the Company and its  subsidiaries.  The plan,  which permitted  grants through
  March 31, 1994,  provided  that the  purchase  price shall be no less than the
  fair  market  value of a share of common  stock of the Company on the date the
  option is granted,  except for those options  granted to employees who hold in
  excess of 10% of the Company's  stock, in which case the option price shall be
  110% of the fair  market  value on the date of grant.  Options  granted can be
  exercised  two years or later from the date of grant and expire at the earlier
  of thirty days after  termination  of employment or ten years from the date of
  grant (five years in the case of an  Over-Ten-Percent  Stockholder).  In March
  1994,  the Company  granted  options to two officers and sixteen  employees to
  purchase  217,500 shares at $8.25 per share.  These options have  restrictions
  concerning  employment  for a two-year  period and expire in 2004. At December
  31, 1995, all these options remained outstanding.

  1993 Allied Research Corporation Outside Directors Compensation Plan

  During 1993, the Board of Directors and  shareholders  approved a plan whereby
  each director is entitled to receive a cash payment of $1,000 per month and an
  annual grant of 1,000 shares of the Company's  common stock while serving as a
  board member.  The Company has reserved  52,400 shares of common stock for the
  plan which is subject to certain  restrictions.  The plan will  terminate upon
  the earlier of issuance of all reserved common shares or December 31, 2003. In
  1995,  1994 and 1993,  the Company  granted  3,000,  5,000 and 5,000 shares of
  common  stock  subject to the plan and charged  $11,250,  $22,500 and $74,375,
  respectively, of compensation to operations.

                                      F-20

<PAGE>

                          Allied Research Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE L - CAPITAL STOCK - Continued

  1991 Outside Directors Stock Option Plan

  During 1991,  the Board of Directors  and  shareholders  approved and reserved
  208,000  shares of common stock for the plan. The Company  granted  options to
  purchase a total of 40,000  shares at $2.50 to $4.125  per  share.  All issued
  options  have been  exercised  and there was no  activity  in this plan during
  1995.

  Other

  Stock  grants for 37,260 and 5,950 shares of the  Company's  common stock were
  made to various  employees  during  1994 and 1993.  These  shares  were issued
  outside  of  any  existing  plan  and  their  value   ($172,812  and  $74,375,
  respectively) was charged to operations in 1994 and 1993.

  During  1989,  1990 and 1991,  the Company  granted  non-statutory  options to
  purchase a total of 100,500 shares of common stock at exercise  prices ranging
  from $1.79 to $3.93 per share.  In 1991,  options  for 40,000 of these  shares
  were  transferred  to the 1991 Outside  Directors  Stock  Option  Plan.  As of
  December 31, 1995,  options for 50,000 of the remaining  60,500 shares granted
  had been exercised and the balance of 10,500 shares expired.

  Preferred Share Purchase Rights Agreement

  In June,  1992,  the Board of Directors  adopted the Agreement  which provides
  each  stockholder of record on June 20, 1993, a dividend  distribution  of one
  "right" for each outstanding share of common stock.  Rights become exercisable
  the earlier of ten days following: (1) a public announcement that an acquiring
  person has  purchased or has the right to acquire 10% or more of the Company's
  common stock (effective April 5, 1994, the agreement was amended to reduce the
  threshold  from 25% to 10%), or (2) the  commencement  of a tender offer which
  would result in an offeror  beneficially owning 30% or more of the outstanding
  common stock.  All rights held by an acquiring person or offeror expire on the
  announced  acquisition  date and all rights expire at the close of business on
  June 20, 2001.

  Each right under the Preferred  Share  Purchase  Rights  Agreement  entitles a
  stockholder to acquire at a purchase price of $45, one-hundredth of a share of
  preferred  stock which carries voting and dividend rights similar to one share
  of common stock.  Alternatively,  a right holder may elect to purchase for $45
  an  equivalent  number of common  shares (or in certain  circumstances,  cash,
  property  or other  securities  of the  Company) at a price per share equal to
  one-half of the average  market price for a specified  period.  In lieu of the
  purchase  price,  a right  holder may elect to acquire  one-half of the common
  shares available under the second option. The purchase price and the preferred
  share  fractional  amount are  subject to  adjustment  for  certain  events as
  described in the Agreement.

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

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

                                      F-21

<PAGE>

                          Allied Research Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE L - CAPITAL STOCK - Continued

  Stock Purchase Agreement

  In April, 1993, the Company agreed to purchase 350,000 shares of the Company's
  common  stock  at a base  price  of $15 per  share  from a  shareholder,  plus
  additional consideration as defined in the agreement. During 1993, the Company
  purchased and retired  130,000 shares for  $2,159,361,  including  $209,361 of
  additional  consideration.  During 1994,  the  remaining  220,000  shares were
  purchased for  $3,513,364  and  additional  consideration  of $213,364 in full
  satisfaction of the agreement.


NOTE M - MAJOR CUSTOMERS

  The  Company   derives   substantially   all  of  its  revenues  from  foreign
  governments,  direct  and  indirect  sales  to U.S.  Government  agencies  and
  government prime contractors, primarily on fixed price contracts. During 1995,
  1994  and  1993,  the  Company   derived   approximately   17%,  12%  and  6%,
  respectively,  of its revenue from U.S.  Government  agencies and contractors.
  Two agencies of a foreign government and another foreign government  accounted
  for  approximately  12%,  31% and 27% of the  Company's  revenue in 1995.  Two
  agencies of a foreign government and two other foreign  governments  accounted
  for approximately 5%, 60%, 14% and 7% of the Company's revenue in 1994. During
  1993,  40%,  28% and 24% of the  Company's  revenues  were  derived  from  two
  agencies of a foreign government and another foreign government.


NOTE N - CONCENTRATIONS OF CREDIT RISK

  Financial  instruments and related items which potentially subject the Company
  to  concentrations  of credit  risk  consist  principally  of  temporary  cash
  investments,  trade  receivables and costs and accrued earnings on uncompleted
  contracts.  The Company places its temporary cash investments with high credit
  quality financial institutions.  Credit risk with respect to trade receivables
  and costs and accrued  earnings on uncompleted  contracts are concentrated due
  to the nature of the Company's customer base. The Company receives  guarantees
  and letters of credit from its foreign  customers and performs  ongoing credit
  evaluations  of  its  other  customers'  financial  condition.  The  Company's
  provision for doubtful accounts for 1995 and 1994 was not significant.

  The majority of ammunition  sales are to two agencies of a foreign  government
  and other foreign  governments.  Mecar's  ammunition sales in any given period
  and its backlog at any particular time may be significantly  influenced by one
  or a few large orders.  In addition,  the production  period  required to fill
  most orders range from several months to a year. Accordingly, Mecar's business
  is  dependent  upon its ability to obtain such large  orders and the  required
  financing for these orders.  As of December 31, 1995 and 1994,  backlog orders
  believed to be firm approximated $68.1 and $23.1 million.

  Amounts in foreign  banks at  December  31,  1995 and 1994 were  approximately
  $15,182,000 and  $49,090,000,  respectively.  Changes in the value of the U.S.
  dollar and other currencies affect the Company's financial position and result
  of  operations  since the  Company  has  operations  in Belgium and the United
  Kingdom and sells its products on a worldwide basis.

                                      F-22

<PAGE>

                          Allied Research Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE O - OTHER - NET

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

                                            1995         1994          1993
                                         ----------   ----------   -----------

Net currency transaction gains (losses)  $1,284,446   $1,484,651   $(1,243,190)
Miscellaneous - net                         684,032     (178,578)      240,131
                                          ---------    ---------    ----------

                                         $1,968,478    $1,306,083  $(1,003,059)
                                          =========     =========   ==========


NOTE P - INCOME TAXES

  Effective  January 1, 1993, the Company adopted the provisions of Statement of
  Financial  Accounting  Standards No. 109, "Accounting for Income Taxes" ("SFAS
  No. 109").  SFAS No. 109 requires  recognition of deferred tax liabilities and
  assets for the  expected  future  tax  consequences  of events  that have been
  included  in the  financial  statements  or tax  returns.  Under this  method,
  deferred tax  liabilities  and assets are  determined  based on the difference
  between the financial  statement and tax basis of assets and liabilities using
  enacted tax rates in effect for the year in which the differences are expected
  to reverse.  The Company adopted SFAS No. 109 on a prospective basis resulting
  in  a  noncash  tax  benefit  of  approximately  $168,000,   representing  the
  cumulative effect on prior years of adopting the accounting change in 1993.

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

                              1995              1994                1993
                           ----------       ------------        -----------

      Domestic            $   151,888       $ (1,005,790)       $ 2,400,734
      Foreign              (1,421,507)        (9,267,553)         9,634,804
                           ----------        -----------        -----------

                          $(1,269,619)      $(10,273,343)       $12,035,538
                           ==========        ===========         ==========

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


                              1995              1994                1993
                          -----------        -----------        -----------

      Currently payable
        Domestic          $   116,692       $    (65,405)       $ 1,471,589
        Foreign               498,696            342,935          2,859,742
                          -----------       ------------        -----------
                              615,388            277,530          4,331,331
      Deferred - net          128,264            390,233           (290,915)
                          -----------       ------------        -----------

                              743,652       $    667,763        $ 4,040,416
                          ===========       ============        ===========

                                      F-23

<PAGE>

                          Allied Research Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE P - INCOME TAXES - Continued

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

                                                    1995      1994      1993
                                                  -------   -------   -------

    Taxes at statutory rate                        (34.0)%   (34.0)%    34.0 %
    Benefit of foreign tax credit carryforward      (7.4)    (14.3)     (5.1)
    Foreign tax rate differential and current
      loss limitations                              94.3      53.9       4.8
    State taxes, net of federal income tax effect      -        .9       1.2
    Other                                            5.7         -         -
    Cumulative effect of adopting SFAS 109             -         -      (1.3)
                                                  -------   -------   -------
               Income taxes                         58.6 %      6.5 %   33.6 %
                                                  =======   ========  =======

  In  1995,  1994  and  1993,  the  Company's  Belgian   subsidiaries   utilized
  approximately  $47,000,  $50,000  and  $5,901,000,  respectively,  of  foreign
  operating loss carryforwards for tax reporting purposes.  Unused net operating
  losses  of  the  Belgian   subsidiaries  at  December  31,  1995   approximate
  $18,672,000,  which under Belgian tax law cannot be carried  back,  but may be
  carried forward indefinitely subject to certain annual limitations.

  The Company utilized  approximately $94,000,  $1,664,000,  and $615,000 of its
  foreign tax credits in 1995, 1994 and 1993. At December 31, 1995,  foreign tax
  credit  carryforwards of approximately  $1,100,000 were available which expire
  through 2009.

  Deferred  tax  liabilities  have not been  recognized  for  bases  differences
  related  to   investments   in  the  Company's   Belgian  and  United  Kingdom
  subsidiaries.   These  differences,  which  consist  primarily  of  unremitted
  earnings  intended to be  indefinitely  reinvested,  aggregated  approximately
  $16,500,000 at December 31, 1995.  Determination of the amount of unrecognized
  deferred tax liabilities is not practicable.

                                      F-24

<PAGE>

                          Allied Research Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE P - INCOME TAXES - Continued

  Deferred taxes at December 31, 1995 and 1994 are comprised as follows:

<TABLE>
<CAPTION>
                                                                                      1995              1994
                                                                                  -------------------------------
      <S>                                                                         <C>                <C>
      Current
        Unrealized exchange losses                                                $    (85,970)      $    (52,161)
        Compensated absences                                                            96,900             95,600
        Deferred income                                                                 (4,185)           (19,268)
        Other                                                                           14,200             20,200
        Deferred compensation                                                           55,628             63,723
                                                                                  ------------       ------------

            Current deferred tax asset/liability                                        76,573            108,094

      Noncurrent
        Foreign tax credit carryforwards                                             1,099,625          1,002,974
        Foreign and domestic net operating loss carryforwards                       18,754,277         16,653,156
        Depreciation and amortization                                                  295,881            230,866
        Unrealized exchange gain                                                    (1,069,231)          (755,793)
                                                                                  ------------       ------------

            Noncurrent deferred tax asset/liability                                 19,080,552         17,131,203
                                                                                  ------------       ------------

            Total deferred tax asset/liability before valuation allowances          19,157,125         17,239,297

      Valuation allowances                                                         (19,923,320)       (17,877,228)
                                                                                  ------------       ------------

            Net deferred tax liability                                            $   (766,195)      $   (637,931)
                                                                                  ============       ============
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                      1995              1994
                                                                                  --------------------------------
         <S>                                                                      <C>                <C>

         Current (included in "prepaid expenses and deposits")                    $      80,758      $     127,362
         Deferred income taxes                                                         (846,953)          (765,293)
                                                                                  -------------      -------------

                                                                                  $    (766,195)    $     (637,931)
                                                                                  =============     ==============
</TABLE>


NOTE Q - EXPLOSION

  In April,  1995, an explosion damaged Mecar's storage and loading  facilities,
  and caused production to cease for several months. The Company was insured for
  property damage and business  interruption.  The direct costs of repairing the
  facility  approximating $2.3 million was recovered in addition to $1.3 million
  for business  interruption.  The business interruption portion of the proceeds
  have been classified as revenue in 1995,  which partially  offset overhead and
  operating  costs for the shut down  period.  The $2.3  million  recovery was a
  direct offset against the related costs.

                                      F-25

<PAGE>

                          Allied Research Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE R - RESTRUCTURING CHARGE

  In  the  fourth  quarter  of  1993,  the  Company   recorded  an  accrual  for
  restructuring  costs totaling  $2,883,289 ($.44 per share after taxes) related
  to its Belgian  manufacturing  operations.  The charge  provided for estimated
  employee   severance,   retraining,   early   retirements  and  related  costs
  attributable  to a planned  workforce  reduction  initiated in late 1993.  The
  Company   anticipated  that  it  would  eliminate  over  the  next  two  years
  approximately  32  permanent  and 120  temporary  factory  and  administrative
  positions. The reductions were the result of efficiencies implemented over the
  past several years,  current backlog levels and anticipated  future  workforce
  requirements for Mecar's core defense operations, as well as those expected to
  be redeployed as part of prospective  diversification  ventures.  During 1994,
  the  Company   increased  the  provision  by  $326,831  to  cover   additional
  terminations. The restructuring was completed in early 1995.


NOTE S - EARNINGS PER COMMON SHARE

  Net earnings per common  share is based upon the  weighted  average  number of
  shares  outstanding of 4,408,172 in 1995,  4,392,517 in 1994, and 4,619,965 in
  1993.  Stock  options  outstanding  have not been  included  in the per  share
  computations since they would not have a material effect on per share amounts.


NOTE T - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS

  The Company currently operates in three principal areas:  Product sales (Mecar
  and ARCL),  Engineering and Technical (BRI) and Security  Systems and Services
  (The VSK Group). Product sales includes the production of ammunitions, weapons
  systems and ordnance products systems  integration.  Engineering and Technical
  provides  support  services  primarily to United States Military  Agencies and
  government  contractors.  Security  Systems and  Services  includes  sales and
  services to industrial and  institutional  customers of  protection,  fire and
  access control systems and services.  ARC Services had no significant revenues
  since inception in 1993.

                                      F-26

<PAGE>

                          Allied Research Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE T - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - Continued

  The Company's  foreign  operations  are conducted by Mecar,  the VSK Group and
  ARCL. All material  identifiable assets associated with foreign operations are
  located in Belgium and the United Kingdom.

  Information by geographic area and industry segment is as follows:

    Geographic Area Data          1995              1994               1993
    --------------------      -----------       ------------       ------------

    Net sales
      Belgium (1)             $53,280,097       $ 61,189,115       $137,203,725
      United Kingdom (2)             -               332,266            369,503
      France                    1,054,560                -                  -
      United States            11,434,250          8,325,464          9,524,254
                               ----------        -----------       ------------

                              $65,768,907       $ 69,846,845       $147,097,482
                               ==========        ===========        ===========

    Operating income (loss)
      Belgium                 $  (926,099)      $ (8,954,876)      $ 15,248,932
      United Kingdom             (626,630)           (84,007)          (632,210)
      France                     (495,318)              -                  -
      United States               598,497         (1,622,714)          (733,423)
      Corporate                  (524,288)          (688,929)        (1,063,962)
                               ----------        -----------        -----------

                              $(1,973,838)      $(11,350,526)      $ 12,819,337
                               ==========        ===========       ============

    Assets
      Belgium                 $84,800,974       $100,320,904       $148,882,022
      United Kingdom            1,645,818          1,647,402         10,396,231
      France                    1,213,227                -                  -
      United States             6,593,254          5,418,003          4,313,226
                               ----------        -----------        -----------

                              $94,253,273       $107,386,309       $163,591,479
                               ==========        ===========        ===========


    (1) Includes export sales  principally to customers in Asia\Middle  East and
        Europe of $33,212,000 in 1995, $50,457,142 in 1994, $101,947,46 in 1993.

    (2) Includes  export sales  principally to customers in Asia\Middle  East of
        $332,266 in 1994, and $369,503 in 1993.

                                      F-27

<PAGE>

                          Allied Research Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE T - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - Continued


    Industry Segment Data               1995            1994            1993
    ---------------------            -----------    -----------   ------------

    Net sales
      Product sales                  $36,131,894  $  54,335,591   $137,573,228
      Engineering and technical       11,354,440      8,325,464      9,524,254
      Security systems and service    18,282,573      7,185,790              -
                                     -----------    -----------   ------------

                                     $65,768,907   $ 69,846,845   $147,097,482
                                     ===========   ============   ============

    Operating income (loss)
      Product sales                  $(2,426,616)  $ (9,657,051)  $ 14,071,618
      Engineering and technical          912,048       (872,206)      (188,319)
      Security systems and service        65,018       (132,340)             -
      Corporate                         (524,288)      (688,929)    (1,063,962)
                                     -----------    -----------   ------------

                                     $(1,973,838)  $(11,350,526)  $ 12,819,337
                                     ===========   ============   ============

    Assets
      Product sales                  $83,468,399   $ 94,174,064   $159,278,253
      Engineering and technical        5,855,840      4,096,033      3,922,028
      Security systems and service     4,191,620      7,842,496              -
      Corporate assets                   737,414      1,273,716        391,198
                                     -----------   ------------   ------------

                                     $94,253,273   $107,386,309   $163,591,479
                                     ===========   ============   ============

    Capital expenditures
      Product sales                  $ 2,179,864   $  2,688,614   $  3,335,594
      Engineering and technical          310,059        632,922        310,192
      Security systems and service       430,805        295,982              -
                                     -----------   ------------   ------------

                                       2,920,728   $  3,617,518   $  3,645,786
                                     ===========   ============   ============

    Depreciation and
     amortization expense
      Product sales                    2,310,195   $  1,868,803    $  2,529,547
      Engineering and technical          222,857        238,725         198,115
      Security systems and service       218,815        303,501               -
                                     -----------   ------------    ------------

                                     $ 2,751,867   $  2,411,029    $  2,727,662
                                     ===========   ============    ============

                                      F-28

<PAGE>

                          Allied Research Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE U - QUARTERLY FINANCIAL DATA (UNAUDITED)

                         (Amounts in thousands, except per share data)
                         First     Second      Third     Fourth      Total
        1995            Quarter    Quarter    Quarter    Quarter    For Year
---------------------   -------    -------    -------    -------    --------

Revenue                 $ 9,153    $13,275    $16,530    $26,811     $65,769

Gross profit (loss)         103      2,531      2,583     10,655      15,872

Net earnings (loss)      (2,724)    (1,758)       215      2,254      (2,013)

Per share data:
  Net earnings (loss)      (.62)      (.40)       .05        .51        (.46)


        1994
---------------------
Revenue                 $25,910    $18,481    $ 8,694    $16,762     $69,847

Gross profit (loss)       3,729      2,028       (434)       547       5,870

Net earnings (loss)         378     (2,409)    (2,633)    (6,277)    (10,941)

Per share data:
  Net earnings (loss)       .09       (.55)      (.60)     (1.43)      (2.49)

                                      F-29

<PAGE>




                                   SCHEDULES






<PAGE>

                          Allied Research Corporation

           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                                (Parent Company)

                                 BALANCE SHEETS

                                  December 31,


The condensed  balance  sheets,  statements of operations  and cash flows of the
registrant follow.

         ASSETS
                                                1995           1994
                                            -----------    -----------

Cash and equivalents                        $   454,470    $   874,851
Due from subsidiaries                         3,431,939      3,102,242
Investments in subsidiaries                  31,192,155     32,316,730
Deferred tax asset                                   -          11,562
Deposits and other                              313,287        439,021
                                            -----------    -----------

    Total assets                            $35,391,851    $36,744,406
                                            ===========    ===========




        LIABILITIES


Accounts payable and accrued liabilities    $   206,141    $   267,787
Due to subsidiaries                           6,751,678      6,725,532
Income taxes                                     80,447         53,413
                                            -----------    -----------

    Total liabilities                         7,038,266      7,046,732


STOCKHOLDERS' EQUITY
  Common stock                                  442,206        439,844
  Capital in excess of par value             10,745,296     10,658,175
  Retained earnings                          12,676,000     14,689,271
  Accumulated foreign currency
    translation adjustment                    4,490,083      3,910,384
                                            -----------    -----------
                                             28,353,585     29,697,674
                                            -----------    -----------
                                            $35,391,851    $36,744,406
                                            ===========    ===========

                                      F-31

<PAGE>

                          Allied Research Corporation

     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED

                                (Parent Company)

                            STATEMENTS OF OPERATIONS

                            Year ended December 31,

<TABLE>
<CAPTION>
                                                 1995            1994          1993
                                              -----------    ------------   ----------
<S>                                           <C>            <C>            <C>
Income
  Management fees - intercompany              $ 2,505,222    $  3,864,152   $6,611,746
  Other - net                                     266,361         202,275      (79,968)
                                              -----------    ------------    ---------
                                                2,771,583       4,066,427    6,531,778

Costs and expenses
  Administrative and other                      3,115,474       3,775,141    3,487,492
                                               ----------    ------------    ---------

         Earnings (loss) before equity in
           operations of subsidiaries             (343,891)       291,286    3,044,286

Equity in operations of subsidiaries            (1,696,176)   (10,965,420)   6,296,315
                                                ----------    -----------    ---------

         Earnings (loss)  before income taxes   (2,040,067)   (10,674,134)   9,340,601

Income taxes                                       (26,797)       266,972    1,345,479
                                              ------------    -----------    ---------

         NET EARNINGS (LOSS)                   $(2,013,270)  $(10,941,106)  $7,995,122
                                                ==========    ===========    =========



         Net earnings (loss) per common share       $( .46)        $(2.49)       $1.73
                                                     =====          =====         ====
</TABLE>

                                      F-32

<PAGE>

                          Allied Research Corporation

     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED

                                (Parent Company)

                            STATEMENTS OF CASH FLOWS

                            Year ended December 31,

<TABLE>
<CAPTION>
Increase (decrease) in cash and equivalents                           1995             1994               1993
                                                                  -----------      ------------       -----------
<S>                                                               <C>              <C>                <C>
Cash flows from (used in) operating activities
  Net (loss) earnings for the year                                $(2,013,270)     $(10,941,106)      $ 7,995,122
  Adjustments to reconcile net earnings to net cash from
    (used in) operating activities
      Equity in operations of subsidiaries                          1,696,176        10,965,420        (6,296,315)
      Deferred income taxes                                            41,904            41,048          (152,610)
      Common stock awards and grants                                   11,250           236,473           148,750
  Changes in assets and liabilities
    Income taxes recoverable                                              -                 -             (66,587)
    Due from subsidiaries                                            (329,697)        3,653,332          (346,977)
    Other assets                                                      133,830          (350,872)          (15,609)
    Due to subsidiaries                                                26,146           316,935          (418,783)
    Accounts payable and accrued liabilities                          (61,644)          164,350            32,828
    Income taxes                                                       (3,308)          120,000           (49,784)
                                                                  -----------      ------------       -----------
                                                                    1,514,657        15,146,686        (7,165,087)
                                                                  -----------      ------------       -----------

         Net cash provided by (used in) operating activities         (498,613)        4,205,580           830,035

Cash flows from investing activities
  Capital expenditures                                                    -            (213,840)              -

Cash flows from financing activities
  Proceeds from exercise of stock options                                 -                 -             233,707
  Purchase of treasury shares                                             -          (3,513,360)       (2,159,361)
  Proceeds from employee stock purchase plan shares                    78,232            65,672            22,358
                                                                  -----------      ------------       -----------

           Net cash (used in) provided by  financing activities        78,232        (3,447,688)       (1,903,296)
                                                                  -----------      ------------       -----------

           Net (decrease) increase in cash and equivalents           (420,381)          544,052        (1,073,261)

Cash and equivalents at beginning of year                             874,851           330,799         1,404,060
                                                                  -----------      ------------       -----------

Cash and equivalents at end of year                               $   454,470     $     874,851      $    330,799
                                                                  ===========     =============      ============

Supplemental Disclosures of Cash Flow Information

  Cash paid during the year for
    Interest                                                      $       -       $       3,667      $        -
    Income taxes                                                      120,000               -           1,451,725
</TABLE>

                                      F-33

<PAGE>

                          Allied Research Corporation

                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                        Additions
                                              ----------------------------
                                Balance at      Charged to       Charged                      Balance
                                beginning       costs and        to other                    at end of
Description                     of period        expenses        accounts     Deductions      period
-----------                    -----------    -------------    -----------   ------------   ------------
<S>                            <C>            <C>              <C>             <C>          <C>
Year ended December 31, 1995

  Estimated losses on
    contracts                  $ 1,873,008    $(1,178,475)     $        -      $  263,318    $    431,215
                                ==========     ==========       ==========      =========     ===========

  Allowance for doubtful
    receivables                $   141,000    $   189,077      $        -      $       -     $    330,077
                                ==========     ==========       ==========      =========     ===========

  Valuation allowances on
    deferred tax assets        $17,877,228    $ 2,046,092      $        -      $       -      $19,923,320
                                ==========     ==========       ==========      =========     ===========


Year ended December 31, 1994

  Estimated losses on
    contracts                  $ 3,127,574    $   721,937      $        -      $1,976,503     $ 1,873,008
                                ==========     ==========       ==========      =========      ==========

  Allowance for doubtful
    receivables                $    21,000    $        -    (a)$   120,000     $       -      $   141,000
                                ==========     ==========       ==========      =========      ==========

  Valuation allowances on
    deferred tax assets        $ 3,384,229    $14,492,999      $        -      $       -      $17,877,228
                                ==========     ==========       ==========      =========      ==========

        (a) VSK Group acquisition


Year ended December 31, 1993

  Estimated losses on
    contracts                  $ 1,087,461    $ 3,127,574      $        -      $1,087,461     $ 3,127,574
                                ==========     ==========       ==========      =========      ==========

  Allowance for doubtful
    receivables                $    21,000    $        -       $        -      $       -      $    21,000
                                ==========     ==========       ==========      =========      ==========

  Valuation allowances on
    deferred tax assets        $        -     $        -       $3,384,229      $       -      $ 3,384,229
                                ==========     ==========       =========       =========      ==========
</TABLE>

                                      F-34

<PAGE>







                                    EXHIBITS








<PAGE>

                                 EXHIBIT INDEX



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

 11              Computation of Earnings
                    per Common and Common
                    Equivalent Shares                           E - 3



 21              List of Subsidiaries                           E - 4



 23              Consent of Independent Certified
                    Public Accountants                          E - 5