1368622--6/25/2010--AeroVironment

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We rely heavily on sales to the U.S. government, particularly to agencies of the Department of Defense. Military transformation and operational levels in Afghanistan and Iraq may affect future procurement priorities and existing programs, which could limit demand for our UAS. We operate in evolving markets, which makes it difficult to evaluate our business and future prospects. We face competition from other firms, many of which have substantially greater resources. If the UAS and electric vehicle charging and testing systems markets do not experience significant growth, if we cannot expand our customer base or if our products do not achieve broad acceptance, then we will not be able to achieve our anticipated level of growth. If critical components of our products that we currently purchase from a small number of suppliers or raw materials used to manufacture our products become scarce or unavailable, then we may incur delays in manufacturing and delivery of our products, which could damage our business. Any efforts to expand our product offerings beyond our current markets may not succeed, which could negatively impact our operating results. Our failure to obtain necessary regulatory approvals from the FAA or other appropriate governmental agency may prevent us from expanding the sales of our small UAS to non-military customers in the United States and require us to incur additional costs in the testing of our products. The markets in which we compete are characterized by rapid technological change, which requires us to develop new products and product enhancements, and could render our existing products obsolete. We expect to incur substantial research and development costs and devote significant resources to identifying and commercializing new products, which could significantly reduce our profitability and may never result in revenue to us. If we are unable to manage our growth, our business could be adversely affected. Our earnings and profit margins may decrease based on the mix of our contracts and programs and other factors related to our contracts. Our senior management and key employees are important to our customer relationships and overall business. We must recruit and retain highly-skilled employees to succeed in our competitive business. Our business may be dependent upon our employees obtaining and maintaining required security clearances. Cost overruns on our contracts could subject us to losses, decrease our operating margins and adversely affect our future business. Our products are complex and could have unknown defects or errors, which may give rise to claims against us, diminish our brand or divert our resources from other purposes. The operation of UAS in urban environments may be subject to risks, such as accidental collisions and transmission interference, which may limit demand for our UAS in such environments and harm our business and operating results. Our quarterly operating results may vary widely. Shortfalls in available external research and development funding could adversely affect us. Volatility and cyclicality in the market for electric industrial vehicles could adversely affect us. Our success in the emerging market for passenger and fleet plug-in electric and hybrid vehicle charging systems will depend on numerous factors which are out of our control. Our industrial electric vehicle charging systems business is dependent upon our relationships with third parties with whom we do not have exclusive arrangements. Our plug-in electric and hybrid vehicle charging system business is dependent upon our development of relationships with automakers, utilities and other participants in the plug-in electric and hybrid vehicle and electricity delivery markets. We work in international locations where there are high security risks, which could result in harm to our employees and contractors or substantial costs. We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders. Our investment portfolio includes investments in auction rate securities. Failures in the auctions for these securities affect our liquidity, while deterioration in credit ratings of issuers of such securities and/or third parties insuring such investments may require us to adjust the carrying value of our investment through an impairment of earnings. We face a number of risks related to the recent financial crisis and severe tightening in the global credit markets. Our international business poses potentially greater risks than our domestic business. Potential future acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and impair our financial results. Environmental laws and regulations and unforeseen costs could impact our future earnings. Our plug-in electric and hybrid vehicle charging system business is subject to federal, state and international laws regarding data protection and privacy, and a privacy breach could damage our reputation, expose us to litigation risk and adversely affect our business. Our business and operations are subject to the risks of earthquakes and other natural catastrophic events. Risks Related to Our U.S. Government Contracts We are subject to extensive government regulation, and our failure to comply with applicable regulations could subject us to penalties that may restrict our ability to conduct our business. Our business could be adversely affected by a negative audit or investigation by the U.S. government. Some of our contracts with the U.S. government allow it to use inventions developed under the contracts and to disclose technical data to third parties, which could harm our ability to compete. U.S. government contracts are generally not fully funded at inception and contain certain provisions that may be unfavorable to us, which could prevent us from realizing our contract backlog and materially harm our business and results of operations. U.S. government contracts are subject to a competitive bidding process that can consume significant resources without generating any revenue. Risks Related to Our Intellectual Property If we fail to protect, or incur significant costs in defending, our intellectual property and other proprietary rights, our business, financial condition, and results of operations could be materially harmed. We may be sued by third parties for alleged infringement of their proprietary rights, which could be costly, time-consuming and limit our ability to use certain technologies in the future. Risks Relating to Securities Markets and Investment in Our Stock The price of our common stock may fluctuate significantly. Our management, whose interests may not be aligned with yours, is able to exert significant influence over all matters requiring stockholder approval.

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1368622--6/25/2010--AeroVironment_Inc