2. NATURE OF OPERATIONS AND GOING CONCERN

The Company is a defense technology corporation specializing in the development of innovative next generation less-than-lethal solutions for security situations that do not require the use of deadly force. SDI is currently developing manufacturing partnerships to assist in the deployment of their patent pending family of products. These products consist of; the Blunt Impact Projectile 40mm (BIP40), and the Wireless Electric Projectile 40mm (WEP40).

These financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year.

At August 31, 2011, the Company has not yet achieved profitable operations, had a working capital deficiency of $470,488 and has accumulated losses of $17,072,461 since inception and expects to incur further losses in the development of its business, all of which limits the Company’s ability to continue as a going concern. The Company has a need for additional working capital to launch its blunt impact and electric 40mm round products, meet its ongoing levels of corporate overhead and discharge its liabilities as they come due.

In order to finance the continued development, the Company is working towards raising of appropriate capital in the near future. During the year ended November 30, 2009, the Company raised $197,000 through issue of common shares and warrants. The Company further raised an additional $1,673,300 net through the issue of 8,143,000 common shares and also received $30,000 subscription for shares pending allotment during the year ended November 30, 2010. The Company further received an additional $160,000 subscription for shares pending allotment during the nine month period ended August 31, 2011 and also raised an additional $678,328 by issue of Convertible Debentures

While the Company has been successful in securing financings in the past, there is no assurance that it will be able to do so in the future. Accordingly, these financial statements do not give effect to adjustments, if any, that would be necessary should the Company be unable to continue as a going concern

The Company has incurred a loss of $ 697,811 during the nine month period ended August 31, 2011 partly due to its research and development activities. At August 31, 2011, the Company had an accumulated deficit during the development stage of $17,072,461 which includes a non-cash stock based compensation expense of $5,556,406 for issue of options and warrants.