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August 1, 2005

Securities and Exchange Commission

Attn: Rufus Decker, Branch Chief

Washington, DC 20549-0510

    RE:

    The Allied Defense Group, Inc. — Form 10-K for the Year Ended December 31, 2004

    Form 10-Q for the period ended March 31, 2005

    File No. 1-11376

Dear Mr. Decker:

In response to the Commission’s letter dated July 18, 2005, The Allied Defense Group, Inc. (the
“Company”) is providing the following responses to the Commission’s request for additional
information regarding our Form 10-K filing for the year ended December 31, 2004 and our Form 10-Q
for the period ended March 31, 2005.

Enclosed are the Commission’s inquiries and the Company’s responses which have been numbered to
correspond to the paragraph numbers contained in the July 18, 2005 letter.

The Company also acknowledges that:

    •

    the Company is responsible for the adequacy and accuracy of the disclosure in its
filings;

    •

    Staff comments or changes to disclosure in response to Staff comments do not
foreclose the Commission from taking any action with respect to the filing; and

    •

    the Company may not assert Staff comments as a defense in any proceeding initiated
by the Commission or any person under the federal securities laws of the United States.

You may contact me (703) 847-5268 should there be any further questions.

Sincerely,

__________________________
Gresford B. Gray

Controller & Corporate Secretary

Comment Applicable To Your Overall Filing

    1.

    SEC Comment

Where a comment below requests additional disclosures or other revisions to be made, please
show us in your supplemental response what the revisions will look like. These revisions
should be included in an amendment to your December 31, 2004 Form 10-K.

    Allied

We respectfully disagree with the SEC that all additional disclosures or other revisions
should be included in an amendment to our December 31, 2004 Form 10-K. It is our position
that since the cash in question was restricted, and could not be used for operations until the
restriction was lifted, the impact was not material and while the entry should be noted and
moved to cash from operating activities, it should be done so prospectively. We believe that
the revisions should be handled on a prospective basis. Our proposed revisions will be set
forth under the caption “Revised Disclosure in Future Filings.” Any related explanations or
comments will be set forth under the caption “Allied.”

Statement of Cash Flows, page F-11

    2.

    SEC Comment

We have read your response to comment three from our letter dated June 21, 2005. Please amend
your Form 10-K for the year ended December 31, 2004 to reflect the changes in your cash flow
statement.

    Please include a note in the financial statements included in your amended filing that
discusses the restatement related to the changes in restricted cash and restricted deposits.
In the note please disclose cash flows from operating activities and cash flow from financial
activities as reported and as restated for each period with the reclassified items shown as
reconciling items. You should also disclose the line items in which each amount was
previously included and the line item in which each is now included. Please refer to
paragraphs 13, 36 & 37 of APB 20 for the correction of an error in previously issued financial
statements.

    Your amended Form 10-K should include a revised auditor’s report containing an explanatory
paragraph consistent with AU 420.12.

    Allied

We respectfully disagree that we need to amend our Form 10-K based on the following reasons:

1. Materiality

    •

    As outlined in SEC Staff Accounting Bulletin 99 — Materiality, the
omission or misstatement of an item in a financial statement is material if, in the
light of surrounding circumstances, the magnitude of the item is such that it is
probable that the judgment of a reasonable person relying upon the report would
have been changed or influenced by the inclusion or correction of the item (as
stated in Statement of Financial Accounting Concepts No 2). With this in mind, we
do not believe that the reclassification between the financing and operating
section of the statement of cash flows “in light of surrounding circumstances”
warrants an amendment to our Form 10-K. The reclassification had no impact on the
Consolidated Statements of Earnings or on the Consolidated Balance Sheets. Thus,
there was no change to the Company’s earnings or its liquidity—the principal
measures considered by investors. The amounts of Cash and Restricted cash as set
forth in the Company’s financial statements are unaffected. The only impact of the
reclassification is a change among components of the Consolidated Statements of
Cash Flows. We have had virtually no queries from the investment community
concerning these components. Thus, it is difficult to see how this
reclassification would alter the judgment of a reasonable investor.

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    Caption of Consolidated

    Statements of Cash Flows

    As Previously

    (amounts in thousands)

    As Restated

    Reclassification

    Reported

    Year Ended December 31, 2004

    Cash Flows from Operating Activities

    $
    6,880

    $
    2,893

    $
    3,987

    Cash Flows used in Financing Activities

    (15,762
    )

    (2,893
    )

    (12,869
    )

    Net Decrease in Cash

    $
    (15,437
    )

    $
    0

    $
    (15,437
    )

    Year Ended December 31, 2003

    Cash Flows from Operating Activities

    $
    24,884

    $
    (5,807
    )

    $
    30,691

    Cash Flows from Financing Activities

    6,343

    5,807

    536

    Net Increase in Cash

    $
    28,501

    $
    0

    $
    28,501

    Year Ended December 31, 2002

    Cash Flows from Operating Activities

    $
    (532
    )

    $
    (775
    )

    $
    243

    Cash Flows from Financing Activities

    12,128

    775

    11,353

    Net Increase in Cash

    $
    3,954

    $
    0

    $
    3,954

    2. Difficult time treating classification as an error per APB 20

    •

    We do not believe that this reclassification of the restricted cash
meets the definition of an error per APB 20, paragraph 38. The definition in APB
20 is too restrictive. As a result, we do not believe that an amendment to our
December 31, 2004 Form 10-K is required.

    3. General

    •

    Our original December 31, 2004 Form 10-K includes a restatement related
to the FAS 133 derivatives. We believe that having a second restatement would
cause more confusion to our shareholders rather than providing any tangible
benefits. Frankly, the punishment does not fit the crime. As such, it would be
more prudent to show the revisions to the statement of cash flows on a prospective
basis.

    •

    Based on our assessment of our internal controls surrounding the
classification of changes in restricted cash on the statement of cash flows, we
believe that this adjustment, at best, is a significant deficiency, and does not
affect Item 9A of the Form 10-K.

    Based on the reasons outlined above, we do not believe that the reclassification between the
financing and operating section of the statement of cash flows warrants an amendment to our
Form 10-K. Instead, we propose that we reflect the reclassification on a prospective basis,
starting with our June 2005 10-Q.

2

    Revised Disclosure in Future Filings

Statement of Cash Flows

    2004

    2003

    2002

    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

    Restricted cash and restricted deposits

    2,893

    (5,807
    )

    (775
    )

    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

    4,362

    20,956

    (21,426
    )

    Net cash provided by operating activities

    6,880

    24,884

    (532
    )

    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

    2,000

    —

    —

    Net cash (used in) provided by financing
activities

    (15,762
    )

    6,343

    12,128

Note H — Goodwill, page F-23

    3.

    SEC Comment

Please provide us with additional information to help us understand the appropriateness of the
significant revenue growth assumed in your goodwill impairment analysis related to SeaSpace.

    From a quantitative perspective, Seaspace’s revenue growth is based on the sales activity
within two lines of business: 1) the core business that has existed since inception of this
unit, and 2) the new business estimated to be generated from a new product line of antennas
and other products manufactured or developed internally.

    Core business pertains to those sales planned to be generated from the current customer base.
Estimates for these sales come directly form the business unit and are reviewed by the
President of that particular unit. Those estimates are shown, in unit and price detail, in
the tab labeled “FINSALDET”.

    Antenna sales refer to a product line that was recently launched into production at the
beginning of 2005. A simple but less robust form of this particular product was produced for
the company by a third party in past years. Two years ago, the unit petitioned corporate for
funds to build this enhanced product in-house and to begin marketing the product in 2005. The
entire product line was

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    launched on a $3.4M infusion of capital of which the internal rate of return (IRR) on this
investment was initially estimated to exceed 40%. Projected sales for that product line are
shown on in the tab labeled “FINSALDET”. As with the core business sales estimates, these
projections originate from the subsidiary itself and are approved by that unit’s President.
It is our belief that the returns on this $3.4M investment will be realized over the next 4 to
5 years, and will approximate our original IRR projections. We have incorporated 4 years of
sales projections, for this product line, into our Goodwill analysis.

    From a qualitative perspective, we have successfully enhanced our management team, expanded
our product lines, expanded our customer list, favorably settled a cash-draining law suit, and
concluded an intense and expensive R&D effort in support of the antenna project. These
qualitative enhancements to the business are also considered in our goodwill analysis.

    4.

    SEC Comment

Please confirm that cash flows in FY 2008 include the terminal value cash flows. Please also
tell us how you calculated the probability weighted cash flows in your model and explain the
probabilities used.

    The terminal value for this analysis is included, and our notes related to the manner in which
we calculated the value appears in the tab labeled “FINDATAP”. Cell references with the
formula for calculating the Present Value of the terminal value appears in cell D54.

    The probabilities that you refer to appear on lines 45 thru 49 and were based on the judgment
of ADG management; both at the subsidiary and corporate levels. Those probabilities were also
weighted using the judgment of management.

    Our analysis assumes that 60% of the cash flows estimated each year will be actually realized.
The balance of 40% is expected to be realized based on the weightings that appear in cells
A45 thru A49. Our methodology of assigning probabilities is consistent with current
valuations methods and is also applied in accordance with FAS 142 — further guidance is
contained in Concept 7.

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