AMERICAN DEFENSE SYSTEMS INC

APSG

On March 22, 2011, the Company entered into a Securities Redemption Agreement (the "Redemption Agreement") with the Series A Holders, pursuant to which the Company sold to the Series A Holders all of the issued and outstanding membership interests in APSG, the Company’s wholly-owned subsidiary. The Series A Holders owned an aggregate of 15,000 shares of the Series A Preferred. In exchange for the sale of the APSG interests to the Series A Holders, the Series A Holders (i) paid the Company $1,000,000 in cash at the closing of the transactions and (ii) tendered to the Company the Series A Preferred, which had an aggregate redemption price of $16,500,000. Upon the closing of the transactions, the Series A Holders own 100% of the APSG interests and APSG is no longer a subsidiary of the Company.

In connection with the Redemption Agreement, the Company and the Series A Holders entered into a Membership Interest Option Agreement (the "Option Agreement") pursuant to which the Series A Holders granted the Company an option (the “Option”) to repurchase the APSG interests within six months following the closing of the transactions contemplated by the Redemption Agreement at a cash purchase price equal to the sum of (i) $15,525,000, plus (ii) the amount of any net investment made in APSG concurrently with and following the closing of the Redemption Agreement and prior to the closing of the purchase of the APSG membership interests pursuant to exercise of the Option. An analysis of the Option was performed and its value was deemed to be immaterial.

The presentation herein of the results of continuing operations excludes APSG for all periods presented. The following APSG amounts have been segregated from continuing operations and are reflected as discontinued operations in the condensed consolidated statement of operations for the nine months ended September 30, 2012 and 2011:

There were no APSG amounts reflected as discontinued operations in the condensed consolidated statement of operations for the three months ended September 30, 2012 and 2011.

The total consideration the Company received in connection with the Redemption Agreement was $1.0 million in cash and the return and extinguishment of the mandatorily redeemable Series A Preferred which had a redemption value of $16.5 million. The Company allocated $4.4 million of the consideration to the sale of APSG based on a calculation of the fair value of APSG with the residual amount of the consideration allocated to the redemption of the Series A Preferred. The Company recorded a gain on the sale of APSG of $2,910,565 for the nine months ended September 30, 2011 based on the difference between the allocated consideration and the net book value of APSG, including goodwill.

T2

During the second quarter of 2011, management decided to establish a plan to sell and or discontinue the operations of a portion of AI’s business consisting of the operation of a live-fire interactive tactical training range located in Hicksville, NY, hereinafter referred to as “T2”, therefore, the presentation herein of the results of continuing operations excludes T2 for all periods presented.

The following T2 amounts have been segregated from continuing operations and are reflected as discontinued operations in the condensed consolidated statement of operations for the nine months ended September 30, 2012 and 2011:

The following T2 amounts have been segregated from continuing operations and are reflected as discontinued operations in the condensed consolidated statement of operations for the three months ended September 30, 2012 and 2011:

The following T2 amounts have been segregated from continuing operations and are reflected as discontinued operations in the condensed consolidated balance sheets at September 30, 2012 and December 31, 2011:

During the nine months ended September 30, 2012, the Company impaired the balance of T2 assets. During the nine months ended September 30, 2011, the Company recorded an impairment loss of $199,454 on long-lived assets related to T2.

The Company recorded an additional reserve of $50,000 during the nine months ended September 30, 2011 related to a note receivable from the sale of TAG which operations were discontinued in 2009.

Cash flows from discontinued operations were not reported separately for the nine months ended September 30, 2012 and 2011.