1260996--4/15/2009--AMERICAN_DEFENSE_SYSTEMS

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Risks Relating to Our Company We depend on the U.S. Government for a substantial amount of our sales and our growth in the last few years has been attributable in large part to U.S. wartime spending in support of troop deployments in Iraq and Afghanistan. If such troop levels are reduced significantly, our business may be harmed; and if we do not continue to experience demand for our products within the U.S. Government, our business may fail. Our revenues in 2008 have been concentrated in a small number of contracts obtained through the U.S. Department of Defense and the loss of, or reduction in estimated revenue under, any of these contracts, or the inability to contract further with the U.S. Department of Defense could significantly reduce our revenues and harm our business. We are required to comply with complex procurement laws and regulations, and the cost of compliance with these laws and regulations, and penalties and sanctions for any non-compliance could adversely affect our business. Government contracts are usually awarded through a competitive bidding process that entails risks not present in the acquisition of commercial contracts. The U.S. government may reform its procurement or other practices in a manner adverse to us. Our contracts with the U.S. government and its agencies are subject to audits and cost adjustments. A portion of our business depends upon obtaining and maintaining required security clearances, and our failure to do so could result in termination of certain of our contracts or cause us to be unable to bid or re-bid on certain contracts. We may not realize the full amount of revenues reflected in our backlog, which could harm our operations and significantly reduce our future revenues. We have breached certain financial covenants under our revolving line of credit with TD Bank and the partial or complete loss of such revolving line may impact our ability to timely meet our working capital requirements. U.S. government contracts often contain provisions that are typically not found in commercial contracts and that are unfavorable to us, which could adversely affect our business. The ownership, control or influence of our company by foreigners could result in the termination, non-renewal or our inability to obtain certain U.S. government contracts, which would reduce our revenues and harm our business. We depend on our suppliers and three, in particular, currently provide us with approximately 55% to 65% of our supply needs. If we can not obtain certain components for our products or we lost our key supplier, we might have to develop alternative designs that could increase our costs or delay our operations. If we fail to keep pace with the ever-changing market of security-related defense products, our revenues and financial condition will be negatively affected. We may be subject to personal liability claims for our products and if our insurance is not sufficient to cover such claims, our expenses may increase substantially. We are subject to substantial competition and we must continue research and development to remain competitive. We must comply with environmental regulations or we may have to pay expensive penalties or clean up costs. We may not be able to adequately safeguard our intellectual property rights and trade secrets from unauthorized use, and we may become subject to claims that we infringe on others' intellectual property rights. We depend on management and other key personnel and we may not be able to execute our business plan without their services. We depend on the use of our operating facilities, which currently are nearing capacity. To the extent our growth strategy is successful, our operations could require additional space by the end of 2009 which, if not obtained on a cost-effective basis, could adversely affect our results of operations and financial conditions. We may partner with foreign entities, and domestic entities with foreign contacts, which may affect our business plans. We are presently classified as a small business and the loss of our small business status may adversely affect our ability to compete for government contracts. We intend to pursue international sales opportunities which may require export licenses and controls. We have made, and expect to continue to make, strategic acquisitions and investments, and these activities involve risks and uncertainties. The outcome of litigation in which we have been named as a defendant is unpredictable and an adverse decision in any such matter could have a material adverse effect on our financial position or results of operations. Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our profitability. Risks Relating to Our Common Stock If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to report accurately our financial results. This could have a material adverse effect on our share price. Volatility of our stock price could adversely affect stockholders. We currently do not intend to pay dividends on our common stock and consequently your only opportunity to achieve a return on your investment is if the price of common stock appreciates. Provisions in our certificate of incorporation and bylaws or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our stock.

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1260996--4/15/2009--AMERICAN_DEFENSE_SYSTEMS_INC