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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, 2000                                                       0-2545
-----------------                                                       ------

                          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 260
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:

     Title of Class        Name of Exchange
     --------------        ----------------

     Common Stock,         American Stock Exchange
     $0.10 Par Value

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

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

                                 Yes  X     No
                                    -----

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

     State the aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 1, 2001:

     Common Stock - Par Value $.10      $32,300,969

     The number of shares of registrant's Common Stock outstanding as of March
1, 2001, was 4,878,064.
<PAGE>

Item 1.  Business.

General.
-------

     Allied Research Corporation ("Allied" or the "Company") was incorporated in
1962 under the name Allied Research Associates, Inc. Allied changed its
corporate name to Allied Research Corporation in 1988. Allied's strategic
security services businesses are primarily conducted through MECAR S.A.
("MECAR") and a group of Belgian corporations acquired in 1994, 1995 and 1999
consisting of VSK Electronics, S.A., Tele Technique Generale, S.A., IDCS, S.A.
and VIGITEC, S.A. (collectively, the "VSK Group"). MECAR is located in Petit-
Roeulx-lez-Nivelles, Belgium; and the VSK Group operates from several different
locations in Belgium.

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

Allied.
------

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

MECAR.
-----

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

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

     Mortar Ammunition. The 81mm family of mortar ammunition has recently been
     -----------------
modernized to compete with the latest generation of this product line.
Production quantities of this latest version have already been manufactured and
delivered to MECAR customers. The 120mm family is a state of the art

                                       1
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ammunition for standard field mortars and for the increased performance turreted
AMS mortar. The current version of this ammunition has successfully completed
qualification with the US Army, together with the 120mm AMS LAV-M(S) system.
This system is capable of direct as well as indirect fire. The MECAR ammunition
is the only one so far developed that has been designed to perform in the AMS
weapon high pressure and acceleration environment.

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

     The 90mm KENERGA Weapon System has been jointly developed by Cockerill
     ------------------------------
Mechanical Systems ("CMI") and MECAR to provide the modern APC with anti-tank
punch similar to that of tanks equipped with 105mm guns, without sacrifice to
the range, mobility and maintainability of the light APC. In this partnership,
CMI is responsible for the weapon and MECAR for the ammunition. The ammunition
family includes the APFSDS, HESH and SMK versions with their corresponding
training rounds. This system is currently undergoing qualification by the U.S.
Army.

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

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

     Medium Caliber Round. The  25mm APFSDS-T ammunition round is MECAR's entry
     --------------------
into the medium caliber arena. To date, over 500,000 rounds have been sold.

     76mm L23 Ammunition. MECAR manufactures HE, HESH and HESH-
     -------------------

                                       2
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PRAC ammunition for the L23 guns, which are in service with armored vehicles in
several countries in Europe, South America, Africa and the Far East. Even though
this is an established weapon, requirements for this ammunition are expected to
continue for the next several years.

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

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

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

Limited.
-------

     Limited, a systems integrator in the ammunition industry, was established
by Allied in 1989 to augment its overseas business development efforts. 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.

                                       3
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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. In late 1999, the VSK Group acquired all of the
outstanding stock of VIGITEC, S.A., which markets closed circuit television
systems and provides other communications services.

BRI.
---

     BRI is an engineering and technical firm that specializes in design,
prototype fabrication, production, test and inspection documentation for
government and industry. All of the stock of BRI was sold by Allied in March,
2000.

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

     See Note R to Allied's consolidated financial statements for information
concerning the geographic areas and industry segments of Allied which
information is incorporated herein by reference.

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

     Allied derives the principal portion of its revenues from direct and
indirect sales to foreign governments and prime contractors, primarily on fixed
price contracts. The addition of the VSK Group adds a non-military component to
company-wide operations. Two agencies of a foreign government and another
foreign government accounted for approximately 19%, 23% and 18% in 2000, 3%, 27%
and 31% in 1999, and 52%, 22% and 11% in 1998 of Allied's revenues. In addition,
during 2000, direct and indirect foreign military sales contracts for the
benefit of one of such foreign government agencies were approximately 24% of
Company revenue. The VSK Group accounted for approximately 23%, 35% and 16% of
Allied's 2000, 1999 and 1998 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

                                       4
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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. The production period required to fill most such orders may range
from several months to a year. Most of the contracts received by MECAR require
delivery in approximately one year. Accordingly, MECAR's business is dependent
upon its ability to obtain such large orders. MECAR frequently accepts smaller
orders in an attempt to increase its customer base. MECAR's products are
designed for general military use by a variety of government customers.

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

     MECAR has from time-to-time received foreign military sale ("FMS")
contracts from the U.S. Government for the manufacture of ammunition for the
benefit of a foreign government. Such contracts are subject to termination for
convenience or upon default. The contracts received by MECAR through the FMS
system do not include down payments, are not secured by letters of credit and do
not require MECAR to submit advance payment guarantees/performance bonds.

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

                                       5
<PAGE>

Marketing.
---------

     Most of the marketing activities of MECAR 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 distributor/value added reseller.

     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 2000, 1999 and 1998, MECAR expended $736,764, $793,916
and $811,240, respectively, for research and development activities. MECAR
designed most of the products which it currently manufactures. MECAR designs and
develops most of its special tooling, fixtures and special explosive loading and
testing systems.

     The business of the VSK Group requires continuous investment in research
and development to update and enhance its security systems. The VSK Group
employs a staff of design engineers specialized in the field of both electronic
hardware and software. During 2000, 1999 and 1998 the VSK Group expended
$846,307, $892,092 and $802,810 , respectively, on research and development.

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

     Production of ammunition requires an ample supply of chemicals,
pyrotechnical materials and metal component parts and casings. MECAR generally
attempts to ensure that several vendors will be available in the open market to
compete for all supply contracts. However, once the development phase is
complete and the design has been stabilized for certain products, the continued

                                       6
<PAGE>

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.

     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, 2000 and December 31, 1999, Allied had backlog orders
believed to be firm, after giving effect to the percentage of completion method
of accounting, of approximately $63.4 million and $105.0 million, respectively.
A substantial portion of the backlog of orders as of December 31, 2000 is
expected to be filled in 2001.

Competition.
-----------

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

     The nature of the competition encountered by the VSK Group depends upon the
segment of the security systems business. In the development and manufacturing
area, there are a number of larger competitors, many with greater

                                       7
<PAGE>

financial resources than the VSK Group. In the installation and services area,
the VSK Group competes with a number of smaller, local competitors.

Personnel.
---------

     As of December 31, 2000, Allied, MECAR and the VSK Group had 417 full and
part-time employees as follows:

     ALLIED
     ------

     Salaried employees                       4

     MECAR
     -----

     Technical and salaried employees        47
     Hourly workers                         228
     Technical consultants                    1

     VSK Group
     ---------

     Technical salaried employees           112
     Hourly workers                          23
     Part-time employees                      2

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

Patents.
-------

     Neither Allied nor any of its subsidiaries holds any significant patents.

Environmental Regulations.
-------------------------

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

Principal Customers.
-------------------

     MECAR has historically received a large percentage of its revenue from two
(2) agencies of a foreign government. MECAR now receives contracts for the
benefit of these customers via its independent distributor/value added reseller
or via the FMS program.

                                       8
<PAGE>

Item 2.  Properties.

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

     MECAR's principal factory is located approximately 25 miles south of
Brussels near Nivelles, Belgium. The factory principally consists of a
manufacturing and administrative complex which was occupied by MECAR in 1989.
The manufacturing area is approximately 112,000 square feet and the
administration facilities is approximately 28,000 square feet. There are a
number of older buildings on the property that are still used in conjunction
with the new complex. A small test firing range is maintained on this property.
MECAR also owns a 600 acre test range in the vicinity of the Village of Marche
in the Ardennes region of Belgium, which was acquired in 1985. It is currently
anticipated that MECAR will cease its use of the Ardennes firing range in July,
2001. Thereafter, to the extent it needs access to a firing range larger than
the one at its principal facility, it plans to utilize a range maintained by the
Belgian Army.

     Throughout 2000, MECAR operated at an average of 90% of productive capacity
of its facility, assuming the operation of 3 shifts. MECAR is currently
operating at 100% of productive capacity.

     The VSK Group operates from owned facilities containing approximately
49,400 square feet. Such facilities are currently operating at approximately 85%
of productive capacity.

     Capital expenditure programs for facilities and equipment planned in 2001
will require funding of approximately $2.8 million.

Item 3.  Legal Proceedings.

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

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

     There were no matters submitted to a vote of security holders of Allied
during the fourth quarter of 2000.

                                       9
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                                    PART II

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

Market Information.
-------------------

     Allied's Common Stock has been listed for trading on the American Stock
Exchange ("AMEX") since September 15, 1992. Its AMEX trading symbol is ALR. Its
media listing is under the symbol Allied Research. The table below shows the
high and low sales prices of Allied's Common Stock during 2000 and 1999 (as
reported by AMEX):

     2000                     High      Low
     ----                     ----      ---
     1st Quarter              $9.38     $7.00
     2nd Quarter              $8.56     $6.75
     3rd Quarter              $9.31     $7.13
     4th Quarter              $9.19     $7.75

     1999                     High      Low
     ----                     ----      ---
     1st Quarter              $8.25     $6.06
     2nd Quarter              $8.00     $5.25
     3rd Quarter              $6.50     $4.38
     4th Quarter              $6.94     $5.25

Stockholders.
------------

     There were approximately 1,156 holders of record of the Common Stock of
Allied as of March 1, 2001.

Dividends.
---------

     Allied paid a 5% stock dividend in November, 1992 to holders of record of
its Common Stock on October 15, 1992. Cash was paid in lieu of the issuance of
fractional shares. There have been no dividends declared or paid by Allied in
1993-2000. The banking agreements of MECAR restrict the ability of such
subsidiary to transfer funds to Allied as described in Management's Discussion
and Analysis of Financial Condition and Results of Operations.

                                       10
<PAGE>

Item 6.  Selected Financial Data.

     The following selected financial data relates to Allied's consolidated
financial position and results of operations for 2000, 1999, 1998, 1997 and
1996:

                               2000       1999      1998      1997      1996
                               ----       ----      ----      ----      ----
                                   (000's omitted except per share amounts)

Revenues                    $107,743    $59,033   $133,078  $123,935  $92,026

Earnings (loss) from
 - continuing operations       8,705     (3,282)     8,629     8,147    4,520
 - discontinued operation        517       (746)       437       418      285
                             -------     -------   --------  --------  -------
     Net earnings (loss)       9,222     (4,028)     9,066     8,565    4,805
                             =======     =======   ========  ========  =======

Earnings (loss) per share
Basic:
     continuing operations      1.79      (0.68)      1.83      1.79     1.02
     discontinued operation     0.11      (0.16)      0.09      0.09     0.06
                             -------    -------   --------  --------  -------
       Net income (loss)        1.90      (0.84)      1.92      1.88     1.08
                             =======    =======   ========  ========  =======

Diluted:
     continuing operations      1.79      (0.68)      1.81      1.76     1.02
     discontinued operation     0.11      (0.16)      0.09      0.09     0.06
                             -------    -------   --------  --------  -------
       Net income (loss)        1.90      (0.84)      1.90      1.85     1.08
                             =======    =======   ========  ========  =======

Total assets                  87,757     60,131    101,635    89,310   89,305

Long-term debt
obligations and
redeemable preferred stock     3,650      3,081      4,154     5,104    6,662

Cash dividends declared
Per common share                   -          -          -         -        -

     NOTE:  All per share amounts have been restated consistent with the
     provision of FASB 128, which became effective in 1997.



                                       11
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Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations.

Overview
--------

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

     In 2000, Allied operated in three (3) principal segments: the development
and production of ammunitions and weapon systems ("product sales"); the
manufacture, distribution and service of an integrated line of industrial
security products ("security systems and services"); and engineering and
technical support services prior to its sale in March, 2000 ("engineering and
technical"). Product sales, security systems and services and engineering and
technical were provided solely by MECAR and a related company, Sedachim; the VSK
Group; and BRI, respectively. Accordingly, all references in this Item 7 to (i)
MECAR shall refer to the product sales segment, (ii) the VSK Group shall refer
to the security systems and services segment and (iii) BRI shall refer to the
engineering and technical segment. All references herein to Allied or the
Company shall refer to Allied Research Corporation as a whole. An agreement to
sell the stock of BRI was executed in early December, 1999 and the stock of BRI
was sold in March, 2000. Accordingly, BRI's operations have been excluded from
Allied's results from continuing operations and the net results of such
operations are reported separately as results from discontinued operation.

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

     Allied earned net profits of $8.7 ($1.79 per share - diluted) from
continuing operations in 2000 compared to a net loss of $3.3 ($0.68 per share -
diluted) for 1999 and net profits of $8.6 ($1.81 per share - diluted) for 1998.

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

     This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that are based on

                                       12
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current expectations, estimates and projections about the Company and the
industries in which it operates. In addition, other written or oral statements
which constitute forward-looking statements may be made by or on behalf of the
Company. Words such as "expects", "anticipates", "intends", "plans", "believes",
"seeks", "estimates", or variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions ("Future Factors") which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecast in
such forward-looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.

     Future Factors include substantial reliance on MECAR's principal customers
to continue to acquire MECAR's products on a regular basis; the cyclical nature
of the Company's military business; rapid technological developments and changes
and the Company's ability to continue to introduce competitive new products and
services on a timely, cost effective basis; the ability of the Company to
successfully continue to increase the commercial component of its business; the
mix of products/services; domestic and foreign governmental fiscal affairs and
public policy changes which may affect the level of purchases made by customers;
changes in environmental and other domestic and foreign governmental
regulations; continued availability of financing, financial instruments and
financial resources in the amounts, at the times and on the terms required to
support the Company's future business. These are representative of the Future
Factors that could affect the outcome of the forward-looking statements. In
addition, such statements could be affected by general industry and market
conditions and growth rates; general domestic and international economic
conditions including interest rate and currency exchange rate fluctuations;
increasing competition by foreign and domestic competitors, including new
entrants; and other Future Factors.

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

     Allied reported excellent results for 2000. While VSK continues to
contribute solid revenue and earnings, Allied's 2000 results were largely driven
by MECAR's return to profitable operations.

     MECAR began to receive substantial orders from its traditional customer
base in the latter portion of 1999. Such orders continued in 2000. As a result,
MECAR operated at or near capacity of its facilities throughout much of 2000.

                                       13
<PAGE>

The increase in orders from MECAR's traditional customer base coincided with a
substantial increase in worldwide oil prices. Allied believes that this price
increase positively impacted its customers' purchasing power which in turn lead
to increased orders. The vast majority of MECAR's 2000 revenues resulted from
orders from its traditional customer base.

     MECAR's 2000 revenues included contracts for the benefit of its customers
via the Foreign Military Sales Program ("FMS") as well as from direct and
indirect contracts with foreign governments.

     MECAR has supplied both 90 mm ammunition and 120 mm mortar ammunition for
use in two (2) new weapon systems acquired by one of MECAR's traditional
customers via FMS contracts. The customer has indicated a need and desire for
additional rounds of each of the 90 mm ammunition and 120 mm mortar ammunition.
Allied believes that an additional order or orders for such rounds could be
received in 2001.

     MECAR continues to supply a wide variety of medium and large caliber
ammunition to its customers via direct and indirect contracts with its customer
countries. Non-FMS sales to MECAR's traditional customers have historically been
made with the assistance of an independent marketing representative, which also
provided significant product and customer support. In 2000, MECAR designated an
affiliate of the representative as its distributor/value added reseller to the
principal customers. Thus, these sales are now being made on an indirect basis
to its traditional customers. Allied does not anticipate that this change will
adversely affect MECAR, its operations or its profitability.

     During 2000, MECAR received a relatively small order from a new South
American customer. MECAR continues to actively pursue the South American market.
MECAR is in active negotiations with another South American country which is
hoped will lead to another order in 2001.

     In March 2001, MECAR received two (2) new contracts aggregating $24.5. One
of the contracts is from its traditional customer base and one of the contracts
is from a new country customer.

     The VSK Group recorded another excellent year in 2000. It contributed
approximately $20.1 in revenues and $1.7 in profits. During 2000, the VSK
Group's work for Belgian banks increased from prior levels and the VSK Group
successfully integrated VIGITEC (a subsidiary acquired in December, 1999). The

                                       14
<PAGE>

results of the VSK Group were off slightly from 1999 results due, in part, to
reduced operating margins.

     Both MECAR's and the VSK Group's reported earnings for the year were
adversely impacted by the fluctuations of the Euro during 2000. During 2000,
MECAR utilized the Euro as its principal currency and the VSK Group utilized the
Belgian Franc, which is linked to the Euro. Commencing January 1, 2001, the VSK
Group joined MECAR in conducting its operations via the Euro.

     Allied commenced 2001 with a consolidated backlog of approximately $63.5
compared with a consolidated backlog at the beginning of 2000 of $105.0. MECAR
began 2001 with a backlog of approximately $54.3 compared with a 2000 beginning
backlog of $93.5. VSK began 2001 with a backlog of approximately $9.2 compared
with a 2000 beginning backlog of approximately $11.5.

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

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

     The Company's liquidity did not materially improve in 2000 despite the
excellent operating results and an increase in working capital.

     As a result of losses incurred in 1999 and substantial purchases required
by its increased workload, MECAR obtained a $9.2 line of credit in early 2000 to
fund working capital requirements. At December 31, 2000, the outstanding balance
under the line of credit was $2.8. It is anticipated that the line of credit
will be fully repaid by the end of April, 2001.

     In addition, Allied made advances of $4.0 to MECAR throughout 2000 to
supplement MECAR's working capital which are scheduled to be repaid in the
spring of 2001.

     In an effort to minimize the liquidity shortage at MECAR, during 2000 the
bank pool provided a partial waiver of the requirement to pledge cash to
collateralize performance bonds and advance payment guarantees issued by the
bank pool for the benefit of MECAR. It is anticipated that the waiver will
expire in mid-year 2001 at which point MECAR will be required to provide the
full amount of restricted cash as collateral as required by the bank pool
agreement.

                                       15
<PAGE>

     No liquidity problems are forecast for 2001. In the longer term, Allied's
liquidity will continue to depend upon its ability to obtain substantial orders
from its traditional customer base and the success of its efforts to broaden its
revenue base.

Liquidity.
---------

     Working capital, which includes restricted cash, was approximately $34.9 at
December 31, 2000, which is an increase of $9.1 from the December 31, 1999
level. Allied's current working capital is required for operations and to
support credit facility agreements.

     Cash and equivalents at December 31, 2000 increased over year-end 1999
levels largely as a result of the partial cash collateral requirement waiver by
the bank pool. This increase was offset by lower levels of restricted cash.
Accounts receivable at December 31, 2000 increased over December 31, 1999 levels
by $9.4 due to substantial 2000 year-end shipments by MECAR. Costs and accrued
earnings on uncompleted contracts increased by $20.0 from year-end 1999 levels
as a result of increased amounts of work-in-progress at the end of 2000.
Inventories at year-end 2000 were 68% higher than at the end of 1999 due to the
increased workload at MECAR. Prepaid expenses increased $2.0 over 1999 levels as
a result of advance payments on contracts in process at 2000 year-end.
Intangibles at 2000 year-end decreased from 1999 levels due to annual
amortization. Deferred taxes decreased in 2000 by $2.5 as a result of the
utilization of tax loss carryforwards generated in 1999 at MECAR that were used
in the current year.

     Current liabilities increased by $20.7 over December 31, 1999 levels due to
a substantial increase in bank debt, accounts payable, accrued liabilities and
customer deposits at the end of 2000 associated with the increased work at
MECAR. Long-term debt increased during 2000 by $0.4 as a result of equipment
purchases during the year.

     During 2000, 1999 and 1998, Allied funded its operations principally with
internally generated cash and back-up credit facilities required for foreign
government contracts. In addition, MECAR utilized a $9.2 line of credit
throughout 2000.

     MECAR typically obtains relatively large orders for its ammunition and

                                       16
<PAGE>

weapon systems which require credit facilities to provide import letters of
credit, advance payment guarantees and performance bonds. These needs have been
met in the last few years via agreements primarily with a multi-member foreign
bank pool.

     As has been the case in recent years, the bank pool must agree to extend
such facility to new orders as they are received by MECAR. 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 pool agreement and other loan agreements continue to impose
certain restrictions on MECAR. MECAR's obligations were collateralized at
December 31, 2000 by a pledge on MECAR's assets of $25. The bank pool agreement
further precludes MECAR from making payments to any company in the Allied group
in excess of $2.4 per year, unless MECAR has unrestricted cash in excess of
$5.7. MECAR's obligations under the bank agreement, after giving effect to the
1999 European reorganization of ARC Europe, are also supported by a guarantee
provided by Allied and a pledge of the stock of the VSK Group.

     MECAR has a mortgage loan with a foreign government agency which had an
outstanding balance of approximately $1.8 at December 31, 2000. Principal and
interest payments on the mortgage loan extend through January, 2004, and the
loan includes a prepayment penalty clause.

     The VSK Group operated throughout 2000 primarily from cash generated from
operations. The VSK Group is obligated on several mortgages and other long-term
obligations with December 31, 2000 balances aggregating $0.3. It is also
obligated on letters of credit required by a contract with a customer.

     On January 1, 1999, eleven member countries of the European Union adopted
the Euro as their common legal currency and established fixed conversion rates
between their existing sovereign currencies and the Euro. The Euro is currently
trading on currency exchanges and the legacy currencies will remain legal tender
in the participating countries for a transition period between January 1, 1999
and January 1, 2002. During the transition period, cash-less payments can be
made in the Euro, and parties can elect to pay for goods and services and
transact business using either the Euro or a legacy currency. Between January 1,
2002, and July 1, 2002, the participating countries will introduce Euro notes
and coins and withdraw all legacy currencies so that they will no longer be
available.

                                       17
<PAGE>

     MECAR has adopted the Euro as its functional currency. The VSK Group used
the Belgian Franc as its primary currency in 2000; effective January 1, 2001,
the VSK Group adopted the Euro as its functional currency. Allied will
continue to evaluate all issues involving the introduction of the Euro as
further accounting, tax and governmental legal and regulatory guidance becomes
available. Based on current information and Allied's current assessment, Allied
does not expect that the Euro conversion will have a material adverse effect on
its business or financial condition. However, its operations in 2000 were
adversely impacted by the fluctuations in the value of the Euro versus the U.S.
Dollar.

     In September 1998, Allied's Board of Directors authorized the purchase of
up to 200,000 shares of Allied's common stock. During 2000, 1999 and 1998,
Allied repurchased 75,688, 22,600 and 3,000 shares of its common stock in market
transactions. The Company does not anticipate repurchasing shares of Company
stock at the same rate in calendar year 2001.

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

Capital Resources.
-----------------

     Allied spent $3.9 in 2000 on capital equipment as compared with $2.3 in
1999 and $2.2 in 1998, respectively. The expenditures in 2000 were primarily for
new equipment for MECAR. Management currently anticipates that it will spend
approximately $2.8 on capital expenditures in 2001 for additional upgrades to
the MECAR and VSK Group facilities and equipment.

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

     Allied had revenues from continuing operations of $107.7 in 2000 compared
to $59.0 in 1999 and $133.1 in 1998, respectively. Allied earned profits from
continuing operations of $8.7 in 2000 compared to a loss of $3.3 in 1999 and
profits of $8.6 in 1998.

     The following table sets forth, for the years ended December 31, 2000, 1999
and 1998, certain items from Allied's consolidated statements of operations
expressed as a percentage of revenue:

                                       18
<PAGE>

                                 2000   1999     1998
                                 ----   ----     ----
Revenue                           100%   100%   100.0%

Costs and Expenses
 Cost of sales                   74.2   86.2     82.1
 Selling and administrative      10.0   18.1      7.8
 Research and development         1.5    2.9      1.2
                                 ----   ----    -----
   Operating income (loss)       14.3   (7.2)     8.9

Other income (deductions)

  Interest income                 0.6    1.4      0.9
  Interest expense               (1.4)  (1.9)    (1.0)
  Other - net                     0.4    1.3     (0.6)
                                 ----   ----    -----

   Earnings (loss) before
   discontinued operation and
   income taxes                  13.9   (6.4)     8.2

Income tax expense (benefit)      5.8   (0.8)     1.7
                                 ----   ----    -----

   Earnings (loss) from
   continuing operations          8.1   (5.6)     6.5

Discontinued operation            0.5   (1.3)     0.3
                                 ----   ----    -----

   Net earnings (loss)            8.6   (6.9)     6.8
                                 ====   ====    =====

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

Revenues
--------

   Allied's consolidated revenues from continuing operations for 2000 increased
$48.7, or 83%, over 1999 revenues. Revenues from continuing operations for 1999
decreased $74.0, or 56%, as compared to 1998.

                                  Revenues By Segment
                                  -------------------
                                      ($ Millions)
                         2000               1999              1998
                                                              ----
                 Amount       %      Amount      %     Amount       %
                 ------      --      ------     --     ------      --
MECAR             $87.6      81%     $38.5      65%    $111.8      84%
VSK                20.1      19%      20.5      35%      21.3      16%

                                       19
<PAGE>

     MECAR's revenues for 2000 increased by 128% over its 1999 revenues. MECAR's
1999 revenues were only 34% of its 1998 revenues. The increase in 2000 revenues
is attributable to increased order levels for its products. The decline in 1999
revenues compared to 1998 was due to delays in receipt of orders from MECAR's
primary customers.

     In 2000, revenues at the VSK Group decreased approximately 2% from 1999
levels (if currency fluctuations are eliminated, 2000 VSK Group revenues were
14% greater than 1999 revenues). In 1999, revenues at the VSK Group decreased
approximately 4% from 1998 revenues.

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

     Cost of sales as a percentage of sales for 2000 was approximately 74%
compared with 86% for 1999 and 82% for 1998. The decreased cost of sales
percentage was primarily attributable to increased revenue at MECAR, changes in
the mix of products being produced and the price structure on orders received
from MECAR's distributor/value added reseller. Costs in 1999 were higher than
normal as a result of rework costs on orders for certain customers.

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

     Selling and general administrative expenses in 2000 increased less than 1%
over those incurred in 1999, primarily as a result of continued cost containment
efforts over the past three (3) years.

     Selling and general administrative expenses in 1999 were 4% greater than
those incurred in 1998 principally as a result of costs incurred in the 1999
proxy solicitation contest.

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

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

     Research and development costs incurred in 1999 increased by $0.07 (or 4%)
over 1998 levels. The percentage increased as a factor of revenue, rather than a
change in effort.

                                       20
<PAGE>

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

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

     Interest income decreased in 1999 by $0.3 (or 28%) from 1998 levels,
principally due to decreased amounts of cash invested.

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

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

     Interest expense decreased in 1999 by $0.3 (or 19%) compared to the amount
incurred in 1998, as a result of a decrease in the amount of bank fees paid by
MECAR, in part since the FMS contracts received by MECAR in 1999 did not require
performance bonds or advance payment letters of credit.

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

     Other-net results were a $0.5 gain in 2000 and a $0.8 gain in 1999, largely
due to net currency gains at MECAR and the VSK Group.

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

                       Pre-Tax Profit (Loss) By Segment
                       --------------------------------
                                 ($ Millions)


                                    2000      1999       1998
                                  Amount    Amount     Amount
                                  ------    ------     ------

          MECAR                    $12.7     $(7.7)     $ 6.9
          VSK                        2.9       4.2        4.5
          Corporate and Other       (0.6)     (0.2)      (0.5)


     MECAR's 2000 pre-tax profit was largely attributable to its increased
revenue.  MECAR's 1999 loss resulted from insufficient revenue and unanticipated
costs to rework products for certain customers.

                                       21
<PAGE>

     The VSK Group's 2000 pre-tax profit decreased by $1.3 from its 1999 level
due to reduced operating margins and exchange rate changes.  The VSK Group's
1999 pre-tax profit decreased slightly ($0.3) from 1998 levels as a result of
exchange rate fluctuations.

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

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

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

     The 1998 effective tax rate was 20.3%, primarily due to the utilization of
tax loss carryforwards at MECAR and the reduction of $0.9 in deferred and
accrued tax obligations in the United Kingdom that were favorably resolved in
1998.

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

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

     The Company had a $3.3 loss in 1999 from continuing operations compared
with $8.6 profits in 1998.

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

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

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

     The Company's loss from discontinued operations of $0.7 in 1999 and its net
income of $0.4 in 1998 is from BRI operations.

                                       22
<PAGE>

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

     Through February 28, 2001, the Company has not experienced any significant
problems related to the Y2K issue.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

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

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

     At year-end 2000, Allied had approximately $4.6 million of fixed-rate
indebtedness and approximately $3.7 million of variable-rate indebtedness.
Allied has not entered into any interest rate swaps or other derivatives with
respect to its indebtedness.

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

     Assuming year-end 2000 variable rate debt and cash available for
investment, a one percent change in interest rates would impact net interest
income by less than $0.1.

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

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

                                       23
<PAGE>

subsidiaries' operating results.

     Additionally, Allied's consolidated financial statements are denominated in
U.S. dollars and, accordingly, changes in the exchange rates between the Allied
subsidiaries' local currency and the U.S. dollar will affect the translation of
such subsidiaries' financial results into U.S. dollars for purposes of reporting
the consolidated financial results. Allied does not hedge these matters because
cash-flows from international operations are generally re-invested locally. It
is estimated that a 10% change in foreign exchange rates would impact reported
operating profit by less than $0.92.

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

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

Item 8.  Financial Statements and Supplementary Data.

     The financial statements required by this item are set forth following the
signature pages hereof.

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

Item 9.  Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosures.

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

                                   PART III

Item 10.  Directors and Executive Officers of Allied.

Directors.
---------

     The following are the directors of Allied:

                                       24
<PAGE>

     J. H. Binford Peay, III, age 60, became a director in April, 2000 and was
elected Chairman of the Board, President and Chief Executive Officer in January,
2001. Since 1997, General Peay has been a consultant. General Peay retired in
1997 as Commander in Chief, United States Central Command, with responsibility
for operations in some 20 countries throughout Africa, the Middle East, Persian
Gulf and South Asia. Previously, he was Vice Chief of Staff, U.S. Army. General
Peay is currently a director of United Defense L.P., and a Trustee of the George
C. Marshall Foundation, the V.M.I. Foundation and the National Defense
University.

     J. R. Sculley, age 60, became a director of Allied in 1991 and currently
serves as Chairman Emeritus. He served as Chairman of the Board and Chief
Executive Officer from December, 1992 until September, 1999; from April 1992
until December 1992 he served as President and Chief Operating Officer of
Allied. Between 1989 and April, 1992, Mr. Sculley was Director of Advanced
Studies and Technologies of Grumman Corporation, a defense company, and, prior
thereto, was Assistant Secretary of the Army (Research, Development and
Acquisition).

     Clifford C. Christ, age 53, became a director of Allied in 1993. He has
been the President and Chief Executive Officer of NavCom Defense Electronics,
Inc., a defense electronics company, since 1988.

     Harry H. Warner, age 65, became a director of Allied in early 1996.
Throughout the last five years, Mr. Warner has been a self-employed financial
consultant, investor and real estate developer. He is also a director of
Chesapeake Corporation, Pulaski Furniture Corporation and Virginia Management
Investment Corporation.

     Ronald H. Griffith, age 62, became a director of Allied in April, 2000.
Mr. Griffith is Executive Vice President and Chief Operating Officer of MPRI,
Inc., a professional services company, since 1998.  Formerly, he served as Vice
Chief of Staff of the U.S. Army.

Executive Officers.
------------------

     The following are the sole executive officers of Allied:

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

                                       25
<PAGE>

     John G. Meyer, Jr., age 56, was elected Executive Vice President, Chief
Operating Officer and acting Chief Financial Officer in January, 2001. Mr. Meyer
recently retired from the U.S. Army having served as its most senior Public
Affairs Officer for the last four (4) years.

     Bruce W. Waddell, age 54, was elected Vice President for Strategic Planning
and Corporate Development in January, 2001. He served as a director of Allied
from April, 2000 through January, 2001. Mr. Waddell was most recently President
of The Stonebridge Group, Inc., a management consulting firm specializing in
strategy and business development. He previously held management positions with
Avery Dennison and in General Electric's defense and lighting businesses.

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, 2000, 1999 and 1998, to the chief executive officer
of Allied and to other executive officers of Allied whose total annual salary
and bonus exceeds $100,000:

                                       26
<PAGE>

                          SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                Long Term Compensation
                                                                                ----------------------
                              Annual Compensation                           Awards               Payouts
                              -------------------                           ------               -------
------------------------------------------------------------------------------------------------------------------------------------
  Name and Principal       Year    Salary      Bonus         Other Annual   Restricted    Securities     LTIP Payouts   All Other
      Position                      ($)         ($)/1/       Compensation    Stock        Underlying     Payouts ($)   Compensation
                                                                 ($)       Award(s) ($)   Options/SARs                     ($)
                                                                                             (#)
------------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>    <C>          <C>           <C>           <C>            <C>            <C>            <C>
W. Glenn Yarborough,       2000   $200,000     $50,000                                                                  $475,000/2/
Jr., President and Chief
Executive Officer until
January, 2001
------------------------------------------------------------------------------------------------------------------------------------
                           1999   $200,000           0
------------------------------------------------------------------------------------------------------------------------------------
                           1998   $197,000     $61,312
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

______________

     /1/ Mr. Yarborough was awarded bonuses of $50,000 and $61,312 for 2000 and
     1998 performance, respectively. The bonus for 1998 performance was paid via
     the grant of 9,000 shares of Company stock in February, 1999. The shares
     issued in February, 1999 had a market value of $6.8125 per share on the
     date of grant.
     /2/ Mr. Yarborough's employment agreement provides for monthly severance
     payments for one (1) year following his January, 2001 retirement equal to
     his monthly salary payments prior to his retirement. In addition, Mr.
     Yarborough will provide five (5) years of consulting services for $55,000
     per year to commence immediately following payment of his severance.

                                       27
<PAGE>

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

<TABLE>
<CAPTION>
                                                          -------------------------------------------------------------------
                                                            Number of Securities Underlying    Value of Unexercised In-the-
                                                            Unexercised Options/SARs at FY-    Money Options/SARs at FY-End
                                                                       End (#)                             ($)
                                                          -------------------------------------------------------------------
                                                          <S>                                  <C>
                                                          -------------------------------------------------------------------
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
      Name           Shares         Value Realized ($)      Exercisable/Unexercisable       Exercisable/Unexercisable
                   Acquired on
                   Exercise (#)
-----------------------------------------------------------------------------------------------------------------------------
<S>                <C>              <C>                     <C>                             <C>
   W. Glenn          14,000             $7,000                                  0/0                                0/0
Yarborough, Jr.
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       28
<PAGE>

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

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

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

     In 1992, the Board of Directors of Allied adopted the Allied Research
Corporation Outside Directors Retirement Plan (the "Directors Retirement Plan")
to provide retirement benefits for long-standing Outside Directors. Under the
Directors Retirement Plan, Outside Directors are eligible for a retirement
benefit if they retire from the Board and have served as a member of the Board
for a minimum of five (5) years. An eligible Outside Director who retires from
the Board is entitled to receive, commencing on the last day of the first month
following the month in which the director attains age seventy (70), monthly
payments equal to the monthly cash compensation received from Allied at the time
the director terminated service in such capacity. Such payments will cease upon
the earlier of the expiration of a period of time equivalent to the period of
time the director served as a member of the Board or the death of the director.
In the event that a director has breached any fiduciary or legal duty to Allied,
the director will forfeit any right to payment of benefits under the Directors
Retirement Plan. The Directors Retirement Plan is administered by the Board of
Directors. The Board of Directors has determined that no further benefits will
accrue under the plan to current or future Outside Directors. During 2000,
payments of $82,597 were made to former directors of Allied in consideration of
their accrued benefits under the Directors Retirement Plan. The other
individuals with accrued benefits under the Directors Retirement Plan agreed to
accept the following consideration in lieu thereof:

     Mr. Warner - Shares of Allied's stock upon his retirement from the Board.


                                       29
<PAGE>

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

     Mr. Sculley - A cash payment when Mr. Sculley reaches age 70.

     In 1991, the Board of Directors of Allied adopted the Allied Research
Corporation Outside Directors Stock Option Plan (the "Directors Option Plan") by
which Allied may grant options for up to 208,000 shares of Allied's Common Stock
to its Outside Directors. None of the options granted pursuant to the Directors
Option Plan are intended to qualify as incentive stock options under Sections
422 through 424 of the Internal Revenue Code. The purpose of the Directors
Option Plan is to advance the interest 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. Options for an
aggregate of 39,000 shares were granted under the Directors Option Plan in 2000
to Allied's Outside Directors.

     In 2000, Mr. Sculley was paid approximately $194,000 in satisfaction of his
post-employment severance entitlement. In addition, in consideration for
consulting services to be provided by Mr. Sculley, in early 2001 the Company
agreed to accelerate certain post-employment entitlements due to Mr. Sculley
arising from his prior employment as Chief Executive Officer of the Company. As
a result, Mr. Sculley is entitled to annual payments of $80,000 for a five (5)
year period.

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

     In 2001, General Peay and Allied entered into an employment agreement which
provides for an annual salary of $300,000 and the potential to earn an annual
bonus up to 50% of the annual salary upon satisfaction of certain performance
standards. Allied granted General Peay a stock award of 10,000 shares of Allied
stock as well as options for 100,000 shares of Allied stock which vest over a
four (4) year period (the "Option"). In the event Allied terminates General
Peay's employment without cause within six (6) months following a change of
control which occurs during the first year of employment, Allied will pay to
General Peay an amount equal to $500,000 less any profit realizable on the
Option as a result of the change of control.

     In 2001, Mr. Meyer and Allied entered into an employment agreement

                                       30
<PAGE>

which provides for an annual salary of $160,000 and the potential to earn an
annual bonus up to 35% of the annual salary upon satisfaction of certain
performance standards. Allied granted Mr. Meyer a stock award of 2,500 shares of
Allied stock as well as options for 40,000 shares of Allied stock which vest
over a four (4) year period. Upon certain terminations of Mr. Meyer's
employment, he will be entitled to receive his annual salary for one year
following such termination.

     In 2001, Mr. Waddell and Allied entered into an employment agreement which
provides for an annual salary of $145,000 and the potential to earn an annual
bonus up to 35% of the annual salary upon satisfaction of certain performance
standards. Allied granted Mr. Waddell a stock award of 2,500 shares of Allied
stock as well as option for 40,000 shares of Allied stock which vest over a four
(4) year period. Upon certain terminations of Mr. Waddell's employment, he will
be entitled to receive his annual salary for one year following such
termination.

     Mr. Yarborough's employment with Allied terminated in January, 2001. His
employment agreement provides for payment at the rate of his former salary
($200,000 per year) through December, 2001. Thereafter, he has a five (5) year
consulting agreement which calls for fees of $55,000 per year.

     Mr. Sculley's employment with Allied terminated in September, 1999. He is
entitled to post-employment payments of $80,000 per year for a five (5) year
period. Such amounts are subject to acceleration upon a change of control of
Allied.

     In June, 1991, the Board of Directors of Allied adopted the Preferred Share
Purchase Rights Agreement (the "Agreement"). The Agreement provides each
stockholder of record on a dividend distribution one "right" for each
outstanding share of Allied's common stock. Rights become exercisable at the
earlier of ten days following: (1) a public announcement that an acquirer has
purchased or has the right to acquire 10% or more of Allied's common stock, or
(2) the commencement of a tender offer which would result in an offeror
beneficially owning 30% or more of the outstanding common stock of Allied. All
rights held by an acquirer or offeror expire on the announced acquisition date,
and all rights expire at the close of business on 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

                                       31
<PAGE>

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, 2000 consisted from time to time of Messrs. Robert W. Hebel, Harry H.
Warner, Clifford C. Christ, Ronald G. Griffith and J. H. Binford Peay, III. The
current members of the Compensation Committee are Messrs. Warner, Christ and
Griffith. Mr. Griffith is Executive Vice President of MPRI, Inc. and General
Peay previously served on the Board of Directors of MPRI, Inc.

                                       32
<PAGE>

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

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

<TABLE>
<CAPTION>
Title of            Name and Address of                Amount and nature of
Class               Beneficial Owner                   Beneficial Ownership     Percent of Class/1/
-----               -------------------                --------------------     ------------------
<S>                 <C>                                <C>                      <C>
Common              FMR Corp./2/                       465,000                       9.4%
                    82 Devonshire Street               Owned directly
                    Boston, MA 02109

Common              Dimensional Fund                   355,200                       7.2%
                    Advisors, Inc./3/                  Owned directly
                    1299 Ocean Ave., 11/th/ Floor
                    Santa Monica, CA 90401

Common              Kahn Capital                       318,500                       6.4%
                    Management, LLC/4/                 Owned directly
                    5506 Worsham Court
                    Windemere, FL 34786

Common              Bricoleur Capital                  576,900                      11.7%
                    Management, LLC/5/                 Owned directly
                    12230 El Camino Rd, Ste. 100
                    San Diego, CA 92130
</TABLE>

___________________________
/1/ Based upon 4,878,064 shares of common stock outstanding plus 62,000 shares
which may be acquired within 60 days pursuant to outstanding stock options.
/2/ FMR Corp. and its wholly-owned subsidiary, Fidelity Management & Research
Company ("Fidelity"), Edward C. Johnson, 3rd and Abigail P. Johnson, jointly
filed an amended Schedule 13G with the SEC on February 13, 2001. This Schedule
13G states that Fidelity Low-Priced Stock Fund owned 465,000 shares of Common
Stock as of December 31, 2000.
/3/ Dimensional Fund Advisors, Inc. ("Dimensional"), a registered investment
advisor, filed an amended Schedule 13G with the SEC on February 2, 2001. This
Schedule 13G states that Dimensional is deemed to have beneficial ownership of
355,200 shares, all of which shares are owned by advisory clients of
Dimensional. Dimensional disclaims beneficial ownership of all such shares.
/4/ Kahn Capital Management, LLC ("Kahn") filed a Schedule 13F with the SEC on
February 12, 2001. This Schedule 13F states that Kahn Capital Partners, L.P., a
limited partnership of which Kahn is the general partner, owned 318,500 shares
of Common Stock as of December 31, 2000.
/5/ Bricoleur Capital Management, LLC ("Bricoleur") filed a Schedule 13F with
the SEC on February 7, 2001. This Schedule 13F states that Bricoleur owned
576,900 shares of Common Stock as of December 31, 2000.

                                       33
<PAGE>

     The following information is furnished as of March 21, 2001, with respect
to the beneficial ownership by management of Allied's Common Stock:

<TABLE>
<CAPTION>
Title of                 Name and Address of           Amount and nature of
Class                    Beneficial Owner              Beneficial Ownership     Percent of Class/6/
-----                    --------------------          --------------------     ------------------
<S>                      <C>                           <C>                      <C>
Common                   J. H. Binford Peay, III       19,500/7/                         *
                                                       Owned directly

Common                   Harry H. Warner               23,500/7/                         *
                                                       Owned directly

Common                   Clifford C. Christ            34,500/7/                         *
                                                       Owned directly

Common                   J. R. Sculley                 99,900/7/                         2.0%
                                                       Owned directly

Common                   Ronald H. Griffith            7,500/7/                          *
                                                       Owned directly

Common                   All executive officers        204,580                           4.1%
                         and directors as a            Owned directly
                         group (7)
</TABLE>

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

Item 13.  Certain Relationships and Related Transactions.

     Mr. Sculley's employment with the Company terminated in September, 1999.
During 2000, the Company paid Mr. Sculley approximately $194,000 in satisfaction
of his post-employment severance entitlement.  In addition, he is entitled to
post-employment payments of $80,000 per year for a five (5) year period.  Such
amounts are subject to acceleration upon a change of control of the Company.

__________________
/6/ Based upon 4,878,064 shares of common stock outstanding plus 62,000 shares
which may be acquired within sixty (60) days pursuant to outstanding stock
options.
/7/ Includes stock options for 6,500 shares which may be exercised within sixty
(60) days.

                                       34
<PAGE>

                                    PART IV

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

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

     Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification 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
          2000 and 1999

          Consolidated Statements of Operations for      F-6
          the three years ended December 31, 2000

          Consolidated Statements of Stockholders'       F-7
          Equity for the three years ended
          December 31, 2000

          Consolidated Statements of Cash Flows          F-8
          for the three years ended December 31, 2000

          Notes to Consolidated Financial Statements     F-10

                                       35
<PAGE>

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

     (a)(2)(a) As of December 31, 2000 and 1999
               and for the three years ended December 31, 2000.

               Schedule I - Condensed
               Financial Information of Allied                          F-32

               Schedule II - Valuation
               and Qualifying Accounts                                  F-35

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

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

           Exhibit 10A - Employment agreement between Allied Research
           Corporation and J. H. Binford Peay, III (Incorporated by
           reference from Form 8-K filed in March, 2001.)

           Exhibit 10B - Employment agreement between Allied Research
           Corporation and John G. Meyer, Jr. (Incorporated by
           reference from Form 8-K filed in March, 2001.)

           Exhibit 10C - Employment agreement between Allied Research
           Corporation and Bruce W. Waddell (Incorporated by reference
           from Form 8-K filed in March, 2001.)

           Exhibit 21 - List of Subsidiaries                            E-3

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

                                       36
<PAGE>

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

          No reports on Form 8-K were filed during the fourth quarter of 2000.

     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>

                                  SIGNATURES

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

                                Allied Research Corporation


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

Date: March 21, 2001

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


                                By: /s/  John G. Meyer, Jr.
                                    --------------------------
                                    John G. Meyer, Jr.,
                                    Executive Vice President, Chief Operating
                                    Officer and Acting Chief Financial Officer
Date: March 21, 2001


                                  **********


                                    /s/  J. R. Sculley
                                ----------------------------------------
                                J. R. Sculley, Director
Date: March 21, 2001

                                       38
<PAGE>

                          /s/ Clifford C. Christ
                         --------------------------------------
                         Clifford C. Christ, Director
Date: March 21, 2001



                          /s/ Harry H. Warner
                         --------------------------------------
                         Harry H. Warner, Director
Date: March 21, 2001



                          /s/ Ronald H. Griffith
                         --------------------------------------
                         Ronald H. Griffith, Director
Date: March 21, 2001

                                       39
<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION


                            Washington, D.C. 20549








                      FINANCIAL STATEMENTS AND SCHEDULES

                               December 31, 2000








                               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


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



<TABLE>
<CAPTION>
                                                                          Page
<S>                                                                      <C>
Report of Independent Certified Public Accountants                       F - 3

Consolidated Balance Sheets at December 31, 2000 and 1999                F - 4

Consolidated Statements of Operations for the three years ended
  December 31, 2000                                                      F - 6

Consolidated Statements of Stockholders' Equity for the three years
  ended December 31, 2000                                                F - 7

Consolidated Statements of Cash Flows for the three years ended
  December 31, 2000                                                      F - 8

Notes to Consolidated Financial Statements                               F - 10

Schedules as of and for the three years ended December 31, 2000

      Schedule I - Condensed Financial Information of Registrant         F - 32

      Schedule II -Valuation and Qualifying Accounts                     F - 35
</TABLE>
<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, 2000 and 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2000.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Allied Research
Corporation and subsidiaries as of December 31, 2000 and 1999, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.

We have also audited Schedules I and II for each of the three years in the
period ended December 31, 2000.  In our opinion, these schedules present fairly,
in all material respects, the information required to be set forth therein.


/s/ Grant Thornton LLP


Baltimore, Maryland
February 2, 2001
<PAGE>

                          Allied Research Corporation

                          CONSOLIDATED BALANCE SHEETS

                                  December 31,

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

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                      2000                  1999
                                                                                  -----------           -----------
<S>                                                                              <C>                    <C>
CURRENT ASSETS
 Cash and equivalents                                                             $ 7,570,358           $ 5,967,854
 Restricted cash                                                                    3,010,253             4,508,082
 Accounts and note receivable                                                      18,661,105             9,278,078
 Costs and accrued earnings on
   uncompleted contracts                                                           34,136,421            14,109,419
 Inventories                                                                        5,910,906             3,518,870
 Prepaid expenses                                                                   2,996,142               972,528
 Net assets of discontinued operation                                                       -             4,198,644
                                                                                  -----------           -----------

      Total current assets                                                         72,285,185            42,553,475

PROPERTY, PLANT AND EQUIPMENT - AT COST
 Buildings and improvements                                                        11,905,686            11,189,215
 Machinery and equipment                                                           28,460,783            27,197,414
                                                                                  -----------           -----------
                                                                                   40,366,469            38,386,629
 Less accumulated depreciation                                                     29,803,505            29,241,906
                                                                                  -----------           -----------
                                                                                   10,562,964             9,144,723
 Land                                                                               1,112,356             1,116,993
                                                                                  -----------           -----------
                                                                                   11,675,320            10,261,716

OTHER ASSETS
 Intangibles, less accumulated amortization of
   $2,538,365 and $2,326,247 in 2000 and 1999,
   respectively                                                                     3,251,404             4,255,332
 Deferred taxes                                                                       406,085             2,923,464
 Other                                                                                139,258               136,944
                                                                                  -----------           -----------
                                                                                    3,796,747             7,315,740
                                                                                  -----------           -----------

                                                                                  $87,757,252           $60,130,931
                                                                                  ===========           ===========
</TABLE>

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

                                      F-4
<PAGE>

                          Allied Research Corporation

                    CONSOLIDATED BALANCE SHEETS - CONTINUED

                                  December 31,

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

                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                       2000                  1999
                                                                                   -----------           -----------
<S>                                                                                <C>                   <C>
CURRENT LIABILITIES
 Notes payable                                                                     $ 3,699,100           $   608,624
 Current maturities of long-term debt                                                1,079,053             1,224,552
 Accounts payable                                                                   22,008,658            10,757,295
 Accrued liabilities                                                                 3,608,536             2,810,355
 Accrued losses on contracts                                                           712,076               172,572
 Customer deposits                                                                   5,777,112               492,842
 Income taxes                                                                          502,332               664,521
                                                                                   -----------           -----------

      Total current liabilities                                                     37,386,867            16,730,761


LONG-TERM DEBT, less current maturities                                              3,529,539             3,080,605

DEFERRED INCOME TAXES                                                                  120,772                     -

CONTINGENCIES AND COMMITMENTS                                                                -                     -

STOCKHOLDERS' EQUITY
 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, 4,812,464
   in 2000 and 4,836,722 in 1999                                                       481,246               483,672
 Capital in excess of par value                                                     13,689,053            13,906,739
 Retained earnings                                                                  40,305,945            31,083,628
 Accumulated other comprehensive loss                                               (7,756,170)           (5,154,474)
                                                                                   -----------           -----------
                                                                                    46,720,074            40,319,565
                                                                                   -----------           -----------

                                                                                   $87,757,252           $60,130,931
                                                                                   ===========           ===========
</TABLE>

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

                                      F-5
<PAGE>

                          Allied Research Corporation

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                            Years ended December 31,

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

<TABLE>
<CAPTION>
                                                                     2000           1999           1998
                                                                 ------------    -----------   ------------
<S>                                                              <C>            <C>            <C>
Revenue                                                          $107,742,815    $59,032,607   $133,078,127

Cost and expenses
 Cost of sales                                                     79,974,464     50,863,772    109,283,912
 Selling and administrative                                        10,818,384     10,756,462     10,340,218
 Research and development                                           1,583,071      1,686,008      1,614,050
                                                                 ------------    -----------   ------------
                                                                   92,375,919     63,306,242    121,238,180
                                                                 ------------    -----------   ------------

     Operating income (loss)                                       15,366,896     (4,273,635)    11,839,947

Other income (deductions)
 Interest income                                                      654,504        835,496      1,159,011
 Interest expense                                                  (1,524,098)    (1,102,312)    (1,352,862)
 Other - net                                                          489,392        782,781       (815,028)
                                                                 ------------    -----------   ------------
                                                                     (380,202)       515,965     (1,008,879)
                                                                 ------------    -----------   ------------

 Earnings (loss) before discontinued
operation and income taxes                                         14,986,694     (3,757,670)    10,831,068

Income tax expense (benefit)                                        6,281,370       (475,803)     2,202,038
                                                                 ------------    -----------   ------------

     Earnings (loss) from continuing operations                     8,705,324     (3,281,867)     8,629,030

Discontinued operation
 Income (loss) from operation of engineering and technical
  segment, less income tax of $18,394 in 2000 and income tax
  benefit of $409,330 in 1999, and income tax expense of
  $308,130 in 1998                                                     54,100       (746,414)       436,608



 Gain on sale, net of income taxes                                    462,893              -              -
                                                                 ------------    -----------   ------------
                                                                      516,993       (746,414)       436,608
                                                                 ------------    -----------   ------------

     NET EARNINGS (LOSS)                                         $  9,222,317    $(4,028,281)  $  9,065,638
                                                                 ============    ===========   ============

Earnings (loss) per share
 Basic
   Continuing operations                                         $       1.79    $      (.68)  $       1.83
   Discontinued operation                                                 .11           (.16)           .09
                                                                 ------------    -----------   ------------
     Net income (loss)                                           $       1.90    $      (.84)  $       1.92
                                                                 ============    ===========   ============
 Diluted
   Continuing operations                                         $       1.79    $      (.68)  $       1.81
   Discontinued operation                                                 .11           (.16)           .09
                                                                 ------------    -----------   ------------
     Net income (loss)                                           $       1.90    $      (.84)  $       1.90
                                                                 ============    ===========   ============

Weighted average number of common shares:

 Basic                                                              4,844,267      4,818,857      4,722,303
                                                                 ============    ===========   ============

 Diluted                                                            4,846,399      4,818,857      4,765,207
                                                                 ============    ===========   ============
</TABLE>

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

                                      F-6
<PAGE>

                          Allied Research Corporation

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                  Years ended December 31, 2000, 1999 and 1998

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

<TABLE>
<CAPTION>

                                                Preferred         Common Stock           Capital
                                                              ---------------------
                                                Stock, no                   $.10        in excess      Retained
                                                par value       Shares    par value    of par value    earnings
                                                ---------     ---------   ---------    ------------   -----------
<S>                                             <C>          <C>            <C>         <C>            <C>
Balance at January 1, 1998                      $       -     4,608,221    $460,822    $12,100,521   $26,046,271
 Common stock awards                                    -        57,448       5,745        683,631             -
 Employee stock purchase plan purchases                 -        94,505       9,450        628,172             -
 Retirement of common stock                             -        (3,000)       (300)       (21,225)            -
 Comprehensive income
   Net earnings for the year                            -             -           -              -     9,065,638
   Currency translation adjustment                      -             -           -              -             -
    Total comprehensive income                          -             -           -              -             -
                                                ---------     ---------    --------    -----------   -----------

Balance at December 31, 1998                            -     4,757,174     475,717     13,391,099    35,111,909
 Common stock awards                                    -        66,048       6,605        440,597             -
 Employee stock purchase plan purchases                 -        36,100       3,610        209,319             -
 Retirement of common stock                             -       (22,600)     (2,260)      (134,276)            -
 Comprehensive loss
   Net loss for the year                                -             -           -              -    (4,028,281)
   Currency translation adjustment                      -             -           -              -             -
    Total comprehensive loss                            -             -           -              -             -
                                                ---------     ---------    --------    -----------   -----------

Balance at December 31, 1999                            -     4,836,722     483,672     13,906,739    31,083,628
 Common stock awards                                    -        17,000       1,700        139,550             -
 Employee stock purchase plan purchases                 -        34,430       3,443        253,696             -
 Retirement of common stock                             -       (75,688)     (7,569)      (610,932)            -
 Comprehensive income
   Net earnings for the year                            -             -           -              -     9,222,317
   Currency translation adjustment                      -             -           -              -             -
    Total comprehensive income                          -             -           -              -             -
                                                ---------     ---------    --------    -----------   -----------

Balance at December 31, 2000                    $       -     4,812,464    $481,246    $13,689,053   $40,305,945
                                                =========     =========    ========    ===========   ===========

<CAPTION>

                                                         Accumulated             Total
                                                     other comprehensive      stockholders'
                                                        (loss) income            equity
                                                         ------------         ------------
<S>                                                  <C>                      <C>
Balance at January 1, 1998                                $(1,713,159)        $ 36,894,455
 Common stock awards                                                -              689,376
 Employee stock purchase plan purchases                             -              637,622
 Retirement of common stock                                         -              (21,525)
 Comprehensive income
   Net earnings for the year                                        -                    -
   Currency translation adjustment                          2,698,284                    -
    Total comprehensive income                                      -           11,763,922
                                                          -----------         ------------

Balance at December 31, 1998                                  985,125           49,963,850
 Common stock awards                                                -              447,202
 Employee stock purchase plan purchases                             -              212,929
 Retirement of common stock                                         -             (136,536)
 Comprehensive loss
   Net loss for the year                                            -                    -
   Currency translation adjustment                         (6,139,599)                   -
    Total comprehensive loss                                        -          (10,167,880)
                                                          -----------         ------------

Balance at December 31, 1999                               (5,154,474)          40,319,565
 Common stock awards                                                -              141,250
 Employee stock purchase plan purchases                             -              257,139
 Retirement of common stock                                         -             (618,501)
 Comprehensive income
   Net earnings for the year                                        -                    -
   Currency translation adjustment                         (2,601,696)                   -
    Total comprehensive income                                      -            6,620,621
                                                          -----------         ------------

Balance at December 31, 2000                              $(7,756,170)        $ 46,720,074
                                                          ===========         ============
</TABLE>

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

                                      F-7
<PAGE>

                          Allied Research Corporation

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                           Years ended December 31,

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

<TABLE>
<CAPTION>
Increase (decrease) in cash and equivalents                          2000                  1999                   1998
                                                                 ------------          ------------           ------------
<S>                                                               <C>                  <C>                    <C>
Cash flows from (used in) operating activities
 Net earnings (loss) for the year                                $  9,222,317          $ (4,028,281)          $  9,065,638
 Adjustments to reconcile net earnings (loss) to net
   cash from continuing operating activities
    Depreciation and amortization                                   1,694,810             2,136,214              2,104,370
    Gain on sale of subsidiary                                       (462,318)                    -                      -
    (Income) loss from discontinued operation                         (54,100)              746,414               (436,608)
    Gain on sale of fixed assets                                            -               (45,808)                     -
    Deferred income taxes                                           2,415,598            (2,578,217)            (1,263,193)
    Provision for estimated losses on contracts                       539,504              (159,795)               200,938
    Common stock awards                                               141,250               447,202                689,376
    Changes in assets and liabilities
     Accounts receivable                                           (4,549,178)            9,190,965             16,609,921
     Cost and accrued earnings on
       uncompleted contracts                                      (20,925,251)            4,098,209            (12,070,920)
     Inventories                                                   (2,633,890)             (609,352)             3,800,770
     Prepaid expenses and other assets                             (1,485,542)            7,830,017             (5,865,649)
     Accounts payable and accrued liabilities                      10,730,295           (11,630,667)           (10,122,052)
     Customer deposits                                              5,283,474           (14,145,053)             8,243,361
     Income taxes                                                     (81,649)             (634,944)              (402,161)
                                                                 ------------          ------------           ------------
                                                                   (9,386,997)           (5,354,815)             1,488,153
                                                                 ------------          ------------           ------------

 Net cash (used in) provided by continuing operating
  activities                                                         (164,680)           (9,383,096)            10,553,791


Cash flows from (used in) investing activities
 Capital expenditures                                              (3,850,115)           (2,256,305)            (2,211,019)
 Proceeds from sale of subsidiary                                   2,822,495                     -                      -
 Proceeds from sale of fixed assets                                         -               519,866                      -
 Acquisition of subsidiary                                                  -              (924,680)                     -
                                                                 ------------          ------------           ------------

 Net cash used in investing activities                             (1,027,620)           (2,661,119)            (2,211,019)
</TABLE>

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

                                      F-8
<PAGE>

                          Allied Research Corporation

               CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                           Years ended December 31,

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


<TABLE>
<CAPTION>
                                                                     2000                  1999                  1998
                                                                 -----------           -----------           -----------
<S>                                                              <C>                   <C>                   <C>
Cash flows from (used in) financing activities
 Net increase in short-term borrowings                             2,864,172             1,286,882                74,050
 Principal payments on long-term debt                             (1,082,419)             (982,207)           (1,156,694)
 Proceeds from issuance of long-term debt                          1,346,594               153,403                     -
 Retirement of common stock                                         (618,501)             (136,536)              (21,525)
 Proceeds from employee stock purchases                              257,139               212,929               637,622
 Restricted cash and restricted deposits                           1,497,829             9,505,823            (5,286,719)
                                                                 -----------           -----------           -----------

        Net cash provided by (used in)
           financing activities                                    4,264,814            10,040,294            (5,753,266)

Cash flows provided by (used in) discontinued operation
                                                                           -               493,258            (1,687,675)

Effects of exchange rates on cash                                 (1,470,010)           (2,754,139)            1,638,721
                                                                 -----------           -----------           -----------

        Net increase (decrease) in cash
           and equivalents                                         1,602,504            (4,264,802)            2,540,552

Cash and equivalents at beginning of year                          5,967,854            10,232,656             7,692,104
                                                                 -----------           -----------           -----------

Cash and equivalents at end of year                              $ 7,570,358           $ 5,967,854           $10,232,656
                                                                 ===========           ===========           ===========

Supplemental Disclosures of Cash Flow Information:
-------------------------------------------------
 Cash paid during the year for
   Interest                                                      $ 1,425,688           $ 1,255,594           $ 1,352,548
   Income taxes                                                    6,072,626             1,719,500             4,429,842
</TABLE>



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

                                      F-9
<PAGE>

                         Allied Research Corporation

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

 The consolidated financial statements of the Company include the accounts of
 Allied Research Corporation (Allied), a Delaware corporation, and its wholly-
 owned subsidiaries, ARC Europe, S. A. (ARC Europe), a Belgian company, Barnes &
 Reinecke, Inc. (BRI), a Delaware corporation (which discontinued operations),
 Allied Research Corporation Limited (Limited), a United Kingdom company and ARC
 International Sales Corporation, a Barbados corporation (both of which are
 inactive).

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

 Significant intercompany transactions have been eliminated in consolidation.

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

 Allied's operating subsidiaries are located in Belgium.  Allied sold its
 domestic operations (BRI) in March 2000.  During 2000, eighty-one percent of
 Allied's business activity was in the development and production of ammunitions
 and weapons systems in Belgium with sales to customers in Asia, the Middle
 East, the United States and Europe.  Nineteen percent of the business activity
 is developing, manufacturing, distributing and servicing industrial security
 products in Belgium with industrial customers throughout Europe.  A description
 of the business segments and operations of Allied follows.

  Corporate
  ---------

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

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

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

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

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

                                      F-10
<PAGE>

                         Allied Research Corporation

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

  Engineering and Technical (Discontinued Operation)
  --------------------------------------------------

  BRI provided engineering and technical support services and sold directly and
  indirectly to United States Military Agencies, other defense contractors,
  foreign governments and industry.  Allied sold BRI on March 6, 2000 and its
  operation has been reflected as a discontinued operation.

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

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

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

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

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

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

 In the normal course of the Company's business, it does not bill shipping and
 handling costs to customers.

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

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

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

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

                                     F-11
<PAGE>

                         Allied Research Corporation

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

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

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

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

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

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

 Intangibles represent 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.

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

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

 Currency gains and losses on contracts designated as hedges of foreign currency
 commitments are deferred and recognized when the measurement of the related
 foreign currency transactions are recognized.

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

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

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

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

 Warranties
 ----------

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

                                     F-12
<PAGE>

                         Allied Research Corporation

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

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

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

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

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

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

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

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

 Certain items in the 1999 and 1998 financial statements have been reclassified
 to conform to the current presentation.

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

 In June 1999, SFAS No. 133, Accounting for Derivative Instruments and Hedging
 Activities, was issued and as amended by SFAS No's. 137 and 138 is effective
 for all fiscal quarters of fiscal years beginning after June 15, 2000. The
 Company will adopt SFAS No. 133 effective with the first quarter of 2001. The
 statement establishes accounting and reporting standards for derivative
 instruments and for hedging activities. SFAS No. 133 will require the Company
 to measure all derivatives at fair value and to recognize them in its balance
 sheet as an asset or liability, depending on the Company's rights or
 obligations under the derivative contract. Implementation of this standard is
 not anticipated to have a material effect on the Company's results of
 operations, financial position or cash flows.

 The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
 (SAB 101), Revenue Recognition in Financial Statements, in December 1999.  The
 SAB summarizes certain of the SEC staff's views in applying accounting
 principles generally accepted in the United States of America to revenue
 recognition in financial statements.  The Company reviewed its revenue
 recognition policies and determined that they are in compliance with SAB 101.


NOTE B - DISCONTINUED OPERATION

 On March 6, 2000, the Company sold the stock of BRI, the engineering and
 technical segment of its business. In 2000, the Company realized income from
 operations, net of taxes, from the engineering and technical segment of
 $54,100 and a gain on sale of the segment, net of taxes of $462,893. In 1999
 and 1998, the (loss) income from operations, net of income taxes was ($746,414)
 and $436,608, respectively.

                                     F-13
<PAGE>

                         Allied Research Corporation

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

NOTE B - DISCONTINUED OPERATION - Continued

 Summarized data relating to the discontinued operation of the engineering and
 technical segment for the years ended December 31, 2000, 1999 and 1998 and net
 asset data for 1999 are as follows:

<TABLE>
<CAPTION>
                                                           2000               1999                1998
                                                        ----------        -----------         -----------
          <S>                                           <C>               <C>                 <C>
          Results of operations
            Operating revenue                           $1,492,501        $11,237,247         $10,457,075
            Operating income (loss)                         72,494           (907,177)            817,257
            Net income (loss)                               54,100           (746,414)            436,608

          Net assets of discontinued operation
            Current assets                                                $ 8,790,728
            Property and equipment, net                                       283,238
            Other assets                                                    7,738,314
            Current liabilities                                             6,587,803
            Long-term liabilities                                           6,025,833
                                                                          -----------

                                                                          $ 4,198,644
                                                                          ===========
</TABLE>


NOTE C - RESTRICTED CASH

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

 Restricted cash of $3,010,253 and $4,508,082 included in current assets at
 December 31, 2000 and 1999, respectively, was restricted or pledged as
 collateral for these agreements and other obligations.

 Net assets of discontinued operations include amounts restricted under BRI's
 credit facility.


NOTE D - ACCOUNTS AND NOTE RECEIVABLE

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

<TABLE>
<CAPTION>
                                                                                  2000               1999
                                                                               -----------         ----------
       <S>                                                                     <C>                 <C>
       Receivables from foreign governments                                    $ 9,409,943         $3,284,120
       Commercial and other receivables, less allowance for doubtful
        receivables of $153,840 in 2000 and $168,682 in 1999                     9,251,162          5,993,958
                                                                               -----------         ----------

                                                                               $18,661,105         $9,278,078
                                                                               ===========         ==========
</TABLE>

 Included in commercial and other receivables is a note receivable arising from
  the sale of BRI which has a balance of $900,000 at December 31, 2000.  The
  note bears interest at 6.5% and matures on September 6, 2001.

                                     F-14
<PAGE>

                          Allied Research Corporation

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

NOTE E - PREPAID EXPENSES

 Advance payments on contracts in process in 2000 and 1999 of approximately
 $1,061,185 and $253,865, respectively, were included in prepaid expenses.


NOTE F - CREDIT FACILITY

 The Company is obligated under various credit agreements (the Agreements) with
 its foreign banks and its foreign banking pool that provide credit facilities
 primarily for letters of credit, bank guarantees, performance bonds and similar
 instruments required for specific sales contracts.  The Agreements provide for
 certain bank charges and fees as the line is used, plus fees of 2% of
 guarantees issued and annual fees of 1.25% - 1.35% of letters of credit and
 guarantees outstanding.  These fees are charged to interest expense.  As of
 December 31, 2000, guarantees and performance bonds of approximately $9.7
 million remain outstanding.

 Advances under the Agreements are secured by restricted cash of approximately
 $3 million.  Amounts outstanding are also collateralized by the letters of
 credit received under the contracts financed, and a pledge of approximately $25
 million on Mecar's assets.  Certain Agreements provide for restrictions on
 payments or transfers to Allied and Limited for management fees, intercompany
 loans, loan payments, the maintenance of certain net worth levels and other
 provisions.

 Mecar also has a line-of-credit for working capital of approximately $9.2
 million at December 31, 2000, that matures on February 28, 2001.  Advances on
 the line bear interest at two points over the Euro overnight index average
 (7.16% at December 31, 2000).  At December 31, 2000 the balance outstanding was
 approximately $2.8 million.


NOTE G - ACCRUED LOSSES ON CONTRACTS

 The Company provided for accrued losses of $712,076 at December 31, 2000 in
 connection with the completion of certain contracts in progress.  These
 contracts are scheduled to be completed in 2001.


NOTE H - LONG-TERM DEBT

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


                                                  2000              1999
                                               ----------        ----------

                  Mortgage loan agreements     $2,098,458        $3,133,769
                  Other                         2,510,134         1,171,388
                                               ----------        ----------
                                                4,608,592         4,305,157
                  Less current maturities       1,079,053         1,224,552
                                               ----------        ----------

                                               $3,529,539        $3,080,605
                                               ==========        ==========

                                     F-15
<PAGE>

                          Allied Research Corporation

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

NOTE H - LONG-TERM DEBT - Continued

 Mortgage Loan Agreements
 ------------------------

 The Company entered into a mortgage loan agreement in 1986, which was amended
 in 1994, to partially finance the construction of Mecar's manufacturing and
 administration facilities in Belgium, that had a balance due of $1,751,543 at
 December 31, 2000. The loan matures in January, 2004. As amended, the loan is
 payable in annual principal installments of $550,000. The loan bears interest
 at approximately 8.75% annually, is collateralized by a mortgage on the
 Company's real estate and includes a prepayment penalty. The Company is also
 obligated on several mortgages on the VSK Group's buildings which have a total
 balance due of $346,915 at December 31, 2000. The mortgages mature at various
 dates through 2005 in annual installments of approximately $39,000, plus
 interest at rates ranging from 3.9% to 4.5% per year.

 Other
 -----

 The Company is also obligated on various vehicle, equipment and other loans.
 The notes are generally secured by the assets acquired, bear interest at rates
 ranging from 3.50% to 8.00% and mature at various dates through 2005.

 Scheduled annual maturities of long-term obligations as of December 31, 2000
 are as follows:

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

                                    2001               $1,079,053
                                    2002                2,129,135
                                    2003                  527,666
                                    2004                  762,116
                                    2005                  110,622


NOTE I - BENEFIT PLANS

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

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

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


NOTE J - CONTINGENCIES AND COMMITMENTS

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

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

                                     F-16
<PAGE>

                          Allied Research Corporation

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

NOTE J - CONTINGENCIES AND COMMITMENTS - Continued

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

 The Company enters into foreign exchange contracts in the normal course of
 business primarily to hedge certain sales and purchase contracts.  These
 contracts typically mature within twelve months, and forward exchange gains and
 losses are recognized upon final maturity or at the time the related foreign
 currency transaction is recognized. Contracts with a notional amount of $37.8
 million were outstanding as of December 31, 2000 ($15 million at December 31,
 1999).

 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.

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

 The Company leases office space and equipment under operating leases which
 expire at various dates through 2007.  Certain leases also include escalation
 provisions for taxes and operating costs.  The following is a schedule by year
 of base rentals due on operating leases that have initial or remaining lease
 terms in excess of one year as of December 31, 2000:


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

                       2001                      $135,141
                       2002                       123,749
                       2003                       120,000
                       2004                       120,000
                       2005                       120,000
                       Thereafter                 240,000

 Total rental expense charged to operations approximated $137,000, $122,000 and
 $124,000, for the years ended December 31, 2000, 1999 and 1998, respectively.

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

                                     F-17
<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>
                                                                       2000                                1999
                                                            ------------------------------     -------------------------------
                                                            Carrying           Estimated         Carrying          Estimated
                                                              Amount          Fair Value           Amount         Fair Value
                                                            ----------        ------------     -----------       -------------
<S>                                                         <C>               <C>              <C>               <C>
     Notes payable and long-term debt, including
      current maturities                                     $8,307,692        $8,307,692        $4,913,781      $ 4,913,781
     Off-balance-sheet instruments
      Guarantees and letters of credit                                -          9,739,00                 -        6,913,000
      Foreign exchange contracts                                      -         37,800,00                 -       15,000,000
</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.

 .    The fair 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
      Company for debt of the same remaining maturities. The Company believes
      the aggregate carrying value approximates fair value.

 .    Estimated fair values for off-balance-sheet instruments (performance
      bonds, advance payment guarantees, letters-of-credit and foreign exchange
      contracts) 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. The fair value of foreign exchange contracts
      are based on their notional values, since they have short-term maturities
      at December 31, 2000.


NOTE L - CAPITAL STOCK

 During 1998, the Board of Directors authorized the repurchase of up to 200,000
 shares of the Company's common stock.  During 2000, 1999 and 1998, 75,688,
 22,600 and 3,000 shares were reacquired and retired, respectively.

 At December 31, 2000, options to acquire 62,000 shares of the Company's common
 stock were outstanding and 651,299 shares were reserved for future issuance
 under the following plans:

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

 During 1997, the Board of Directors and shareholders approved and reserved
 225,000 shares of common stock for awards to key employees of the Company and
 its subsidiaries in the form of stock options and stock awards. The Plan is
 administered by the Compensation Committee of the Board of Directors, and
 employees of the Company and its subsidiaries who are deemed to be key
 employees by the Committee are eligible for awards under the Plan. In 2000 and
 1999, 10,000 and 62,048 shares, respectively, were awarded under the Plan.

                                     F-18
<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 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 2000,
 1999 and 1998 - 16,930, 31,548 and 7,085 shares, respectively were issued under
 the plan and $21,822, $29,570 and $9,314 was charged to operations.

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

 The Company reserved 410,900 shares of common stock for key employees of the
 Company and its subsidiaries. The plan permitted grants through 1998,
 authorized the Board to grant incentive stock options, non-statutory stock
 options, stock appreciation rights, stock awards, restricted stock, performance
 stock rights and cash awards.  Each type of grant places certain requirements
 and restrictions upon the Company and grantee.  As of December 31, 2000,
 options for 2,500 shares with an exercise price of $3.75 remain outstanding.

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

 The Company reserved 315,000 shares of common stock for key employees of the
 Company and its subsidiaries. The plan permitted option grants through March
 31, 1994.  In March 1994, the Company granted options to two officers and
 sixteen employees to purchase 217,500 shares at $8.25 per share.  These options
 expire in 2004.  At December 31, 2000, 20,500 of 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
 2000, 1999 and 1998, the Company granted 7,000, 4,000 and 4,000 shares of
 common stock subject to the plan and charged $52,500, $24,500 and $48,000,
 respectively, to operations.

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

 During 1991, the Board of Directors and shareholders approved and reserved
 208,000 shares of common stock for the plan.  Through 1996, the Company granted
 options to purchase a total of 115,000 shares all of which have been exercised.
 During 2000, the Company granted options to purchase a total of 39,000 shares
 at $7.88 per share.  At December 31, 2000, options for 39,000 shares remained
 outstanding.

 Other
 -----

 Stock grants for 48,746 shares of the Company's common stock were made to
 various employees during 1998.  These shares were issued outside of any
 existing plan and their value ($487,460) was charged to operations.

                                     F-19
<PAGE>

                          Allied Research Corporation

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

NOTE L - CAPITAL STOCK - Continued

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

 The Board of Directors has adopted an Agreement which provides each stockholder
 of record a dividend distribution of one "right" for each outstanding share of
 common stock. Rights become exercisable the earlier of ten days following: (1)
 a public announcement that an acquiring person has purchased or has the right
 to acquire 10% or more of the Company's common stock, 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 provision of the Agreement prior to exercise of
 the rights.

                                     F-20
<PAGE>

                          Allied Research Corporation

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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


NOTE L - CAPITAL STOCK - Continued

 The following table summarizes option activity:

<TABLE>
<CAPTION>
                                                                      2000
                                                             ---------------------------
                                                                        Weighted Average      1999       1998
                                                              Shares     Exercise Price      Shares     Shares
                                                             --------   ----------------    --------   --------
     <S>                                                     <C>        <C>                 <C>        <C>
     Options outstanding at beginning of year                  50,750         $7.72          127,350    214,770
     Options granted                                           39,000          7.88                -          -
     Options exercised                                        (17,500)         7.35           (4,200)   (87,420)
     Options forfeited                                              -             -          (56,000)         -
     Options expired                                          (10,250)         8.25          (16,400)         -
                                                             --------         -----         --------   --------

     Options outstanding at end of year                        62,000          7.83           50,750    127,350
                                                             ========         =====         ========   ========

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

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

     Options exercisable at end of year                        62,000                         50,750     94,750

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

 The following table summarizes options outstanding at December 31, 2000:

<TABLE>
<CAPTION>
                                                                                            Weighted Average
                Number                                            Weighted Average               Remaining
              Outstanding              Exercise Prices            Exercise Prices           Contractual Life
              -----------              ---------------            ---------------           ----------------
              <S>                      <C>                        <C>                       <C>
                2,500                       $3.75                      $3.75                      5.22
               39,000                       $7.88                      $7.88                      4.43
               20,500                       $8.25                      $8.25                      3.17
</TABLE>

 The fair value of each option grant is estimated on the date of grant using the
 Black-Scholes options pricing model with the following weighted average
 assumptions used for grants in 2000: risk free interest rate of 6.46%; expected
 volatility rate of 60%; and expected lives of 3 years.  There were no options
 granted in 1999 and 1998.

                                     F-21
<PAGE>

                          Allied Research Corporation

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

NOTE L - CAPITAL STOCK - Continued

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

                                                 2000     1999       1998
                                               -------   -------    -------

                Pro forma
                 Net earnings decrease         $85,459   $46,503    $59,568
                 Earnings per share decrease
                  Basic                            .02       .01        .01
                  Diluted                          .02       .01        .01


NOTE M - MAJOR CUSTOMERS

 The Company derives the majority of its revenues directly or indirectly from
 foreign governments (some of which are through the U.S. government via the
 Foreign Military Sales program), primarily on fixed price contracts. Direct and
 indirect sales to two agencies of a foreign government and another foreign
 government accounted for approximately 19%, 23% and 18% of revenue in 2000, 3%,
 27% and 31% of revenue in 1999 and 22%, 52% and 11% of revenue in 1998. In
 addition, during 2000, direct and indirect foreign military sales contracts for
 the benefit of one of such foreign government agencies were approximately 24%
 of revenue.


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 generally receives
 guarantees and letters of credit from its foreign customers and performs
 ongoing credit evaluations of its other customers' financial condition. The
 Company's provision for doubtful accounts for 2000 and 1999 was not
 significant.

 The majority of ammunition sales are to or for the benefit of 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 ranges from several months to a year. Accordingly,
 Mecar's business is dependent upon its ability to obtain such large orders and
 the required financing for these orders. As of December 31, 2000 and 1999,
 backlog orders, believed to be firm, from continuing operations, approximated
 $63.5 and $105.0 million, respectively.

 Amounts in foreign banks at December 31, 2000 and 1999 were approximately $9.1
 million and $8.7 million, respectively. Changes in the value of the U.S. dollar
 and other currencies affect the Company's financial position and results of
 operations since the Company has assets and operations in Belgium and sells its
 products on a worldwide basis.
<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:

<TABLE>
<CAPTION>
                                                                2000              1999           1998
                                                              --------          --------      -----------
            <S>                                               <C>               <C>           <C>
            Net currency transaction (losses) gains           $(42,183)         $664,042      $(1,093,160)
            Miscellaneous - net                                531,575           118,739          278,132
                                                              --------          --------      -----------

                                                              $489,392          $782,781      $  (815,028)
                                                              ========          ========      ===========
</TABLE>


NOTE P - INCOME TAXES

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

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

<TABLE>
<CAPTION>
                                                   2000              1999              1998
                                               -----------       -----------       -----------
            <S>                                <C>               <C>               <C>
            Domestic                           $  (572,025)      $  (334,165)      $  (531,456)
            Foreign                             15,558,719        (3,423,505)       11,362,524
                                               -----------       -----------       -----------

                                               $14,986,694       $(3,757,670)      $10,831,068
                                               ===========       ===========       ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                2000                1999              1998
                                                             ----------         -----------        ----------
            <S>                                              <C>                <C>                <C>
            Currently (refundable) payable
             Domestic                                        $  (36,379)        $   448,206        $  110,372
             Foreign                                          3,677,622           1,436,918         2,945,711
                                                             ----------         -----------        ----------
                                                              3,641,243           1,885,124         3,056,083
            Deferred - net                                    2,640,127          (2,360,927)         (854,045)
                                                             ----------         -----------        ----------

                 Total attributable to continuing
                  operations                                  6,281,370            (475,803)       $2,202,038


            Taxes related to discontinued operation              18,394            (409,330)          308,130
                                                             ----------         -----------        ----------

                 Total tax provision                         $6,299,764         $  (885,133)       $2,510,168
                                                             ==========         ===========        ==========
</TABLE>

                                     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 federal statutory rate.  Differences between the statutory rate and the
 Company's provision are as follows:

<TABLE>
<CAPTION>
                                                                2000          1999          1998
                                                               ------       -------        ------
          <S>                                                  <C>          <C>            <C>
          Taxes at statutory rate                               34.0 %       (34.0)%        34.0 %
          Foreign tax rate differential                          6.3          (5.8)          5.9
          Benefit of foreign net operating losses                  -             -         (13.3)
          Amortization of intangibles                            1.1          13.8          (5.4)
          Deemed dividend                                          -          11.2           1.3
          Other                                                 (0.9)         (3.2)         (0.8)
                                                               -----        ------         -----

          Income taxes                                          40.5 %       (18.0)%        21.7 %
                                                               =====        ======         =====
</TABLE>

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

 Foreign loss carryforwards of $6.6 million and $3.8 million were utilized in
 2000 and 1998, respectively for tax reporting purposes. Income tax expense in
 1998 was reduced by approximately $939,000 as a result of the favorable
 resolution of deferred and accrued tax obligations in the United Kingdom.

 The Company utilized approximately $631,500 and $143,600 of its foreign tax
 credits in 1999 and 1998, respectively.  At December 31, 2000, foreign tax
 credit carryforwards of approximately $288,399 were available.  These credits
 expire through 2004.

 Deferred tax liabilities have not been recognized for basis differences related
 to investments in the Company's Belgian and United Kingdom subsidiaries. These
 differences, which consist primarily of unremitted earnings intended to be
 indefinitely reinvested, aggregated approximately $10.7 million at December 31,
 2000. 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, 2000 and 1999 are comprised as follows:

<TABLE>
<CAPTION>
                                                                                     2000        1999
                                                                                  ---------   -----------
   <S>                                                                           <C>          <C>
   Current deferred tax asset
    Unrealized exchange gain                                                      $       -   $     1,976

   Noncurrent
    Foreign tax credit carryforwards                                                288,399     1,379,239
    Foreign and domestic net operating loss carryforwards                                 -     2,742,229
    Depreciation and amortization                                                   207,871        37,479
    Deferred compensation                                                           199,588       138,925
    Deferred income                                                                (120,772)      (20,721)
    Other                                                                            (1,374)       25,552
                                                                                  ---------   -----------

      Noncurrent deferred tax asset                                                 573,712     4,302,703
                                                                                  ---------   -----------

      Total deferred tax asset before valuation allowance                           573,712     4,304,679

   Valuation allowance                                                             (288,399)   (1,379,239)
                                                                                  ---------   -----------

      Net deferred tax asset                                                      $ 285,313   $ 2,925,440
                                                                                  =========   ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                     2000        1999
                                                                                  ---------   -----------
   <S>                                                                           <C>          <C>
   Current asset (included in "prepaid expenses and deposits")                    $       -   $     1,976
   Noncurrent deferred tax liabilities                                             (120,772)            -
   Noncurrent deferred taxes                                                        406,085     2,923,464
                                                                                  ---------   -----------

                                                                                  $ 285,313   $ 2,925,440
                                                                                  =========   ===========
</TABLE>

                                     F-25
<PAGE>

                          Allied Research Corporation

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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


NOTE Q - EARNINGS PER COMMON SHARE

 The following table reconciles the numerators and denominators of the basic and
 diluted earnings per share (EPS) computations.

<TABLE>
<CAPTION>
                                                              2000                                        1999
                                               ------------------------------------    ------------------------------------------
                                                   Income
                                                     from                                Loss from
                                               continuing   Discontinued                continuing    Discontinued
                                               operations    operation   Net income     operations     operation        Net loss
                                               ----------    ----------  ----------    -----------     ----------     -----------
<S>                                            <C>          <C>          <C>           <C>            <C>             <C>
Basic EPS
  Income (loss) available
    to common stockholders                     $8,705,324    $  516,993  $9,222,317    $(3,281,867)    $ (746,414)    $(4,028,281)
                                               ==========    ==========  ==========    ===========     ==========     ===========

Weighted average number of
    common shares outstanding                   4,844,267     4,844,267   4,844,267      4,818,857      4,818,857       4,818,857
                                               ==========    ==========  ==========    ===========     ==========     ===========

 Basic EPS                                     $     1,79    $      .11  $     1.90    $      (.68)    $     (.16)    $      (.84)
                                               ==========    ==========  ==========    ===========     ==========     ===========

Diluted EPS
  Income (loss) available to
    common stockholders                        $8,705,324    $  516,993  $9,222,317    $(3,281,867)    $ (746,414)    $(4,028,281)

Income impact of assumed
    conversions                                         -             -           -              -              -               -
                                               ----------    ----------  ----------    -----------     ----------     -----------

Income (loss) available to
    common stockholders on a
    diluted basis                              $8,705,324    $  516,993  $9,222,317    $(3,281,867)    $ (746,414)    $(4,028,281)
                                               ==========    ==========  ==========    ===========     ==========     ===========

Weighted average number of
   common shares outstanding                    4,844,267     4,844,267   4,844,267      4,818,857      4,818,857       4,818,857

 Effect of dilutive securities
   - stock options                                  2,132         2,132       2,132              -              -               -
                                               ----------    ----------  ----------    -----------     ----------     -----------

 Adjusted weighted average
    number of common shares
    outstanding                                 4,846,399     4,846,399   4,846,399      4,818,857      4,818,857       4,818,857
                                               ==========    ==========  ==========    ===========     ==========     ===========

       Diluted EPS                                  $1.79    $      .11  $     1.90    $      (.68)    $     (.16)    $      (.84)
                                               ==========    ==========  ==========    ===========     ==========     ===========

<CAPTION>
                                                 Income
                                                  from
                                               continuing   Discontinued     Net
                                               operations    operation     income
                                               ----------   ----------   ----------
<S>                                            <C>          <C>          <C>
Basic EPS
  Income (loss) available
    to common stockholders                     $8,629,030    $  436,608  $9,065,638
                                               ==========

Weighted average number of
  common shares outstanding                     4,722,303     4,722,303   4,722,303
                                               ==========    ==========  ==========

 Basic EPS                                     $     1.83    $      .09  $     1.92
                                               ==========    ==========  ==========

Diluted EPS
  Income (loss) available to
    common stockholders                        $8,629,030    $  436,608  $9,065,638

Income impact of assumed
  conversions                                           -             -           -
                                               ----------    ----------  ----------

Income (loss) available to
  common stockholders on a
    diluted basis                              $8,629,030    $  436,608  $9,065,638
                                               ==========    ==========  ==========

Weighted average number of
  common shares outstanding                     4,722,303     4,722,303   4,722,303

Effect of dilutive securities
  - stock options                                  42,904        42,904      42,904
                                               ----------    ----------  ----------

Adjusted weighted average
  number of common shares
    outstanding                                 4,765,207     4,765,207   4,765,207
                                               ==========    ==========  ==========

      Diluted EPS                              $     1.81    $      .09  $     1.90
                                               ==========    ==========  ==========
</TABLE>

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


NOTE R - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS

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

                                     F-26
<PAGE>

                          Allied Research Corporation

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

NOTE R - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - Continued

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

<TABLE>
<CAPTION>
                                                           2000                1999                1998
                                                       ------------         -----------        ------------
     <S>                                               <C>                  <C>                <C>
     Revenues from external customers, from
      continuing operations
       Product Sales                                   $ 87,610,826         $38,575,416        $111,804,077
       Security Systems and Service                      20,131,989          20,457,191          21,274,050
                                                       ------------         -----------        ------------

                                                       $107,742,815         $59,032,607        $133,078,127
                                                       ============         ===========        ============

     Interest expense
      Product Sales                                    $  1,411,723         $   795,630        $  1,203,361
      Security Systems and Service                          112,184             130,535             159,284
      Corporate and Other                                       191             176,147              (9,783)
                                                       ------------         -----------        ------------

                                                       $  1,524,098         $ 1,102,312        $  1,352,862
                                                       ============         ===========        ============

     Interest income
      Product Sales                                    $    283,745         $   471,925        $    853,581
      Security Systems and Service                          130,196             104,787              83,444
      Corporate and Other                                   240,563             258,784             221,986
                                                       ------------         -----------        ------------

                                                       $    654,504         $   835,496        $  1,159,011
                                                       ============         ===========        ============

     Income tax expense (benefit)
      Product Sales                                    $  5,180,113         $(2,447,046)       $  1,162,865
      Security Systems and Service                        1,270,993           1,645,356           1,909,945
      Corporate and Other                                  (169,736)            325,887            (870,772)
                                                       ------------         -----------        ------------

                                                       $  6,281,370         $  (475,803)       $  2,202,038
                                                       ============         ===========        ============

     Depreciation and amortization
      Product Sales                                    $  1,449,062         $ 1,520,183        $  1,474,159
      Security Systems and Service                          732,928             611,482             623,074
      Corporate and Other                                    12,664               4,549               7,137
                                                       ------------         -----------        ------------

                                                       $  2,194,654         $ 2,136,214        $  2,104,370
                                                       ============         ===========        ============

     Segment profit (loss), from continuing
      operations before taxes
       Product Sales /(1)/                             $ 12,703,260         $(7,743,149)       $  6,854,793
       Security Systems and Service                       2,855,459           4,172,136           4,452,232
       Corporate and Other/(1)/                            (572,025)           (186,657)           (475,957)
                                                       ------------         -----------        ------------

                                                       $ 14,986,694         $(3,757,670)       $ 10,831,068
                                                       ============         ===========        ============
</TABLE>

                                     F-27
<PAGE>

                          Allied Research Corporation

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

NOTE R - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - Continued

<TABLE>
<CAPTION>
                                                           2000               1999               1998
                                                        -----------        -----------       ------------
     <S>                                                <C>                <C>               <C>
     Segment assets
      Product Sales                                     $68,125,248        $40,499,173       $ 80,262,860
      Security Systems and Service                       16,458,039         13,116,269         13,567,284
      Corporate and Other /(2)/                           3,173,965          2,316,845          2,366,287
                                                        -----------        -----------       ------------

         Total reportable segments                       87,757,252         55,932,287         96,196,431

      Discontinued operations                                     -          4,198,644          5,438,316
                                                        -----------        -----------       ------------

                                                        $87,757,252        $60,130,931       $101,634,747
                                                        ===========        ===========       ============

     Expenditure for segment assets
      Product Sales                                     $ 2,840,971        $ 1,685,305       $  1,634,411
      Security Systems and Service                        1,013,477            571,000            576,608
      Corporate and Other                                    38,578                  -                  -
                                                        -----------        -----------       ------------

                                                        $ 3,893,026        $ 2,256,305       $  2,211,019
                                                        ===========        ===========       ============
</TABLE>

        /(1)/  Unusual items - direct corporate cost allocations to operating
               segments increased by approximately $166,000 in 1998, which
               affect year-to-year comparability.

        /(2)/  Net of intersegment receivables.

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

<TABLE>
<CAPTION>
                                                                 Geographic Segment Data
                                                      2000               1999               1998
                                                  ------------        -----------       ------------
     <S>                                          <C>                 <C>               <C>
     Revenues from external customers
      Middle East                                 $ 45,688,844        $19,864,608       $105,439,877
      United States /(1)/                           25,726,688         13,632,279            549,492
      Belgium                                       19,771,275         18,272,388         14,481,788
      Canada                                        11,320,304                  -                  -
      France                                         3,069,015          4,116,046          4,096,218
      Other foreign countries                        2,166,689          3,147,286          8,510,752
                                                  ------------        -----------       ------------

                                                  $107,742,815        $59,032,607       $133,078,127
                                                  ============        ===========       ============
</TABLE>

            /(1)/   Includes foreign military sales.

                                     F-28
<PAGE>

                          Allied Research Corporation

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

NOTE R - GEOGRAPHIC AREAS AND INDUSTRY SEGMENTS - Continued

<TABLE>
<CAPTION>
                                                                           Geographic Segment Data

                                                            2000               1999              1998
                                                        -----------        -----------       ------------
     <S>                                                <C>                <C>               <C>
     Segment assets
      Belgium                                           $84,583,288        $53,615,442       $ 93,830,144
      United Kingdom                                        185,326            256,652            260,149
      United States /(2)/                                 2,988,638          2,060,193          2,106,138
                                                        -----------        -----------       ------------

         Total reportable segments                       87,757,252         55,932,287         96,196,431

      Discontinued operation                                      -          4,198,644          5,438,316
                                                        -----------        -----------       ------------

                                                        $87,757,252        $60,130,931       $101,634,747
                                                        ===========        ===========       ============

        /(2)/ Net of intersegment receivables and investments.
</TABLE>


NOTE S - QUARTERLY FINANCIAL DATA (UNAUDITED)

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

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

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

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

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

                          Allied Research Corporation

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

NOTE S - QUARTERLY FINANCIAL DATA (UNAUDITED) - Continued
---------------------------------------------------------

<TABLE>
<CAPTION>
                                                                   (Amounts in thousands, except per share data) *
                                                        -----------------------------------------------------------
                                                         First     Second        Third       Fourth        Total
                      1999                              Quarter    Quarter      Quarter      Quarter      For Year
------------------------------------------              -------   ---------    ---------    ---------    ----------
<S>                                                     <C>      <C>           <C>          <C>          <C>
Revenue                                                 $23,800     $ 7,436      $ 7,216      $20,581       $59,033
Gross profit                                              4,176        (508)         278        4,223         8,169
Earnings (loss) from continuing operations                1,263      (4,096)      (3,710)       3,261        (3,282)
Discontinued operation                                        3        (329)        (169)        (251)         (746)
Net earnings (loss)                                       1,266      (4,425)      (3,879)       3,010        (4,028)

Per share data:
 Basic
  Continuing operations                                 $   .27     $  (.86)     $  (.77)     $   .69       $  (.68)
  Discontinued operation                                      -        (.07)        (.03)        (.06)         (.16)
                                                        -------     -------      -------      -------       -------

    Net income                                          $   .27     $  (.93)     $  (.80)     $   .63       $  (.84)
                                                        =======     =======      =======      =======       =======

 Diluted
  Continuing operations                                 $   .27     $  (.86)     $  (.77)     $   .69       $  (.68)
  Discontinued operation                                      -        (.07)        (.03)        (.06)         (.16)
                                                        -------     -------      -------      -------       -------

    Net income                                          $   .27     $  (.93)     $  (.80)     $   .63       $  (.84)
                                                        =======     =======      =======      =======       =======
</TABLE>

      * All amounts have been restated to reflect  discontinued operations
                          attributable to each period.

                                     F-30
<PAGE>

                                   SCHEDULES

                                     F-31
<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.

<TABLE>
<CAPTION>
                                                                2000             1999
                                                            -----------      -----------
<S>                                                         <C>              <C>
                       ASSETS

Cash and equivalents                                        $ 1,527,064      $ 1,780,929
Investment in subsidiaries                                   41,118,859       37,309,624
Due from subsidiaries                                         3,868,732        1,345,256
Deferred tax asset                                              274,258          140,901
Deposits and other                                            1,185,811          248,533
                                                            -----------      -----------

    Total assets                                            $47,974,724      $40,825,243
                                                            ===========      ===========

    LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
  Accounts payable and accrued liabilities                  $ 1,254,650      $   505,678
                                                            -----------      -----------

    Total liabilities                                         1,254,650          505,678

STOCKHOLDERS' EQUITY
  Common stock                                                  481,246          483,672
  Capital in excess of par value                             13,689,053       13,906,739
  Retained earnings                                          40,305,945       31,083,628
  Accumulated other comprehensive loss                       (7,756,170)      (5,154,474)
                                                            -----------      -----------
                                                             46,720,074       40,319,565
                                                            -----------      -----------

                                                            $47,974,724      $40,825,243
                                                            ===========      ===========
</TABLE>


                                     F-32
<PAGE>

                          Allied Research Corporation

    SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED

                               (Parent Company)

                           STATEMENTS OF OPERATIONS

                            Year ended December 31,

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


<TABLE>
<CAPTION>
                                                                        2000             1999               1998
                                                                     ----------       ------------       ----------
<S>                                                                  <C>              <C>                <C>
Income
  Intercompany management fees                                       $2,867,912       $  2,967,432       $2,850,448
  Dividend from subsidiary                                                    -         10,456,160                -
  Other - net                                                           876,091            645,250          463,881
                                                                     ----------       ------------       ----------
                                                                      3,744,003         14,068,842        3,314,329

Costs and expenses
  Administrative and other                                            3,853,136          3,946,847        3,845,785
                                                                     ----------       ------------       ----------

      (Loss) earnings before equity in operations of
       subsidiaries                                                    (109,133)        10,121,995         (531,456)

Equity in operations of subsidiaries, less
  dividends received of $10,456,160 in 1999                           9,161,714        (13,824,389)       9,665,490
                                                                     ----------       ------------       ----------

      Earnings (loss) before income taxes                             9,052,581         (3,702,394)       9,134,034

Income taxes (benefit)                                                 (169,736)           325,887           68,396
                                                                     ----------       ------------       ----------

      NET EARNINGS (LOSS)                                            $9,222,317       $ (4,028,281)      $9,065,638
                                                                     ==========       ============       ==========

      Earnings per common share
       Basic                                                         $     1.90       $       (.84)      $     1.92
                                                                     ==========       ============       ==========

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

                                     F-33
<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                           2000            1999             1998
                                                                   ------------     -----------     ------------
<S>                                                                <C>              <C>             <C>
Cash flows from (used in) operating activities
 Net (loss) earnings for the year                                  $  9,222,317     $(4,028,281)    $  9,065,638
 Adjustments to reconcile net (loss) earnings to net cash
  from (used in) operating activities
   Equity in operations of subsidiaries                              (9,615,823)      3,368,229       (9,665,490)
   Gain on sale of subsidiary                                          (516,993)              -                -
   Dividend from subsidiary                                                   -      10,456,160                -
   Depreciation and amortization                                         13,663           4,549            5,307
   Deferred income taxes                                               (133,357)       (122,700)         (41,978)
   Common stock awards and grants                                       141,250         447,202          689,376
   Changes in assets and liabilities
    Other assets                                                         16,185          31,923          141,823
    Due to subsidiaries                                              (2,523,476)     (9,548,529)      (1,333,421)
    Accounts payable and accrued liabilities                            801,463        (515,170)          36,512
    Income taxes                                                        (81,649)       (244,748)               -
                                                                   ------------     -----------     ------------
                                                                    (11,898,737)      3,876,916      (10,167,871)
                                                                   ------------     -----------     ------------

      Net cash used in operating activities                          (2,676,420)       (151,365)      (1,102,233)

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

      Net cash provided by investing activities                       2,783,919               -                -

Cash flows from financing activities
 Proceeds from employee stock purchase plan shares                      257,139         212,929          637,622
 Retirement of common stock                                            (618,501)       (136,536)         (21,525)
                                                                   ------------     -----------     ------------

      Net cash (used in) provided by financing activities              (361,362)         76,393          616,097
                                                                   ------------     -----------     ------------

      Net decrease in cash and equivalents                             (253,865)        (74,972)        (486,136)

Cash and equivalents at beginning of year                             1,780,929       1,855,901        2,342,037
                                                                   ------------     -----------     ------------

Cash and equivalents at end of year                                $  1,527,064     $ 1,780,929     $  1,855,901
                                                                   ============     ===========     ============

Supplemental Disclosures of Cash Flow Information:
-------------------------------------------------
 Cash paid during the year for:
  Income taxes                                                     $     70,123     $    68,154     $    178,000
  Interest                                                                  191         221,973                -

Supplemental of Non-Cash Investing and Financing Activities:
-----------------------------------------------------------
  Non-cash dividend from subsidiary                                $          -     $10,456,160     $          -
</TABLE>

                                     F-34

<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, 2000
----------------------------

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

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

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

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

 Estimated losses on
  contracts                             $  175,470    $172,572       $      -    $  475,470 /(1)/  $  172,572
                                        ==========    ========       ========    ==========        ==========

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

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


Year ended December 31, 1998
----------------------------

 Estimated losses on
  contracts                             $  256,549    $175,470       $      -    $  256,549 /(1)/  $  175,470
                                        ==========    ========       ========    ==========        ==========

 Allowance for doubtful
  receivables                           $  184,351    $ 29,011       $      -    $        -        $  213,362
                                        ==========    ========       ========    ==========        ==========

 Valuation allowances on
  deferred tax assets                   $2,236,594    $      -       $      -    $1,738,229 /(3)/  $  498,365
                                        ==========    ========       ========    ==========        ==========
</TABLE>

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

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

       /(3)/  In 2000 and 1998, reductions in deferred tax valuation allowance
              and reduction in valuation allowance due to utilization of net
              operating loss in 2000 and 1998.

                                     F-35
<PAGE>




                                    EXHIBITS


<PAGE>

                                 EXHIBIT INDEX

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



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


  21           List of Subsidiaries                                    E-3



  23           Consent of Independent Certified
                Public Accountants                                     E-4