##### 









UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2004


Commission file number: 1-11376





The Allied Defense Group, Inc.


(Exact name of registrant as specified in its charter)


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

8000 Towers Crescent Drive, Suite 260


Vienna, Virginia 22182


(Address of principal executive offices, including zip
code)


(703) 847-5268


(Registrants telephone number, including area code)





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


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

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


þ o


o


þ o






Documents Incorporated by Reference












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##### 



INDEX


|           |  |                                                                                                    |    |  |    | 
|---------- |  | -------------------------------------------------------------------------------------------------- | -- |  | -- | 
|PART I    
|Item 1.    |  | Business                                                                                           |    |  | 2  | 
|Item 2.    |  | Properties                                                                                         |    |  | 16 | 
|Item 3.    |  | Legal Proceedings                                                                                  |    |  | 17 | 
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                |    |  | 17 | 
|PART II   
|Item 5.    |  | Market for Stock and Related Stockholder Matters And Issuer
    Purchases of Equity Securities     |    |  | 17 | 
|Item 6.    |  | Selected Financial Data                                                                            |    |  | 18 | 
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition
    and Results of Operations          |    |  | 19 | 
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                                         |    |  | 34 | 
|Item 8.    |  | Financial Statements and Supplementary Data                                                        |    |  | 34 | 
|Item 9.    |  | Changes in and Disagreements With Accountants on Accounting and
    Financial Disclosures          |    |  | 34 | 
|Item 9A.   |  | Controls and Procedures                                                                            |    |  | 35 | 
|Item 9B.   |  | Other Information                                                                                  |    |  | 35 | 
|PART III  
|Item 10.   |  | Directors and Executive Officers                                                                   |    |  | 36 | 
|Item 11.   |  | Executive Compensation                                                                             |    |  | 36 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management
    and Related Stockholder Matters |    |  | 36 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                                     |    |  | 36 | 
|Item 14.   |  | Principal Accounting Fees and Service                                                              |    |  | 36 | 
|PART IV   
|Item 15.   |  | Exhibits, Financial Statement Schedules, and Reports on
    Form 8-K                               |    |  | 37 | 
|Signatures |  |                                                                                                    | 39 | 

1



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PART I


Item 1.     Business








|                  |  |                                                         |  |         
|----------------- |  | ------------------------------------------------------- |  | --------
|Date              |  | Company Involved                                        |  | Event   
|                  |  |                                                         |  |         
|May 31, 1994      |  | VSK Electronics N.V and Télé Technique
    Générale S.A |  | Acquired
|May 9, 1995       |  | Intelligent Data Capturing Systems N.V                  |  | Acquired
|December 11, 1999 |  | VIGITEC S.A                                             |  | Acquired
|December 31, 2001 |  | News/Sports Microwave Rental Inc                        |  | Acquired
|June 6, 2002      |  | Titan Dynamics Systems, Inc                             |  | Acquired
|July 31, 2002     |  | SeaSpace Corporation                                    |  | Acquired
|August 1, 2004    |  | Control Monitor Systems, Inc                            |  | Acquired





| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | Strategic acquisitions that complement existing operating
    divisions                                                    
|
| |  | Organic growth by expanding product offerings, increasing market
    share in existing markets, and penetrating new markets
|
| |  | Enhance marketing and business development efforts between each
    subsidiary to increase sales and backlog               
|
| |  | Successfully integrate new subsidiaries to ensure profitability
    and accretion                                          





2



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Description of Business


Allied.


MECAR.


Mortar Ammunition


90mm Ammunition


Tank Ammunition nd


Other Ammunition


Grenades


3



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VSK Group.


NS Microwave.


Titan Dynamics.


SeaSpace. ®


4



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MECAR USA.


Geographic Areas and Industry Segments




Market and Customers












5



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##### 









Principal Customers




Raw Materials and Suppliers












Marketing




6



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Research and Development








Backlog




|                                |  |                   |              |  |                   |   |              | 
|------------------------------- |  | ----------------- | ------------ |  | ----------------- | - | ------------ | 
|                                |  | December 31, 2004 |              |  | December 31, 2003 |  
|                                |  |                   |              |  |                   |  
|Ordnance and Manufacturing      |  | $                 | 50.5 million |  |                   | $ | 81.2 million | 
|Electronic Security             |  |                   | 24.6 million |  |                   | $ | 24.3 million | 
|Environmental Safety & Security |  |                   | 1.5 million  |  |                   | $ | 1.7 million  | 
|Software, Training & Simulation |  |                   | 0.7 million  |  |                   | $ | 0.5 million  | 



Competition




7



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Seasonal Nature of Business






8



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Personnel




|               |  |                    |     |  |         |  |     |           |  |  |             |  |  |       |   |  |  |  |     | 
|-------------- |  | ------------------ | --- |  | ------- |  | --- | --------- |  |  | ----------- |  |  | ----- | - |  |  |  | --- | 
|               |  | Technical &        |     |  | Hourly  |  |     | Part-time |  |  | Technical   |  |  |      
|               |  | salaried employees |     |  | workers |  |     | employees |  |  | consultants |  |  | Total |  
|               |  |                    |     |  |         |  |     |           |  |  |             |  |  |       |  
|Allied         |  |                    | 8   |  |         |  |    |           |  |  |            |  |  |       |  |  |  |  | 8   | 
|MECAR          |  |                    | 56  |  |         |  | 321 |           |  |  |            |  |  |       | 3 |  |  |  | 380 | 
|VSK Group      |  |                    | 132 |  |         |  | 17  |           |  |  | 5           |  |  |       |  |  |  |  | 154 | 
|NS Microwave   |  |                    | 45  |  |         |  | 24  |           |  |  |            |  |  |       |  |  |  |  | 69  | 
|SeaSpace       |  |                    | 38  |  |         |  | 5   |           |  |  |            |  |  |       |  |  |  |  | 43  | 
|Titan Dynamics |  |                    | 2   |  |         |  | 8   |           |  |  |            |  |  |       |  |  |  |  | 10  | 



Patents and Trademarks




Environmental Regulations




Available Information


www.allieddefensegroup.com. www.allieddefensegroup.com




| |                               
| | ------------------------------
| | The Allied Defense Group, Inc.
| | 8000 Towers Crescent Drive    
| | Suite 260                     
| | Vienna, Virginia 22182        
| | (703) 847-5268                

Executive Officers of Allied




John G. Meyer, Jr.


9



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##### 





Monte L. Pickens,


Charles A. Hasper,


Wayne F. Hosking, Jr.


Risk Factors


























10



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| |   |                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the timing and amount of, or cancellation or rescheduling of,
    orders for our products;                                                                                    
|
| |  | our ability to develop, introduce, ship and support new products
    and product enhancements and manage product transitions,
    announcements and new product introductions;
|
| |  | our ability to achieve cost reductions;                                                                                                                                       
|
| |  | our ability to achieve and maintain production volumes and
    quality levels for our products;                                                                               

11



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| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| |  | the volume of products sold and the mix of distribution channels
    through which they are sold;            
|
| |  | the loss of any one of our major customers or a significant
    reduction in orders from those customers; and
|
| |  | increased competition, particularly from larger, better
    capitalized competitors.                         



















12



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| |   |                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | make it more difficult for us to satisfy our obligations,                                                                                                                                                                                                                    
|
| |  | require us to dedicate a substantial portion of our cash flow
    from operations to payments on our debt, thereby reducing the
    amount of cash flow available for working capital, capital
    expenditures, acquisitions and other general corporate purposes,          
|
| |  | limit our flexibility in planning for, or reacting to, changes
    in our lines of business,                                                                                                                                                                                 
|
| |  | place us at a competitive disadvantage compared to competitors
    that have lower debt service obligations and significantly
    greater operating and financing flexibility,                                                                                               
|
| |  | limit, along with the financial and other restrictive covenants
    applicable to our indebtedness, among other things, our ability
    to borrow additional funds,                                                                                                          
|
| |  | increase our vulnerability to general adverse economic and
    industry conditions, and                                                                                                                                                                                      
|
| |  | result in an event of default upon a failure to comply with
    financial covenants contained in our senior credit facilities
    which, if not cured or waived, could have a material adverse
    effect on our business, financial condition, or results of
    operations.



13



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14



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15



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|        |           
|------- | ----------
|Item 2. | Properties



|                     |  |             |  |                |            |  |        |        |                  |                                   
|-------------------- |  | ----------- |  | -------------- | ---------- |  | ------ | ------ | ---------------- | ----------------------------------
|                     |  |             |  | Square Footage |            | 
|                     |  |             |  |                |            | 
|Location             |  | Property    |  | Owned          |            |  | Leased |        | Industry Segment
|                     |  |             |  |                |            |  |        |        |                 
|Nivelles, Belgium    |  | Office/ Mfg |  |                | 140,000    |  |        |        |                  | Ordnance & Manufacturing(1)       
|Harelbeke, Belgium   |  | Office/ Mfg |  |                | 25,600     |  |        |        |                  | Electronic Security(2)            
|Heppignies, Belgium  |  | Office/ Mfg |  |                | 9,600      |  |        |        |                  | Electronic Security(2)            
|Brussels, Belgium    |  | Office/ Mfg |  |                | 8,700      |  |        |        |                  | Electronic Security(2)            
|Hasselt, Belgium     |  | Office/ Mfg |  |                | 7,500      |  |        |        |                  | Electronic Security(2)            
|Huntington Beach, CA |  | Office/ Mfg |  |                |            |  |        | 3,100  |                  | Electronic Security(2)            
|Spring Valley, CA    |  | Office/ Mfg |  |                |            |  |        | 18,400 |                  | Electronic Security(3)            
|Poway, CA            |  | Office/ Mfg |  |                |            |  |        | 27,400 |                  | Environmental Safety & Security(4)
|Marshall, TX         |  | Office/ Mfg |  |                |            |  |        | 3,800  |                  | Software, Training & Simulation(5)
|Marshall, TX         |  | Office/ Mfg |  |                | In process |  |        |        |                  | Ordnance & Manufacturing(6)       






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | MECARs principal factory is located approximately 25 miles
    south of Brussels near Nivelles, Belgium. The factory
    principally consists of a manufacturing and administrative
    complex which was occupied by MECAR in 1989. The manufacturing
    area is approximately 112,000 square feet and the administration
    facility is approximately 28,000 square feet. There are a number
    of older buildings on the property that are still used in
    conjunction with the new complex. A small test firing range is
    maintained on this property. MECAR also owns 600 acres in the
    vicinity of the Village of Marche in the Ardennes region of
    Belgium, which was previously used as a test range. MECAR ceased
    its use of the Ardennes firing range in 2001. MECAR is now
    utilizing other test ranges, including a test range owned by the
    Belgian Army, although it is also exploring the prospects of
    securing the use of a new test range. Throughout 2004, MECAR
    operated using one full and two partial shifts. MECAR is
    currently operating near its productive capacity.
|   
|(2) | The VSK Group operates from owned facilities throughout Belgium,
    as well as a leased facility in California. Such facilities are
    currently operating at approximately 85% of productive capacity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

16



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | NS Microwave operates from leased office, production and
    warehouse facilities in Spring Valley, California. In 2004, NS
    Microwave expanded to a second warehouse facility in close
    proximity to its original facility providing an additional
    10,000 square feet. The facilities are leased on a month to
    month basis and are currently operating at approximately 80% of
    productive capacity.
|   
|(4) | SeaSpace operates from leased office, production and warehouse
    facilities in Poway, CA. The office lease expires in June, 2009
    and the facility is currently operating at approximately 70% of
    productive capacity. In 2004, SeaSpace expanded to two
    production and warehouse facilities in close proximity to its
    original facility providing an additional 13,400 square feet.                 
|   
|(5) | Titan Dynamics operates from a leased office and manufacturing
    facility in Marshall, TX. The facility is currently operating at
    approximately 80% of productive capacity.                                                                                                                                                                                                                                     
|   
|(6) | MECAR USA will operate from an office and manufacturing facility
    in Marshall, Texas, which is being constructed by the local
    development authority. Construction is expected to be completed
    during the second quarter of 2005. It is anticipated that Titan
    Dynamics will relocate its operations to share this facility
    with MECAR USA.                                                         



Item 3.     Legal
Proceedings




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




PART II




|        |                                                                                            
|------- | -------------------------------------------------------------------------------------------
|Item 5. | Market for Stock, Related Stockholder Matters and Issuer
    Purchases of Equity Securities

Market Information.


|            |  |      |       |  |      |   |       |      |  |   |       |  |  |   |       | 
|----------- |  | ---- | ----- |  | ---- | - | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|            |  | 2004 |       |  | 2003 |  
|            |  |      |       |  |      |  
|            |  | High |       |  | Low  |   |       | High |  |   | Low   | 
|            |  |      |       |  |      |   |       |      |  |   |       | 
|1st Quarter |  | $    | 23.97 |  |      | $ | 18.25 |      |  | $ | 19.00 |  |  | $ | 14.86 | 
|2nd Quarter |  |      | 21.50 |  |      |   | 16.50 |      |  |   | 19.00 |  |  |   | 14.75 | 
|3rd Quarter |  |      | 19.66 |  |      |   | 17.81 |      |  |   | 22.00 |  |  |   | 18.25 | 
|4th Quarter |  |      | 22.31 |  |      |   | 18.56 |      |  |   | 24.04 |  |  |   | 20.00 | 

Stockholders.


Dividends.


17



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##### 





Equity Compensation Plan Information.


|                                                           |  |                            |         |  |                           |                                |       |                                 |  |  |         | 
|---------------------------------------------------------- |  | -------------------------- | ------- |  | ------------------------- | ------------------------------ | ----- | ------------------------------- |  |  | ------- | 
|                                                           |  |                            |         |  |                           | Number of securities available |      
|                                                           |  | Number of securities to be |         |  | Weighted average exercise |                                |       | for future issuance under       | 
|                                                           |  | issued upon exercise of    |         |  | price of outstanding      |                                |       | equity compensation plans       | 
|                                                           |  | outstanding options,       |         |  | options, warrants and     |                                |       | (excluding securities reflected | 
|                                                           |  | warrants and rights        |         |  | rights                    |                                |       | in column (a))                  | 
|                                                           |  | (a)                        |         |  | (b)                       |                                |       | (c)                             | 
|                                                           |  |                            |         |  |                           |                                |       |                                 | 
|Equity compensation plans approved by security holders     |  |                            | 632,266 |  |                           | $                              | 14.69 |                                 |  |  | 125,287 | 
|Equity compensation plans not approved by security holders |  |                            | 105,000 |  |                           | $                              | 25.18 |                                 |  |  |        | 
|                                                           |  |                            |         |  |                           |                                |       |                                 | 
|Total                                                      |  |                            | 737,266 |  |                           | $                              | 16.18 |                                 |  |  | 125,287 | 
|                                                           |  |                            |         |  |                           |                                |       |                                 | 

Item 6.     Selected Financial
Data




18



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##### 





|                                         |                          |                                          |         |       |         |   |         |         |       |   |         |        |        |      |        |        |        |   |         |       |       | 
|---------------------------------------- | ------------------------ | ---------------------------------------- | ------- | ----- | ------- | - | ------- | ------- | ----- | - | ------- | ------ | ------ | ---- | ------ | ------ | ------ | - | ------- | ----- | ----- | 
|                                         |                          | 2004                                     |         |       | 2003(1) |   |         | 2002(1) |       |   | 2001(1) |        |        | 2000 |       
|                                         |                          |                                          |         |       |         |   |         |         |       |   |         |        |        |      |       
|                                         |                          | (000s omitted except per share amounts) |        
|Operations data:                         |                          |                                          |         |       |         |   |         |         |       |   |         |        |        |      |        |        |        |   |         |      
|Revenues                                 |                          | $                                        | 146,900 |       |         | $ | 154,235 |         |       | $ | 145,274 |        |        | $    | 96,641 |        |        | $ | 107,743 |      
|Earnings from                            |                          |                                          |         |       |         |   |         |         |       |   |         |        |        |      |        |        |        |   |         |      
|                                         |  continuing operations  |                                          |         | 2,518 |         |   |         | 3,928   |       |   |         | 20,894 |        |      |        | 10,165 |        |   |         | 8,705 |      
|                                         |  discontinued operation |                                          |         |      |         |   |         |        |       |   |         |       |        |      |        |       |        |   |         | 517   |      
|                                         |                          |                                          |         |       |         |   |         |         |       |   |         |        |        |      |       
|                                         |                          | Net earnings                             |         |       | 2,518   |   |         |         | 3,928 |   |         |        | 20,894 |      |        |        | 10,165 |   |         |       | 9,222 | 
|                                         |                          |                                          |         |       |         |   |         |         |       |   |         |        |        |      |       
|Earnings per share                       |                          |                                          |         |       |         |   |         |         |       |   |         |        |        |      |        |        |        |   |         |      
|Basic:                                   |                          |                                          |         |       |         |   |         |         |       |   |         |        |        |      |        |        |        |   |         |      
|                                         |  continuing operations  |                                          |         | 0.45  |         |   |         | 0.71    |       |   |         | 3.94   |        |      |        | 2.07   |        |   |         | 1.79  |      
|                                         |  discontinued operation |                                          |         |      |         |   |         |        |       |   |         |       |        |      |        |       |        |   |         | 0.11  |      
|                                         |                          |                                          |         |       |         |   |         |         |       |   |         |        |        |      |       
|                                         |                          | Net earnings                             |         |       | 0.45    |   |         |         | 0.71  |   |         |        | 3.94   |      |        |        | 2.07   |   |         |       | 1.90  | 
|                                         |                          |                                          |         |       |         |   |         |         |       |   |         |        |        |      |       
|Diluted:                                 |                          |                                          |         |       |         |   |         |         |       |   |         |        |        |      |        |        |        |   |         |      
|                                         |  continuing operations  |                                          |         | 0.42  |         |   |         | 0.66    |       |   |         | 3.73   |        |      |        | 2.05   |        |   |         | 1.79  |      
|                                         |  discontinued operation |                                          |         |      |         |   |         |        |       |   |         |       |        |      |        |       |        |   |         | 0.11  |      
|                                         |                          |                                          |         |       |         |   |         |         |       |   |         |        |        |      |       
|                                         |                          | Net earnings                             |         |       | 0.42    |   |         |         | 0.66  |   |         |        | 3.73   |      |        |        | 2.05   |   |         |       | 1.90  | 
|                                         |                          |                                          |         |       |         |   |         |         |       |   |         |        |        |      |       
|Balance sheet data:                      |                          |                                          |         |       |         |   |         |         |       |   |         |        |        |      |        |        |        |   |         |      
|Working capital                          |                          |                                          | 87,469  |       |         |   | 89,217  |         |       |   | 77,346  |        |        |      | 40,996 |        |        |   | 34,898  |      
|Total assets                             |                          |                                          | 197,356 |       |         |   | 220,944 |         |       |   | 171,737 |        |        |      | 86,584 |        |        |   | 87,636  |      
|Long-term obligations                    |                          |                                          | 6,817   |       |         |   | 13,925  |         |       |   | 13,257  |        |        |      | 3,110  |        |        |   | 3,529   |      
|Stockholders equity                     |                          |                                          | 130,083 |       |         |   | 118,138 |         |       |   | 97,843  |        |        |      | 58,449 |        |        |   | 46,720  |      
|Cash dividends declared per common share |                          |                                          |        |       |         |   |        |         |       |   |        |        |        |      |       |        |        |   |        |      






|    |                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Consolidated Statements of Earnings and the Consolidated
    Balance Sheet for 2003, 2002 and 2001 have been restated to
    reflect adjustments that are described in Notes A and V of the
    Notes to Consolidated Financial Statements.









|        |                                                                                                                                
|------- | -------------------------------------------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations (amounts in thousands of
    dollars)

Overview






| |   |                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Ordnance & Manufacturingsegment consists of MECAR,
    located in Belgium, and MECAR USA, located in Marshall, TX.
    MECAR develops and produces medium caliber tank, mortar and
    other ammunition. MECAR USA will initially pursue contracts from
    U.S. and foreign governments for ammunition and pyrotechnics
    devices. MECAR USA is expected to be operational in mid-2005.

19



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Electronic Securitysegment consists of the VSK Group,
    located in Belgium and California, and NS Microwave, located in
    San Diego, CA. The VSK Group consists of VSK Electronics N.V.
    which manufactures access control, intrusion protection, fire
    detection and video systems; Télé Technique
    Générale S.A. which installs security systems;
    Intelligent Data Capturing Systems N.V. which manufacturers
    integrated video systems; VIGITEC S.A. which installs networked
    video surveillance systems; and Control Monitor Systems which
    manufactures access control systems. NS Microwave designs,
    manufactures, distributes and services industrial and law
    enforcement surveillance products and systems.
|
| |  | Environmental Safety & Securitysegment consists of
    SeaSpace, located in San Diego, CA, which designs, manufactures,
    distributes and services weather and environmental satellite
    ground reception systems, and which has begun to manufacture and
    market antenna products.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Software, Training & Simulationsegment consists of
    Titan Dynamics, located in Marshall, TX, which designs,
    manufactures and sells battlefield effects simulators, minor
    pyrotechnics and other training devices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          







Restatement






20



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21



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##### 





Condensed Consolidated Statements of Earnings


|                    |                              |                          |         |           |             |   |         |          |  |               |          |        |    |          |         |               |          |   |         |        |  |   |         |        | 
|------------------- | ---------------------------- | ------------------------ | ------- | --------- | ----------- | - | ------- | -------- |  | ------------- | -------- | ------ | -- | -------- | ------- | ------------- | -------- | - | ------- | ------ |  | - | ------- | ------ | 
|                    |                              | Years Ended December 31, |        
|                    |                              |                          |        
|                    |                              | 2004                     |         |           | 2003        |   |         | 2002     | 
|                    |                              |                          |         |           |             |   |         |          | 
|                    |                              |                          |         | Pro-Forma |             |   | As      |          |  | As Previously |          |        | As |          |         | As Previously |         
|                    |                              | Actual                   |         |           | (Unaudited) |   |         | Restated |  |               | Reported |        |    | Restated |         |               | Reported |  
|                    |                              |                          |         |           |             |   |         |          |  |               |          |        |    |          |         |               |          |  
|Revenues            |                              | $                        | 146,900 |           |             | $ | 160,737 |          |  | $             | 154,235  |        |    | $        | 171,407 |               |          | $ | 145,274 |        |  | $ | 130,866 |       
|Cost of Sales       |                              |                          | 104,850 |           |             |   | 110,671 |          |  |               | 114,800  |        |    |          | 124,558 |               |          |   | 90,430  |        |  |   | 91,509  |       
|                    | Operating income             |                          |         | 6,182     |             |   |         | 14,198   |  |               |          | 10,905 |    |          |         | 18,319        |          |   |         | 35,718 |  |   |         | 20,231 | 
|                    | Earnings before income taxes |                          |         | 3,478     |             |   |         | 11,494   |  |               |          | 9,129  |    |          |         | 16,543        |          |   |         | 35,437 |  |   |         | 19,950 | 
|Income taxes        |                              |                          | 960     |           |             |   | 3,685   |          |  |               | 5,201    |        |    |          | 7,722   |               |          |   | 14,543  |        |  |   | 9,278   |       
|                    |                              |                          |         |           |             |   |         |          |  |               |          |        |    |          |         |               |          |  
|                    | Net Earnings                 |                          | $       | 2,518     |             |   | $       | 7,809    |  |               | $        | 3,928  |    |          | $       | 8,821         |          |   | $       | 20,894 |  |   | $       | 10,672 | 
|                    |                              |                          |         |           |             |   |         |          |  |               |          |        |    |          |         |               |          |  
|Earnings per share: |                              |                          |         |           |             |   |         |          |  |               |          |        |    |          |         |               |          |   |         |        |  |   |         |       
|                    | Basic                        |                          | $       | 0.45      |             |   | $       | 1.40     |  |               | $        | 0.71   |    |          | $       | 1.60          |          |   | $       | 3.94   |  |   | $       | 2.01   | 
|                    |                              |                          |         |           |             |   |         |          |  |               |          |        |    |          |         |               |          |  
|                    | Diluted                      |                          | $       | 0.42      |             |   | $       | 1.34     |  |               | $        | 0.66   |    |          | $       | 1,54          |          |   | $       | 3.73   |  |   | $       | 1,92   | 
|                    |                              |                          |         |           |             |   |         |          |  |               |          |        |    |          |         |               |          |  

Reconciliation between Pro-Forma and Actual Results




|                             |  |          |         |  |                     |   |        |                      |  |   |             |  |  |   |         | 
|---------------------------- |  | -------- | ------- |  | ------------------- | - | ------ | -------------------- |  | - | ----------- |  |  | - | ------- | 
|                             |  | As       |         |  | Impact From         |   |        | Impact from          |  |   | Pro-Forma   | 
|                             |  | Restated |         |  | Derivative Gains(1) |   |        | Euro Fluctuations(2) |  |   | (Unaudited) | 
|                             |  |          |         |  |                     |   |        |                      |  |   |             | 
|Year Ended December 31, 2004 |  |          |         |  |                     |   |        |                      |  |   |             |  |  |   |         | 
|Revenues                     |  | $        | 146,900 |  |                     | $ | (3,699 | )                    |  | $ | 17,536      |  |  | $ | 160,737 | 
|Cost of Sales                |  |          | 104,850 |  |                     |   |       |                      |  |   | 5,821       |  |  |   | 110,671 | 
|Operating income             |  |          | 6,182   |  |                     |   | (3,699 | )                    |  |   | 11,715      |  |  |   | 14,198  | 
|Earnings before income       |  |          | 3,478   |  |                     |   | (3,699 | )                    |  |   | 11,715      |  |  |   | 11,494  | 
|Income taxes                 |  |          | 960     |  |                     |   | (1,258 | )                    |  |   | 3,983       |  |  |   | 3,685   | 
|                             |  |          |         |  |                     |   |        |                      |  |   |             | 
|Net Earnings                 |  | $        | 2,518   |  |                     | $ | (2,441 | )                    |  | $ | 7,732       |  |  | $ | 7,809   | 
|                             |  |          |         |  |                     |   |        |                      |  |   |             | 

22



---



##### 



|                             |  |          |         |  |  |   |         |    |            |   |        |  |  |   |         | 
|---------------------------- |  | -------- | ------- |  |  | - | ------- | -- | ---------- | - | ------ |  |  | - | ------- | 
|                             |  |          |         |  |  |   |         | As |           
|                             |  | As       |         |  |  |   |         |    | Previously |  
|                             |  | Restated |         |  |  |   |         |    | Reported   |  
|                             |  |          |         |  |  |   |         |    |            |  
|Year Ended December 31, 2003 |  |          |         |  |  |   |         |    |            |   |        |  |  |   |         | 
|Revenues                     |  | $        | 154,235 |  |  | $ | (13,625 | )  |            | $ | 30,797 |  |  | $ | 171,407 | 
|Cost of Sales                |  |          | 114,800 |  |  |   |        |    |            |   | 9,758  |  |  |   | 124,558 | 
|Operating income             |  |          | 10,905  |  |  |   | (13,625 | )  |            |   | 21,039 |  |  |   | 18,319  | 
|Earnings before income       |  |          | 9,129   |  |  |   | (13,625 | )  |            |   | 21,039 |  |  |   | 16,543  | 
|Income taxes                 |  |          | 5,201   |  |  |   | (4,632  | )  |            |   | 7,153  |  |  |   | 7,722   | 
|                             |  |          |         |  |  |   |         |    |            |   |        | 
|Net Earnings                 |  | $        | 3,928   |  |  | $ | (8,993  | )  |            | $ | 13,886 |  |  | $ | 8,821   | 
|                             |  |          |         |  |  |   |         |    |            |   |        | 

|                             |  |          |         |  |  |   |         |    |            |   |        |  |  |   |         | 
|---------------------------- |  | -------- | ------- |  |  | - | ------- | -- | ---------- | - | ------ |  |  | - | ------- | 
|                             |  |          |         |  |  |   |         | As |           
|                             |  | As       |         |  |  |   |         |    | Previously |  
|                             |  | Restated |         |  |  |   |         |    | Reported   |  
|                             |  |          |         |  |  |   |         |    |            |  
|Year Ended December 31, 2002 |  |          |         |  |  |   |         |    |            |   |        |  |  |   |         | 
|Revenues                     |  | $        | 145,274 |  |  | $ | (16,977 | )  |            | $ | 2,569  |  |  | $ | 130,866 | 
|Cost of Sales                |  |          | 90,430  |  |  |   |        |    |            |   | 1,079  |  |  |   | 91,509  | 
|Operating income             |  |          | 35,718  |  |  |   | (16,977 | )  |            |   | 1,490  |  |  |   | 20,231  | 
|Earnings before income       |  |          | 35,437  |  |  |   | (16,977 | )  |            |   | 1,490  |  |  |   | 19,950  | 
|Income taxes                 |  |          | 14,543  |  |  |   | (5,772  | )  |            |   | 507    |  |  |   | 9,278   | 
|                             |  |          |         |  |  |   |         |    |            |   |        | 
|Net Earnings                 |  | $        | 20,894  |  |  | $ | (11,205 | )  |            | $ | 983    |  |  | $ | 10,672  | 
|                             |  |          |         |  |  |   |         |    |            |   |        | 
|Cumulative Net Earnings      |  | $        | 27,340  |  |  | $ | (22,639 | )  |            | $ | 22,601 |  |  | $ | 27,302  | 
|                             |  |          |         |  |  |   |         |    |            |   |        | 






|    |                                                                                  
|--- | ---------------------------------------------------------------------------------
|(1) | Unrealized gains on FX contracts and related tax effects.                        
|   
|(2) | Impact of revising the revenues at the average rates and related
    tax effects.



Results of Operations




23



---



##### 





|                       |                            |                                  |         |         |       |  |       |      |     |   |         |         |        |  |       |      |     |   |         |        |        |  |       |      |      | 
|---------------------- | -------------------------- | -------------------------------- | ------- | ------- | ----- |  | ----- | ---- | --- | - | ------- | ------- | ------ |  | ----- | ---- | --- | - | ------- | ------ | ------ |  | ----- | ---- | ---- | 
|                       |                            | For the years ended December 31, |        
|                       |                            |                                  |        
|                       |                            | 2004                             |         |         | 2003  |  |       | 2002 |    
|                       |                            |                                  |         |         |       |  |       |      |    
|Revenue                |                            | $                                | 146,900 |         |       |  | 100.0 | %    |     | $ | 154,235 |         |        |  | 100.0 | %    |     | $ | 145,274 |        |        |  | 100.0 | %   
|Cost and expenses      |                            |                                  |         |         |       |  |       |      |     |   |         |         |        |  |       |      |     |   |         |        |        |  |       |     
|                       | Cost of sales              |                                  |         | 104,850 |       |  |       | 71.4 |     |   |         | 114,800 |        |  |       | 74.4 |     |   |         | 90,430 |        |  |       | 62.3 |     
|                       | Selling and administrative |                                  |         | 29,173  |       |  |       | 19.9 |     |   |         | 23,998  |        |  |       | 15.6 |     |   |         | 17,497 |        |  |       | 12.0 |     
|                       | Research and development   |                                  |         | 6,695   |       |  |       | 4.5  |     |   |         | 4,532   |        |  |       | 2.9  |     |   |         | 1,629  |        |  |       | 1.1  |     
|                       |                            |                                  |         |         |       |  |       |      |     |   |         |         |        |  |       |      |     |  
|                       |                            | Operating income                 |         |         | 6,182 |  |       |      | 4.2 |   |         |         | 10,905 |  |       |      | 7.1 |   |         |        | 35,718 |  |       |      | 24.6 | 
|Other income (expense) |                            |                                  |         |         |       |  |       |      |     |   |         |         |        |  |       |      |     |   |         |        |        |  |       |     
|                       | Interest income            |                                  |         | 549     |       |  |       | 0.4  |     |   |         | 459     |        |  |       | 0.3  |     |   |         | 506    |        |  |       | 0.3  |     
|                       | Interest expense           |                                  |         | (2,441  | )     |  |       | (1.7 | )   |   |         | (2,490  | )      |  |       | (1.6 | )   |   |         | (2,087 | )      |  |       | (1.4 | )   
|                       | Other  net                |                                  |         | (812    | )     |  |       | (0.6 | )   |   |         | 255     |        |  |       | 0.2  |     |   |         | 1,300  |        |  |       | 0.9  |     
|                       |                            |                                  |         |         |       |  |       |      |     |   |         |         |        |  |       |      |     |  
|                       |                            | Earnings before income taxes     |         |         | 3,478 |  |       |      | 2.3 |   |         |         | 9,129  |  |       |      | 6.0 |   |         |        | 35,437 |  |       |      | 24.4 | 
|Income tax expense     |                            |                                  | 960     |         |       |  | 0.6   |      |     |   | 5,201   |         |        |  | 3.4   |      |     |   | 14,543  |        |        |  | 10.0  |     
|                       |                            |                                  |         |         |       |  |       |      |     |   |         |         |        |  |       |      |     |  
|                       |                            | Net earnings                     |         | $       | 2,518 |  |       |      | 1.7 |   |         | $       | 3,928  |  |       |      | 2.6 |   |         | $      | 20,894 |  |       |      | 14.4 | 
|                       |                            |                                  |         |         |       |  |       |      |     |   |         |         |        |  |       |      |     |  

2004 compared to 2003 compared to 2002


Revenues.


|                                |  |                    |         |  |      |  |       |        |  |   |         |  |  |        |       |   |   |   |         |  |  |  |       |  
|------------------------------- |  | ------------------ | ------- |  | ---- |  | ----- | ------ |  | - | ------- |  |  | ------ | ----- | - | - | - | ------- |  |  |  | ----- | -
|                                |  | Revenue by Segment |        
|                                |  |                    |        
|                                |  | 2004               |         |  | 2003 |  |       | 2002   | 
|                                |  |                    |         |  |      |  |       |        | 
|                                |  | Amount             |         |  | %    |  |       | Amount |  |   | %       |  |  | Amount |       |   | % |  
|                                |  |                    |         |  |      |  |       |        |  |   |         |  |  |        |       |   |   |  
|Ordnance & Manufacturing        |  | $                  | 93,579  |  |      |  | 63.7  | %      |  | $ | 112,538 |  |  |        | 73.0  | % |   | $ | 109,687 |  |  |  | 75.5  | %
|Electronic Security             |  |                    | 45,973  |  |      |  | 31.3  | %      |  |   | 33,303  |  |  |        | 21.6  | % |   |   | 31,302  |  |  |  | 21.5  | %
|Environmental Safety & Security |  |                    | 6,435   |  |      |  | 4.4   | %      |  |   | 7,065   |  |  |        | 4.6   | % |   |   | 4,032   |  |  |  | 2.8   | %
|Software, Training & Simulation |  |                    | 913     |  |      |  | 0.6   | %      |  |   | 1,329   |  |  |        | 0.8   | % |   |   | 253     |  |  |  | 0.2   | %
|                                |  |                    |         |  |      |  |       |        |  |   |         |  |  |        |       |   |   |  
|                                |  | $                  | 146,900 |  |      |  | 100.0 | %      |  | $ | 154,235 |  |  |        | 100.0 | % |   | $ | 145,274 |  |  |  | 100.0 | %
|                                |  |                    |         |  |      |  |       |        |  |   |         |  |  |        |       |   |   |  





24



---



##### 









Cost of Sales.


Selling and Administrative Expenses.


Research and Development.


Interest Income.


Interest expense.


25



---



##### 



Other  Net.


Pre-Tax Profit.


|                                |  |                                  |        |   |      |   |        |      |  |   |        |  
|------------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                |  | Pre-Tax Profit (Loss) by Segment |       
|                                |  |                                  |       
|                                |  | 2004                             |        |   | 2003 |   |        | 2002 | 
|                                |  |                                  |        |   |      |   |        |      | 
|Ordnance & Manufacturing        |  | $                                | 3,475  |   |      | $ | 9,073  |      |  | $ | 31,926 |  
|Electronic Security             |  |                                  | 6,987  |   |      |   | 2,618  |      |  |   | 3,903  |  
|Environmental Safety & Security |  |                                  | (3,283 | ) |      |   | (528   | )    |  |   | 550    |  
|Software, Training & Simulation |  |                                  | (438   | ) |      |   | (207   | )    |  |   | (181   | )
|Corporate and Other             |  |                                  | (3,263 | ) |      |   | (1,827 | )    |  |   | (761   | )
|                                |  |                                  |        |   |      |   |        |      | 
|                                |  | $                                | 3,478  |   |      | $ | 9,129  |      |  | $ | 35,437 |  
|                                |  |                                  |        |   |      |   |        |      | 











Income Taxes.


Net Earnings.


26



---



##### 



Backlog.


|                                |  |                    |        |            |                   |  |     |                   |            |   |          |  |  |            |     |   |          |   |         |  |  |  |     |  
|------------------------------- |  | ------------------ | ------ | ---------- | ----------------- |  | --- | ----------------- | ---------- | - | -------- |  |  | ---------- | --- | - | -------- | - | ------- |  |  |  | --- | -
|                                |  | Backlog by Segment |       
|                                |  |                    |       
|                                |  | December 31, 2004  |        |            | December 31, 2003 |  |     | December 31, 2002 |           
|                                |  |                    |        |            |                   |  |     |                   |           
|                                |  |                    |        | Percentage |                   |  |     |                   | Percentage |   |          |  |  | Percentage |    
|                                |  | Amount             |        |            | of Total          |  |     | Amount            |            |   | of Total |  |  | Amount     |     |   | of Total |  
|                                |  |                    |        |            |                   |  |     |                   |            |   |          |  |  |            |     |   |          |  
|Ordnance & Manufacturing        |  | $                  | 50,491 |            |                   |  | 65  | %                 |            | $ | 81,204   |  |  |            | 75  | % |          | $ | 135,480 |  |  |  | 91  | %
|Electronic Security             |  |                    | 24,601 |            |                   |  | 32  |                   |            |   | 24,349   |  |  |            | 23  |   |          |   | 10,559  |  |  |  | 7   |  
|Environmental Safety & Security |  |                    | 1,523  |            |                   |  | 2   |                   |            |   | 1,744    |  |  |            | 2   |   |          |   | 1,998   |  |  |  | 1   |  
|Software, Training & Simulation |  |                    | 658    |            |                   |  | 1   |                   |            |   | 498      |  |  |            |    |   |          |   | 1,170   |  |  |  | 1   |  
|                                |  |                    |        |            |                   |  |     |                   |            |   |          |  |  |            |     |   |          |  
|                                |  | $                  | 77,273 |            |                   |  | 100 | %                 |            | $ | 107,795  |  |  |            | 100 | % |          | $ | 149,207 |  |  |  | 100 | %
|                                |  |                    |        |            |                   |  |     |                   |            |   |          |  |  |            |     |   |          |  



Liquidity and Capital Resources


American Jobs Creation Act of 2004.






Balance Sheet.




27



---



##### 

















Cash Flows.


|                                                    |  |                                 |         |   |      |   |        |      |  |   |         |  
|--------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                    |  | For the Years Ended December 31 |        
|                                                    |  |                                 |        
|                                                    |  | 2004                            |         |   | 2003 |   |        | 2002 | 
|                                                    |  |                                 |         |   |      |   |        |      | 
|Net cash provided by operating activities           |  | $                               | 3,987   |   |      | $ | 30,691 |      |  | $ | 243     |  
|Net cash used in investing activities               |  |                                 | (7,998  | ) |      |   | (6,342 | )    |  |   | (10,100 | )
|Net cash provided by (used in) financing activities |  |                                 | (12,869 | ) |      |   | 536    |      |  |   | 11,353  |  

Operating Activities.


28



---



##### 





Investing Activities.


Financing Activities.


Allied.


MECAR.






29



---



##### 





VSK Group.


Other Subsidiaries.


Contractual Obligations and Commercial Commitments.




|                             |                               |                                         |        |             |      |   |        |       |  |       |       |       |           |         |     |       |  |   |       |       | 
|---------------------------- | ----------------------------- | --------------------------------------- | ------ | ----------- | ---- | - | ------ | ----- |  | ----- | ----- | ----- | --------- | ------- | --- | ----- |  | - | ----- | ----- | 
|                             |                               | Payments due by period (amount in 000s) |       
|                             |                               |                                         |       
|                             |                               |                                         |        | Less than 1 |      |   | 2  3  |       |  | 4  5 |       |       | More than |        
|Contractual Obligations      |                               | Total                                   |        |             | year |   |        | years |  |       | years |       |           | 5 years |    
|                             |                               |                                         |        |             |      |   |        |       |  |       |       |       |           |         |    
|Long-Term Debt Obligations   |                               | $                                       | 1,971  |             |      | $ | 204    |       |  | $     | 358   |       |           | $       | 89  |       |  | $ | 1,320 |      
|Capital Lease Obligations    |                               |                                         | 7,202  |             |      |   | 2,529  |       |  |       | 3,842 |       |           |         | 831 |       |  |   |      |      
|Convertible Debenture        |                               |                                         | 2,231  |             |      |   | 2,231  |       |  |       |      |       |           |         |    |       |  |   |      |      
|Operating Leases             |                               |                                         | 1,954  |             |      |   | 394    |       |  |       | 824   |       |           |         | 736 |       |  |   |      |      
|Purchase Obligations         |                               |                                         |       |             |      |   |       |       |  |       |      |       |           |         |    |       |  |   |      |      
|                             |                               |                                         |        |             |      |   |        |       |  |       |       |       |           |         |    
|                             | Total Contractual Obligations |                                         | $      | 13,358      |      |   | $      | 5,358 |  |       | $     | 5,024 |           |         | $   | 1,656 |  |   | $     | 1,320 | 
|                             |                               |                                         |        |             |      |   |        |       |  |       |       |       |           |         |    
|Commercial Commitments Total |                               |                                         |        |             |      |   |        |       |  |       |       |       |           |         |     |       |  |   |       |      
|Bank guarantees              |                               | $                                       | 26,781 |             |      | $ | 26,781 |       |  |       |      |       |           |         |    |       |  |   |      |      
|                             |                               |                                         |        |             |      |   |        |       |  |       |       |       |           |         |    

Future Liquidity.






Off-Balance Sheet Arrangements.


30



---



##### 



Recent Accounting Pronouncements.


Critical Accounting Policies








| |   |                                                            
| | - | -----------------------------------------------------------
| |  | Revenue recognition via the percentage of completion method
|
| |  | Goodwill and intangible asset valuation                    
|
| |  | Inventory reserves and allowance for doubtful accounts     
|
| |  | Derivative instruments                                     
|
| |  | Valuation of deferred income taxes and income tax reserves.

Revenue Recognition via the Percentage of Completion
Method.






31



---



##### 



Goodwill and intangible asset valuation.






Inventory reserves and allowance for doubtful accounts.


Derivatives Instruments. Accounting
for Derivative Instruments and Hedging Activities


Valuation of deferred income taxes and income tax
reserves.


32



---



##### 







Forward-Looking Statements








| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | substantial reliance on MECARs principal customers to
    continue to acquire products on a regular basis;                                                                                       
|
| |  | the cyclical nature of the Companys military business;                                                                                                                                           
|
| |  | rapid technological developments and changes and the
    Companys ability to continue to introduce competitive new
    products and services on a timely, cost effective basis;                  
|
| |  | the ability of the Company to successfully continue to expand
    its business base;                                                                                                              
|
| |  | the ability of the Companys acquired businesses to mature
    and meet performance expectations;                                                                                                 
|
| |  | the mix of products/services;                                                                                                                                                                     
|
| |  | domestic and foreign governmental fiscal affairs and public
    policy changes which may affect the level of purchases made by
    customers;                                                     
|
| |  | changes in environmental and other domestic and foreign
    governmental regulations;                                                                                                             
|
| |  | general risks associated with doing business outside the United
    States, including, without limitation, import duties, tariffs,
    quotas and political and economic instability;             
|
| |  | the effects of terrorist actions on business activities,
    customer orders and cancellations, and the United States and
    international governments responses to these terrorist
    actions;
|
| |  | changes in government regulations;                                                                                                                                                                
|
| |  | liability and other claims asserted against us;                                                                                                                                                   
|
| |  | the ability to attract and retain qualified personnel; and                                                                                                                                        
|
| |  | continued availability of financing, financial instruments and
    financial resources in the amounts, at the times, and on the
    terms required to support the Companys future business.      



33



---



##### 





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

market
risk, credit risk




Interest Rate Sensitivity.


Exchange Rate Sensitivity.






|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data





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



34



---



##### 





|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Disclosure Controls and Procedures




Managements Report on Internal Control over Financial
Reporting








|         |                  
|-------- | -----------------
|Item 9B. | Other Information



35



---



##### 



PART III






|         |                                           
|-------- | ------------------------------------------
|Item 10. | Directors and Executive Officers of Allied



http://www.allieddefensegroup.com




| |                                      
| | -------------------------------------
| | Allied Defense Group, Inc.           
| | 8000 Towers Crescent Drive, Suite 260
| | Vienna, Virginia 22182               
| | (703) 847-5268                       
| | Attn: Investor Relations             





|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation





|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters





|         |                                                
|-------- | -----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions.





|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accounting Fees and Service.



36



---



##### 



PART IV


Item 15.     Exhibits and
Financial Statement Schedules


|            |       |  |                         |                                                                                                                                                                      
|----------- | ----- |  | ----------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |       |  | Description of Exhibits
|            |       |  |                        
|            | 3.1   |  |                         | Certificate of Incorporation, as amended (Incorporated by
    reference from Form 10-Q filed in August 2002).                                                        
|            | 3.2   |  |                         | Amended and Restated By-Laws (Incorporated by reference from
    Form 10-Q filed in August 2004).                                                                    
|            | 3.3   |  |                         | Rights Agreement between Allied and Mellon Investor Services,
    LLC (Incorporated by reference from Form 8-K filed in June
    2001).                              
|            | 10.1  |  |                         | Employment Agreement between Allied and John G. Meyer, Jr.
    (Incorporated by reference from Form 8-K filed in March 2001 and
    Form 8-K filed in August 2001).  
|            | 10.2  |  |                         | Employment Agreement letter amendments between Allied and John
    G. Meyer, Jr. (Incorporated by reference from Form 10-Q
    filed in August 2004).                
|            | 10.3  |  |                         | Employment Agreement between Allied and Charles A. Hasper
    (Incorporated by reference from Form 8-K filed in August
    2001).                                    
|            | 10.4  |  |                         | Employment Agreement letter amendment between Allied and Charles
    A. Hasper (Incorporated by reference from Form 10-Q filed
    in August 2004).                  
|            | 10.5  |  |                         | Employment Agreement between Allied and Monte L. Pickens
    (Incorporated by reference from Form 8-K filed in April
    2003).                                      
|            | 10.6  |  |                         | Employment Agreement letter amendment between Allied and Monte
    L. Pickens (Incorporated by reference from Form 10-Q filed
    in August 2004).                   
|            | 10.7  |  |                         | Employment Agreement between Allied and Wayne F. C. Hosking, Jr.
    (Incorporated by reference from Form 8-K filed in April
    2004).                              
|            | 10.8  |  |                         | Employment Agreement between Allied and John J. Marcello
    (Incorporated by reference from Form 10-Q filed in August
    2004).                                    
|            | 10.9  |  |                         | 2001 Equity Incentive Plan, as amended (Incorporated by
    reference from Proxy Statements filed in April 2001 and April
    2002).                                 
|            | 10.10 |  |                         | 8% Convertible Debenture, Series A and related documents
    (Incorporated by reference from Form 8-K filed in July
    2002).                                       
|            | 10.11 |  |                         | Credit Agreement for MECAR S.A. (Incorporated by reference from
    Form 10-Q filed in August 2002).                                                                 
|            | 10.12 |  |                         | Award/Contract dated as of March 1, 2002, by and between MECAR
    S.A. and U.S. Government (Incorporated by reference from
    Form 10-Q filed in August 2002).     
|            | 10.13 |  |                         | Employee Stock Purchase Plan, as amended (Incorporated by
    reference from Form 10-Q filed in November 2002).                                                      
|            | 10.14 |  |                         | Lease Agreement, as amended (Incorporated by reference from
    Form 10-Q filed in November 2002).                                                                   
|            | 10.15 |  |                         | Form of Indemnity Agreement for Directors and Executive Officers
    (Incorporated by reference from Form 10-Q filed in November
    2002).                          
|            | 10.16 |  |                         | International Distribution Agreement (Incorporated by reference
    from Form  10-Q filed in November 2002).                                                         
|            | 10.17 |  |                         | Deferred Compensation Plan for Non-Employee Directors
    (Incorporated by reference from Form 10-Q filed in August
    2004).                                       
|            | 10.18 |  |                         | Loan and Security Agreement among Wilton Funding, LLC and Allied
    and certain of its subsidiaries (Incorporated by reference from
    Form 8-K filed in June 2004)
|            | 10.19 |  |                         | Amendment to Loan and Security Agreement among Wilton Funding,
    LLC and Allied and certain of its subsidiaries                                                    
|            | 10.20 |  |                         | Stock Option Agreement-Employee Form (Incorporated by reference
    from Form 10-Q filed in November 2004)                                                           

37



---



##### 



|            |       |  |                         |                                                                                                                           
|----------- | ----- |  | ----------------------- | --------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |       |  | Description of Exhibits
|            |       |  |                        
|            | 10.21 |  |                         | Directors Stock Option Agreement-Director Form
    (Incorporated by reference from Form 10-Q filed in November
    2004) 
|            | 10.22 |  |                         | Summary of Annual Compensation of Board Members                                                                           
|            | 21    |  |                         | List of Subsidiaries                                                                                                      
|            | 23    |  |                         | Consent of Independent Registered Public Accounting Firm                                                                  
|            | 31.1  |  |                         | Certification of Chief Executive Officer Pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002                    
|            | 31.2  |  |                         | Certification of Chief Financial Officer Pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002                    
|            | 32    |  |                         | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
    Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

38



---



##### 



Reports on Form 8-K




SIGNATURES






| |                                   
| | ----------------------------------
| | The Allied Defense Group,
    Inc.



| |     |                       
| | --- | ----------------------
| | By: | /s/ John G. Meyer, Jr.

| |                                      
| | -------------------------------------
| |                                      
| | John G. Meyer, Jr.                   
| | Chief Executive Officer and President





|                                                        |  |                                             |  |                                       |  |                     
|------------------------------------------------------- |  | ------------------------------------------- |  | ------------------------------------- |  | --------------------
|Signature                                               |  | Title                                       |  | Date                                 
|                                                        |  |                                             |  |                                      
|By:                                                     |  | /s/ Charles A. HasperCharles
    A. Hasper, |  | Chief Financial Officer and Treasurer |  | Date: March 31, 2005
|                                                       
|By:                                                     |  | /s/ Gresford B. GrayGresford
    B. Gray,   |  | Controller and Corporate Secretary    |  | Date: March 31, 2005
|                                                       
|**********                                             
|                                                       
|/s/ J. R. SculleyJ.
    R. Sculley                      |  | Director                                    |  | Date: March 31, 2005                 
|                                                       
|/s/ Clifford C. ChristClifford
    C. Christ            |  | Director                                    |  | Date: March 31, 2005                 
|                                                       
|/s/ Harry H. WarnerHarry
    H. Warner                  |  | Director                                    |  | Date: March 31, 2005                 
|                                                       
|/s/ Ronald H. GriffithRonald
    H. Griffith            |  | Director                                    |  | Date: March 31, 2005                 
|                                                       
|/s/ Gilbert F. DeckerGilbert
    F. Decker              |  | Director                                    |  | Date: March 31, 2005                 
|                                                       
|/s/ John G. Meyer, Jr.John
    G. Meyer, Jr.            |  | Director                                    |  | Date: March 31, 2005                 
|                                                       
|/s/ J.H. Binford Peay,
    IIIJ.H
    Binford Peay, III |  | Director                                    |  | Date: March 31, 2005                 

39



---



##### 



SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FINANCIAL STATEMENTS AND SCHEDULES


December 31, 2004


FORMING A PART OF


ANNUAL REPORT PURSUANT TO


THE SECURITIES EXCHANGE ACT OF 1934


FORM 10-K


OF


The Allied Defense Group Inc.


F-1



---



##### 



THE ALLIED DEFENSE GROUP INC.


INDEX TO FINANCIAL STATEMENTS AND SCHEDULES


|                                                                                                                      |                                                                |      |      |      | 
|--------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ---- | ---- | ---- | 
|                                                                                                                      |                                                                | Page |     
|                                                                                                                      |                                                                |      |     
|Managements Report on Internal Controls over Financial
    Reporting                                                 |                                                                |      | F-3  |     
|Report of Independent Registered Public Accounting Firm                                                               |                                                                |      | F-4  |     
|Consolidated Balance Sheets at December 31, 2004
    and 2003                                                         |                                                                |      | F-7  |     
|Consolidated Statements of Earnings for each of the three years
    in the period ended December 31, 2004             |                                                                |      | F-9  |     
|Consolidated Statements of Stockholders Equity for each of
    the three years in the period ended December 31, 2004 |                                                                |      | F-10 |     
|Consolidated Statements of Cash Flows for each of the three
    years in the period ended December 31, 2004           |                                                                |      | F-11 |     
|Notes to Consolidated Financial Statements                                                                            |                                                                |      | F-12 |     
|Schedules as of and for the three years ended
    December 31, 2004                                                   |                                                                |      |      |     
|                                                                                                                      | Schedule I  Condensed Financial Information of
    Registrant |      |      | F-37 | 
|                                                                                                                      | Schedule II  Valuation and Qualifying Accounts                |      |      | F-40 | 

F-2



---



##### 



MANAGEMENTS REPORT ON INTERNAL CONTROLS OVER FINANCIAL
REPORTING
















|                                                                                          |  |                                                                                            
|----------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------
|/s/ Charles A. HasperCharles
    A. Hasper
    Chief Financial Officer
    March 31, 2005 |  | /s/ John G. Meyer, Jr.John
    G. Meyer, Jr.
    Chief Executive Officer
    March 31, 2005

F-3



---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


















F-4



---



##### 











| |                       
| | ----------------------
| | /s/ Grant Thornton LLP





F-5



---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






















| |                       
| | ----------------------
| | /s/ Grant Thornton LLP





F-6



---



##### 



THE ALLIED DEFENSE GROUP, INC.


CONSOLIDATED BALANCE SHEETS


|                                   |                                                     |                      |         |          |         |   |         |        |         | 
|---------------------------------- | --------------------------------------------------- | -------------------- | ------- | -------- | ------- | - | ------- | ------ | ------- | 
|                                   |                                                     | December 31,         |        
|                                   |                                                     |                      |        
|                                   |                                                     | 2004                 |         |          | 2003    |  
|                                   |                                                     |                      |         |          |         |  
|                                   |                                                     |                      |         | Restated |        
|                                   |                                                     | (In Thousands of     |        
|                                   |                                                     | Dollars)             |        
|ASSETS                            
|Current Assets                     |                                                     |                      |         |          |         |   |         |       
|                                   | Cash                                                |                      | $       | 27,940   |         |   | $       | 43,377 |        
|                                   | Restricted cash                                     |                      |         | 11,757   |         |   |         | 15,937 |        
|                                   | Accounts receivable, net                            |                      |         | 31,946   |         |   |         | 33,404 |        
|                                   | Costs and accrued earnings on uncompleted contracts |                      |         | 52,745   |         |   |         | 60,516 |        
|                                   | Inventories, net                                    |                      |         | 17,161   |         |   |         | 12,068 |        
|                                   | Deferred tax asset                                  |                      |         | 1,058    |         |   |         | 1,016  |        
|                                   | Fair value of foreign exchange contracts            |                      |         | 1,195    |         |   |         | 6,900  |        
|                                   | Prepaid and other current assets                    |                      |         | 4,123    |         |   |         | 4,880  |        
|                                   |                                                     |                      |         |          |         |  
|                                   |                                                     | Total current assets |         |          | 147,925 |   |         |        | 178,098 | 
|                                  
|Property, Plant and Equipment, net |                                                     |                      | 30,294  |          |         |   | 24,615  |       
|                                  
|Other Assets                       |                                                     |                      |         |          |         |   |         |       
|                                   | Intangible assets, net                              |                      |         | 3,723    |         |   |         | 4,135  |        
|                                   | Goodwill                                            |                      |         | 14,401   |         |   |         | 13,718 |        
|                                   | Deferred tax asset, non-current                     |                      |         | 485      |         |   |         |       |        
|                                   | Other assets                                        |                      |         | 528      |         |   |         | 378    |        
|                                   |                                                     |                      |         |          |         |  
|                                   |                                                     |                      | 19,137  |          |         |   | 18,231  |       
|                                   |                                                     |                      |         |          |         |  
|                                   |                                                     | $                    | 197,356 |          |         | $ | 220,944 |       
|                                   |                                                     |                      |         |          |         |  



F-7



---



##### 



THE ALLIED DEFENSE GROUP, INC.


CONSOLIDATED BALANCE SHEETS  Continued


|                                     |                                                                                                                                                |                           |         |          |        |   |         |        |        | 
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------- | -------- | ------ | - | ------- | ------ | ------ | 
|                                     |                                                                                                                                                | December 31,              |        
|                                     |                                                                                                                                                |                           |        
|                                     |                                                                                                                                                | 2004                      |         |          | 2003   |  
|                                     |                                                                                                                                                |                           |         |          |        |  
|                                     |                                                                                                                                                |                           |         | Restated |       
|                                     |                                                                                                                                                | (Thousands of Dollars)    |        
|LIABILITIES AND STOCKHOLDERS EQUITY
|                                    
|Current Liabilities                  |                                                                                                                                                |                           |         |          |        |   |         |       
|                                     | Notes payable                                                                                                                                  |                           | $       | 54       |        |   | $       | 14,200 |       
|                                     | Current maturities of long-term debt                                                                                                           |                           |         | 2,733    |        |   |         | 2,709  |       
|                                     | Convertible subordinated debenture, current                                                                                                    |                           |         | 2,231    |        |   |         | 5,250  |       
|                                     | Accounts payable                                                                                                                               |                           |         | 34,933   |        |   |         | 53,284 |       
|                                     | Accrued liabilities                                                                                                                            |                           |         | 9,374    |        |   |         | 7,594  |       
|                                     | Customer deposits                                                                                                                              |                           |         | 8,708    |        |   |         | 4,938  |       
|                                     | Deferred compensation                                                                                                                          |                           |         | 1,612    |        |   |         |       |       
|                                     | Income taxes                                                                                                                                   |                           |         | 811      |        |   |         | 906    |       
|                                     |                                                                                                                                                |                           |         |          |        |  
|                                     |                                                                                                                                                | Total current liabilities |         |          | 60,456 |   |         |        | 88,881 | 
|                                    
|Long-Term Obligations                |                                                                                                                                                |                           |         |          |        |   |         |       
|                                     | Long-term debt, less current maturities and unamortized discount                                                                               |                           |         | 6,440    |        |   |         | 4,902  |       
|                                     | Convertible subordinated debenture, less current maturities and
    unamortized discount                                                       |                           |         |         |        |   |         | 2,156  |       
|                                     | Deferred compensation                                                                                                                          |                           |         | 377      |        |   |         | 1,334  |       
|                                     | Deferred taxes                                                                                                                                 |                           |         |         |        |   |         | 5,533  |       
|                                     |                                                                                                                                                |                           |         |          |        |  
|                                     |                                                                                                                                                |                           | 6,817   |          |        |   | 13,925  |       
|Contingencies and Commitments        |                                                                                                                                                |                           |        |          |        |   |        |       
|                                    
|Stockholders Equity                 |                                                                                                                                                |                           |         |          |        |   |         |       
|                                     | Preferred stock, no par value; authorized, 1,000,000 shares;
    none issued                                                                   |                           |         |         |        |   |         |       |       
|                                     | Common stock, par value, $.10 per share; authorized 30,000,000
    shares; issued and outstanding, 5,601,101 in 2004 and 5,551,373
    in 2003 |                           |         | 560      |        |   |         | 555    |       
|                                     | Capital in excess of par value                                                                                                                 |                           |         | 26,669   |        |   |         | 25,891 |       
|                                     | Retained earnings                                                                                                                              |                           |         | 78,013   |        |   |         | 75,495 |       
|                                     | Accumulated other comprehensive income (loss)                                                                                                  |                           |         | 24,841   |        |   |         | 16,197 |       
|                                     |                                                                                                                                                |                           |         |          |        |  
|                                     |                                                                                                                                                |                           | 130,083 |          |        |   | 118,138 |       
|                                     |                                                                                                                                                |                           |         |          |        |  
|                                     |                                                                                                                                                | $                         | 197,356 |          |        | $ | 220,944 |       
|                                     |                                                                                                                                                |                           |         |          |        |  



F-8



---



##### 



THE ALLIED DEFENSE GROUP, INC.


CONSOLIDATED STATEMENTS OF EARNINGS


|                                          |                            |                                  |                              |           |       |       |          |           |        |       |         |           |        |        | 
|----------------------------------------- | -------------------------- | -------------------------------- | ---------------------------- | --------- | ----- | ----- | -------- | --------- | ------ | ----- | ------- | --------- | ------ | ------ | 
|                                          |                            | Years ended December 31,         |                             
|                                          |                            |                                  |                             
|                                          |                            | 2004                             |                              |           | 2003  |       |          | 2002      |       
|                                          |                            |                                  |                              |           |       |       |          |           |       
|                                          |                            |                                  |                              | Restated  |       |       | Restated |          
|                                          |                            | (In Thousands of Dollars, except |                             
|                                          |                            | per share data)                  |                             
|Revenue                                   |                            | $                                | 146,900                      |           |       | $     | 154,235  |           |        | $     | 145,274 |          
|                                         
|Cost and expenses                         |                            |                                  |                              |           |       |       |          |           |        |       |         |          
|                                          | Cost of sales              |                                  |                              | 104,850   |       |       |          | 114,800   |        |       |         | 90,430    |       
|                                          | Selling and administrative |                                  |                              | 29,173    |       |       |          | 23,998    |        |       |         | 17,497    |       
|                                          | Research and development   |                                  |                              | 6,695     |       |       |          | 4,532     |        |       |         | 1,629     |       
|                                          |                            |                                  |                              |           |       |       |          |           |       
|                                          |                            |                                  | 140,718                      |           |       |       | 143,330  |           |        |       | 109,556 |          
|                                          |                            |                                  |                              |           |       |       |          |           |       
|                                          |                            | Operating income                 |                              |           | 6,182 |       |          |           | 10,905 |       |         |           | 35,718 |       
|                                         
|Other income (expense)                    |                            |                                  |                              |           |       |       |          |           |        |       |         |          
|                                          | Interest income            |                                  |                              | 549       |       |       |          | 459       |        |       |         | 506       |       
|                                          | Interest expense           |                                  |                              | (2,441    | )     |       |          | (2,490    | )      |       |         | (2,087    | )     
|                                          | Other  net                |                                  |                              | (812      | )     |       |          | 255       |        |       |         | 1,300     |       
|                                          |                            |                                  |                              |           |       |       |          |           |       
|                                          |                            |                                  | (2,704                       | )         |       |       | (1,776   | )         |        |       | (281    | )        
|                                          |                            |                                  |                              |           |       |       |          |           |       
|                                          |                            |                                  | Earnings before income taxes |           |       | 3,478 |          |           |        | 9,129 |         |           |        | 35,437 | 
|Income tax expense                        |                            |                                  | 960                          |           |       |       | 5,201    |           |        |       | 14,543  |          
|                                          |                            |                                  |                              |           |       |       |          |           |       
|                                          |                            | NET EARNINGS                     |                              | $         | 2,518 |       |          | $         | 3,928  |       |         | $         | 20,894 |       
|                                          |                            |                                  |                              |           |       |       |          |           |       
|                                         
|Earnings per share                        |                            |                                  |                              |           |       |       |          |           |        |       |         |          
|                                          | Basic                      |                                  | $                            | 0.45      |       |       | $        | 0.71      |        |       | $       | 3.94      |       
|                                          | Diluted                    |                                  | $                            | 0.42      |       |       | $        | 0.66      |        |       | $       | 3.73      |       
|                                         
|Weighted average number of common shares: |                            |                                  |                              |           |       |       |          |           |        |       |         |          
|                                          | Basic                      |                                  |                              | 5,568,183 |       |       |          | 5,496,786 |        |       |         | 5,304,998 |       
|                                          |                            |                                  |                              |           |       |       |          |           |       
|                                          | Diluted                    |                                  |                              | 5,991,101 |       |       |          | 5,970,119 |        |       |         | 5,658,274 |       
|                                          |                            |                                  |                              |           |       |       |          |           |       



F-9



---



##### 



THE ALLIED DEFENSE GROUP, INC.


CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


|                                                   |                                                          |                                                  |                            |              |   |      |           |         |             |              |     |          |          |   |               |               |   |               |        |        |       |   |         |      |        |   |         |       |   |        | 
|-------------------------------------------------- | -------------------------------------------------------- | ------------------------------------------------ | -------------------------- | ------------ | - | ---- | --------- | ------- | ----------- | ------------ | --- | -------- | -------- | - | ------------- | ------------- | - | ------------- | ------ | ------ | ----- | - | ------- | ---- | ------ | - | ------- | ----- | - | ------ | 
|                                                   |                                                          | Years ended December 31, 2004, 2003 and 2002     |                           
|                                                   |                                                          |                                                  |                           
|                                                   |                                                          |                                                  |                            | Common Stock |   |      |           |         | Accumulated |              |     |         
|                                                   |                                                          | Preferred                                        |                            |              |   |      | Capital   |         |             |              |     | other    |          |   | Total         |              
|                                                   |                                                          | Stock, no                                        |                            |              |   | $.10 |           |         | in excess   |              |     | Retained |          |   | comprehensive |               |   | stockholders |       
|                                                   |                                                          | par value                                        |                            | Shares       |   |      | par value |         |             | of par value |     |          | earnings |   |               | (loss) income |   |               | Equity |       
|                                                   |                                                          |                                                  |                            |              |   |      |           |         |             |              |     |          |          |   |               |               |   |               |        |       
|                                                   |                                                          | (In Thousands of Dollars, except per share data) |                           
|Balance at January 1, 2002, as previously reported |                                                          | $                                                |                           |              |   |      | 5,129,179 |         |             | $            | 513 |          |          | $ | 17,273        |               |   | $             | 50,673 |        |       | $ | (9,810  | )    |        | $ | 58,649  |      
|                                                   | Derivative adjustment                                    |                                                  |                            |              |   |      |           |         |             |              |     |          |          |   |               |               |   |               |        |        |       |   |         | (202 | )      |   |         | (202  | )
|Balance at January 1, 2002, as restated            |                                                          | $                                                |                           |              |   |      | 5,129,179 |         |             | $            | 513 |          |          | $ | 17,273        |               |   | $             | 50,673 |        |       | $ | (10,012 | )    |        | $ | 58,447  |      
|                                                   | Common stock awards                                      |                                                  |                            |             |   |      |           | 35,964  |             |              |     | 3        |          |   |               | 785           |   |               |        |        |       |   |         |      |        |   |         | 788   |  
|                                                   | Common stock issued                                      |                                                  |                            |             |   |      |           | 293,070 |             |              |     | 29       |          |   |               | 6,444         |   |               |        |        |       |   |         |      |        |   |         | 6,473 |  
|                                                   | Employee stock purchase plan purchases                   |                                                  |                            |             |   |      |           | 9,100   |             |              |     | 1        |          |   |               | 168           |   |               |        |        |       |   |         |      |        |   |         | 169   |  
|                                                   | Exercise stock options                                   |                                                  |                            |             |   |      |           | 7,500   |             |              |     | 1        |          |   |               | 61            |   |               |        |        |       |   |         |      |        |   |         | 62    |  
|                                                   | Warrants issued                                          |                                                  |                            |             |   |      |           |        |             |              |     |         |          |   |               | 140           |   |               |        |        |       |   |         |      |        |   |         | 140   |  
|                                                   | Comprehensive income Net earnings for the year, restated |                                                  |                            |             |   |      |           |        |             |              |     |         |          |   |               |              |   |               |        | 20,894 |       |   |         |      |        |   |         |      |  
|                                                   |                                                          | Currency translation adjustment                  |                            |              |  |      |           |         |            |              |     |          |         |   |               |               |  |               |        |        |       |   |         |      | 10,870 |   |         |       |  |       
|                                                   |                                                          |                                                  | Total comprehensive income |              |   |     |           |         |             |             |     |          |          |  |               |               |   |              |        |        |       |  |         |      |        |  |         |       |   | 31,764 | 
|                                                   |                                                          |                                                  |                            |              |   |      |           |         |             |              |     |          |          |   |               |               |   |               |        |        |      
|Balance at December 31, 2002, as restated          |                                                          | $                                                |                           |              |   |      | 5,474,813 |         |             | $            | 547 |          |          | $ | 24,871        |               |   | $             | 71,567 |        |       | $ | 858     |      |        | $ | 97,843  |      
|                                                   | Common stock awards                                      |                                                  |                            |              |   |      |           | 6,000   |             |              |     | 1        |          |   |               | 110           |   |               |        |        |       |   |         |      |        |   |         | 111   |  
|                                                   | Employee stock purchase plan purchases                   |                                                  |                            |              |   |      |           | 10,560  |             |              |     | 1        |          |   |               | 151           |   |               |        |        |       |   |         |      |        |   |         | 152   |  
|                                                   | Exercise stock options                                   |                                                  |                            |              |   |      |           | 60,000  |             |              |     | 6        |          |   |               | 759           |   |               |        |        |       |   |         |      |        |   |         | 765   |  
|                                                   | Comprehensive income Net earnings for the year, restated |                                                  |                            |              |   |      |           |         |             |              |     |          |          |   |               |               |   |               |        | 3,928  |       |   |         |      |        |   |         |       |  
|                                                   |                                                          | Currency translation adjustment                  |                            |              |   |      |           |         |             |              |     |          |          |   |               |               |   |               |        |        |       |   |         |      | 15,339 |   |         |       |   |       
|                                                   |                                                          |                                                  | Total comprehensive income |              |   |     |           |         |             |             |     |          |          |  |               |               |   |              |        |        |       |  |         |      |        |  |         |       |   | 19,267 | 
|                                                   |                                                          |                                                  |                            |              |   |      |           |         |             |              |     |          |          |   |               |               |   |               |        |        |      
|Balance at December 31, 2003, as restated          |                                                          | $                                                |                           |              |   |      | 5,551,373 |         |             | $            | 555 |          |          | $ | 25,891        |               |   | $             | 75,495 |        |       | $ | 16,197  |      |        | $ | 118,138 |      
|                                                   | Common stock awards                                      |                                                  |                            |              |   |      |           | 5,753   |             |              |     | 1        |          |   |               | 105           |   |               |        |        |       |   |         |      |        |   |         | 106   |  
|                                                   | Employee stock purchase plan purchases                   |                                                  |                            |              |   |      |           | 16,241  |             |              |     | 1        |          |   |               | 259           |   |               |        |        |       |   |         |      |        |   |         | 260   |  
|                                                   | Exercise stock options                                   |                                                  |                            |              |   |      |           | 27,734  |             |              |     | 3        |          |   |               | 346           |   |               |        |        |       |   |         |      |        |   |         | 349   |  
|                                                   | Warrants issued                                          |                                                  |                            |              |   |      |           |        |             |              |     |         |          |   |               | 68            |   |               |        |        |       |   |         |      |        |   |         | 68    |  
|                                                   | Comprehensive income                                     |                                                  |                            |              |   |      |           |         |             |              |     |          |          |   |               |               |   |               |        |        |       |   |         |      |        |   |         |       |  
|                                                   |                                                          | Net earnings for the year                        |                            |              |   |      |           |         |             |              |     |          |          |   |               |               |   |               |        |        | 2,518 |   |         |      |        |   |         |       |   |       
|                                                   |                                                          | Currency translation adjustment                  |                            |              |   |      |           |         |             |              |     |          |          |   |               |               |   |               |        |        |       |   |         |      | 8,644  |   |         |       |   |       
|                                                   |                                                          |                                                  | Total comprehensive income |              |   |     |           |         |             |             |     |          |          |  |               |               |   |              |        |        |       |  |         |      |        |  |         |       |   | 11,162 | 
|                                                   |                                                          |                                                  |                            |              |   |      |           |         |             |              |     |          |          |   |               |               |   |               |        |        |      
|Balance at December 31, 2004                       |                                                          | $                                                |                           |              |   |      | 5,601,101 |         |             | $            | 560 |          |          | $ | 26,669        |               |   | $             | 78,013 |        |       | $ | 24,841  |      |        | $ | 130,083 |      
|                                                   |                                                          |                                                  |                            |              |   |      |           |         |             |              |     |          |          |   |               |               |   |               |        |        |      



F-10



---



##### 



THE ALLIED DEFENSE GROUP, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                              |                                                                                                                                    |                                                                                               |                                                    |                                                     |        |         |          |        |       |        |         |        |         |         |         |  
|------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------- | --------------------------------------------------- | ------ | ------- | -------- | ------ | ----- | ------ | ------- | ------ | ------- | ------- | ------- | -
|                                                              |                                                                                                                                    | Years ended December 31,                                                                      |                                                   
|                                                              |                                                                                                                                    |                                                                                               |                                                   
|                                                              |                                                                                                                                    | 2004                                                                                          |                                                    |                                                     | 2003   |         |          | 2002   |      
|                                                              |                                                                                                                                    |                                                                                               |                                                    |                                                     |        |         |          |        |      
|                                                              |                                                                                                                                    |                                                                                               |                                                    | Restated                                            |        |         | Restated |       
|                                                              |                                                                                                                                    | (In Thousands of Dollars)                                                                     |                                                   
|Cash flows from operating activities                          |                                                                                                                                    |                                                                                               |                                                    |                                                     |        |         |          |        |       |        |         |       
|                                                              | Net earnings for the year                                                                                                          |                                                                                               | $                                                  | 2,518                                               |        |         | $        | 3,928  |       |        | $       | 20,894 |        
|                                                              | Adjustments to reconcile net earnings to net cash from (used in)
    continuing operating activities Depreciation and amortization |                                                                                               |                                                    | 4,551                                               |        |         |          | 4,037  |       |        |         | 3,322  |        
|                                                              |                                                                                                                                    | Unrealized losses (gains) on forward contracts                                                |                                                    |                                                     | 4,217  |         |          |        | 1,233 |        |         |        | (17,165 | )      
|                                                              |                                                                                                                                    | Gain on sale of fixed assets                                                                  |                                                    |                                                     | (44    | )       |          |        | (18   | )      |         |        |        |        
|                                                              |                                                                                                                                    | Deferred income taxes                                                                         |                                                    |                                                     | (1,584 | )       |          |        | 3,384 |        |         |        | 6,629   |        
|                                                              |                                                                                                                                    | Provision for estimated losses on contracts                                                   |                                                    |                                                     | 661    |         |          |        | 255   |        |         |        | 282     |        
|                                                              |                                                                                                                                    | Amortization of debt issue costs and conversion feature                                       |                                                    |                                                     | 179    |         |          |        | 243   |        |         |        |        |        
|                                                              |                                                                                                                                    | Common stock awards                                                                           |                                                    |                                                     | 106    |         |          |        | 111   |        |         |        | 651     |        
|                                                              |                                                                                                                                    | Changes in assets and liabilities                                                             |                                                    |                                                     |        |         |          |        |       |        |         |        |         |        
|                                                              |                                                                                                                                    |                                                                                               | Accounts receivable                                |                                                     |        | (10,246 | )        |        |       | 2,305  |         |        |         | (2,572  | )      
|                                                              |                                                                                                                                    |                                                                                               | Cost and accrued earnings on uncompleted contracts |                                                     |        | 25,635  |          |        |       | (830   | )       |        |         | (29,570 | )      
|                                                              |                                                                                                                                    |                                                                                               | Inventories                                        |                                                     |        | (4,090  | )        |        |       | (1,392 | )       |        |         | (3,309  | )      
|                                                              |                                                                                                                                    |                                                                                               | Prepaid expenses and other assets                  |                                                     |        | 1,275   |          |        |       | (1,609 | )       |        |         | 532     |        
|                                                              |                                                                                                                                    |                                                                                               | Accounts payable and accrued liabilities           |                                                     |        | (22,442 | )        |        |       | 21,488 |         |        |         | 18,801  |        
|                                                              |                                                                                                                                    |                                                                                               | Customer deposits                                  |                                                     |        | 3,100   |          |        |       | (928   | )       |        |         | 993     |        
|                                                              |                                                                                                                                    |                                                                                               | Deferred compensation                              |                                                     |        | 521     |          |        |       | 672    |         |        |         | 300     |        
|                                                              |                                                                                                                                    |                                                                                               | Income taxes                                       |                                                     |        | (370    | )        |        |       | (2,188 | )       |        |         | 455     |        
|                                                              |                                                                                                                                    |                                                                                               |                                                    |                                                     |        |         |          |        |      
|                                                              |                                                                                                                                    |                                                                                               | 1,469                                              |                                                     |        |         | 26,763   |        |       |        | (20,651 | )     
|                                                              |                                                                                                                                    |                                                                                               |                                                    |                                                     |        |         |          |        |      
|                                                              |                                                                                                                                    |                                                                                               |                                                    | Net cash provided by operating activities           |        |         | 3,987    |        |       |        | 30,691  |        |         |         | 243     |  
|Cash flows used in investing activities                       |                                                                                                                                    |                                                                                               |                                                    |                                                     |        |         |          |        |       |        |         |       
|                                                              | Capital expenditures                                                                                                               |                                                                                               |                                                    | (7,517                                              | )      |         |          | (6,362 | )     |        |         | (6,290 | )      
|                                                              | Acquisitions, net of cash acquired                                                                                                 |                                                                                               |                                                    | (525                                                | )      |         |          |       |       |        |         | (3,810 | )      
|                                                              | Proceeds from sale of fixed assets                                                                                                 |                                                                                               |                                                    | 44                                                  |        |         |          | 20     |       |        |         |       |        
|                                                              |                                                                                                                                    |                                                                                               |                                                    |                                                     |        |         |          |        |      
|                                                              |                                                                                                                                    |                                                                                               |                                                    | Net cash used in investing activities               |        |         | (7,998   | )      |       |        | (6,342  | )      |         |         | (10,100 | )
|Cash flows from (used in) financing activities                |                                                                                                                                    |                                                                                               |                                                    |                                                     |        |         |          |        |       |        |         |       
|                                                              | Net (decrease) increase in short-term borrowings                                                                                   |                                                                                               |                                                    | (14,013                                             | )      |         |          | 5,780  |       |        |         | 3,245  |        
|                                                              | Proceeds from convertible subordinated debenture                                                                                   |                                                                                               |                                                    |                                                    |        |         |          |       |       |        |         | 7,500  |        
|                                                              | Principal payments on long-term debt and debenture                                                                                 |                                                                                               |                                                    | (8,279                                              | )      |         |          | (2,343 | )     |        |         | (1,486 | )      
|                                                              | Proceeds from issuance of long-term debt                                                                                           |                                                                                               |                                                    | 4,781                                               |        |         |          | 1,989  |       |        |         | 2,796  |        
|                                                              | Debt issue costs                                                                                                                   |                                                                                               |                                                    | (860                                                | )      |         |          |       |       |        |         | (158   | )      
|                                                              | Proceeds from stock purchases                                                                                                      |                                                                                               |                                                    | 261                                                 |        |         |          | 152    |       |        |         | 169    |        
|                                                              | Option exercises                                                                                                                   |                                                                                               |                                                    | 348                                                 |        |         |          | 765    |       |        |         | 62     |        
|                                                              | Restricted cash and restricted deposits                                                                                            |                                                                                               |                                                    | 4,893                                               |        |         |          | (5,807 | )     |        |         | (775   | )      
|                                                              |                                                                                                                                    |                                                                                               |                                                    |                                                     |        |         |          |        |      
|                                                              |                                                                                                                                    |                                                                                               |                                                    | Net cash (used in) provided by financing activities |        |         | (12,869  | )      |       |        | 536     |        |         |         | 11,353  |  
|Effects of exchange rates on cash                             |                                                                                                                                    |                                                                                               | 1,443                                              |                                                     |        |         | 3,616    |        |       |        | 2,458   |       
|                                                              |                                                                                                                                    |                                                                                               |                                                    |                                                     |        |         |          |        |      
|                                                              |                                                                                                                                    |                                                                                               |                                                    | Net (decrease) increase in cash                     |        |         | (15,437  | )      |       |        | 28,501  |        |         |         | 3,954   |  
|Cash at beginning of year                                     |                                                                                                                                    |                                                                                               | 43,377                                             |                                                     |        |         | 14,876   |        |       |        | 10,922  |       
|                                                              |                                                                                                                                    |                                                                                               |                                                    |                                                     |        |         |          |        |      
|Cash at end of year                                           |                                                                                                                                    | $                                                                                             | 27,940                                             |                                                     |        | $       | 43,377   |        |       | $      | 14,876  |       
|                                                              |                                                                                                                                    |                                                                                               |                                                    |                                                     |        |         |          |        |      
|Supplemental Disclosures of Cash Flow Information:            |                                                                                                                                    |                                                                                               |                                                    |                                                     |        |         |          |        |       |        |         |       
|                                                              | Cash paid during the year for                                                                                                      |                                                                                               |                                                    |                                                     |        |         |          |        |       |        |         |        |        
|                                                              |                                                                                                                                    | Interest                                                                                      |                                                    | $                                                   | 1,516  |         |          | $      | 1,492 |        |         | $      | 535     |        
|                                                              |                                                                                                                                    | Income taxes                                                                                  |                                                    |                                                     | 7,782  |         |          |        | 9,455 |        |         |        | 9,510   |        
|Supplemental Non-Cash Investing and Financing
    Activities: |                                                                                                                                    |                                                                                               |                                                    |                                                     |        |         |          |        |       |        |         |       
|                                                              |                                                                                                                                    | Non-cash consideration in connection with business acquisition                                |                                                    |                                                     |       |         |          |        |      |        |         | $      | 6,473   |        
|                                                              |                                                                                                                                    | Warrants issued in conjunction with long term debt and
    convertible subordinated debenture |                                                    |                                                     | 68     |         |          |        |      |        |         |        | 140     |        
|                                                              |                                                                                                                                    | Convertible debenture beneficial conversion feature                                           |                                                    |                                                     |       |         |          |        |      |        |         |        | 138     |        



F-11



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Thousands of Dollars)


Note A  Summary of Significant Accounting
Policies


Nature of Operations.


Restatement.






Selected Consolidated Statement of Earnings Data


|                             |  |        |         |             |                     |   |             |                      |  |               |          |  |  |   |         | 
|---------------------------- |  | ------ | ------- | ----------- | ------------------- | - | ----------- | -------------------- |  | ------------- | -------- |  |  | - | ------- | 
|                             |  |        |         | Impact From |                     |   | Impact from |                      |  | As Previously |         
|                             |  | Actual |         |             | Derivative Gains(1) |   |             | Euro Fluctuations(2) |  |               | Reported | 
|                             |  |        |         |             |                     |   |             |                      |  |               |          | 
|Year Ended December 31, 2003 |  |        |         |             |                     |   |             |                      |  |               |          |  |  |   |         | 
|                             |  |        |         |             |                     |   |             |                      |  |               |          | 
|Revenues                     |  | $      | 154,235 |             |                     | $ | (13,625     | )                    |  | $             | 30,797   |  |  | $ | 171,407 | 
|Cost of Sales                |  |        | 114,800 |             |                     |   |            |                      |  |               | 9,758    |  |  |   | 124,558 | 
|Operating income             |  |        | 10,905  |             |                     |   | (13,625     | )                    |  |               | 21,039   |  |  |   | 18,319  | 
|Earnings before income       |  |        | 9,129   |             |                     |   | (13,625     | )                    |  |               | 21,039   |  |  |   | 16,543  | 
|Income taxes                 |  |        | 5,201   |             |                     |   | (4,632      | )                    |  |               | 7,153    |  |  |   | 7,722   | 
|                             |  |        |         |             |                     |   |             |                      |  |               |          | 
|Net Earnings                 |  | $      | 3,928   |             |                     | $ | (8,993      | )                    |  | $             | 13,886   |  |  | $ | 8,821   | 
|                             |  |        |         |             |                     |   |             |                      |  |               |          | 
|Year Ended December 31, 2002 |  |        |         |             |                     |   |             |                      |  |               |          |  |  |   |         | 
|                             |  |        |         |             |                     |   |             |                      |  |               |          | 
|Revenues                     |  | $      | 145,274 |             |                     | $ | (16,977     | )                    |  | $             | 2,569    |  |  | $ | 130,866 | 
|Cost of Sales                |  |        | 90,430  |             |                     |   |            |                      |  |               | 1,079    |  |  |   | 91,509  | 
|Operating income             |  |        | 35,718  |             |                     |   | (16,977     | )                    |  |               | 1,490    |  |  |   | 20,231  | 
|Earnings before income       |  |        | 35,437  |             |                     |   | (16,977     | )                    |  |               | 1,490    |  |  |   | 19,950  | 
|Income taxes                 |  |        | 14,543  |             |                     |   | (5,772      | )                    |  |               | 507      |  |  |   | 9,278   | 
|                             |  |        |         |             |                     |   |             |                      |  |               |          | 
|Net Earnings                 |  | $      | 20,894  |             |                     | $ | (11,205     | )                    |  | $             | 983      |  |  | $ | 10,672  | 
|                             |  |        |         |             |                     |   |             |                      |  |               |          | 






|    |                                                                                                
|--- | -----------------------------------------------------------------------------------------------
|(1) | Unrealized gains on FX contracts and related tax effects.                                      
|   
|(2) | Impact of revising the euro-based based revenues at the spot
    rates and related tax effects.

F-12



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)


|                                                    |  |                   |         |               |                   |   |         |          |  |               |          |  |  |   |         |  
|--------------------------------------------------- |  | ----------------- | ------- | ------------- | ----------------- | - | ------- | -------- |  | ------------- | -------- |  |  | - | ------- | -
|                                                    |  | December 31, 2003 |         |               | December 31, 2002 |  
|                                                    |  |                   |         |               |                   |  
|                                                    |  |                   |         | As Previously |                   |   | As      |          |  | As Previously |         
|                                                    |  | As Restated       |         |               | Reported          |   |         | Restated |  |               | Reported | 
|                                                    |  |                   |         |               |                   |   |         |          |  |               |          | 
|Accounts receivable                                 |  | $                 | 33,404  |               |                   | $ | 29,321  |          |  | $             | 28,027   |  |  | $ | 28,551  |  
|Costs and accrued earnings on uncompleted contracts |  |                   | 60,516  |               |                   |   | 68,414  |          |  |               | 55,601   |  |  |   | 56,728  |  
|Fair value of foreign exchange contracts            |  |                   | 6,900   |               |                   |   | 9,378   |          |  |               | 18,815   |  |  |   | 13,595  |  
|Total current assets                                |  |                   | 178,098 |               |                   |   | 184,391 |          |  |               | 137,983  |  |  |   | 134,414 |  
|Total assets                                        |  |                   | 220,944 |               |                   |   | 227,237 |          |  |               | 171,737  |  |  |   | 168,168 |  
|Accrued liabilities                                 |  |                   | 7,594   |               |                   |   | 16,846  |          |  |               | 8,219    |  |  |   | 8,219   |  
|Foreign exchange contracts                          |  |                   |        |               |                   |   | 9,378   |          |  |               |         |  |  |   | 13,595  |  
|Total current liabilities                           |  |                   | 88,881  |               |                   |   | 107,511 |          |  |               | 60,637   |  |  |   | 74,232  |  
|Deferred tax liability  non-current                |  |                   | 5,533   |               |                   |   | 1,339   |          |  |               | 5,946    |  |  |   | 111     |  
|Total liabilities                                   |  |                   | 102,806 |               |                   |   | 117,242 |          |  |               | 73,894   |  |  |   | 81,654  |  
|Accumulated other comprehensive income (loss)       |  |                   | 16,197  |               |                   |   | 13,383  |          |  |               | 858      |  |  |   | (249    | )
|Total liabilities and stockholders equity          |  |                   | 220,944 |               |                   |   | 227,237 |          |  |               | 171,737  |  |  |   | 168,168 |  



Basis of Presentation.




| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | ARC Europe, S. A. (ARC Europe), a Belgian company,                                    
|
| |  | Allied Research Corporation Limited (Limited), an inactive
    United Kingdom company,
|
| |  | News/ Sports Microwave Rental, Inc. (NS Microwave), a California
    corporation,     
|
| |  | Titan Dynamics Systems, Inc., (Titan Dynamics), a Texas
    corporation,              
|
| |  | SeaSpace Corporation (SeaSpace), a California corporation, and                        
|
| |  | Mecar USA, a Delaware corporation.                                                    





Foreign Currency Translation.


Reclassifications.


Use of Estimates.


F-13



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)




Cash.


Accounts Receivable.


Inventories.


Property, Plant and Equipment.


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





Intangibles and Goodwill.


Derivative Financial Instruments. Accounting for Derivative Instruments and Hedging
Activities


F-14



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)




Revenue and Cost Recognition.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Percentage of Completion Method 
    Revenues under fixed price contracts are recognized on the
    percentage-of-completion method measured by costs incurred to
    total estimated costs at completion. The actual costs on these
    contracts may differ from the Companys estimate at
    completion. Provision for estimated losses and penalties on
    contracts are recorded when identified. Revenues under
    cost-plus-fixed-fee and time and material contracts are
    recognized on the basis of costs incurred during the period plus
    the fee earned. As contracts extend over one or more years,
    revisions in costs and earnings estimated during the course of
    the work are reflected in the accounting period in which the
    facts which require the revision become known. The revenue
    recognized on the contracts in progress for 2004, 2003 and 2002
    were $116,161, $125,672 and $123,965, respectively.



| |  |                                                                                                                                                                                                                                                                                                                                                                                
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Costs and accrued profits on uncompleted direct and indirect
    fixed price contracts with foreign governments, direct and
    indirect U.S. government foreign military sales
    (FMS) contracts, and custom designed domestic security and
    weather systems, which are billable upon completion, are carried
    as costs and accrued earnings on uncompleted contracts.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Completed contract method  Revenues
    from the sale of traditional fire & security systems, as
    well as battlefield effects simulators, are recognized when the
    installation is completed, less a provision for anticipated
    service costs. Security system maintenance contract revenues are
    recognized over the term of the contract on a straight-line
    basis. Revenues from service work rendered are recorded when
    performed.





Advertising.


Research and Development. Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use


F-15



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)


Warranties.


Income Taxes.


Earnings Per Common Share.


Detachable Stock Purchase Warrants 


Application of
Issue No. 98-5 to Certain Convertible Instruments


Stock-Based Compensation Accounting
for Stock Issued to Employees.


F-16



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)




|                                                                                                                                                                                   |                                    |      |       |          |      |   |          |       |   |   |        |       |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------- | ---- | ----- | -------- | ---- | - | -------- | ----- | - | - | ------ | ----- | -
|                                                                                                                                                                                   |                                    | 2004 |       |          | 2003 |   |          | 2002  |  
|                                                                                                                                                                                   |                                    |      |       |          |      |   |          |       |  
|                                                                                                                                                                                   |                                    |      |       | Restated |      |   | Restated |      
|Reported net earnings                                                                                                                                                              |                                    | $    | 2,518 |          |      | $ | 3,928    |       |   | $ | 20,894 |      
|Stock-based compensation costs that would have been included in
    the determination of reported net earnings, if the fair value
    method was applied to all awards, net of tax |                                    |      | (585  | )        |      |   | (471     | )     |   |   | (347   | )    
|                                                                                                                                                                                   |                                    |      |       |          |      |   |          |       |  
|Pro forma net earnings                                                                                                                                                             |                                    | $    | 1,933 |          |      | $ | 3,457    |       |   | $ | 20,547 |      
|                                                                                                                                                                                   |                                    |      |       |          |      |   |          |       |  
|Basic earnings per share                                                                                                                                                           |                                    |      |       |          |      |   |          |       |   |   |        |      
|                                                                                                                                                                                   | Reported earnings per share        |      |       | 0.45     |      |   |          | 0.71  |   |   |        | 3.94  |  
|                                                                                                                                                                                   | Compensation costs, net of tax     |      |       | (0.11    | )    |   |          | (0.09 | ) |   |        | (0.07 | )
|                                                                                                                                                                                   |                                    |      |       |          |      |   |          |       |  
|                                                                                                                                                                                   | Pro forma basic earnings per share |      | $     | 0.34     |      |   | $        | 0.62  |   |   | $      | 3.87  |  
|                                                                                                                                                                                   |                                    |      |       |          |      |   |          |       |  
|Diluted earnings per share                                                                                                                                                         |                                    |      |       |          |      |   |          |       |   |   |        |      
|                                                                                                                                                                                   | Reported earnings per share        |      |       | 0.42     |      |   |          | 0.66  |   |   |        | 3.73  |  
|                                                                                                                                                                                   | Compensation costs, net of tax     |      |       | (0.10    | )    |   |          | (0.08 | ) |   |        | (0.06 | )
|                                                                                                                                                                                   |                                    |      |       |          |      |   |          |       |  
|                                                                                                                                                                                   | Pro forma basic earnings per share |      | $     | 0.32     |      |   | $        | 0.58  |   |   | $      | 3.67  |  
|                                                                                                                                                                                   |                                    |      |       |          |      |   |          |       |  



|                         |  |      |       |   |      |  |       |      |  |  |       |  
|------------------------ |  | ---- | ----- | - | ---- |  | ----- | ---- |  |  | ----- | -
|                         |  | 2004 |       |   | 2003 |  |       | 2002 | 
|                         |  |      |       |   |      |  |       |      | 
|Risk free interest rate  |  |      | 3.63  | % |      |  | 2.86  | %    |  |  | 1.82  | %
|Expected volatility rate |  |      | 33.90 | % |      |  | 47.00 | %    |  |  | 44.00 | %
|Expected lives  years   |  |      | 3     |   |      |  | 3     |      |  |  | 3     |  
|Divided yield            |  |      |      |   |      |  |      |      |  |  |      |  



Major Customers.


Concentrations of Credit Risk.


F-17



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)










Newly Issued Accounting Standards


Share-Based Payment


Inventory
Costs  An Amendment of ARB No. 43,
Chapter 4.


Exchanges of Non-monetary AssetsAn Amendment of APB
Opinion No. 29


F-18



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)




Note B  Acquisition




| |                        
| | -----------------------
| | Control Monitor Systems





|                       |                     |   |      |     | 
|---------------------- | ------------------- | - | ---- | --- | 
|Current assets         |                     | $ | 69   |    
|Property and equipment |                     |   | 23   |    
|Goodwill               |                     |   | 449  |    
|Intangibles            |                     |   | 50   |    
|Total assets acquired  |                     |   | 591  |    
|Current liabilities    |                     |   | (172 | )  
|Deferred tax liability |                     |   | (19  | )  
|                       |                     |   |     
|                       | Net assets acquired |   | $    | 400 | 
|                       |                     |   |     



| |                       
| | ----------------------
| | Titan Dynamics Systems





|                       |                     |   |       |       | 
|---------------------- | ------------------- | - | ----- | ----- | 
|Current assets         |                     | $ | 92    |      
|Property and equipment |                     |   | 64    |      
|Goodwill               |                     |   | 1,656 |      
|Intangibles            |                     |   | 894   |      
|                       |                     |   |      
|Total assets acquired  |                     |   | 2,706 |      
|Deferred tax liability |                     |   | (311  | )    
|Other liabilities      |                     |   | (368  | )    
|                       |                     |   |      
|                       | Net assets acquired |   | $     | 2,027 | 
|                       |                     |   |      

F-19



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)




| |                     
| | --------------------
| | SeaSpace Corporation







|                       |                     |   |        |       | 
|---------------------- | ------------------- | - | ------ | ----- | 
|Current assets         |                     | $ | 4,245  |      
|Property and equipment |                     |   | 725    |      
|Goodwill               |                     |   | 4,322  |      
|Intangibles            |                     |   | 2,495  |      
|Other assets           |                     |   | 153    |      
|                       |                     |   |       
|Total assets acquired  |                     |   | 11,940 |      
|Deferred tax liability |                     |   | (874   | )    
|Other liabilities      |                     |   | (1,800 | )    
|                       |                     |   |       
|                       | Net assets acquired |   | $      | 9,266 | 
|                       |                     |   |       



|                     |  |            |       |  |                     |  |          | 
|-------------------- |  | ---------- | ----- |  | ------------------- |  | -------- | 
|                     |  | Estimated  |       |  | Weighted Average    | 
|                     |  | Fair Value |       |  | Amortization Period | 
|                     |  |            |       |  |                     | 
|Capitalized Software |  | $          | 523   |  |                     |  | 6 years  | 
|Customer lists       |  |            | 1,972 |  |                     |  | 15 years | 
|Customer list        |  |            | 50    |  |                     |  |         | 
|Patents              |  |            | 894   |  |                     |  | 13 years | 
|                     |  |            |       |  |                     | 
|Total                |  | $          | 3,439 |  |                     |  | 13 years | 
|                     |  |            |       |  |                     | 



Note C  Restricted Cash




|                                                                |  |      |        |  |      |   |        | 
|--------------------------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                                                                |  | 2004 |        |  | 2003 |  
|                                                                |  |      |        |  |      |  
|Collateralized performance bonds and advance payment guarantees |  | $    | 9,745  |  |      | $ | 15,812 | 
|Senior secured facility deposit                                 |  |      | 2,000  |  |      |   |       | 
|Other                                                           |  |      | 12     |  |      |   | 125    | 
|                                                                |  |      |        |  |      |  
|                                                                |  | $    | 11,757 |  |      | $ | 15,937 | 
|                                                                |  |      |        |  |      |  



F-20



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)






Note D  Accounts Receivable




|                                                                                                               |  |      |        |          |      |   |        | 
|-------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | -------- | ---- | - | ------ | 
|                                                                                                               |  | 2004 |        |          | 2003 |  
|                                                                                                               |  |      |        |          |      |  
|                                                                                                               |  |      |        | Restated |     
|Direct and indirect receivables from governments                                                               |  | $    | 19,290 |          |      | $ | 19,696 | 
|Commercial and other receivables, less allowance for doubtful
    receivables of $143 in 2004 and $115 in 2003 |  |      | 12,656 |          |      |   | 13,708 | 
|                                                                                                               |  |      |        |          |      |  
|                                                                                                               |  | $    | 31,946 |          |      | $ | 33,404 | 
|                                                                                                               |  |      |        |          |      |  



Note E  Inventories




|                                                                                   |  |      |        |  |      |   |        | 
|---------------------------------------------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                                                                                   |  | 2004 |        |  | 2003 |  
|                                                                                   |  |      |        |  |      |  
|Raw materials                                                                      |  | $    | 15,701 |  |      | $ | 9,852  | 
|Work in process                                                                    |  |      | 686    |  |      |   | 1,017  | 
|Finished goods, less reserve for obsolescence of $668 in 2004
    and $214 in 2003 |  |      | 774    |  |      |   | 1,199  | 
|                                                                                   |  |      |        |  |      |  
|                                                                                   |  | $    | 17,161 |  |      | $ | 12,068 | 
|                                                                                   |  |      |        |  |      |  

Note F  Property, Plant & Equipment




|                              |  |      |        |  |      |   |        | 
|----------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                              |  | 2004 |        |  | 2003 |  
|                              |  |      |        |  |      |  
|Land                          |  | $    | 1,632  |  |      | $ | 1,502  | 
|Buildings and improvements    |  |      | 23,621 |  |      |   | 20,021 | 
|Machinery and equipment       |  |      | 59,372 |  |      |   | 50,309 | 
|                              |  |      |        |  |      |  
|                              |  | $    | 84,625 |  |      | $ | 71,832 | 
|Less accumulated depreciation |  |      | 54,331 |  |      |   | 47,217 | 
|                              |  |      |        |  |      |  
|                              |  | $    | 30,294 |  |      | $ | 24,615 | 
|                              |  |      |        |  |      |  



F-21



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)


Capital Leases.




|                               |  |      |        |  |      |   |        | 
|------------------------------ |  | ---- | ------ |  | ---- | - | ------ | 
|                               |  | 2004 |        |  | 2003 |  
|                               |  |      |        |  |      |  
|Leased equipment               |  | $    | 13,721 |  |      | $ | 10,769 | 
|Less: accumulated amortization |  |      | 4,170  |  |      |   | 3,063  | 
|                               |  |      |        |  |      |  
|                               |  | $    | 9,551  |  |      | $ | 7,706  | 
|                               |  |      |        |  |      |  



|                                            |      |   |       |       | 
|------------------------------------------- | ---- | - | ----- | ----- | 
|Year ending December 31,                    |      |   |       |      
|                                            | 2005 |   | $     | 2,678 | 
|                                            | 2006 |   |       | 2,385 | 
|                                            | 2007 |   |       | 1,681 | 
|                                            | 2008 |   |       | 650   | 
|                                            | 2009 |   |       | 230   | 
|                                            |      |   |      
|Total minimum lease payments                |      |   | 7,624 |      
|Less: Amount representing interest          |      |   | (431  | )    
|                                            |      |   |      
|Present value of net minimum lease payments |      | $ | 7,193 |      
|                                            |      |   |      

Note G  Intangible Assets




|                         |       |                   |       |       |                   |   |     |       |  |       |        |       |             |              |       |       |     |   |     |     |  |   |       |       | 
|------------------------ | ----- | ----------------- | ----- | ----- | ----------------- | - | --- | ----- |  | ----- | ------ | ----- | ----------- | ------------ | ----- | ----- | --- | - | --- | --- |  | - | ----- | ----- | 
|                         |       | December 31, 2004 |       |       | December 31, 2003 |  
|                         |       |                   |       |       |                   |  
|Intangible assets        |       | Gross             |       |       | Accumulated       |   |     |       |  | Gross |        |       | Accumulated |              |       |      
|subject to amortization: |       | Amount            |       |       | Amortization      |   |     | Net   |  |       | Amount |       |             | Amortization |       |       | Net |  
|                         |       |                   |       |       |                   |   |     |       |  |       |        |       |             |              |       |       |     |  
|Capitalized Software     |       | $                 | 1,184 |       |                   | $ | 477 |       |  | $     | 707    |       |             | $            | 1,179 |       |     | $ | 282 |     |  | $ | 897   |      
|Customer Lists           |       |                   | 2,297 |       |                   |   | 540 |       |  |       | 1,757  |       |             |              | 2,247 |       |     |   | 356 |     |  |   | 1,891 |      
|Patents                  |       |                   | 1,494 |       |                   |   | 235 |       |  |       | 1,259  |       |             |              | 1,494 |       |     |   | 147 |     |  |   | 1,347 |      
|                         |       |                   |       |       |                   |   |     |       |  |       |        |       |             |              |       |       |     |  
|                         | Total |                   | $     | 4,975 |                   |   | $   | 1,252 |  |       | $      | 3,723 |             |              | $     | 4,920 |     |   | $   | 785 |  |   | $     | 4,135 | 
|                         |       |                   |       |       |                   |   |     |       |  |       |        |       |             |              |       |       |     |  



|     |      |        |  |   |     | 
|---- | ---- | ------ |  | - | --- | 
|Year |      | Amount
|     |      |       
|     | 2005 |        |  | $ | 540 | 
|     | 2006 |        |  |   | 379 | 
|     | 2007 |        |  |   | 297 | 
|     | 2008 |        |  |   | 225 | 
|     | 2009 |        |  |   | 225 | 

F-22



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)


Note H  Goodwill


|                                  |  |                     |       |               |                   |   |                    |              |  |   |       |   |  |   |        |  
|--------------------------------- |  | ------------------- | ----- | ------------- | ----------------- | - | ------------------ | ------------ |  | - | ----- | - |  | - | ------ | -
|                                  |  |                     |       | Environmental |                   |   | Software, Training |              |  |  
|                                  |  | Electronic Security |       |               | Safety & Security |   |                    | & Simulation |  |   | Total |  
|                                  |  |                     |       |               |                   |   |                    |              |  |   |       |  
|Balance as of January 1, 2003     |  | $                   | 5,936 |               |                   | $ | 3,323              |              |  | $ | 1,345 |   |  | $ | 10,604 |  
|Goodwill acquired during the year |  |                     |       |               |                   |   | 125                |              |  |   |       |   |  |   | 125    |  
|Deferred tax asset adjustment     |  |                     | 426   |               |                   |   | 874                |              |  |   | 311   |   |  |   | 1,611  |  
|Foreign exchange fluctuation      |  |                     | 1,378 |               |                   |   |                    |              |  |   |       |   |  |   | 1,378  |  
|Balance as of December 31, 2003   |  | $                   | 7,740 |               |                   | $ | 4,322              |              |  | $ | 1,656 |   |  | $ | 13,718 |  
|Goodwill acquired during the year |  |                     | 449   |               |                   |   | 125                |              |  |   |       |   |  |   | 574    |  
|Deferred tax asset adjustment     |  |                     |       |               |                   |   |                    |              |  |   | (261  | ) |  |   | (261   | )
|Foreign exchange fluctuation      |  |                     | 370   |               |                   |   |                   |              |  |   |      |   |  |   | 370    |  
|                                  |  |                     |       |               |                   |   |                    |              |  |   |       |  
|Balance as of December 31, 2004   |  | $                   | 8,559 |               |                   | $ | 4,447              |              |  | $ | 1,395 |   |  | $ | 14,401 |  
|                                  |  |                     |       |               |                   |   |                    |              |  |   |       |  



Note I  Notes Payable and Credit Facility








Note J  Accrued Losses on Contracts and Deferred
Compensation


Accrued losses on contracts.


F-23



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)


Deferred compensation.


Note K  Long-Term Debt




|                                                              |                                                                  |      |       |       |      |   |       |       | 
|------------------------------------------------------------- | ---------------------------------------------------------------- | ---- | ----- | ----- | ---- | - | ----- | ----- | 
|                                                              |                                                                  | 2004 |       |       | 2003 |  
|                                                              |                                                                  |      |       |       |      |  
|Notes payable, less unamortized discount and debt issue costs |                                                                  | $    | 1,176 |       |      | $ |      |      
|Mortgage loan agreements                                      |                                                                  |      | 284   |       |      |   | 908   |      
|Loan for Control Monitor Systems acquisition                  |                                                                  |      | 300   |       |      |   |       |      
|                                                              |                                                                  |      |       |       |      |  
|Capital leases and other                                      |                                                                  |      | 7,413 |       |      |   | 6,703 |      
|                                                              |                                                                  |      |       |       |      |  
|                                                              | Total Long-Term Debt                                             |      | $     | 9,173 |      |   | $     | 7,611 | 
|Less current maturities                                       |                                                                  |      | 2,733 |       |      |   | 2,709 |      
|                                                              |                                                                  |      |       |       |      |  
|                                                              | Long-Term Debt, less current maturities and unamortized discount |      | $     | 6,440 |      |   | $     | 4,902 | 
|                                                              |                                                                  |      |       |       |      |  

Notes payable.


Mortgage Loan Agreements.


Loan for Control Monitor Systems acquisition.


Other.


F-24



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)




Year
    
    Amount2005
    
    
    $
    2,7332006
    
    
    
    2,4312007
    
    
    
    1,7702008
    
    
    
    6842009
    
    
    
    235Thereafter
    
    
    
    1,320


Note L  Convertible Subordinated Debenture




Note M  Benefit Plans




Note N  Contingencies and Commitments










F-25



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)




|     |      |        |  |   |     | 
|---- | ---- | ------ |  | - | --- | 
|Year |      | Amount
|     |      |       
|     | 2005 |        |  | $ | 394 | 
|     | 2006 |        |  |   | 406 | 
|     | 2007 |        |  |   | 418 | 
|     | 2008 |        |  |   | 431 | 
|     | 2009 |        |  |   | 304 | 





Note O  Fair Value of Financial Instruments




|                                                                          |                                  |          |        |   |            |          |        |          |  |   |            |   |  |   |        |        | 
|------------------------------------------------------------------------- | -------------------------------- | -------- | ------ | - | ---------- | -------- | ------ | -------- |  | - | ---------- | - |  | - | ------ | ------ | 
|                                                                          |                                  | 2004     |        |   | 2003       |         
|                                                                          |                                  |          |        |   |            |         
|                                                                          |                                  | Carrying |        |   | Estimated  |          |        | Carrying |  |   | Estimated  |  
|                                                                          |                                  | Amount   |        |   | Fair Value |          |        | Amount   |  |   | Fair Value |  
|                                                                          |                                  |          |        |   |            |          |        |          |  |   |            |  
|                                                                          |                                  |          |        |   |            | Restated |       
|Notes payable and long-term obligations, including current
    maturities |                                  | $        | 13,447 |   |            | $        | 13,447 |          |  | $ | 30,550     |   |  | $ | 30,550 |       
|Foreign exchange contracts                                                |                                  |          | 1,223  |   |            |          | 1,223  |          |  |   | 6,900      |   |  |   | 6,900  |       
|Off-balance-sheet instruments                                             |                                  |          |       |   |            |          |       |          |  |   |           |   |  |   |       |       
|                                                                          | Guarantees and performance bonds |          |        |  |            |          |        | 26,781   |  |   |            |  |  |   |        | 18,097 | 
|                                                                          | Standby letters of credit        |          |        |  |            |          |        |         |  |   |            |  |  |   |        |       | 





| |   |                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The fair value of notes payable and long-term obligations is
    estimated based on approximate market prices for the same or
    similar issues or the current rates offered to the Company for
    debt of the same remaining maturities. The Company believes the
    aggregate carrying value approximates fair value.                                                  
|
| |  | The fair value of foreign exchange contracts is based on the
    mark to market calculations performed at the end of each period.
    The balance sheet at December 31, 2004 and 2003 includes
    the fair value of MECARs forward contracts of $1,195 and
    $6,900, respectively. The fair value of the VSK Groups
    forward contracts was $28 at December 31, 2004.
|
| |  | Estimated fair values for off-balance-sheet instruments, which
    include performance bonds and advance payment guarantees are
    reflected at the face value of these obligations, since
    management does not expect to have any claims against these
    obligations based on its past experience.                                                                   

F-26



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)




|         |                                 
|-------- | --------------------------------
|Note P  | Derivative Financial Instruments

Derivatives and hedging




Fair value hedges




Cash flow hedges




Derivatives not designated as hedges




Counterparty credit risk






|         |                     
|-------- | --------------------
|Note Q  | Stockholders Equity



F-27



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)




2001 Equity Incentive Plan.


1997 Incentive Stock Plan.


1992 Employee Stock Purchase Plan.


Preferred Share Purchase Rights Agreement.








F-28



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)




|                                                                |  |        |         |          |       |   |       |        |          |   |         |   |  |          |       |  |       |   |         |   |  |   |       | 
|--------------------------------------------------------------- |  | ------ | ------- | -------- | ----- | - | ----- | ------ | -------- | - | ------- | - |  | -------- | ----- |  | ----- | - | ------- | - |  | - | ----- | 
|                                                                |  | 2004   |         |          | 2003  |   |       | 2002   |         
|                                                                |  |        |         |          |       |   |       |        |         
|                                                                |  |        |         | Weighted |       |   |       |        | Weighted |   |         |   |  | Weighted |      
|                                                                |  |        |         | Average  |       |   |       |        | Average  |   |         |   |  | Average  |      
|                                                                |  |        |         | Exercise |       |   |       |        | Exercise |   |         |   |  | Exercise |      
|                                                                |  | Shares |         |          | Price |   |       | Shares |          |   | Price   |   |  | Shares   |       |  | Price |  
|                                                                |  |        |         |          |       |   |       |        |          |   |         |   |  |          |       |  |       |  
|Options outstanding at beginning of year                        |  |        | 620,000 |          |       | $ | 14.08 |        |          |   | 531,000 |   |  | $        | 12.81 |  |       |   | 286,000 |   |  | $ | 8.54  | 
|Options granted                                                 |  |        | 40,000  |          |       |   | 20.43 |        |          |   | 149,000 |   |  |          | 16.92 |  |       |   | 252,500 |   |  |   | 17.51 | 
|Options exercised                                               |  |        | (27,734 | )        |       |   | 9.21  |        |          |   | (60,000 | ) |  |          | 9.87  |  |       |   | (7,500  | ) |  |   | 8.25  | 
|Options forfeited                                               |  |        |        |          |       |   |      |        |          |   |        |   |  |          |      |  |       |   |        |   |  |   |      | 
|Options expired                                                 |  |        |        |          |       |   |      |        |          |   |        |   |  |          |      |  |       |   |        |   |  |   |      | 
|                                                                |  |        |         |          |       |   |       |        |          |   |         |   |  |          |       |  |       |  
|Options outstanding at end of year                              |  |        | 632,266 |          |       | $ | 14.69 |        |          |   | 620,000 |   |  | $        | 14.08 |  |       |   | 531,000 |   |  | $ | 12.81 | 
|                                                                |  |        |         |          |       |   |       |        |          |   |         |   |  |          |       |  |       |  
|Options exercisable at end of year                              |  |        | 416,930 |          |       |   |       |        |          |   | 305,333 |   |  |          |       |  |       |   | 179,000 |   |  |   |       | 
|Weighted-average fair value of options, granted during the year |  | $      | 7.59    |          |       |   |       |        |          | $ | 7.73    |   |  |          |       |  |       | $ | 7.10    |   |  |   |       | 



|            |         |  |                 |   |                 |                  |  |   |                  |  |  |           |            |  |                  |  |         |  |  |   |       | 
|----------- | ------- |  | --------------- | - | --------------- | ---------------- |  | - | ---------------- |  |  | --------- | ---------- |  | ---------------- |  | ------- |  |  | - | ----- | 
|            |         |  |                 |   |                 | Weighted         |  |   | Exercisable      | 
|            |         |  |                 |   |                 | Average          |  |   |                  | 
|Number      |         |  | Range of        |   |                 | Weighted Average |  |   | Remaining        |  |  | Number of |            |  | Weighted Average | 
|Outstanding |         |  | Exercise Prices |   |                 | Exercise Prices  |  |   | Contractual Life |  |  | Options   |            |  | Exercise Prices  | 
|            |         |  |                 |   |                 |                  |  |   |                  |  |  |           |            |  |                  | 
|            | 193,500 |  |                 | $ | 7.88 to $ 8.63  |                  |  | $ | 8.47             |  |  |           | 3.56 Years |  |                  |  | 157,500 |  |  | $ | 8.43  | 
|            | 48,000  |  |                 | $ | 9.01 to $14.90  |                  |  | $ | 13.92            |  |  |           | 3.04 Years |  |                  |  | 16,000  |  |  | $ | 14.90 | 
|            | 390,766 |  |                 | $ | 16.40 to $25.00 |                  |  | $ | 17.88            |  |  |           | 4.16 Years |  |                  |  | 243,430 |  |  | $ | 18.11 | 

Note R  Other  Net




|                                        |  |      |        |   |      |   |      |      |  |   |       | 
|--------------------------------------- |  | ---- | ------ | - | ---- | - | ---- | ---- |  | - | ----- | 
|                                        |  | 2004 |        |   | 2003 |   |      | 2002 | 
|                                        |  |      |        |   |      |   |      |      | 
|Net currency transaction gains (losses) |  | $    | (1,832 | ) |      | $ | (545 | )    |  | $ | 872   | 
|Miscellaneous  net                     |  |      | 1,020  |   |      |   | 800  |      |  |   | 428   | 
|                                        |  |      |        |   |      |   |      |      | 
|                                        |  | $    | (812   | ) |      | $ | 255  |      |  | $ | 1,300 | 
|                                        |  |      |        |   |      |   |      |      | 



Note S  Income Taxes




F-29



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)






|         |  |      |        |          |      |   |          |      |  |   |        |  
|-------- |  | ---- | ------ | -------- | ---- | - | -------- | ---- |  | - | ------ | -
|         |  | 2004 |        |          | 2003 |   |          | 2002 | 
|         |  |      |        |          |      |   |          |      | 
|         |  |      |        | Restated |      |   | Restated |     
|Domestic |  | $    | (5,751 | )        |      | $ | (5,295   | )    |  | $ | (93    | )
|Foreign  |  |      | 9,230  |          |      |   | 14,424   |      |  |   | 35,530 |  
|         |  |      |        |          |      |   |          |      | 
|         |  | $    | 3,479  |          |      | $ | 9,129    |      |  | $ | 35,437 |  
|         |  |      |        |          |      |   |          |      | 



|                             |          |                          |   |          |        |   |          |        |        |   |   |       |        | 
|---------------------------- | -------- | ------------------------ | - | -------- | ------ | - | -------- | ------ | ------ | - | - | ----- | ------ | 
|                             |          | 2004                     |   |          | 2003   |   |          | 2002   |       
|                             |          |                          |   |          |        |   |          |        |       
|                             |          |                          |   | Restated |        |   | Restated |       
|Current Provision            |          |                          |   |          |        |   |          |        |        |   |   |      
|                             | Domestic |                          | $ | 417      |        |   | $        | 309    |        |   | $ | 1,781 |       
|                             | Foreign  |                          |   | 6,364    |        |   |          | 8,301  |        |   |   | 8,290 |       
|                             |          |                          |   |          |        |   |          |        |       
|                             |          | Total Current Provision  |   |          | 6,781  |   |          |        | 8,610  |   |   |       | 10,071 | 
|Deferred (Benefit) Provision |          |                          |   |          |        |   |          |        |        |   |   |      
|                             | Domestic |                          |   | (2,995   | )      |   |          | (848   | )      |   |   | (899  | )     
|                             | Foreign  |                          |   | (2,826   | )      |   |          | (2,561 | )      |   |   | 5,371 |       
|                             |          |                          |   |          |        |   |          |        |       
|                             |          | Total Deferred Provision |   |          | (5,821 | ) |          |        | (3,409 | ) |   |       | 4,472  | 
|                             |          | Total tax provision      |   | $        | 960    |   |          | $      | 5,201  |   |   | $     | 14,543 | 
|                             |          |                          |   |          |        |   |          |        |       



|                                    |              |      |       |          |      |  |          |      |   |  |      |      |  
|----------------------------------- | ------------ | ---- | ----- | -------- | ---- |  | -------- | ---- | - |  | ---- | ---- | -
|                                    |              | 2004 |       |          | 2003 |  |          | 2002 |  
|                                    |              |      |       |          |      |  |          |      |  
|                                    |              |      |       | Restated |      |  | Restated |     
|Taxes at statutory rate             |              |      | 34.0  | %        |      |  | 34.0     | %    |   |  | 34.0 | %   
|Foreign tax rate differential       |              |      |      |          |      |  | 18.1     |      |   |  | 1.4  |     
|State taxes, net of federal benefit |              |      | (2.4  | )        |      |  | (2.2     | )    |   |  |     |     
|Permanent differences               |              |      | 12.2  |          |      |  | 7.8      |      |   |  |     |     
|Amortization of intangibles         |              |      |      |          |      |  |         |      |   |  | 1.2  |     
|Valuation allowance                 |              |      | (10.4 | )        |      |  |         |      |   |  |     |     
|                                    |              |      |       |          |      |  |          |      |  
|Other                               |              |      | (5.8  | )        |      |  | (0.7     | )    |   |  | 4.4  |     
|                                    |              |      |       |          |      |  |          |      |  
|                                    | Income taxes |      |       | 27.6     | %    |  |          | 57.0 | % |  |      | 41.0 | %
|                                    |              |      |       |          |      |  |          |      |  

F-30



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)




|                                      |                                  |                          |                                |          |        |        |        |        |        |        |  
|------------------------------------- | -------------------------------- | ------------------------ | ------------------------------ | -------- | ------ | ------ | ------ | ------ | ------ | ------ | -
|                                      |                                  | 2004                     |                                |          | 2003   |       
|                                      |                                  |                          |                                |          |        |       
|                                      |                                  |                          |                                | Restated |       
|Deferred tax assets                   |                                  |                          |                                |          |        |        |        |       
|                                      | Inventory                        |                          | $                              | 769      |        |        | $      | 249    |       
|                                      | Compensation accruals            |                          |                                | 113      |        |        |        | 114    |       
|                                      | Valuation adjustments            |                          |                                | 198      |        |        |        | 152    |       
|                                      | Accrued expenses                 |                          |                                | 225      |        |        |        | 162    |       
|                                      | Business tax credits             |                          |                                | 394      |        |        |        | 204    |       
|                                      | Deferred compensation            |                          |                                | 128      |        |        |        | 185    |       
|                                      | Capitalized software             |                          |                                | 1,309    |        |        |        |       |       
|                                      | Foreign tax credit carryforwards |                          |                                | 1,295    |        |        |        | 3,857  |       
|                                      | Net operating loss carryforwards |                          |                                | 1,469    |        |        |        | 395    |       
|                                      |                                  |                          |                                |          |        |       
|                                      |                                  | Gross deferred tax asset |                                |          | 5,900  |        |        |        | 5,318  |       
|                                      |                                  | Valuation allowance      |                                |          | (1,466 | )      |        |        | (4,117 | )     
|                                      |                                  |                          |                                |          |        |       
|                                      |                                  |                          | Total deferred tax assets      |          | $      | 4,434  |        |        | $      | 1,201  |  
|Deferred tax liabilities              |                                  |                          |                                |          |        |        |        |       
|                                      | Depreciation and amortization    |                          | $                              | (1,251   | )      |        | $      | (1,356 | )     
|                                      | Derivatives                      |                          |                                | (1,568   | )      |        |        | (4,194 | )     
|                                      | Deferred income                  |                          |                                | (73      | )      |        |        | (168   | )     
|                                      |                                  |                          |                                |          |        |       
|                                      |                                  |                          | Total deferred tax liabilities |          | $      | (2,892 | )      |        | $      | (5,718 | )
|Net Deferred Tax Assets (Liabilities) |                                  | $                        | 1,542                          |          |        | $      | (4,517 | )     
|                                      |                                  |                          |                                |          |        |       









F-31



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)








|         |                          
|-------- | -------------------------
|Note T  | Earnings Per Common Share



|                                                     |  |      |           |          |      |   |           |      |  |   |           | 
|---------------------------------------------------- |  | ---- | --------- | -------- | ---- | - | --------- | ---- |  | - | --------- | 
|                                                     |  | 2004 |           |          | 2003 |   |           | 2002 | 
|                                                     |  |      |           |          |      |   |           |      | 
|                                                     |  |      |           | Restated |      |   | Restated  |     
|Net earnings                                         |  | $    | 2,518     |          |      | $ | 3,928     |      |  | $ | 20,894    | 
|Interest on convertible debenture, net of taxes      |  |      |          |          |      |   |          |      |  |   | 185       | 
|                                                     |  |      |           |          |      |   |           |      | 
|Net earnings after interest on convertible debenture |  | $    | 2,518     |          |      | $ | 3,928     |      |  | $ | 21,079    | 
|                                                     |  |      |           |          |      |   |           |      | 
|Weighted average number of basic shares              |  |      | 5,568,183 |          |      |   | 5,496,786 |      |  |   | 5,304,998 | 
|Common stock equivalents                             |  |      | 422,918   |          |      |   | 473,333   |      |  |   | 353,276   | 
|                                                     |  |      |           |          |      |   |           |      | 
|Weighted average number of diluted shares            |  |      | 5,991,101 |          |      |   | 5,970,119 |      |  |   | 5,658,274 | 
|                                                     |  |      |           |          |      |   |           |      | 
|Basic earnings per share                             |  | $    | 0.45      |          |      | $ | 0.71      |      |  | $ | 3.94      | 
|                                                     |  |      |           |          |      |   |           |      | 
|Diluted earnings per share                           |  | $    | 0.42      |          |      | $ | 0.66      |      |  | $ | 3.73      | 
|                                                     |  |      |           |          |      |   |           |      | 





|         |                                       
|-------- | --------------------------------------
|Note U  | Geographic Areas and Industry Segments



F-32



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)




|                                 |                                 |      |         |        |      |   |          |         |   |   |          |         |  
|-------------------------------- | ------------------------------- | ---- | ------- | ------ | ---- | - | -------- | ------- | - | - | -------- | ------- | -
|                                 |                                 | 2004 |         |        | 2003 |   |          | 2002    |  
|                                 |                                 |      |         |        |      |   |          |         |  
|Revenues from external customers |                                 |      |         |        |      |   | Restated |         |   |   | Restated |        
|                                 | Ordnance & Manufacturing        |      | $       | 93,579 |      |   | $        | 112,538 |   |   | $        | 109,687 |  
|                                 | Electronic Security             |      |         | 45,973 |      |   |          | 33,303  |   |   |          | 31,302  |  
|                                 | Environmental Safety & Security |      |         | 6,435  |      |   |          | 7,065   |   |   |          | 4,032   |  
|                                 | Software Training & Simulation  |      |         | 913    |      |   |          | 1,329   |   |   |          | 253     |  
|                                 |                                 |      |         |        |      |   |          |         |  
|                                 |                                 | $    | 146,900 |        |      | $ | 154,235  |         |   | $ | 145,274  |        
|                                 |                                 |      |         |        |      |   |          |         |  
|Interest expense                 |                                 |      |         |        |      |   |          |         |   |   |          |        
|                                 | Ordnance & Manufacturing        |      | $       | 1,483  |      |   | $        | 1,603   |   |   | $        | 1,350   |  
|                                 | Electronic Security             |      |         | 48     |      |   |          | 49      |   |   |          | 52      |  
|                                 | Environmental Safety & Security |      |         | 1      |      |   |          | 1       |   |   |          | 1       |  
|                                 | Software Training & Simulation  |      |         |       |      |   |          |        |   |   |          |        |  
|                                 | Corporate and Other             |      |         | 909    |      |   |          | 837     |   |   |          | 684     |  
|                                 |                                 |      |         |        |      |   |          |         |  
|                                 |                                 | $    | 2,441   |        |      | $ | 2,490    |         |   | $ | 2,087    |        
|                                 |                                 |      |         |        |      |   |          |         |  
|Interest income                  |                                 |      |         |        |      |   |          |         |   |   |          |        
|                                 | Ordnance & Manufacturing        |      | $       | 202    |      |   | $        | 221     |   |   | $        | 232     |  
|                                 | Electronic Security             |      |         | 274    |      |   |          | 167     |   |   |          | 193     |  
|                                 | Environmental Safety & Security |      |         | 22     |      |   |          | 35      |   |   |          | 11      |  
|                                 | Software Training & Simulation  |      |         | 1      |      |   |          |        |   |   |          |        |  
|                                 | Corporate and Other             |      |         | 50     |      |   |          | 36      |   |   |          | 70      |  
|                                 |                                 |      |         |        |      |   |          |         |  
|                                 |                                 | $    | 549     |        |      | $ | 459      |         |   | $ | 506      |        
|                                 |                                 |      |         |        |      |   |          |         |  
|Income tax expense (benefit)     |                                 |      |         |        |      |   | Restated |         |   |   | Restated |        
|                                 | Ordnance & Manufacturing        |      | $       | 1,288  |      |   | $        | 3,733   |   |   | $        | 11,913  |  
|                                 | Electronic Security             |      |         | 2,694  |      |   |          | 654     |   |   |          | 1,638   |  
|                                 | Environmental Safety & Security |      |         | (1,411 | )    |   |          | (199    | ) |   |          | 212     |  
|                                 | Software Training & Simulation  |      |         | (169   | )    |   |          | (68     | ) |   |          | (48     | )
|                                 | Corporate and Other             |      |         | (1,442 | )    |   |          | 1,081   |   |   |          | 828     |  
|                                 |                                 |      |         |        |      |   |          |         |  
|                                 |                                 | $    | 960     |        |      | $ | 5,201    |         |   | $ | 14,543   |        
|                                 |                                 |      |         |        |      |   |          |         |  
|Depreciation and amortization    |                                 |      |         |        |      |   |          |         |   |   |          |        
|                                 | Ordnance & Manufacturing        |      | $       | 2,687  |      |   | $        | 2,336   |   |   | $        | 1,767   |  
|                                 | Electronic Security             |      |         | 1,216  |      |   |          | 1,093   |   |   |          | 1,010   |  
|                                 | Environmental Safety & Security |      |         | 524    |      |   |          | 488     |   |   |          | 206     |  
|                                 | Software Training & Simulation  |      |         | 77     |      |   |          | 74      |   |   |          | 43      |  
|                                 | Corporate and Other             |      |         | 47     |      |   |          | 46      |   |   |          | 296     |  
|                                 |                                 |      |         |        |      |   |          |         |  
|                                 |                                 | $    | 4,551   |        |      | $ | 4,037    |         |   | $ | 3,322    |        
|                                 |                                 |      |         |        |      |   |          |         |  

F-33



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)


|                                        |                                 |      |         |         |      |   |          |         |   |   |          |         |  
|--------------------------------------- | ------------------------------- | ---- | ------- | ------- | ---- | - | -------- | ------- | - | - | -------- | ------- | -
|                                        |                                 | 2004 |         |         | 2003 |   |          | 2002    |  
|                                        |                                 |      |         |         |      |   |          |         |  
|Segment profit (loss) from before taxes |                                 |      |         |         |      |   | Restated |         |   |   | Restated |        
|                                        | Ordnance & Manufacturing        |      | $       | 3,475   |      |   | $        | 9,073   |   |   | $        | 31,926  |  
|                                        | Electronic Security             |      |         | 6,987   |      |   |          | 2,618   |   |   |          | 3,903   |  
|                                        | Environmental Safety & Security |      |         | (3,283  | )    |   |          | (528    | ) |   |          | 550     |  
|                                        | Software Training & Simulation  |      |         | (438    | )    |   |          | (207    | ) |   |          | (181    | )
|                                        | Corporate and Other             |      |         | (3,263  | )    |   |          | (1,827  | ) |   |          | (761    | )
|                                        |                                 |      |         |         |      |   |          |         |  
|                                        |                                 | $    | 3,478   |         |      | $ | 9,129    |         |   | $ | 35,437   |        
|                                        |                                 |      |         |         |      |   |          |         |  
|Segment assets                          |                                 |      |         |         |      |   | Restated |         |   |   | Restated |        
|                                        | Ordnance & Manufacturing        |      | $       | 129,991 |      |   | $        | 153,154 |   |   | $        | 121,634 |  
|                                        | Electronic Security             |      |         | 45,231  |      |   |          | 35,048  |   |   |          | 28,641  |  
|                                        | Environmental Safety & Security |      |         | 12,808  |      |   |          | 12,207  |   |   |          | 10,833  |  
|                                        | Software Training & Simulation  |      |         | 3,421   |      |   |          | 3,077   |   |   |          | 2,883   |  
|                                        | Corporate and Other(1)          |      |         | 5,905   |      |   |          | 17,458  |   |   |          | 7,747   |  
|                                        |                                 |      |         |         |      |   |          |         |  
|                                        |                                 | $    | 197,356 |         |      | $ | 220,944  |         |   | $ | 171,738  |        
|                                        |                                 |      |         |         |      |   |          |         |  
|Capital Expenditure for Segment assets  |                                 |      |         |         |      |   |          |         |   |   |          |        
|                                        | Ordnance & Manufacturing        |      | $       | 4,708   |      |   | $        | 4,918   |   |   | $        | 4,250   |  
|                                        | Electronic Security             |      |         | 1,525   |      |   |          | 747     |   |   |          | 1,504   |  
|                                        | Environmental Safety & Security |      |         | 1,230   |      |   |          | 682     |   |   |          | 159     |  
|                                        | Software Training & Simulation  |      |         | 44      |      |   |          | 12      |   |   |          | 49      |  
|                                        | Corporate and Other             |      |         | 10      |      |   |          | 3       |   |   |          | 328     |  
|                                        |                                 |      |         |         |      |   |          |         |  
|                                        |                                 | $    | 7,517   |         |      | $ | 6,362    |         |   | $ | 6,290    |        
|                                        |                                 |      |         |         |      |   |          |         |  






|    |                                 
|--- | --------------------------------
|(1) | Net of intersegment receivables.

F-34



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)




|                                 |                         |                         |         |        |      |   |          |        |  |   |          |        | 
|-------------------------------- | ----------------------- | ----------------------- | ------- | ------ | ---- | - | -------- | ------ |  | - | -------- | ------ | 
|                                 |                         | Geographic Segment Data |        
|                                 |                         |                         |        
|                                 |                         | 2004                    |         |        | 2003 |   |          | 2002   | 
|                                 |                         |                         |         |        |      |   |          |        | 
|Revenues from external customers |                         |                         |         |        |      |   | Restated |        |  |   | Restated |       
|                                 | United States(1)        |                         | $       | 55,254 |      |   | $        | 78,849 |  |   | $        | 69,863 | 
|                                 | Belgium                 |                         |         | 25,694 |      |   |          | 24,320 |  |   |          | 16,373 | 
|                                 | Venezuela               |                         |         | 9,910  |      |   |          | 18,042 |  |   |          | 4,138  | 
|                                 | Saudi Arabia            |                         |         | 35,007 |      |   |          | 13,051 |  |   |          | 44,730 | 
|                                 | France                  |                         |         | 6,676  |      |   |          | 6,385  |  |   |          | 3,987  | 
|                                 | Kuwait                  |                         |         |       |      |   |          | 3,545  |  |   |          |       | 
|                                 | Germany                 |                         |         | 1,345  |      |   |          | 1,233  |  |   |          | 618    | 
|                                 | Canada(1)               |                         |         | 10     |      |   |          | 1      |  |   |          | 365    | 
|                                 | Japan                   |                         |         | 353    |      |   |          | 899    |  |   |          |       | 
|                                 | Taiwan                  |                         |         | 267    |      |   |          | 338    |  |   |          |       | 
|                                 | Qatar                   |                         |         | 2,844  |      |   |          |       |  |   |          |       | 
|                                 | Other foreign countries |                         |         | 9,540  |      |   |          | 7,572  |  |   |          | 5,200  | 
|                                 |                         |                         |         |        |      |   |          |        | 
|                                 |                         | $                       | 146,900 |        |      | $ | 154,235  |        |  | $ | 145,274  |       
|                                 |                         |                         |         |        |      |   |          |        | 






|    |                                                                 
|--- | ----------------------------------------------------------------
|(1) | Includes foreign military sales for the benefit of Saudi Arabia.

|               |                  |                         |         |         |      |   |          |         |  |   |          |         | 
|-------------- | ---------------- | ----------------------- | ------- | ------- | ---- | - | -------- | ------- |  | - | -------- | ------- | 
|               |                  | Geographic Segment Data |        
|               |                  |                         |        
|               |                  | 2004                    |         |         | 2003 |   |          | 2002    | 
|               |                  |                         |         |         |      |   |          |         | 
|Segment assets |                  |                         |         |         |      |   | Restated |         |  |   | Restated |        
|               | Belgium          |                         | $       | 161,241 |      |   | $        | 178,104 |  |   | $        | 140,305 | 
|               | United Kingdom   |                         |         | 199     |      |   |          | 179     |  |   |          | 225     | 
|               | United States(1) |                         |         | 35,916  |      |   |          | 42,661  |  |   |          | 31,209  | 
|               |                  |                         |         |         |      |   |          |         | 
|               |                  | $                       | 197,356 |         |      | $ | 220,944  |         |  | $ | 171,738  |        
|               |                  |                         |         |         |      |   |          |         | 






|    |                                                 
|--- | ------------------------------------------------
|(1) | Net of intersegment receivables and investments.

|                       |               |      |        |        |      |   |        |        |  |   |        |        | 
|---------------------- | ------------- | ---- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                       |               | 2004 |        |        | 2003 |   |        | 2002   | 
|                       |               |      |        |        |      |   |        |        | 
|Property and equipment |               |      |        |        |      |   |        |        |  |   |        |       
|                       | Belgium       |      | $      | 27,956 |      |   | $      | 23,308 |  |   | $      | 17,202 | 
|                       | United States |      |        | 2,338  |      |   |        | 1,307  |  |   |        | 1,442  | 
|                       |               |      |        |        |      |   |        |        | 
|                       |               | $    | 30,294 |        |      | $ | 24,615 |        |  | $ | 18,644 |       
|                       |               |      |        |        |      |   |        |        | 

F-35



---



##### 



THE ALLIED DEFENSE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Thousands of Dollars)




|         |                                     
|-------- | ------------------------------------
|Note V  | Quarterly Financial Data (Unaudited)



|                |         |                                               |        |      |          |   |        |          |  |   |         |      |   |          |        |      |  |   |         |      | 
|--------------- | ------- | --------------------------------------------- | ------ | ---- | -------- | - | ------ | -------- |  | - | ------- | ---- | - | -------- | ------ | ---- |  | - | ------- | ---- | 
|                |         | First                                         |        |      | Second   |   |        | Third    |  |   | Fourth  |      |   | Total    |       
|2004            |         | Quarter                                       |        |      | Quarter  |   |        | Quarter  |  |   | Quarter |      |   | For Year |       
|                |         |                                               |        |      |          |   |        |          |  |   |         |      |   |          |       
|                |         | Restated                                      |        |      | Restated |   |        | Restated |  |   |         |      |  
|                |         | (Amounts in thousands, except per share data) |       
|Revenue         |         | $                                             | 26,864 |      |          | $ | 39,231 |          |  | $ | 36,138  |      |   | $        | 44,667 |      |  | $ | 146,900 |     
|Gross profit    |         |                                               | 4,688  |      |          |   | 10,776 |          |  |   | 8,837   |      |   |          | 17,749 |      |  |   | 42,050  |     
|Net earnings    |         |                                               | (2,865 | )    |          |   | 1,641  |          |  |   | 22      |      |   |          | 3,720  |      |  |   | 2,518   |     
|Per share data: |         |                                               |        |      |          |   |        |          |  |   |         |      |   |          |        |      |  |   |         |     
|                | Basic   |                                               | ($     | 0.52 | )        |   | $      | 0.30     |  |   | ($      | 0.00 | ) |          | $      | 0.66 |  |   | $       | 0.45 | 
|                |         |                                               |        |      |          |   |        |          |  |   |         |      |   |          |       
|                | Diluted |                                               | ($     | 0.49 | )        |   | $      | 0.28     |  |   | ($      | 0.00 | ) |          | $      | 0.63 |  |   | $       | 0.42 | 
|                |         |                                               |        |      |          |   |        |          |  |   |         |      |   |          |       

|                              |         |         |        |      |         |   |        |         |  |   |        |      |  |  |  |  |  |  |  |  | 
|----------------------------- | ------- | ------- | ------ | ---- | ------- | - | ------ | ------- |  | - | ------ | ---- |  |  |  |  |  |  |  |  | 
|                              |         | First   |        |      | Second  |   |        | Third   |  |   |        |      | 
|2004 (as previously reported) |         | Quarter |        |      | Quarter |   |        | Quarter |  |   |        |      | 
|                              |         |         |        |      |         |   |        |         |  |   |        |      | 
|Revenue                       |         | $       | 34,468 |      |         | $ | 45,228 |         |  | $ | 37,142 |      |  |  |  |  |  |  |  | 
|Gross profit                  |         |         | 10,158 |      |         |   | 14,691 |         |  |   | 9,080  |      |  |  |  |  |  |  |  | 
|Net earnings                  |         |         | 744    |      |         |   | 4,226  |         |  |   | 182    |      |  |  |  |  |  |  |  | 
|Per share data:               |         |         |        |      |         |   |        |         |  |   |        |      |  |  |  |  |  |  |  | 
|                              | Basic   |         | $      | 0.13 |         |   | $      | 0.76    |  |   | $      | 0.03 |  |  |  |  |  |  |  |  | 
|                              |         |         |        |      |         |   |        |         |  |   |        |      |  |  | 
|                              | Diluted |         | $      | 0.13 |         |   | $      | 0.71    |  |   | $      | 0.03 |  |  |  |  |  |  |  |  | 
|                              |         |         |        |      |         |   |        |         |  |   |        |      |  |  | 

|                |         |                                               |        |      |         |   |        |         |  |   |         |      |   |          |        |      |  |   |         |      | 
|--------------- | ------- | --------------------------------------------- | ------ | ---- | ------- | - | ------ | ------- |  | - | ------- | ---- | - | -------- | ------ | ---- |  | - | ------- | ---- | 
|                |         | First                                         |        |      | Second  |   |        | Third   |  |   | Fourth  |      |   | Total    |       
|2003 (restated) |         | Quarter                                       |        |      | Quarter |   |        | Quarter |  |   | Quarter |      |   | For Year |       
|                |         |                                               |        |      |         |   |        |         |  |   |         |      |   |          |       
|                |         | (Amounts in thousands, except per share data) |       
|Revenue         |         | $                                             | 35,853 |      |         | $ | 41,205 |         |  | $ | 31,421  |      |   | $        | 45,756 |      |  | $ | 154,235 |     
|Gross profit    |         |                                               | 10,231 |      |         |   | 12,430 |         |  |   | 6,022   |      |   |          | 10,752 |      |  |   | 39,435  |     
|Net earnings    |         |                                               | 1,617  |      |         |   | 2,565  |         |  |   | (376    | )    |   |          | 122    |      |  |   | 3,928   |     
|Per share data: |         |                                               |        |      |         |   |        |         |  |   |         |      |   |          |        |      |  |   |         |     
|                | Basic   |                                               | $      | 0.30 |         |   | $      | 0.47    |  |   | ($      | 0.07 | ) |          | $      | 0.02 |  |   | $       | 0.71 | 
|                |         |                                               |        |      |         |   |        |         |  |   |         |      |   |          |       
|                | Diluted |                                               | $      | 0.29 |         |   | $      | 0.45    |  |   | ($      | 0.05 | ) |          | $      | 0.02 |  |   | $       | 0.66 | 
|                |         |                                               |        |      |         |   |        |         |  |   |         |      |   |          |       

|                              |         |         |        |      |         |   |        |         |  |   |         |      |  |          |        |      |  |   |         |      | 
|----------------------------- | ------- | ------- | ------ | ---- | ------- | - | ------ | ------- |  | - | ------- | ---- |  | -------- | ------ | ---- |  | - | ------- | ---- | 
|                              |         | First   |        |      | Second  |   |        | Third   |  |   | Fourth  |      |  | Total    |       
|2003 (as previously reported) |         | Quarter |        |      | Quarter |   |        | Quarter |  |   | Quarter |      |  | For Year |       
|                              |         |         |        |      |         |   |        |         |  |   |         |      |  |          |       
|Revenue                       |         | $       | 42,657 |      |         | $ | 42,723 |         |  | $ | 34,871  |      |  | $        | 51,156 |      |  | $ | 171,407 |     
|Gross profit                  |         |         | 13,743 |      |         |   | 12,032 |         |  |   | 7,899   |      |  |          | 13,175 |      |  |   | 46,849  |     
|Net earnings                  |         |         | 3,934  |      |         |   | 2,302  |         |  |   | 863     |      |  |          | 1,722  |      |  |   | 8,821   |     
|Per share data:               |         |         |        |      |         |   |        |         |  |   |         |      |  |          |        |      |  |   |         |     
|                              | Basic   |         | $      | 0.72 |         |   | $      | 0.42    |  |   | $       | 0.16 |  |          | $      | 0.31 |  |   | $       | 1.60 | 
|                              |         |         |        |      |         |   |        |         |  |   |         |      |  |          |       
|                              | Diluted |         | $      | 0.68 |         |   | $      | 0.40    |  |   | $       | 0.16 |  |          | $      | 0.30 |  |   | $       | 1.54 | 
|                              |         |         |        |      |         |   |        |         |  |   |         |      |  |          |       

F-36



---



##### 



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF
REGISTRANT


THE ALLIED DEFENSE GROUP, INC.


(Parent Company)


BALANCE SHEETS


|                                     |                                                  |                        |         |          |         |   |         |        |         | 
|------------------------------------ | ------------------------------------------------ | ---------------------- | ------- | -------- | ------- | - | ------- | ------ | ------- | 
|                                     |                                                  | December 31,           |        
|                                     |                                                  |                        |        
|                                     |                                                  | 2004                   |         |          | 2003    |  
|                                     |                                                  |                        |         |          |         |  
|                                     |                                                  |                        |         | Restated |        
|                                     |                                                  | (Thousands of Dollars) |        
|ASSETS                              
|Cash and equivalents                 |                                                  | $                      | 1,017   |          |         | $ | 15,039  |       
|Restricted cash                      |                                                  |                        | 2,012   |          |         |   | 125     |       
|Investment in subsidiaries           |                                                  |                        | 130,169 |          |         |   | 111,216 |       
|Due from subsidiaries                |                                                  |                        | 1,202   |          |         |   |        |       
|Income tax recoverable               |                                                  |                        |        |          |         |   | 350     |       
|Deferred taxes                       |                                                  |                        | 1,076   |          |         |   | 417     |       
|Other                                |                                                  |                        | 342     |          |         |   | 336     |       
|                                     |                                                  |                        |         |          |         |  
|                                     |                                                  | Total assets           |         | $        | 135,818 |   |         | $      | 127,483 | 
|                                     |                                                  |                        |         |          |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY
|Liabilities                          |                                                  |                        |         |          |         |   |         |       
|                                     | Accounts payable and accrued liabilities         |                        | $       | 1,994    |         |   | $       | 725    |        
|                                     | Due to subsidiaries                              |                        |         |         |         |   |         | 402    |        
|                                     | Income tax                                       |                        |         | 4        |         |   |         |       |        
|                                     | Deferred Compensation                            |                        |         | 376      |         |   |         | 404    |        
|                                     | Long term debt, less unamortized discount        |                        |         | 1,176    |         |   |         |       |        
|                                     | Convertible Debenture, less unamortized discount |                        |         | 2,231    |         |   |         | 7,405  |        
|                                     |                                                  |                        |         |          |         |  
|                                     |                                                  | Total liabilities      |         |          | 5,781   |   |         |        | 8,936   | 
|                                    
|Stockholders Equity                 |                                                  |                        |         |          |         |   |         |       
|                                     | Common stock                                     |                        |         | 560      |         |   |         | 555    |        
|                                     | Capital in excess of par value                   |                        |         | 26,669   |         |   |         | 25,891 |        
|                                     | Retained earnings                                |                        |         | 78,013   |         |   |         | 75,495 |        
|                                     | Accumulated other comprehensive loss             |                        |         | 24,795   |         |   |         | 16,606 |        
|                                     |                                                  |                        |         |          |         |  
|                                     |                                                  |                        | 130,037 |          |         |   | 118,547 |       
|                                     |                                                  |                        |         |          |         |  
|                                     |                                                  | $                      | 135,818 |          |         | $ | 127,483 |       
|                                     |                                                  |                        |         |          |         |  

F-37



---



##### 



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF
REGISTRANT  (Continued)


THE ALLIED DEFENSE GROUP, INC.


(Parent Company)


STATEMENTS OF EARNINGS


|                                                              |                              |                                                             |         |          |        |      |          |        |        |      |        |       |        |      | 
|------------------------------------------------------------- | ---------------------------- | ----------------------------------------------------------- | ------- | -------- | ------ | ---- | -------- | ------ | ------ | ---- | ------ | ----- | ------ | ---- | 
|                                                              |                              | Year ended December 31,                                     |        
|                                                              |                              |                                                             |        
|                                                              |                              | 2004                                                        |         |          | 2003   |      |          | 2002   |       
|                                                              |                              |                                                             |         |          |        |      |          |        |       
|                                                              |                              |                                                             |         | Restated |        |      | Restated |       
|                                                              |                              | (Thousands of Dollars)                                      |        
|Income                                                        |                              |                                                             |         |          |        |      |          |        |        |      |        |      
|                                                              | Intercompany management fees |                                                             | $       | 4,249    |        |      | $        | 4,146  |        |      | $      | 3,859 |       
|                                                              | Dividend from subsidiaries   |                                                             |         |         |        |      |          | 14,186 |        |      |        | 4,883 |       
|                                                              | Other  net                  |                                                             |         | 45       |        |      |          | 99     |        |      |        | 60    |       
|                                                              |                              |                                                             |         |          |        |      |          |        |       
|                                                              |                              |                                                             | 4,294   |          |        |      | 18,431   |        |        |      | 8,802  |      
|Costs and expenses                                            |                              |                                                             |         |          |        |      |          |        |        |      |        |      
|                                                              | Administrative and other     |                                                             |         | 7,512    |        |      |          | 5,905  |        |      |        | 4,688 |       
|                                                              |                              |                                                             |         |          |        |      |          |        |       
|                                                              |                              | Earnings (loss) before equity in operations of subsidiaries |         |          | (3,218 | )    |          |        | 12,526 |      |        |       | 4,114  |     
|Equity in operations of subsidiaries, less dividends received |                              |                                                             | 4,272   |          |        |      | (7,767   | )      |        |      | 17,572 |      
|                                                              |                              |                                                             |         |          |        |      |          |        |       
|                                                              |                              | Earnings (loss) before income taxes                         |         |          | 1,054  |      |          |        | 4,759  |      |        |       | 21,686 |     
|Income taxes (benefit)                                        |                              |                                                             | (1,464  | )        |        |      | 831      |        |        |      | 792    |      
|                                                              |                              |                                                             |         |          |        |      |          |        |       
|                                                              |                              | NET EARNINGS                                                |         | $        | 2,518  |      |          | $      | 3,928  |      |        | $     | 20,894 |     
|                                                              |                              |                                                             |         |          |        |      |          |        |       
|                                                              |                              | Earnings per common share                                   |         |          |        |      |          |        |        |      |        |       |        |     
|                                                              |                              |                                                             | Basic   |          | $      | 0.45 |          |        | $      | 0.71 |        |       | $      | 3.94 | 
|                                                              |                              |                                                             |         |          |        |      |          |        |       
|                                                              |                              |                                                             | Diluted |          | $      | 0.42 |          |        | $      | 0.66 |        |       | $      | 3.73 | 
|                                                              |                              |                                                             |         |          |        |      |          |        |       

F-38



---



##### 



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF
REGISTRANT  (Continued)


THE ALLIED DEFENSE GROUP, INC.


(Parent Company)


STATEMENTS OF CASH FLOWS


|                                                                 |                                                                                           |                         |                                                              |                                           |      |        |          |       |     |        |         |        |     |         |        |  
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ----------------------- | ------------------------------------------------------------ | ----------------------------------------- | ---- | ------ | -------- | ----- | --- | ------ | ------- | ------ | --- | ------- | ------ | -
|                                                                 |                                                                                           | Year ended December 31, |                                                             
|                                                                 |                                                                                           |                         |                                                             
|                                                                 |                                                                                           | 2004                    |                                                              |                                           | 2003 |        |          | 2002  |    
|                                                                 |                                                                                           |                         |                                                              |                                           |      |        |          |       |    
|                                                                 |                                                                                           |                         |                                                              | Restated                                  |      |        | Restated |      
|Cash flows from operating activities                             |                                                                                           |                         |                                                              |                                           |      |        |          |       |     |        |         |       
|                                                                 | Net earnings for the year                                                                 |                         | $                                                            | 2,518                                     |      |        | $        | 3,928 |     |        | $       | 20,894 |    
|                                                                 | Adjustments to reconcile net earnings to net cash from (used in)
    operating activities |                         |                                                              |                                           |      |        |          |       |     |        |         |        |    
|                                                                 |                                                                                           |                         | Equity in operations of subsidiaries                         |                                           |      | (4,272 | )        |       |     | (6,419 | )       |        |     | (22,455 | )     
|                                                                 |                                                                                           |                         | Dividend from subsidiary                                     |                                           |      |       |          |       |     | 14,186 |         |        |     | 4,883   |       
|                                                                 |                                                                                           |                         | Depreciation and amortization                                |                                           |      | 47     |          |       |     | 46     |         |        |     | 297     |       
|                                                                 |                                                                                           |                         | Deferred taxes                                               |                                           |      | (658   | )        |       |     | (375   | )       |        |     | 953     |       
|                                                                 |                                                                                           |                         | Amortization of debenture issue costs and conversion feature |                                           |      | 179    |          |       |     | 243    |         |        |     |        |       
|                                                                 |                                                                                           |                         | Common stock awards and grants                               |                                           |      | 106    |          |       |     | 111    |         |        |     | 651     |       
|                                                                 |                                                                                           |                         | Changes in assets and liabilities                            |                                           |      |        |          |       |     |        |         |        |     |         |       
|                                                                 |                                                                                           |                         |                                                              | Other assets                              |      |        | 306      |       |     |        | (546    | )      |     |         | 342    |  
|                                                                 |                                                                                           |                         |                                                              | Due to subsidiaries                       |      |        | (1,605   | )     |     |        | (3,492  | )      |     |         | (2,504 | )
|                                                                 |                                                                                           |                         |                                                              | Accounts payable and accrued liabilities  |      |        | 1,270    |       |     |        | (30     | )      |     |         | (1,489 | )
|                                                                 |                                                                                           |                         |                                                              | Deferred compensation                     |      |        | (27      | )     |     |        | 191     |        |     |         |       |  
|                                                                 |                                                                                           |                         |                                                              | Income taxes                              |      |        | 4        |       |     |        |        |        |     |         | (238   | )
|                                                                 |                                                                                           |                         |                                                              |                                           |      |        |          |       |    
|                                                                 |                                                                                           |                         | (4,650                                                       | )                                         |      |        | 3,915    |       |     |        | (19,560 | )     
|                                                                 |                                                                                           |                         |                                                              |                                           |      |        |          |       |    
|                                                                 |                                                                                           |                         |                                                              | Net cash provided by operating activities |      |        | (2,132   | )     |     |        | 7,843   |        |     |         | 1,334  |  
|Cash flows used in investing activities                          |                                                                                           |                         |                                                              |                                           |      |        |          |       |     |        |         |       
|                                                                 | Capital expenditures                                                                      |                         |                                                              | (10                                       | )    |        |          | (3    | )   |        |         | (328   | )  
|                                                                 | Equity infusions in subsidiaries                                                          |                         |                                                              | (6,367                                    | )    |        |          |      |     |        |         |       |    
|                                                                 | Acquisitions                                                                              |                         |                                                              | (125                                      | )    |        |          |      |     |        |         | (4,895 | )  
|                                                                 |                                                                                           |                         |                                                              |                                           |      |        |          |       |    
|                                                                 |                                                                                           |                         |                                                              | Net cash used in investing activities     |      |        | (6,502   | )     |     |        | (3      | )      |     |         | (5,223 | )
|Cash flows from financing activities                             |                                                                                           |                         |                                                              |                                           |      |        |          |       |     |        |         |       
|                                                                 | Proceeds from issuance of long-term debt                                                  |                         |                                                              | 2,000                                     |      |        |          |      |     |        |         |       |    
|                                                                 | Proceeds from convertible subordinated debenture                                          |                         |                                                              |                                          |      |        |          |      |     |        |         | 7,500  |    
|                                                                 | Debt issue costs                                                                          |                         |                                                              | (860                                      | )    |        |          |      |     |        |         | (158   | )  
|                                                                 | Principal payments on debenture                                                           |                         |                                                              | (5,250                                    | )    |        |          |      |     |        |         |       |    
|                                                                 | Proceeds from employee stock purchase plan shares                                         |                         |                                                              | 261                                       |      |        |          | 152   |     |        |         | 169    |    
|                                                                 | Option exercises                                                                          |                         |                                                              | 348                                       |      |        |          | 765   |     |        |         | 62     |    
|                                                                 | Restricted cash                                                                           |                         |                                                              | (1,887                                    | )    |        |          | 125   |     |        |         | (250   | )  
|                                                                 |                                                                                           |                         |                                                              |                                           |      |        |          |       |    
|                                                                 |                                                                                           |                         |                                                              | Net cash provided by financing activities |      |        | (5,388   | )     |     |        | 1,042   |        |     |         | 7,323  |  
|                                                                 |                                                                                           |                         |                                                              |                                           |      |        |          |       |    
|                                                                 |                                                                                           |                         |                                                              | Net increase in cash and equivalents      |      |        | (14,022  | )     |     |        | 8,882   |        |     |         | 3,434  |  
|Cash and equivalents at beginning of year                        |                                                                                           |                         | 15,039                                                       |                                           |      |        | 6,157    |       |     |        | 2,723   |       
|                                                                 |                                                                                           |                         |                                                              |                                           |      |        |          |       |    
|Cash and equivalents at end of year                              |                                                                                           | $                       | 1,017                                                        |                                           |      | $      | 15,039   |       |     | $      | 6,157   |       
|                                                                 |                                                                                           |                         |                                                              |                                           |      |        |          |       |    
|Supplemental Disclosures of Cash Flow Information:               |                                                                                           |                         |                                                              |                                           |      |        |          |       |     |        |         |       
|                                                                 | Cash paid during the year for:                                                            |                         |                                                              |                                           |      |        |          |       |     |        |         |        |    
|                                                                 |                                                                                           | Income taxes            |                                                              | $                                         | 45   |        |          | $     |    |        |         | $      | 360 |        
|                                                                 |                                                                                           | Interest                |                                                              |                                           | 641  |        |          |       | 590 |        |         |        | 36  |        
|Supplemental of Non-Cash Investing and Financing
    Activities: |                                                                                           |                         |                                                              |                                           |      |        |          |       |     |        |         |       
|                                                                 | Non-cash consideration in connection with business acquisition                            |                         |                                                              |                                          |      |        |          |      |     |        | $       | 6,473  |    
|                                                                 | Warrants issued in conjunction with convertible debenture                                 |                         |                                                              | 68                                        |      |        |          |      |     |        |         | 140    |    
|                                                                 | Convertible debenture beneficial conversion feature                                       |                         |                                                              |                                          |      |        |          |      |     |        |         | 138    |    

F-39



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SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS


THE ALLIED DEFENSE GROUP, INC.


Valuation and Qualifying Accounts


Years ended December 31, 2004, 2003 and 2002


|                             |                                             |                |   |           |            |  |   |          |  |            |   |           |        |  |   |     |     |  |   |       | 
|---------------------------- | ------------------------------------------- | -------------- | - | --------- | ---------- |  | - | -------- |  | ---------- | - | --------- | ------ |  | - | --- | --- |  | - | ----- | 
|                             |                                             |                |   | Additions |            |  |   |         
|                             |                                             |                |   |           |            |  |   |         
|                             |                                             | Balance at     |   |           | Charged to |  |   | Charged  |  |            |   | Balance   |       
|                             |                                             | beginning      |   |           | costs and  |  |   | to other |  |            |   | at end of |       
|Description                  |                                             | of period      |   |           | expenses   |  |   | accounts |  | Deductions |   |           | period | 
|                             |                                             |                |   |           |            |  |   |          |  |            |   |           |        | 
|                             |                                             | (In Thousands) |  
|Year ended December 31, 2004 |                                             |                |   |           |            |  |   |          |  |            |   |           |        |  |   |     |     |  |   |      
|                             | Estimated losses on contracts               |                | $ | 283       |            |  | $ | 726      |  |            | $ |          |        |  | $ | 283 | (1) |  | $ | 726   | 
|                             |                                             |                |   |           |            |  |   |          |  |            |   |           |        |  |  
|                             | Allowance for doubtful receivables          |                | $ | 115       |            |  | $ | 143      |  |            | $ |          |        |  | $ | 115 | (2) |  | $ | 143   | 
|                             |                                             |                |   |           |            |  |   |          |  |            |   |           |        |  |  
|                             | Valuation allowance on inventory            |                | $ | 214       |            |  | $ | 454      |  |            | $ |          |        |  | $ |    |     |  | $ | 668   | 
|                             |                                             |                |   |           |            |  |   |          |  |            |   |           |        |  |  
|                             | Valuation allowances on deferred tax assets |                | $ | 4,229     |            |  | $ |         |  |            | $ |          |        |  | $ |    |     |  | $ |      | 
|                             |                                             |                |   |           |            |  |   |          |  |            |   |           |        |  |  
|Year ended December 31, 2003 |                                             |                |   |           |            |  |   |          |  |            |   |           |        |  |   |     |     |  |   |      
|                             | Estimated losses on contracts               |                | $ | 313       |            |  | $ | 283      |  |            | $ |          |        |  | $ | 313 | (1) |  | $ | 283   | 
|                             |                                             |                |   |           |            |  |   |          |  |            |   |           |        |  |  
|                             | Allowance for doubtful receivables          |                | $ | 233       |            |  | $ | 115      |  |            | $ |          |        |  | $ | 233 | (2) |  | $ | 115   | 
|                             |                                             |                |   |           |            |  |   |          |  |            |   |           |        |  |  
|                             | Valuation allowance on inventory            |                | $ | 200       |            |  | $ | 14       |  |            | $ |          |        |  | $ |    |     |  | $ | 214   | 
|                             |                                             |                |   |           |            |  |   |          |  |            |   |           |        |  |  
|                             | Valuation allowances on deferred tax assets |                | $ | 1,244     |            |  | $ | 2,985    |  |            | $ |          |        |  | $ |    |     |  | $ | 4,229 | 
|                             |                                             |                |   |           |            |  |   |          |  |            |   |           |        |  |  
|Year ended December 31, 2002 |                                             |                |   |           |            |  |   |          |  |            |   |           |        |  |   |     |     |  |   |      
|                             | Estimated losses on contracts               |                | $ | 382       |            |  | $ | 313      |  |            | $ |          |        |  | $ | 382 | (1) |  | $ | 313   | 
|                             |                                             |                |   |           |            |  |   |          |  |            |   |           |        |  |  
|                             | Allowance for doubtful receivables          |                | $ | 107       |            |  | $ | 126      |  |            | $ |          |        |  | $ |    |     |  | $ | 233   | 
|                             |                                             |                |   |           |            |  |   |          |  |            |   |           |        |  |  
|                             | Valuation allowance on inventory            |                | $ | 150       |            |  | $ | 50       |  |            | $ |          |        |  | $ |    |     |  | $ | 200   | 
|                             |                                             |                |   |           |            |  |   |          |  |            |   |           |        |  |  
|                             | Valuation allowances on deferred tax assets |                | $ | 271       |            |  | $ | 973      |  |            | $ |          |        |  | $ |    |     |  | $ | 1,244 | 
|                             |                                             |                |   |           |            |  |   |          |  |            |   |           |        |  |  






|    |                                                                           
|--- | --------------------------------------------------------------------------
|(1) | Represents amount of reserve relieved through completion of
    contracts.
|   
|(2) | Represents write-off of receivables.                                      

F-40



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EXHIBIT INDEX


|       |      |  |                        |                                                                                                                                                          |      |  |     | 
|------ | ---- |  | ---------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | --- | 
|Number |      |  | Description of Exhibit |                                                                                                                                                          | Page | 
|       |      |  |                        |                                                                                                                                                          |      | 
|       | 21   |  |                        | List of Subsidiaries                                                                                                                                     |      |  | E-2 | 
|       | 23   |  |                        | Consent of Independent Registered Public Accounting Firm                                                                                                 |      |  | E-3 | 
|       | 31.1 |  |                        | Certification of Chief Executive Officer pursuant to
    Section 302 of Sarbanes-Oxley Act of 2002, dated
    March 31, 2005                             |      |  | E-4 | 
|       | 31.2 |  |                        | Certification of Chief Financial Officer pursuant to
    Section 302 of Sarbanes-Oxley Act of 2002, dated
    March 31, 2005                             |      |  | E-5 | 
|       | 32   |  |                        | Certification of Chief Executive Officer and Chief Financial
    Officer pursuant to Section 906 of Sarbanes-Oxley Act of
    2002, dated March 31, 2005 |      |  | E-6 | 

E-1