Overview

Allied is a strategic portfolio of defense and security businesses, with presence in worldwide markets, offering both government and commercial customers' leading edge products and services. The Company has two main reporting segments, the Ammunition & Weapons Effects (AWE) segment and the Electronic Security (ES) segment. In addition, the Company had a third, Other segment, that solely consisted of the Company's SeaSpace subsidiary. In July 2007, September 2007 and March 2008, the Company sold SeaSpace, The VSK Group, and Titan, respectively. Accordingly, the results of operations, financial position and cash flows of SeaSpace, The VSK Group and Titan, have been reported as discontinued operations for all periods presented and are eliminated from the segment discussion provided below. Headquarters expenses are reported separately on the segment reporting schedules.

The AWE segment provides conventional ammunition and other training devices to the U.S. military and 30 countries worldwide, dealing with defense departments or ministries of defense in US/European Community approved sovereign entities. The ES segment encompasses a wide range of fixed and deployable systems and equipment used to address today's security and surveillance requirements in the U.S. The ES segment markets its products to governments, law enforcement, and commercial security personnel. In addition to having distinct differences in client base and application of products, the production processes of the segments are distinct.

• Ammunition & Weapons Effects segment 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 became operational in late 2005 and pursues contracts from U.S. and foreign governments for ammunition and pyrotechnics devices with a focus on the 105MM market. More recently, MECAR USA has begun purchasing and selling weapon systems and/or ammunition manufactured by others, in the form of procurement contracts for the benefit of the U.S government and other foreign governments.

• Electronic Security segment consists of News Sports Microwave (NSM) and Global Microwave Systems (GMS), both located near San Diego, California. NSM designs, manufactures, installs and services industrial and law enforcement surveillance products and integrated systems for the law enforcement community and agencies of the Department of Homeland Security and the Department of Defense. GMS designs and manufactures miniature and sub-miniature FM and digital transmitters, receivers, and related equipment for investigative, surveillance, and security applications, and live TV news/sports/entertainment coverage.

Allied, the parent Company, provides management, business development and related services to its subsidiaries and has no operating activities.

The Company continues to evaluate it strategic options. The Company has committed to a formal plan to sell GMS to be in a position to satisfy a potential "put" of its senior secured convertible notes which may be made in December 2008 and/or January 2009, as discussed below. In addition, the Board of Directors of the Company is evaluating a possible dissolution of all operating units of the Company and the return of the net remaining proceeds to the shareholders. At this time the Directors of the Board continue to evaluate the future plans for the Company, and will continue to evaluate the alternatives to maximizing shareholder value through either the dissolution process or a more focused, cohesive business strategy centered on the MECAR business.

Liquidity and Capital Resources

As described in the Company's Form 10-K filed for December 31, 2007, the Company encountered liquidity difficulties in 2006 and 2007. The liquidity position improved markedly in the third and fourth

quarters of 2007, but the Company anticipates some liquidity challenges in the summer months of 2008 as MECAR performs on its increased backlog and is limited in its ability to ship product to its largest customer during the summer months from June through August. As described below and as more fully described in Notes 1 and 7 to the Condensed Consolidated Financial Statements, in April 2008, MECAR signed an agreement with the lenders of its credit facility to finance MECAR until November 30, 2008 for its revolving cash line and until December 31, 2008 for MECAR's performance bond and advance payment guarantee line. Management believes that this short-term financing agreement will allow MECAR the opportunity to refinance on a permanent basis once it has had more time to perform and generate cash based on the current backlog.

During 2007, as MECAR worked to secure new multi-year sales contracts and reduce its fixed cost base, MECAR was also working on restructuring its credit facility. MECAR had failed to be in compliance with annual covenant requirements for the facility at December 31, 2005, 2006 and 2007 although MECAR did obtain debt waivers for all years. In April 2008, MECAR reached an agreement with its existing bank group regarding its credit facility. The agreement provided for an expansion of the total credit facility from approximately $67,699 (€42,850) to $72,083 (€45,625). The credit facility was restructured and the portion designated for tax prepayments was terminated. The agreement provides for a cash line of $16,115 (€10,200) and performance bond and advance payment guarantee line of $55,968 (€35,425). The agreement requires a partial repayment of MECAR's cash line of $8,057 (€5,100) in July 2008 and the remainder to be repaid by November 30, 2008. The performance bond and advance payment guarantee line expires on December 31, 2008. Based on the timing of MECAR's shipments in July 2008, the Company was unable to repay half of the cash line by July 31, 2008. As agreed with its bank group, MECAR paid down €2,000 on August 6, 2008, and the Company is working with the bank group to repay the remaining €3,100 cash line. The Company has proposed to make the repayment in September 2008 with the earlier of the cash proceeds of certain late July shipments or the proceeds of the Company's anticipated sale of its GMS subsidiary, both of which are expected in September. MECAR's bank group has verbally agreed to this proposal at the time of this filing. If the Company is unable to secure a final agreement with the bank group, it will have to look to alternative funding sources to repay the remaining €3,100 cash line which may include additional borrowing.

In addition, in April 2008, MECAR's bank group received local government support that will guarantee an additional portion of MECAR's performance bonds and advance payment guarantees from May through November 2008. This additional guarantee will reduce the required restricted cash balances at MECAR and allow the Company to fund MECAR through its critical working capital expansion period. This agency began guaranteeing approximately 50% of MECAR's new performance bonds and advance payment guarantees in July 2007. Because MECAR's ability to ship to certain Middle Eastern customers is limited in the summer months due to contractual restraints, the Company faces significant cash constraints in the summer months of August and September. The Company is managing through the summer months by postponing non-critical expenditures and rescheduling vendor payments. The Company's cash projections for 2008 show that the Company should be able to generate cash from operations in the last three months of 2008.

In addition, as described in Note 7 of the condensed consolidated financial statements, the Company's Convertible Notes have a put feature that allows the holders to put the notes back to the Company on December 26, 2008 and/or January 19, 2009 based on the date of issuance. As of June 30, 2008, the principal outstanding balance of Convertible Notes was $19,876. The Company has committed to a formal plan to sell GMS to ensure it has the funds available to meet this put feature. The Company is in active negotiation with a prospective purchaser. The Company expects to announce execution of a definitive purchase agreement in August 2008. This transaction is expected to close in September. The put feature requires the holders of the Convertible Notes to give at least 75 days notice of their intent to enforce this feature.

At June 30, 2008, the Company had $13,023 in cash on hand. For the six months ended June 30, 2008, the Company used $19,972 of cash for operating activities from continuing operations mainly related to increases in inventory and costs and accrued earnings on uncompleted contracts at MECAR as it performs on its substantial backlog. The Company does not anticipate continuing to use cash at this level for the remainder of 2008 as MECAR will increase its billings as the contracts in progress are shipped and generate cash collections in the third and fourth quarter of 2008.

In general, the Company believes, that it has adequate cash sources to fund operations in 2008 based on its strong current backlog and its history of performing on a profitable basis when backlog is substantial. However, the Company will sell GMS or refinance the terms of the convertible note holders "put", prior to year end. As noted above MECAR's credit facility has been refinanced for 2008. In the third quarter of 2008, management will begin the process of securing a long-term credit facility solution for MECAR. Management believes, based on MECAR's historic performance when it has substantial backlog as well as its operating performance from the fourth quarter of 2007 to current, that adequate opportunities will be available to find a long-term solution for MECAR's credit needs.

While the Company is looking to secure long-term MECAR financing and be able to satisfy the put feature on its Convertible Notes, there can be no assurance that:

• The Company will be successful securing MECAR's long-term financing.

• The Company will be successful managing its cash requirements in August and September at MECAR, as its ability to ship products, based on seasonality, is limited.

• The Company will be successful in taking necessary steps to be in a position to satisfy a potential "put" of its senior secured convertible notes which may be made in December 2008 and/or January 2009.

• The Company will be successful in its restructuring and turnaround efforts at its subsidiaries.

• The Company will be able to meet the financial debt covenants of its debt instruments.

• The strategic direction taken by the Company's Board of Directors will yield the greatest return to the shareholders.

The Company has less than $500 of firm commitments for capital expenditures outstanding as of June 30, 2008. No additional capital commitments are necessary to support the Company's 2008 revenue projections.

Overview Results

Allied had net income of $906 in the three months ended June 30, 2008 as compared to a net loss of $24,155 in the three months ended June 30, 2007. In the six months ended June 30, 2008, Allied had a net loss of $2,389 as compared to a net loss of $42,009 for the comparable period in 2007.

The net income from continuing operations before income taxes was $1,099 for the three months ended June 30, 2008 as compared to a net loss from continuing operations before income taxes of $23,478 for the comparable period in 2007. The decrease in loss from continuing operations before income taxes in 2008 resulted from improved operating performance mainly at MECAR and GMS and reduced restructuring activities, refinancing activities and interest expenses associated with the senior convertible notes. In addition, the Company recognized net gain on the fair value senior convertible notes and warrant of $705 in the current period as compared to incurred net loss on the fair value of senior convertible notes and warrants of $7,766 in 2007.

The net loss from continuing operations before income taxes was $2,037 for the six months ended June 30, 2008 as compared to $38,075 for the comparable period in 2007. The decrease in loss from continuing operations before income taxes in 2008 resulted from improved operating performance mainly at MECAR and GMS and reduced restructuring activities, refinancing activities and interest expenses associated with the senior convertible notes. In addition, the net loss on the fair value of senior convertible notes and warrants was $7,766 in 2007 as compared to $527 in the current period.

In July 2007, MECAR announced that it had successfully negotiated several new orders with various clients in Asia, Europe, North America and other export markets, with a total expected value exceeding $170,000 over a three year period. In addition in February 2008, the Company announced the award of an additional multi-year contract at MECAR for $43,500. Of the $170,000, the subsidiary has already received firm contracts totaling more than $100,000 for delivery during 2007 and 2008. As to the remaining $70,000, MECAR has received a notice of funding from the client, an end user certificate and export license for the contract and is working with the bank group to establish the applicable performance bond before reclassifying the contract as funded. The backlog at MECAR USA has grown to $35,954 at June 30, 2008 as compared to

$1,096 at June 30, 2007, driven in part by new procurement contracts. On a consolidated basis, the Company had firm committed backlog of $153,070 and additional unfunded backlog of $84,699 at June 30, 2008.

The Company expects improved performance for MECAR and its other subsidiaries. Over the past year, the Company has engaged consultants at MECAR and NSM to restructure the operations in order to decrease the break-even point at each subsidiary. The Company estimates that the break even point is approximately $84,180 (€55,000) per year in revenue for MECAR while NSM's break even point is estimated at annual revenue of approximately $10,000.

The Company's results were significantly affected by the foreign exchange impact on the operations of the Company's Euro-based business units. All Euro-based results of operations were converted at the average 2008 and 2007 exchange rates of 1.53055 and 1.32948, U.S. Dollar to 1 Euro, respectively.

Results of Operations for the Three Months Ended June 30, 2008 and 2007


                                                                Three Months Ended June 30,
                                                             2008                        2007
                                                      Amount          %          Amount           %

Revenue                                              $ 46,274        100.0 %    $   4,761         100.0 %
Cost and expenses
Cost of sales                                          35,667         77.0          9,437         198.2
Selling and administrative                              6,784         14.7          7,561         158.8
Research and development                                1,183          2.6          1,353          28.4

Operating income (loss)                                 2,640          5.7        (13,590 )      (285.4 )
Other income (expense)
Interest income                                           258          0.6             55           1.2
Interest expense                                       (2,445 )       (5.3 )       (5,385 )      (113.1 )
Gain (loss) from fair value of notes and warrants         705          1.5         (4,392 )       (92.3 )
Other - net                                               (59 )       (0.1 )         (166 )        (3.5 )

Income (loss) from continuing operations before
income taxes                                            1,099          2.4        (23,478 )      (493.1 )
Income tax expense (benefit)                              193          0.4              5           0.1

Net income (loss) from continuing operations, net
of tax                                                    906          2.0        (23,483 )      (493.2 )
Gain on sale of subsidiaries, net of tax                    -            -              -             -
Loss from discontinued operations, net of tax               -            -           (672 )       (14.1 )

Loss from discontinued operations, net of tax               -            -           (672 )       (14.1 )

Net Income (loss)                                    $    906          2.0 %    $ (24,155 )      (507.3 )%

Revenue. The table below shows revenue by segment for the three months ended June 30, 2008 and 2007, respectively. Allied had revenue of $46,274 during the current period, which was 872% higher than its revenue in the same period of 2007.

                                                                           Revenue by Segment
                                                         Three Months Ended                   Three Months Ended
                                                            June 30, 2008                       June 30, 2007
                                                                       Percentage                          Percentage
                                                      Amount            of total          Amount            of total

Ammunitions & Weapons Effects                      $     40,322                 87 %    $     1,347                 28 %
Electronic Security                                       5,952                 13            3,414                 72

Total                                              $     46,274                100 %    $     4,761                100 %

The Ammunition & Weapons Effects (AWE) segment revenue for the three months ended June 30, 2008 increased $38,975 (2893%) from the prior period mainly due to a higher volume of MECAR contracts in process due to increased orders received in July 2007. AWE segment revenues for the three months ended June 30, 2008 included $31,987 of revenues from MECAR and $8,335 of revenues from MECAR USA as compared to $1,347 of revenues from MECAR and $0 in revenue at MECAR USA in the prior period. The 2008 revenue for MECAR USA has increased significantly based on a receipt of several new procurement contracts in 2008. Since its inception in late 2005, MECAR USA had been participating in numerous bids for procurement contracts that require the Company to supply ammunition manufactured by other parties. In late 2007 and 2008, MECAR USA was successful in receiving several of these contracts and has grown the revenue levels in the current period. Based on a constant 2007 currency exchange rate for the period, the increase in the three month period for MECAR would have been $25,949 (1926%) as compared to an actual increase of $30,640 (2275%) from 2007 levels.

Revenue for the Electronic Security (ES) segment for the three months ended June 30, 2008 increased $2,538 (74%) from the prior comparable period of 2007. Revenue for the three months ended June 30, 2008 included $3,686 of revenue at GMS and $2,266 of revenues at NSM as compared to $2,391 of revenues at GMS and $1,023 of revenues at NSM in the prior period. The 2008 revenue for GMS was up by $1,295 for the three months ended June 30, 2008 from the prior comparable period as a result of the introduction of a number of new products and applications by GMS in late 2007 and new orders received from federal agencies for their frequency reallocation requirements. The increase of $1,243 in NSM revenue was primarily due to purchase orders received from government customers for frequency reallocation equipment upgrades. The growth experienced by both GMS and NSM was mainly attributable to the Commercial Spectrum Enhancement Act, which was signed into law in December 2004. Under this law the U.S government sold portions of the radio frequency spectrum used by Federal agencies to commercial wireless companies. This sale forced those agencies to vacate the spectrum that they had historically used, and upgrade systems and equipment to migrate to a new frequency for their operations. The cost of the upgrades is being borne by the commercial wireless carriers.

Cost of Sales. Cost of sales, as a percentage of revenue, for the three months ended June 30, 2008, was 77% compared to 198% for the same period in 2007. Gross profit (loss), as a percentage of revenues, was 23% and (98)% for the three months ended June 30, 2008 and 2007, respectively.

                                                            Cost of Sales as a Percentage of Revenue by Segment
                                                       Three Months Ended                           Three Months Ended
                                                          June 30, 2008                               June 30, 2007
                                                                     Percentage of                              Percentage of
                                                 Amount             Segment Revenue           Amount           Segment Revenue

Ammunitions & Weapons Effects                $        33,484                      83 %     $       7,223                    536 %
Electronic Security                                    2,183                      37               2,214                     65

Total                                        $        35,667                      77 %     $       9,437                    198 %

Cost of sales for the AWE segment was $33,484 (83% of segment revenue) in 2008 as compared to $7,223 (536% of segment revenue) in 2007. The change in cost of sales for the three months ended June 30, 2008 resulted primarily from higher sales activity at MECAR. In 2007, MECAR's cost of sales exceeded revenues as a result of a low level of revenues on MECAR's fixed cost structure. Gross profit for the AWE segment was $6,838 (17% of segment revenue) in 2008 as compared to a gross loss of $5,876 (436% of segment revenue) in the prior period. Gross profit for the three months ended June 30, 2008 consisted of $6,449 from MECAR and $389 from MECAR USA, as compared to a gross loss of $5,735 from MECAR and a gross loss of $141 from MECAR USA in the prior period. The difference between MECAR and MECAR USA's margin rates mainly resulted from in-house manufacturing that made up most of the MECAR's revenue as compared to procurement contracts at MECAR USA that have lower margin. In constant U.S Dollars, based on 2007 currency exchange rates, MECAR would have reported a gross profit of $5,493 rather than the reported gross profit of $6,449, which would have been a decrease of $956 in gross profit as a result of exchange rates.

Cost of sales for the ES segment was $2,183 (37% of segment revenue) in 2008 as compared to $2,214 (65% of segment revenue) in 2007. Gross profit for the ES segment was $3,769 (63% of segment revenue) in

2008 as compared to $1,200 (35% of segment revenue) in 2007. Gross profit for the three months ended June 30, 2008 consisted of $2,700 from GMS and $1,069 from NSM as compared to a gross profit of $1,484 from GMS and a gross loss of $284 from NSM in the prior period. The growth of the ES segment profit in 2008 was a result of the increased sales volume at both GMS and NSM and reduced fixed operating costs, including the outsourcing of manufacturing, at NSM.

Most of the Company's subsidiaries operate with a relatively high fixed cost structure. As a result, lower revenue levels can have a very unfavorable impact on profitability. The Company is focused on reducing these breakeven points wherever it can - on both a tactical and strategic level and is investing in business development and sales and marketing programs to ensure sales stay above break-even levels.

Selling and Administrative Expenses. Selling and Administrative (SA) expenses as a percentage of revenue were 15% and 159% for the three months ended June 30, 2008 and 2007, respectively. SA expenses for the three months ended June 30, 2008 consisted of $2,886 from the AWE segment, $1,509 from the ES segment and $2,389 from the Corporate segment as compared to expenses of $1,630 from the AWE segment, $1,484 from the ES segment and $4,447 from the Corporate segment in the prior period.

The increase of $1,256 in the AWE segment was mainly due to a higher level of spending for professional services related to the restructuring of the MECAR credit facility and a higher level of operating activity at both MECAR and MECAR USA in the current period. SA remained consistent in the ES segment between the two periods. The decrease of $2,058 in the Corporate segment resulted from reduced spending in staffing, legal and professional costs in the current period.

The Company is focused on reducing administrative costs across all business segments. It is consolidating back office functions within operating segments and is focused on significant reductions in corporate expenses as restructuring consultants are expected to be reduced in 2008.

Research and Development. Research and development (R&D) costs decreased $170 or
(13)% for the three months ended June 30, 2008 from 2007 levels. This decrease was attributable to overall reduced spending on R&D projects in the current period. The Company had less technical resources focused on Research and Development (R&D) during the three months ended June 30, 2007 due to higher contracts in process in 2008 as labor is diverted to production activities.

Interest Income. Interest income for the three months ended June 30, 2008 increased by $203 from 2007 levels. The increase in interest income was a result of having higher cash levels in 2008 compared to prior comparable period's cash levels in 2007.

Interest Expense. Interest expense for the three months ended June 30, 2008 was $2,445 as compared to prior period expense of $5,385. This decrease was mainly due to a write-down of outstanding unamortized debt issue cost of $1,749 from the debt restructuring in June 2007, an immediate recognition of costs incurred from the debt restructuring transactions of $1,644 in the prior period and an overall lower interest expense based on the reduced outstanding debt in 2008. Current period results were negatively impacted by $1,424 of increased interest expense associated with higher borrowing and increased financing charges associated with the MECAR's short term restructuring that was completed in April 2008.

Net Loss on fair value of the senior convertible notes and warrants. For the three months ended June 30, 2008, the Company recognized a net gain of $705 related to the fair value of the Notes and warrants as compared to the net loss of $4,392 for the comparable period in 2007. The change in the fair value of the Notes and warrants is due primarily to the change in the Company's closing stock price and its volatility during the period. On June 30, 2008, the Company's stock closed at $5.58 per common share as compared to $7.69 per common share on June 30, 2007. See Note 7 for a description of these instruments.

Other - Net. Other - net for the three months ended June 30, 2008 improved by $107 from 2007 levels. This improvement in loss was associated with MECAR's utilization of foreign currency forward contracts to minimize the foreign currency exposures in the three months ended June 30, 2008.

Pre-Tax Income (Loss)

The table below shows the pre-tax income (loss) by segment for the three months
ended June 30, 2008 as compared to the same period in prior year.


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