10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended June 30, 2011

Commission File Number 001-33888

American Defense Systems, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	83-0357690
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

420 McKinney Pkwy

Lillington, NC 27546

(910) 514-9701

(Address including zip code, and telephone number, including area code, of principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  o  No  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer   o	Accelerated Filer   o
Non-Accelerated Filer   o	Smaller Reporting Company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

As of August 15, 2011, 54,512,192 shares of common stock, par value $0.001 per share, of the registrant were outstanding.

Explanatory Note

The purpose of this Amendment No. 1 to the Quarterly Report on Form 10-Q of American Defense Systems, Inc. for the quarterly period ended June 30, 2011, filed with the Securities and Exchange Commission on August 22, 2011 (the “Form 10-Q”), is solely to furnish Exhibit 101 to the Form 10-Q in accordance with Rule 405 of Regulation S-T. Exhibit 101 to this report provides the consolidated financial statements and related notes from the Form 10-Q formatted in XBRL (eXtensible Business Reporting Language).

No other changes have been made to the Form 10-Q.  This Amendment No. 1 to the Form 10-Q speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the original Form 10-Q.

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed (1) not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended,  and (2) not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit
Number	Exhibit
31.1  Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. (1)
31.2  Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended. (1)
32.1  Certification of Chairman and Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)
101.INS*  XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema
101.CAL* XBRL Taxonomy Extension Calculation Linkbase
101.DEF* XBRL Taxonomy Extension Definition Linkbase
101.LAB* XBRL Taxonomy Extension Label Linkbase
101.PRE* XBRL Taxonomy Extension Presentation Linkbase

(1) Previously filed as an Exhibit to the Quarterly Report on Form 10-Q for the period ended June 30, 2011 filed on August 22, 2011.

* XBRL information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AMERICAN DEFENSE SYSTEMS, INC.
Date: September 12, 2011	By:	/s/ Gary Sidorsky
		Gary Sidorsky
		Chief Financial Officer

Index to Exhibits

Exhibit
Number	Exhibit
31.1	Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. (1)
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended. (1)
32.1	Certification of Chairman and Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase
101.DEF*	XBRL Taxonomy Extension Definition Linkbase
101.LAB*	XBRL Taxonomy Extension Label Linkbase
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase

(1) Previously filed as an Exhibit to the Quarterly Report on Form 10-Q for the period ended June 30, 2011 filed on August 22, 2011.

* XBRL information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Jun. 30, 2011	Dec. 31, 2010
Accounts receivable, allowance for doubtful accounts	$ 531,561	$ 380,756	[1]
Mandatorily redeemable Series A convertible preferred stock (cumulative), shares authorized	15,000	15,000	[1]
Mandatorily redeemable Series A convertible preferred stock (cumulative), shares issued	0	15,000	[1]
Mandatorily redeemable Series A convertible preferred stock (cumulative), shares outstanding	0	15,000	[1]
Common stock, par value	$ 0.001	$ 0.001	[1]
Common stock, shares authorized	100,000,000	100,000,000	[1]
Common stock, shares issued	54,512,192	54,341,685	[1]
Common stock, shares outstanding	54,512,192	54,341,685	[1]

[1] Condensed from audited financial statements

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
CONTRACT REVENUES EARNED	$ 1,838,949	$ 8,714,050	$ 4,375,102	$ 20,023,015
COST OF REVENUES EARNED (exclusive of depreciation shown separately below)	1,129,567	7,172,988	2,516,110	13,756,426
GROSS PROFIT	709,382	1,541,062	1,858,992	6,266,589
OPERATING EXPENSES
General and administrative expenses	770,939	896,257	1,587,957	2,326,487
General and administrative salaries	649,054	933,288	1,352,949	1,817,507
Sales and marketing	104,311	571,800	275,715	1,134,609
Research and development	68,857	151,997	184,015	273,714
Depreciation	210,953	265,562	433,595	529,756
Professional fees	262,193	694,163	501,056	1,267,533
TOTAL OPERATING EXPENSES	2,066,307	3,513,067	4,335,287	7,349,606
OPERATING LOSS	(1,356,925)	(1,972,005)	(2,476,295)	(1,083,017)
OTHER INCOME (EXPENSE)
Unrealized loss on adjustment of fair value Series A convertible preferred stock classified as a liability		(226,915)	(2,395,592)	(873,015)
Unrealized gain on warrant liability	5,142	34,004	8,268	9,575
Gain on sale of fixed asset			54,475
Gain on redemption of mandatorily redeemable preferred stock			12,786,969
Settlement of litigation	(45,000)		(45,000)
Interest expense	(255)	(505,761)	(236,373)	(1,150,490)
Interest expense - mandatorily redeemable preferred stock dividends		(375,000)		(750,000)
Finance charge	(10,994)	(97,082)	(31,206)	(176,863)
TOTAL OTHER INCOME (EXPENSE)	(51,107)	(1,170,754)	10,141,541	(2,940,793)
INCOME (LOSS) BEFORE INCOME TAXES FROM CONTINUING OPERATIONS	(1,408,032)	(3,142,759)	7,665,246	(4,023,810)
INCOME TAX PROVISION
INCOME (LOSS) FROM CONTINUING OPERATIONS	(1,408,032)	(3,142,759)	7,665,246	(4,023,810)
DISCONTINUED OPERATIONS (Note 6):
INCOME (LOSS) FROM DISCONTINED OPERATIONS, (including gain on disposal of $2,910,565 during the six months ended June 30, 2011), NET OF TAX of $0	(362,575)	(574,412)	2,525,034	(517,765)
NET INCOME (LOSS)	$ (1,770,607)	$ (3,717,171)	$ 10,190,280	$ (4,541,575)
Weighted Average Shares Outstanding (Basic and Diluted)	54,379,159	47,878,737	54,360,526	47,341,485
Income (Loss) per Share (Basic and Diluted)
INCOME (LOSS) FROM CONTINUING OPERATIONS	$ (0.02)	$ (0.07)	$ 0.14	$ (0.09)
INCOME (LOSS) FROM DISCONTINED OPERATIONS, NET OF TAX	$ (0.01)	$ (0.01)	$ 0.05	$ (0.01)
NET INCOME (LOSS)	$ (0.03)	$ (0.08)	$ 0.19	$ (0.10)

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Document and Entity Information	6 Months Ended
	Jun. 30, 2011	Aug. 15, 2011
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2
Trading Symbol	EAG
Entity Registrant Name	AMERICAN DEFENSE SYSTEMS INC
Entity Central Index Key	0001260996
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		54,512,192

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DISCONTINUED OPERATIONS

6 Months Ended

Jun. 30, 2011

DISCONTINUED OPERATIONS

6. DISCONTINUED OPERATIONS

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 be 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 six months ended June 30, 2011 and 2010:

	2011		2010
Revenues	$	969,291	$	6,861,194
Income (loss) from discontinued operations before income taxes		126,518		(48,438	)
Gain on disposal of APSG		2,910,565		-
Income tax expense		-		-
Income (loss) from discontinued operations, net of tax	$	3,037,083	$	(48,438	)

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 three months ended June 30, 2011 and 2010:

	2011		2010
Revenues	$	-	$	2,724,715
Loss from discontinued operations before income taxes		-		(346,933	)
Gain on disposal of APSG		-		-
Income tax expense		-		-
Loss from discontinued operations, net of tax	$	-	$	(346,933	)

The following APSG amounts have been segregated from continuing operations and are reflected as discontinued operations in the condensed consolidated balance sheet at December 31, 2010:

Current Assets:
Cash	$	178,304
Accounts receivable, net		1,417,240
Inventory		307,732
		1,903,276
Long-term Assets:
Property and equipment, net		17,926
Intangibles		634,450
		652,376
Liabilities
Accounts payable and accrued expenses	$	1,671,350

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 preliminary 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 approximately $3 million for the six months ended June 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 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 six months ended June 30, 2011 and 2010:

	2011		2010
Loss from discontinued operations, net of tax	$	462,049	$	469,327

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 June 30, 2011 and 2010:

	2011		2010
Loss from discontinued operations, net of tax	$	312,575	$	227,479

The following T2 amounts have been segregated from continuing operations and are reflected as discontinued operations in the condensed consolidated balance sheets at June 30, 2011 and December 31, 2010:

	June 30, 2011		December 31, 2010
Current Assets:
Cash	$	11,450	$	1,323
Accounts receivable, net		11,174		6,475
		22,624		7,798
Long-term Assets:
Property and equipment, net		18,517		311,960
Liabilities
Accrued expenses	$	1,960	$	6,023

During the three months ended June 30, 2011, the Company recorded an impairment loss of $199,454 on long-lived assets related to T2.

Tactical Applications Group (“TAG”)

The Company recorded an additional reserve of $50,000 during the three months ended June 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 six months ended June 30, 2011 and 2010.

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COSTS IN EXCESS OF BILLINGS (BILLINGS IN EXCESS OF COSTS) ON UNCOMPLETED CONTRACTS AND ACCOUNTS RECEIVABLE

6 Months Ended

Jun. 30, 2011

COSTS IN EXCESS OF BILLINGS (BILLINGS IN EXCESS OF COSTS) ON UNCOMPLETED CONTRACTS AND ACCOUNTS RECEIVABLE

2. COSTS IN EXCESS OF BILLINGS (BILLINGS IN EXCESS OF COSTS) ON UNCOMPLETED CONTRACTS AND ACCOUNTS RECEIVABLE

Costs in Excess of Billings and Billing in Excess of Costs

The cost in excess of billings on uncompleted purchase orders issued pursuant to contracts reflects the accumulated costs incurred on purchase orders in production but not completed. Upon completion, inspection and acceptance by the customer, the purchase order is invoiced and the accumulated costs are charged to the statement of operations as costs of revenues earned.  During the production cycle of the purchase order, should any progress billings occur or any interim cash payments or advances be received, such billings and/or receipts on uncompleted contracts are accumulated as billings in excess of costs. The Company fully expects to collect net costs incurred in excess of billing within twelve months and periodically evaluates each purchase order and contract for potential disputes related to overruns and uncollectable amounts.

Costs in excess of billing on uncompleted contracts were $1,651,647 and $1,472,606 as of June 30, 2011 and December 31, 2010, respectively.

Backlog

The estimated gross revenue on work to be performed on backlog was approximately $7 million and $19 million as of June 30, 2011 and 2010, respectively.

Accounts Receivable

The Company records accounts receivable related to its long-term contracts, based on billings or on amounts due under the contractual terms. Accounts receivable consist primarily of receivables from completed purchase orders and progress billings on uncompleted contracts. Allowance for doubtful accounts is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. Any amounts considered recoverable under the customer’s surety bonds are treated as contingent gains and recognized only when received.

Accounts receivable throughout the year may decrease based on payments received, credits for change orders, or back charges incurred. At June 30, 2011 and December 31, 2010, the Company had accounts receivable of $881,952 and $1,035,016, respectively and an allowance for doubtful accounts of $531,561 and $380,756, respectively. The Company recorded bad debt expense of approximately $150,000 for the three and six months ended June 30, 2011. The Company recorded bad debt expense of $45,000 and $90,000 for the three and six months ended June 30, 2010, respectively.

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INCOME TAXES

6 Months Ended

Jun. 30, 2011

INCOME TAXES

7. INCOME TAXES

In its interim financial statements the Company follows the guidance in ASC 270, “Interim Reporting” (“ASC 270”) and ASC 740, “Income Taxes” (“ASC 740”) whereby the Company utilizes the expected annual effective tax rate in determining its income tax provisions for the interim period’s income or loss. That rate differs from the U.S. statutory rate primarily as a result of certain net operating loss carryforwards and permanent differences between book and tax reporting. Based on its preliminary assessment, the Company believes the transactions entered into on March 22, 2011 (See Notes 5 and 6) will not result in significant tax as a result of differences in book and tax reporting and the availability of net operating losses to offset taxable income.

The Company does not expect that its unrecognized tax benefits will significantly change within the next twelve months. The Company files a consolidated U.S. income tax return and tax returns in certain state and local jurisdictions. There are no current tax examinations in progress. As of June 30, 2011, the Company remains subject to examination in applicable tax jurisdictions for the relevant statute of limitations periods.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	6 Months Ended
	Jun. 30, 2011		Jun. 30, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS)	$ 10,190,280		$ (4,541,575)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Gain on redemption of preferred stock	(12,786,969)
Gain on disposal of subsidiary	(2,910,565)
Gain on sale of fixed asset	(54,475)
Settlement of litigation	45,000
Impairment of fixed assets	199,454
Change in costs in excess of billings reserve			60,000
Change in fair value associated with preferred stock and warrants liabilities	2,387,324		863,442
Stock based compensation expense	75,107		160,311
Amortization of deferred financing costs	141,710		677,053
Amortization of discount on Series A preferred stock	94,408		467,582
Depreciation and amortization	529,931		579,252
Bad debt expense	150,805		90,000
Write-off of note receivable	50,000
Deferred rent	27,688		176,582
Stock issued for payment of dividends on preferred stock			750,000
Changes in operating assets and liabilities:
Accounts receivable	(583,288)		(3,546,465)
Accounts receivable factoring	84,463		(37,612)
Deposits and other assets	72,089		73,951
Cost in excess of billing on uncompleted contracts	(90,318)		3,294,019
Prepaid expenses and other current assets	131,865		(106,264)
Accounts payable and accrued expenses	564,207		295,952
NET CASH USED IN OPERATING ACTIVITIES	(1,681,284)		(743,772)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed asset	429,697
Proceeds from disposal of subsidiary/redemption of preferred stock	1,000,000
Purchase of equipment	(7,256)		(158,782)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	1,422,441		(158,782)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft			918,884
NET CASH PROVIDED BY FINANCING ACTIVITIES			918,884
NET (DECREASE) INCREASE IN CASH	(258,843)		16,330
CHANGE IN CASH OF DISCONTINUED OPERATIONS, INCLUDING CASH DISPOSED OF AT THE TRANSACTION DATES	143,350
CASH AT BEGINNING OF YEAR	248,532	[1]
CASH AT THE END OF PERIOD	133,039		16,330
Supplemental disclosure of cash flow information:
Cash paid during the period for interest
Cash paid during the period for taxes
Non cash investing and financing activities:
Redemption of mandatorily redeemable preferred stock	$ 16,500,000

[1] Condensed from audited financial statements

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COMMITMENTS AND CONTINGENCIES

6 Months Ended

Jun. 30, 2011

COMMITMENTS AND CONTINGENCIES

3. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

The Company is subject to various claims and contingencies in the ordinary course of its business, including those related to litigation, business transactions, employee-related matters, and others. When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company will record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material. While there can be no assurances, the Company does not expect that any of its pending legal proceedings will have a material financial impact on the Company’s results.

On February 29, 2008, Roy Elfers, a former employee commenced an action against the Company for breach of contract arising from his termination of employment in the Supreme Court of the State of New York, Nassau County. The Complaint seeks damages of approximately $87,000. The parties have completed discovery and have completed taking depositions. On July 26, 2011, the Company proposed a settlement, and the Company has accrued its best estimate of the settlement cost at June 30, 2011 in accordance with ASC 450.

On March 4, 2008, Thomas Cusack, the Company’s former General Counsel, commenced an action with the United States Department of Labor, Occupational Safety and Health and Safety Administration, alleging retaliation in contravention of the Sarbanes-Oxley Act. On April 2, 2008, the Company filed a response to the charges. On May 12, 2011, the Department of Labor dismissed the complaint.  On March 7, 2008, Mr. Cusack also commenced a second action against the Company for breach of contract and related issues arising from his termination of employment in New York State Supreme Court, Nassau County. On May 7, 2008, the Company served a motion to dismiss the complaint, and on or about September 26, 2008, the Court dismissed several claims (tortious interference with a contract, tortious interference with economic opportunity, fraudulent inducement to enter into a contract and breach of good faith and fair dealing). The remaining claims are Mr. Cusack's breach of contract claims, stock conversion claim, as well as one claim for conversion of his personal property which Mr. Cusack has also asserted against the Company’s executive officers. On October 13, 2008, Mr. Cusack filed an amended complaint as to the remaining claims, and on November 5, 2008, the Company filed an answer to the amended complaint and filed counterclaims against Mr. Cusack for fraud and rescission of his contract. The parties have completed discovery and have scheduled depositions. The parties submitted motions for summary judgment, and on August 19, 2010, the Court granted Mr. Cusack’s motion as to his stock conversion claim and narrowed certain issues as to his breach of contract claims. On July 19, 2011, the Appellate Division upheld the stock conversion decision but reversed the decision to narrow the issues as to the breach of contract claims. The next court date is scheduled for October 5, 2011. Mr. Cusack seeks damages in excess of $3,000,000. The Company intends to vigorously defend this action.

On January 7, 2011, Action Group, Inc. commenced an action in the United States District Court for the Eastern District of New York. The complaint seeks $1,187,510 for goods allegedly sold to the Company, for which payment was not received. This amount is included in accounts payable in the condensed consolidated balance sheet as of June 30, 2011. While the parties were engaged in settlement discussions, plaintiff sought and was granted entry of a default on February 8, 2011. Plaintiff then filed a motion with the Court, dated March 7, 2011, seeking entry of a default judgment in the amount of $1,246,542, representing the original demand set forth in the complaint, plus interest, costs and disbursements. On March 16, 2011, the Court issued an Order, directing Defendants to respond to the Court in writing within seven days as to why default judgment should not be entered. On March 28, 2011, counsel for the Company sought and obtained an Order from the Court extending its time to respond to the Court’s March 16, 2011 Order up to and including April 11, 2011. On April 11, 2011, Defendants served and filed a motion to set aside the default entered against them, and in opposition to plaintiff’s motion for entry of a default judgment. On May 26, 2011, the Court, granting the Company’s motion to set aside the default, vacated the default and ordered the Company to file an answer to the complaint. The Company has since interposed its answer, asserting several affirmative defenses to the causes of action alleged. The Court has issued a proposed discovery scheduling order for review and comment by the parties, and the parties will begin the discovery process shortly, including document exchange and depositions.

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SHAREHOLDERS' EQUITY (DEFICIENCY)

6 Months Ended

Jun. 30, 2011

SHAREHOLDERS' EQUITY (DEFICIENCY)

4. SHAREHOLDERS’ EQUITY (DEFICIENCY)

The following table summarizes the changes in shareholders' equity (deficiency) for the six months ended June 30, 2011:

Balance - January 1, 2011	$	(9,760,747	)
Stock based compensation		75,107
Net income		10,190,280
Balance - June 30, 2011	$	504,640

Warrants

The following is a summary of stock warrants outstanding at June 30, 2011:

			Weighted Average		Weighted Average Remaining Contractual Lives
	Warrants		Exercise Price		(in years)
Balance – January 1, 2011		675,001	$	2.00		2.18
Granted		-		n/a		-
Exercised		-		n/a		-
Cancelled, Forfeited or expired		-		n/a		-
Balance – June 30, 2011		675,001	$	2.00		1.69
Exercisable – June 30, 2011		675,001

Stock Option Plan

The Company accounts for all stock based compensation as an expense in the financial statements and associated costs are measured at the fair value of the award. The Company also recognizes the excess tax benefit related to stock option exercises as financing cash inflows instead of operating inflows. As a result, the Company’s net income (loss) before taxes for the six months ended June 30, 2011 and 2010 included $75,107 and $160,311 of stock based compensation, respectively and $41,828 and $42,304, respectively for the three months ended June 30, 2011 and 2010. The stock based compensation expense is included in general and administrative expense in the condensed consolidated statements of operations. The Company has selected a “with-and-without” approach regarding the accounting for the tax effects of share-based compensation awards.

The following is a summary of stock options outstanding at June 30, 2011:

	Stock Options			Weighted- Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life (In years)
Outstanding, January 1, 2011		2,505,000		$	1.65		-		4.38
Granted		-			n/a		n/a		n/a
Exercised		-			n/a		n/a		n/a
Cancelled/forfeited		(65,000	)		2.00		n/a		n/a
Outstanding, June 30, 2011		2,440,000		$	1.64		-		3.90
Exercisable, June 30, 2011		1,289,001		$	1.83				3.60

As of June 30, 2011, there was a total of $262,272 of unrecognized compensation arrangements granted under the Company’s 2007 Incentive Compensation Plan (the “2007 Plan”). The cost is expected to be recognized through 2015.

The Company did not issue any options during the six and three months ended June 30, 2011.

The Company issued 171,000 shares of common stock to directors and consultants as compensation under the 2007 Plan during the three months ended June 30, 2011. The fair value on the date of grant was $8,550 based on the stock price on the date of issuance. These awards were fully vested on the date of grant.

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MANDATORILY REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANT LIABILITIES

6 Months Ended

Jun. 30, 2011

MANDATORILY REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANT LIABILITIES

5. MANDATORILY REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANT LIABILITIES

Series A Preferred

The Series A Preferred was redeemable on October 1, 2011 and convertible into shares of common stock at a rate of 2,000 shares of common stock for each share of Series A Preferred. 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 be 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 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 prepared a preliminary estimate of the fair value of APSG and allocated $4.4 million of the consideration to the sale of APSG and the residual amount of the consideration was allocated to the redemption of the Series A Preferred. The Company recorded a gain on the redemption of the Series A Preferred, which had been previously accounted for as a liability, of approximately $13 million, net of the write off of the unamortized deferred financing costs, for the six months ended June 30, 2011.

2005 Warrants, 2006 Warrants, and Placement Agent Warrants

Upon issuance, the 2005 Warrants, 2006 Warrants, and Placement Agent Warrants met the requirements for equity classification set forth in Emerging Issues Task Force (“EITF”) Issue 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company’s Own Stock, and Statement of Financial Accounting Standards (“SFAS”) No. 133, as codified in ASC 815. However, effective January 1, 2009, the Company was required to analyze its then outstanding financial instruments in accordance with EITF 07-5 as codified in ASC 815-40. Based on the Company’s analysis, its 2005 Warrants, 2006 Warrants, and Placement Agent Warrants, include price protection provisions whereby the exercise price could be adjusted upon certain financing transactions at a lower price per share and could no longer be viewed as indexed to the Company’s common stock. As a result, the 2005 Warrants, 2006 Warrants, and Placement Agent Warrants are accounted for as “derivatives” under ASC 815 and recorded as liabilities at fair value as of January 1, 2009 with changes in subsequent period fair value recorded in the statement of operations. The 2005 and 2006 Warrants expired in June 2010.

Fair values for the Company’s derivatives and financial instruments are estimated by utilizing valuation models that consider current and expected stock prices, volatility, dividends, market interest rates, forward yield curves and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates which may change in the future. The methods and significant inputs and assumptions utilized in estimating the fair value of the Placement Agent Warrants are discussed below. Each of the measurements is considered a Level 3 measurement as a result of at least one unobservable input.

Placement Agent Warrants

The Company estimated the fair value of the Placement Agent Warrants as of June 30, 2011. The model used is subject to the significant assumptions discussed below and requires the following key inputs with respect to the Company and/or instrument:

Quoted Stock Price	$	0.08
Exercise Price	$	2.00
Expected Life (in years)		1.69
Stock Volatility		98.16	%
Risk-Free Rate		0.81	%
Dividend Rate		0	%

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Parenthetical) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
INCOME (LOSS) FROM DISCONTINED OPERATIONS, gain on disposal			$ 2,910,565
INCOME (LOSS) FROM DISCONTINED OPERATIONS, TAX	$ 0	$ 0	$ 0	$ 0

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NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2011

NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

American Defense Systems, Inc. (the “Company” or “ADSI”) was incorporated under the laws of the State of Delaware on December 6, 2002.

On May 1, 2003, the stockholder of A. J. Piscitelli & Associates, Inc. (“AJP”) exchanged all of his issued and outstanding shares for shares of American Defense Systems, Inc. The exchange was accounted for as a recapitalization of the Company, wherein the stockholder retained all the outstanding stock of American Defense Systems, Inc. At the time of the acquisition American Defense Systems, Inc. was substantially inactive.

In January 2008, American Physical Security Group, LLC (“APSG”) was established as a wholly owned subsidiary of the Company for the purposes of acquiring the assets of American Anti-Ram, Inc., a manufacturer of crash tested vehicle barricades. APSG is located in North Carolina. On March 22, 2011, the Company entered into a Securities Redemption Agreement, as more fully discussed in Note 6, with the holders of its Series A convertible preferred stock (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. As such the results of APSG have been reflected in discontinued operations for all periods presented.

Interim Review Reporting

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. For further information, refer to the financial statements and footnotes thereto included in the Company’s Form 10-K annual report for the year ended December 31, 2010 filed on April 15, 2011.

Nature of Business

The Company designs and supplies transparent and opaque armor solutions for both military and commercial applications. Its primary customers are United States government agencies and general contractors who have contracts with governmental entities. These products, sold under Vista trademarks, are used in transport and fighting vehicles, construction equipment, sea craft and various fixed structures which require ballistic and blast attenuation.

The Company also provides engineering and consulting services, develops and installs detention and security hardware, entry control and monitoring systems, intrusion detection systems, and security glass.

Principles of Consolidation

The consolidated financial statements include the accounts of American Defense Systems, Inc. and its wholly-owned subsidiaries, AJP and American Institute for Defense and Tactical Studies, Inc. (“AI”).  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”, was discontinued during the quarter ended June 30, 2011.  As such the results of T2 have been reflected in discontinued operations for all periods presented, see Note 6.  All significant intercompany accounts and transactions have been eliminated in consolidation.

Management Liquidity Plans

As of June 30, 2011, the Company had a working capital deficit of $(578,841), an accumulated deficit of $16,131,518, shareholders’ equity of $504,640 and cash on hand of $133,039. The Company had operating losses of $2,476,295 and $1,083,017 for the six months ended June 30, 2011 and 2010, respectively. The Company had income from continuing operations for the six months ended June 30, 2011 of $7,665,246, including a gain of $12,786,969 on the redemption of mandatorily redeemable preferred stock, and losses from continuing operations for the six months ended June 30, 2010 of $4,023,810. The Company had net income (losses) of $10,190,280 and $(4,541,575) for the six months ended June 30, 2011 and 2010, respectively. The Company had operating losses of $1,356,925 and $1,972,005 for the three months ended June 30, 2011 and 2010, respectively. The Company had losses from continuing operations of $1,408,032 and $3,142,759 for the three months ended June 30, 2011 and 2010, respectively. The Company had net losses of $1,770,607 and $3,717,171 for the three months ended June 30, 2011 and 2010, respectively. The Company had net cash used in operations of $1,681,284 and $743,772 for the six months ended June 30, 2011 and 2010, respectively. The Company entered into an agreement with the Series A Holders on March 22, 2011 to redeem the Series A convertible preferred stock (the “Series A Preferred”), as more fully discussed in Note 6. In addition, the Company has sought to raise capital and continues its efforts to obtain access to capital sufficient to permit the Company to meet its future cash flow needs though there can be no assurance that the Company will be able to obtain additional financing on commercially reasonable terms or at all. The Company also continues to explore all sources of increasing revenue. If the Company is unable in the near term to raise capital or increase revenue, it will not have sufficient cash to sustain its operations for the next twelve months. As a result, the Company may be forced to further reduce or even curtail its operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Reclassifications

Certain amounts in the prior year financial statements have been reclassified for comparative purposes to conform to the presentation in the current year financial statements. These reclassifications had no effect on previously reported income.

Use of Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Significant estimates for all periods presented include cost in excess of billings, allowance for doubtful accounts, liabilities associated with the Series A Preferred and warrants, and valuation of deferred tax assets.

Subsequent Events

The Company has evaluated events that occurred subsequent to June 30, 2011 through the date these financial statements were issued. Management concluded that no subsequent events required disclosure in these financial statements except as noted below.

Effective July 5, 2011, the Company relocated its corporate headquarters and operations from Hicksville, NY to Lillington, NC. The Company's new address is 420 McKinney Pkwy, Lillington, NC 27546.

On July 26, 2011, the Company proposed a settlement in the Roy Elfers litigation, see Note 3. The Company has accrued its best estimate of the settlement cost at June 30, 2011 in accordance with ASC 450.

On July 28, 2011, the Company received notice from the staff of the NYSE Amex LLC (the “Exchange”) that it has accepted the Company’s plan of compliance (the “Plan”) submitted in response to a deficiency letter from the Exchange dated May 16, 2011 based on their review of the Company’s Form 10-K for the period ended December 31, 2010 indicating that the Company is not in compliance with certain continued listing standards as set forth in Part 10 of the Exchange’s Company Guide.

Specifically, the Exchange noted that the Company is not in compliance with (a) Section 1003(a)(i) of the Company Guide because it reported stockholders’ equity of less than $2,000,000 as of December 31, 2010 and losses from continuing operations and net losses in two of its three most recent fiscal years ended December 31, 2010, (b) Section 1003(a)(ii) of the Company Guide because it reported stockholders’ equity of less than $4,000,000 as of December 31, 2010 and losses from continuing operations and net losses in three of its four most recent fiscal years ended December 31, 2010 and (c) Section 1003(a)(iv) of the Company Guide because the Company has sustained losses which are so substantial in relation to the Company’s overall operations or the Company’s existing financial resources, or the Company’s financial condition has become so impaired that it appears questionable, in the opinion of the Exchange, as to whether the Company will be able to continue operations and/or meet its obligations as they mature.  Furthermore, the Company’s financial statements for the year ended December 31, 2010 contained an explanatory paragraph regarding the auditor’s substantial doubt about the Company’s ability to continue as a going concern.

In order to maintain listing of the Company’s common stock on the Exchange, the Company submitted a Plan addressing how the Company intends to regain compliance by August 31, 2011, with respect to Section 1003(a)(iv) of the Company Guide (the requirements of which are set forth in the immediately preceding paragraph), and November 16, 2012, with respect to Sections 1003(a)(i) (the requirements of which are set forth in the immediately preceding paragraph) and 1003(a)(ii) (the requirements of which are set forth in the immediately preceding paragraph).

The exchange has accepted the Company’s Plan and given the Company until August 31, 2011 to secure a large government contract and avoid any delisting proceedings. If a government contract is received, then the Company may be able to continue its listing during the Plan period, up to November 16, 2012, during which time the Company will be subject to periodic reviews to determine whether it is making progress consistent with the Plan. If the Company fails to submit a Plan acceptable to the Exchange or, if the Plan is accepted but the Exchange determines that the Company is not making progress consistent with the Plan or that the Company is not in compliance with all continued listing standards of the Company Guide by November 16, 2012, then the Company expects the Exchange will initiate delisting proceedings.

The Company’s common stock continues to trade on the Exchange under the symbol “EAG,” however, the Exchange has advised the Company that the Exchange is utilizing the financial status indicator fields in the Consolidated Tape Association’s Consolidated Tape System and Consolidated Quote Systems Low Speed and High Speed Tapes to identify companies that are in noncompliance with the Exchange’s continued listing standards. Accordingly, the Company will become subject to the trading symbol extension “.BC” to denote its noncompliance.

Revenue and Cost Recognition

The Company recognizes revenue in accordance with the provisions of Accounting Standards Codification (“ASC”) 605, “Revenue Recognition”, which states that revenue is realized and earned when all of the following criteria are met:

(a) persuasive evidence of the arrangement exists,

(b) delivery has occurred or services have been rendered,

(c) the seller’s price to the buyer is fixed and determinable, and

(d) collectibility is reasonably assured.

The Company recognizes revenue and reports profits from purchase orders filled under master contracts when an order is complete. Purchase orders received under master contracts may extend for periods in excess of one year. However, no revenues, costs or profits are recognized in operations until the period of completion of the order. An order is considered complete when all costs, except insignificant items, have been incurred and the installation or product is operating according to specification or the shipment has been accepted by the customer. Provisions for estimated contract losses are made in the period that such losses are determined. As of June 30, 2011 and December 31, 2010, there were no such provisions made.

Contract Revenue

Cost in Excess of Billing

All costs associated with uncompleted customer purchase orders under contract are recorded on the balance sheet as a current asset called “Costs in Excess of Billings on Uncompleted Contracts, net.” Such costs include direct material, direct labor, and project-related overhead. Upon completion of a purchase order, costs are then reclassified from the balance sheet to the statement of operations as costs of revenue. A customer purchase order is considered complete when a satisfactory inspection has occurred, resulting in customer acceptance and delivery.

Concentrations

The Company’s bank accounts are maintained in financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and therefore bear minimal risk.

The Company has one supplier that provided 15% and 22% of its supply needs during the six and three months ended June 30, 2011, respectively. The Company had one supplier that provided 37% and 43% of its supply needs during the six and three months ended June 30, 2010, respectively. Additionally, the Company relies on a limited number of contract manufacturers and suppliers to provide manufacturing services for its products. The inability of any contract manufacturer or supplier to fulfill supply requirements of the Company could materially impact future operating results.

For the six months ended June 30, 2011, the Company derived 18% and 66%, respectively, of its revenues from various U.S. government entities, and two other customers. For the three months ended June 30, 2011, the Company derived 21% and 70%, respectively, of its revenues from various U.S. government entities, and two other customers. For the six and three months ended June 30, 2010, the Company derived 92% and 84%, respectively of its revenues from various U.S. government entities.

Allowance for Doubtful Accounts

The allowance for doubtful accounts reflects management’s best estimate of probable losses inherent in the account receivable balance. Management determines the allowance based on known troubled accounts, historical experience, and other currently available evidence. Management performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information. Collections and payments from customers are continuously monitored. While such bad debt expenses have historically been within expectations and allowances established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past. At June 30, 2011 and December 31, 2010, the allowance for doubtful accounts was $531,561 and $380,756, respectively.

Long-Lived Assets

The Company periodically reviews long-lived assets and certain identifiable assets related those assets for impairment whenever circumstances and situations change, such that there is an indication that the carrying amounts may not be recoverable. If the anticipated undiscounted cash flows of the long-lived assets are less than the carrying amount, their carrying amounts are reduced to fair value, and an impairment loss is recognized. During the three months ended June 30, 2011, the Company recorded an impairment loss of approximately $199,000 on long-lived assets related to T2, see Note 6.

Segment Reporting

As a result of the sale of APSG on March 22, 2011 (see Note 6) the Company currently classifies its business operations into one reportable segment.

Income (Loss) per Share

Basic income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted-average number of common shares and excludes dilutive potential common shares outstanding, as their effect is anti-dilutive. Dilutive potential common shares would primarily consist of employee stock options, warrants and convertible preferred stock.

Securities that could potentially dilute basic EPS in the future that were not included in the computation of the diluted EPS because to do so would be anti-dilutive consist of the following:

	June 30,
In Thousands	2011		2010
Warrants to purchase Common Stock		675,001		675,001
Options to purchase Common Stock		2,440,000		2,330,000
Series A Convertible Preferred Stock *		-		30,000,000
Total potential Common Stock		3,115,001		33,005,001

* The Company entered into an agreement with the Series A Holders on March 22, 2011 to redeem the Series Preferred as more fully discussed in Note 6. On April 9, 2010, pursuant to the amendment of the Company’s certificate of incorporation, the conversion price of the Series A Preferred was reduced to $0.50 and all of the outstanding shares of the Series A Preferred were convertible into 30,000,000 shares of common stock.

Fair Value of Financial Instruments

Fair value of certain of the Company’s financial instruments including cash, accounts receivable, accounts payable, accrued compensation, and other accrued liabilities approximate cost because of their short maturities. The Company measures and reports fair value in accordance with ASC 820, “Fair Value Measurements and Disclosure” which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value investments.

Fair value, as defined in ASC 820, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of an asset should reflect its highest and best use by market participants, principal (or most advantageous) markets, and an in-use or an in-exchange valuation premise. The fair value of a liability should reflect the risk of nonperformance, which includes, among other things, the Company’s credit risk.

Valuation techniques are generally classified into three categories: the market approach; the income approach; and the cost approach. The selection and application of one or more of the techniques may require significant judgment and are primarily dependent upon the characteristics of the asset or liability, and the quality and availability of inputs. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 also provides fair value hierarchy for inputs and resulting measurement as follows:

Level 1

Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities;

Level 2

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3

Unobservable inputs for the asset or liability that are supported by little or no market activity and that are significant to the fair values.

Fair value measurements are required to be disclosed by the Level within the fair value hierarchy in which the fair value measurements in their entirety fall. Fair value measurements using significant unobservable inputs (in Level 3 measurements) are subject to expanded disclosure requirements including a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings, and a description of where those gains or losses included in earning are reported in the statement of operations.

The Company did not have any assets or liabilities categorized as Level 1 or Level 2 as of June 30, 2011 or December 31, 2010. There were no transfers into or out of Level 1 or Level 2 during the quarters ended June 30, 2011 or 2010.

The following summarizes the Company’s assets and liabilities measured at fair value as of June 30, 2011 and December 31, 2010:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for  Identical		Significant Other  Observable		Significant  Unobservable
	Balance as of		Assets		Inputs		Inputs
Description	June 30, 2011		(Level 1)		(Level 2)		(Level 3)
Liabilities
Placement Agent Warrants (1)	$	554	$	-	$	-	$	554
Total Liabilities	$	554	$	-	$	-	$	554

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical		Significant Other Observable		Significant Unobservable
	Balance as of		Assets		Inputs		Inputs
Description	December 31, 2010		(Level 1)		(Level 2)		(Level 3)
Liabilities
Series A Preferred (1)	$	14,010,000	$	-	$	-	$	14,010,000
Placement Agent Warrants (1)		8,822		-		-		8,822
Total Liabilities	$	14,018,822	$	-	$	-	$	14,018,822

(1) Methods and significant inputs and assumptions are discussed in Note 5 below.

The following is a reconciliation of the beginning and ending balances for the Company’s liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2011 and 2010:

	Series A Preferred			2005 Warrants		2006 Warrants		Placement Agent Warrants			Total
Balance – January 1, 2011	$	14,010,000		$	-	$	-	$	8,822		$	14,018,822
Amortization of debt discount		94,408			-		-		-			94,408
Change in fair value		2,395,592			-		-		(8,268	)		2,387,324
Redemption		(16,500,000	)		-		-		-			(16,500,000	)
Balance – June 30, 2011	$	-		$	-	$	-	$	554		$	554

	Series A Preferred			2005 Warrants			2006 Warrants			Placement Agent Warrants			Total
Balance – January 1, 2010	$	12,429,832		$	4,372		$	1,494		$	29,547		$	12,465,245
Amortization of debt discount		467,582			-			-			-			467,582
Change in fair value		873,015			(4,372	)		(1,494	)		(3,709	)		863,440
Modification of terms		(53,887	)		-			-			-			(53,887	)
Balance – June 30, 2010	$	13,716,542		$	-		$	-		$	25,838		$	13,742,380

The change in fair value recorded for Level 3 liabilities for the periods above are reported in other income (expense) on the condensed consolidated statement of operations.

Recent Accounting Pronouncements

In October 2009, the FASB issued new accounting guidance, under ASC Topic 605, on revenue recognition which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Specifically, this guidance amends the criteria for Subtopic 605-25, Revenue Recognition-Multiple Element Arrangements, for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence, (b) third-party evidence, or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangements to all deliverables using the relative selling price method and also requires expanded disclosures. This guidance is effective for the Company for all new or materially modified arrangements entered into on or after January 1, 2011 with earlier application permitted as of the beginning of a fiscal year. Full retrospective application of the new guidance is optional. The adoption of this standard will have an impact on the Company’s consolidated financial position and results of operations for all multiple deliverable arrangements entered into or materially modified in 2011.

In January 2010, the FASB issued new accounting guidance, under ASC Topic 820, on Fair Value Measurements and Disclosures, which requires new disclosures and clarifies some existing disclosure requirements about fair value measurement. Under the new guidance, a reporting entity should (a) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, and (b) present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs. This guidance was effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of the guidance effective for interim and annual reporting periods beginning after December 15, 2010 and 2009 did not have a material impact on the Company’s consolidated financial position or results of operations.

In July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310): Disclosure about the Credit Quality of Financial Receivables and the Allowance for Credit Losses, which amends ASC Topic 310 by requiring additional disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses on a disaggregated basis. The objective of enhancing these disclosures is to improve financial statement users’ understanding of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The guidance is effective for the first reporting period ending on or after December 15, 2010. The adoption of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)	Jun. 30, 2011	Dec. 31, 2010
CURRENT ASSETS
Cash	$ 133,039	$ 248,532	[1]
Accounts receivable, net of allowance for doubtful accounts of $531,561 and $380,756 as of June 30, 2011 and December 31, 2010	881,952	1,035,016	[1]
Accounts receivable factoring		84,463	[1]
Tax receivable	101,641	101,641	[1]
Costs in excess of billings on uncompleted contracts	1,651,647	1,472,606	[1]
Prepaid and other current assets	108,509	395,845	[1]
Deferred tax assets	1,928	1,928	[1]
Assets of discontinued operations	22,624	1,911,074	[1]
TOTAL CURRENT ASSETS	2,901,340	5,251,105	[1]
Property and equipment, net	998,906	1,649,650	[1]
Deferred financing costs, net		454,741	[1]
Goodwill		812,500	[1]
Deposits	307,637	639,138	[1]
Assets of discontinued operations	18,517	964,336	[1]
TOTAL ASSETS	4,226,400	9,771,470	[1]
CURRENT LIABILITIES
Accounts payable	3,260,849	3,178,119	[1]
Accrued expenses	216,818	444,012	[1]
Warrant liability	554	8,822	[1]
Mandatorily redeemable Series A convertible preferred stock (cumulative), 15,000 shares authorized issued and outstanding		14,010,000	[1]
Liabilities of discontinued operations	1,960	1,677,373	[1]
TOTAL CURRENT LIABILITIES	3,480,181	19,318,326	[1]
LONG TERM LIABILITIES
Deferred rent	239,651	211,963	[1]
Deferred tax liability	1,928	1,928	[1]
TOTAL LIABILITIES	3,721,760	19,532,217	[1]
COMMITMENTS AND CONTINGENCIES			[1]
SHAREHOLDERS' EQUITY (DEFICIENCY)
Common stock, $0.001 par value, 100,000,000 shares authorized, 54,512,192 and 54,341,685 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively	54,512	54,341	[1]
Additional paid-in capital	16,581,646	16,506,708	[1]
Accumulated deficit	(16,131,518)	(26,321,796)	[1]
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY)	504,640	(9,760,747)	[1]
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)	$ 4,226,400	$ 9,771,470	[1]

[1] Condensed from audited financial statements