** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

x                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**FORTHE QUARTERLY PERIOD ENDED JUNE 30, 2007**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**FOR THE TRANSITION PERIODFROM              TO**

**COMMISSIONFILE NUMBER: 001-33253**

**FORCE PROTECTION, INC.**

| **Nevada**                |   | **84-1383888** |
|---------------------------|--------|----------------|
| (State of  Incorporation) |   | (I.R.S. EIN)   |

 

**9801 Highway 78, BuildingNo. 1**

**Ladson, South Carolina**

**29456**

**Registrant’s telephone number:**  (843) 740-7015

Indicate by check markwhether the registrant (1) filed all reports required to be filed bySection 13 or 15(d) of the Securities Act of 1934  during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   **Yes ****x     **No o

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

| Large Accelerated Filer o |   | Accelerated  Filer x |   | Non-Accelerated  Filer o |
|--------------------------------|--------|---------------------------|--------|-------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).

Yes o         **No ****x**

As of July 31, 2007, the registrant had 68,207,649shares of common stock issued and outstanding.

 

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**Table of Contents**
| Part I: Financial  Information                                                                     |   |   |
|---------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                    |   |   |
| Item 1—Consolidated Financial Statements                                                           |   |   |
| Consolidated Statements of Operations For The Three  and Six Months Ended June 30, 2007 and 2006        |   |   |
| Consolidated Balance Sheets As of June 30, 2007 and  December 31, 2006                                  |   |   |
| Consolidated Statements of Cash Flows For The Six  Months Ended June 30, 2007 and 2006                  |   |   |
| Notes To Consolidated Financial Statements                                                              |   |   |
| Item 2—Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |   |
| Item 3—Quantitative and Qualitative Disclosures About  Market Risk                                 |   |   |
| Item  4—Controls and Procedures                                                                    |   |   |
|                                                                                                    |   |   |
| Part II: Other  Information                                                                   |   |   |
|                                                                                                    |   |   |
| Item  1—Legal Proceedings                                                                          |   |   |
| Item  1A—Risk Factors                                                                              |   |   |
| Item 2—Unregistered Sales of Equity Securities and Use  of Proceeds                                |   |   |
| Item 3—Defaults Upon Senior Securities                                                             |   |   |
| Item 4—Submission of Matters To a Vote of Security  Holders                                        |   |   |
| Item  5—Other Information                                                                          |   |   |
| Item  6—Exhibits                                                                                   |   |   |

 

2

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**PART I —FINANCIAL INFORMATION**

**ITEM 1 —CONSOLIDATED FINANCIAL STATEMENTS**

**FORCE PROTECTION, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(unaudited)**

**(in dollars)**
| ** **                                                 | ** ** | **Three Months Ended** | ** **  | **Six Months Ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|-------------|--------------------------------|------------|
| ** **                                                 | ** ** | **June 30,**                | ** **  | **June 30,**              | ** ** |
| ** **                                                 | ** ** | **2007**                         | ** **  | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                 | ** ** | ** **                       | ** **  | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  sales**                                             |       | $                                | 134,701,640 |                           | $          | 56,074,537 |   | $ | 234,860,406 |   | $ | 90,877,122 |   |
| Cost of sales                                              |       | 101,944,855                      |        | 45,917,751                     |       | 179,573,991 |   | 74,082,567 |   |
|                                                       |       | 32,756,785                       |        | 10,156,786                     |       | 55,286,415 |   | 16,794,555 |   |
|                                                       |       |                             |        |                           |       |   |   |   |   |
| General and  administrative expense                        |       | 15,500,908                       |        | 7,744,435                      |       | 30,663,008 |   | 13,705,788 |   |
| Research and  development                                  |       | 3,305,514                        |        | 641,215                        |       | 8,147,333 |   | 1,304,805 |   |
| **Operating  profit**                                      |       | 13,950,363                       |        | 1,771,136                      |       | 16,476,074 |   | 1,783,962 |   |
|                                                       |       |                             |        |                           |       |   |   |   |   |
| Other income                                               |       | 1,106,423                        |        | 20,873                         |       | 2,894,516 |   | 47,922 |   |
| Interest expense                                           |       | (44,060                          | )           | (818,985                       | )          | (79,591 | ) | (1,626,309 | ) |
| **Net  earnings before taxes**                             |       | 15,012,726                       |        | 973,024                        |       | 19,290,999 |   | 205,575 |   |
| ** **                                                 | ** ** | ** **                       | ** **  | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Tax expense                                                |       | 5,385,898                        |        | —                         |       | 7,185,898 |   | — |   |
| **Net  earnings after taxes**                              |       | 9,626,828                        |        | 973,024                        |       | 12,105,101 |   | 205,575 |   |
| ** **                                                 | ** ** | ** **                       | ** **  | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Series D  preferred stock dividend                         |       | —                           |        | (100,162                       | )          | — |   | (261,277 | ) |
| Accretion of  series D preferred stock to redemption value |       | —                           |        | (448,815                       | )          | — |   | (933,565 | ) |
| **Net  earnings (loss) available to common shareholders**  |       | $                                | 9,626,828   |                           | $          | 424,047 |   | $ | 12,105,101 |   | $ | (989,267 | ) |
| ** **                                                 | ** ** | ** **                       | ** **  | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Earnings  (loss) per common share**                      | ** ** | ** **                       | ** **  | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                      |       | $                                | 0.14        |                           | $          | 0.01 |   | $ | 0.18 |   | $ | (0.03 | ) |
| Diluted                                                    |       | $                                | 0.14        |                           | $          | 0.01 |   | $ | 0.18 |   | $ | (0.03 | ) |
|                                                       |       |                             |        |                           |       |   |   |   |   |
| **Weighted-average  shares used to compute:**              | ** ** | ** **                       | ** **  | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                      |       | 68,120,787                       |        | 39,511,931                     |       | 67,874,796 |   | 38,487,506 |   |
| Diluted                                                    |       | 68,918,528                       |        | 39,511,931                     |       | 68,908,746 |   | 38,487,506 |   |
|                                                       |       |                             |        |                           |       |   |   |   |   |

 

The accompanying notes are an integral part of thesefinancial statements.

3

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**FORCE PROTECTION, INC. ANDSUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in dollars)**
| ** **                                                                                                                                                        | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                        | ** ** | **2007**          | ** **  | **2006**              | ** ** |
| ** **                                                                                                                                                        | ** ** | **(unaudited)**   | ** **  | ** **            | ** ** |
| **ASSETS**                                                                                                                                                        | ** ** | ** **        | ** **  | ** **            | ** ** |
| Current assets:                                                                                                                                                   |       |              |        |                  |       |
| Cash and cash  equivalents                                                                                                                                        |       | $                 | 37,870,579  |                  | $          | 156,319,004 |   |
| Accounts receivable,  net of allowance for contractual obligations of $12,301,428 and $6,068,087  for 2007 and 2006, respectively                                 |       | 91,239,318        |        | 36,011,568            |       |
| Inventories                                                                                                                                                       |       | 148,366,311       |        | 60,396,297            |       |
| Other current assets                                                                                                                                              |       | 1,722,941         |        | 374,051               |       |
| Current portion of  deferred taxes                                                                                                                                |       | 8,849,864         |        | 9,562,500             |       |
| Total current assets                                                                                                                                              |       | 288,049,013       |        | 262,663,420           |       |
| Long term portion of  deferred taxes                                                                                                                              |       |              |        | 2,763,991             |       |
| Property and equipment,  net                                                                                                                                      |       | 30,303,126        |        | 8,963,901             |       |
| Intangible assets, net                                                                                                                                            |       | 1,836,111         |        | —                |       |
| **Total assets**                                                                                                                                                  |       | $                 | 320,188,250 |                  | $          | 274,391,312 |   |
| ** **                                                                                                                                                        | ** ** | ** **        | ** **  | ** **            | ** ** |
| **LIABILITIES &  SHAREHOLDERS’ EQUITY**                                                                                                             | ** ** | ** **        | ** **  | ** **            | ** ** |
| Current liabilities:                                                                                                                                              |       |              |        |                  |       |
| Accounts payable                                                                                                                                                  |       | $                 | 68,022,122  |                  | $          | 38,653,813 |   |
| Other accrued  liabilities                                                                                                                                        |       | 5,404,961         |        | 2,968,859             |       |
| Contract liabilities                                                                                                                                              |       | 4,397,653         |        | 1,850,000             |       |
| Current portion of long  term liabilities                                                                                                                         |       | 221,685           |        | 71,685                |       |
| Current tax liability                                                                                                                                             |       | 3,708,830         |        | —                |       |
| Deferred revenue                                                                                                                                                  |       | 5,872,080         |        | 12,824,211            |       |
| Total current  liabilities                                                                                                                                        |       | 87,627,331        |        | 56,368,568            |       |
|                                                                                                                                                              |       |              |        |                  |       |
| Long-term debt:                                                                                                                                                   |       |              |        |                  |       |
| Other long term  liabilities                                                                                                                                      |       | 428,435           |        | 167,937               |       |
| **Total liabilities**                                                                                                                                             |       | 88,055,766        |        | 56,536,505            |       |
|                                                                                                                                                              |       |              |        |                  |       |
| Commitments and  Contingencies (See Note 12)                                                                                                                      |       |              |        |                  |       |
|                                                                                                                                                              |       |              |        |                  |       |
| **SHAREHOLDERS’ EQUITY**                                                                                                                                     | ** ** | ** **        | ** **  | ** **            | ** ** |
| Preferred stock, $0.001  par value, authorized 10,000,000 shares                                                                                                  |       | —            |        | —                |       |
| Common stock, $0.001  par value, 300,000,000 shares authorized, 68,207,649 shares   at 6-30-2007 and 66,762,566 shares at 12-31-2006 issued and  outstanding |       | 68,208            |        | 66,763                |       |
| Shares of common stock  to be issued                                                                                                                              |       |              |        | 31                    |       |
| Additional Paid-in  Capital                                                                                                                                       |       | 251,332,091       |        | 249,694,850           |       |
| Accumulated deficit                                                                                                                                               |       | (19,267,815       | )           | (31,906,837           | )          |
| **Total shareholders’ equity**                                                                                                                               |       | 232,132,484       |        | 217,854,807           |       |
| ** **                                                                                                                                                        | ** ** | ** **        | ** **  | ** **            | ** ** |
| **Total liabilities and shareholders’ equity**                                                                                                               |       | $                 | 320,188,250 |                  | $          | 274,391,312 |   |

 

The accompanying notesare an integral part of these financial statements.

4

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**FORCE PROTECTION, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS(unaudited)(in dollars)**
| ** **                                                                                          | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                          | ** ** | **June 30**               | ** ** |
| ** **                                                                                          | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| ** **                                                                                          | ** ** | **Unaudited**                  | ** ** | ** ** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                                           | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net earnings after  taxes                                                                           |       | $                              | 12,105,101 |   | $ | 205,575 |   |
| **Adjustments  to reconcile net earnings to net cash (used in) provided by operating  activities:** | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Depreciation and  amortization                                                                      |       | 2,338,341                      |       | 338,160 |   |
| Deferred tax expense                                                                                |       | 3,477,068                      |       | — |   |
| Stock based  compensation (FAS 123R)                                                                |       | 860,904                        |       | 362,808 |   |
|                                                                                                |       |                           |       |   |   |
| Net change in definitization                                                                        |       | 6,233,341                      |       | 175,989 |   |
| Increase  (decrease) in inventory reserve                                                           |       | 3,284,807                      |       | 1,507,659 |   |
| Increase  (decrease) in contract liabilities                                                        |       | 2,547,653                      |       | 944,041 |   |
| Change in assets  and liabilities:                                                                  |       |                           |       |   |   |
| Increase in accounts receivable                                                                     |       | (61,461,091                    | )          | (4,244,016 | ) |
| Decrease (increase) in inventories                                                                  |       | (91,254,821                    | )          | 11,145,138 |   |
| Increase in other current assets                                                                    |       | (1,314,357                     | )          | (26,682 | ) |
| Increase in accounts payable                                                                        |       | 29,368,309                     |       | 7,211,839 |   |
| Increase (decrease) in other accrued liabilities                                                    |       | 2,436,102                      |       | (85,112 | ) |
| Increase in tax liability                                                                           |       | 3,708,830                      |       | — |   |
| Increase in deferred revenue                                                                        |       | (6,952,131                     | )          | (12,383,351 | ) |
| **Net  cash (used in) provided by operating activities**                                            |       | (94,621,944                    | )          | 5,152,048 |   |
| ** **                                                                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                                           | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Purchase of  property and equipment—intangibles                                                |       | (2,000,000                     | )          | — |   |
| Purchase of  property and equipment                                                                 |       | (23,513,678                    | )          | (2,348,493 | ) |
| **Net  cash used in investing activities**                                                          |       | (25,513,678                    | )          | (2,348,493 | ) |
| ** **                                                                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Proceeds from exercise  of options                                                                  |       | 1,276,699                      |       | — |   |
| Preferred stock  dividends paid                                                                     |       | —                         |       | (377,553 | ) |
| Increase in long  term liabilities                                                                  |       | 450,000                        |       | — |   |
| Payment on  loans, net                                                                              |       | —                         |       | (5,000,000 | ) |
| Payments on  capitalized leases                                                                     |       | (39,502                        | )          | — |   |
| Issuance of  common stock, net                                                                      |       | —                         |       | 5,970,735 |   |
| **Net  cash provided by financing activities**                                                      |       | 1,687,197                      |       | 593,182 |   |
| **Net  increase (decrease) in cash**                                                                |       | (118,448,425                   | )          | 3,396,737 |   |
| **Cash  and cash equivalents—beginning of period**                                             |       | 156,319,004                    |       | 1,217,509 |   |
| **Cash  and cash equivalents—end of period**                                                   |       | $                              | 37,870,579 |   | $ | 4,614,246 |   |
| **Supplemental  disclosure:**                                                                       | ** ** | ** **                     | ** ** | ** ** | ** ** |
| ** **                                                                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Cash paid for  interest                                                                             |       | $                              | 44,060     |   | $ | 1,609,239 |   |
| Cash paid for  taxes                                                                                |       | $                              | 700,000    |   | $ | 338,160 |   |
| Dividends and  accretion on Series D convertible preferred stock                                    |       | $                              | —     |   | $ | 1,194,842 |   |
|                                                                                                |       |                           |       |   |   |
| **NON  CASH INVESTING AND FINANCING ACTIVITY:**                                                     | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Note payable issued as  consideration for non-compete agreement                                     |       | $                              | 450,000    |   | $ | — |   |

 

Theaccompanying notes are an integral part of these financial statements.

5

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**FORCE PROTECTION, INC. ANDSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**These notesare an integral part of the Company’s financial statements set forth above.**

**NOTE1—BASIS OF PRESENTATION**

The unaudited interimconsolidated financial statements and related notes have been prepared pursuantto the rules and regulations of the Securities and Exchange Commission, or SEC.Accordingly, certain information and footnote disclosures normally included incomplete financial statements prepared in accordance with generally acceptedaccounting principles have been omitted pursuant to such rules and regulations.The accompanying unaudited interim consolidated financial statement and relatednotes should be read in conjunction with the consolidated financial statementsand notes thereto included in the Form 10-K/A for Force Protection, Inc. andits subsidiaries for the year ended December 31, 2006 filed July 12, 2007.

**2006 Year End Amendment and Q2Restatement**

The financial informationincluded in this Form 10-Q referring to the three and the six months ended June30, 2006 has been restated for the effects of stock based compensation toemployees (FAS 123R) and the effect on the basic earning per share (EPS)of accretion on preferred stock and the calculation of weighted average commonshares used to compute diluted earnings per share.

**Effects of Restatement**

**Stock Based Compensation**

The Company has restatedits calculation of stock based compensation (SFAS 123(R)) for the threeand six months ended June 30, 2006. The impact is:
| ** **                                                 | ** ** | **Three Months ended** | ** ** | **Six Months ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                 | ** ** | **June 30, 2006**      | ** ** | **June 30, 2006**    | ** ** |
| Increase in general and  administrative cost               |       | $                                | 260,991    |                           | $          | 362,807 |   |
| Decrease in net  earnings                                  |       | $                                | 260,991    |                           | $          | 362,807 |   |
| Decrease in net  earnings available to common shareholders |       | $                                | 260,991    |                           | $          | 362,807 |   |
| Decrease in basic  earnings per common share               |       | $                                | (0.01      | )                              | $          | (0.01 | ) |
| Decrease in diluted earnings per common share              |       | $                                | (0.01      | )                              | $          | (0.01 | ) |

 

**EarningsPer Share**

The Company has reviewedthe Financial Accounting Standards Board’s Statement of Financial AccountingStandard No. 128—Earnings Per Share (EPS) and determined that incomeavailable to common shareholders did not include the accretion related topreferred stock and the weighted average number of common shares outstandingused to calculate diluted earnings per share did not give effect to commonshares issued upon conversion for the three and six months ended June 30, 2006.The impact is:
| ** **                                                 | ** ** | **Three Months ended** | ** ** | **Six Months ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                 | ** ** | **June 30, 2006**      | ** ** | **June 30, 2006**    | ** ** |
| Decrease in net  earnings available to common shareholders |       | $                                | 448,815    |                           | $          | 933,565 |   |
| Decrease in  basic earnings per common share               |       | $                                | (0.01      | )                              | $          | (0.03 | ) |
| Decrease in diluted  earnings per common share             |       | $                                | (0.01      | )                              | $          | (0.03 | ) |

 

**NOTE2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**Natureof the Business**

Force Protection, Inc.and its subsidiaries (the “Company”) design, manufacture and market blast andballistics armored vehicles for sale to military customers.

**Principlesof Consolidation**

The consolidatedfinancial statements include the accounts of Force Protection, Inc., andits two wholly-owned subsidiaries, Force Protection Industries, Inc. andForce Protection Technologies, Inc.  All inter-company balances andtransactions are eliminated in consolidation.

6

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**GeneralStatement**

The SEC has issuedFinancial Reporting Release No. 60, “Cautionary Advice RegardingDisclosure About Critical Accounting Policies,” (“FRR 60”), suggestingcompanies provide additional disclosure and commentary on their most criticalaccounting policies. In FRR 60, the SEC defined the most critical accountingpolicies as the ones that are most important to the portrayal of a company’sfinancial condition and operating results, and require management to make itsmost difficult and subjective judgments, often as a result of the need to makeestimates of matters that are inherently uncertain. The methods, estimates andjudgments the Company uses in applying these most critical accounting policieshave a significant impact on the results the Company reports in its financialstatement.

The Company believes thefollowing critical accounting policies and procedures, among others, affect itsmore significant judgments and estimates used in the preparation of the Company’sconsolidated financial statements:

**RevenueRecognition**

The Company’s revenue isderived principally from the sale of its vehicles and associated spare partsand training services. Revenue from product sales and spare part sales, net ofan allowance for contractual adjustments, is recognized when the products orspare parts are delivered to and “formally” accepted by the customer. TheCompany defines “formal acceptance” as taking place when a representative ofthe United States government signs the United States Form DD250 entitled “MaterialInspection and Receiving Report” which under the Federal AcquisitionRegulations signifies contractual inspection and acceptance of the workperformed by the contractor.  It also acts as the contractual invoicecreating payment liability on the United States Government.  In accordancewith standard industry practice, there is a representative from the UnitedStates Defense Contract Management Agency (“DCMA”) acting as a contractualrepresentative of the United States Government present at the Company’sfacilities.  This DCMA representative inspects each vehicle as it isdelivered by the Company and upon confirmation of the vehicle’s conformity withthe contractual specifications the inspector or other contractually designatedofficial signs the Form DD250 and formally accepts delivery of thevehicle.  The Company only recognizes revenues arising from its U.S.Government contracts upon execution of the Form DD250 by the DCMA inspector.Under some of the Company’s U.S. Government contracts, it receivesperformance-based payments based on completion of specific milestonesstipulated under the contract (for example, delivery of raw material to theCompany’s Ladson, South Carolina facility). These payments are recorded as “deferredrevenue” and carried on the Company’s balance sheet until the final delivery ofthe products and formal acceptance by the U.S. Government pursuant to the FormDD250. Upon acceptance of the products and the execution of the Form DD250, theCompany recognizes the full sale price of the product as revenue.

Revenues from servicesprovided are recorded in accordance with specific contractual terms. Services have historically consisted of the Company providing on-site personnelon an as-needed basis in a timely manner, and have generally been provided inforeign locations.

The Company negotiatescontracts with its customers which may include revenue arrangements withmultiple deliverables, as outlined by Emerging Issues Task Force No. 00-21 (“EITF00-21”).  The Company’s accounting policies are defined such that eachdeliverable under a contract is accounted for separately.  Historically,the Company has negotiated and signed contracts with its customers whichoutline the contract amount and specific terms and conditions associated witheach deliverable.

**Allowancefor Contractual Adjustments**

The Company’s contractswith the U.S. Government are negotiated as a “sole source” or “open competition”bid process.  A sole source process is one in which the Company is thesole bidder for the contract.  An open competition could involve variousbidders.  Once a bid is accepted, the U.S. Government expects work tocommence immediately.  An open competition results in a final agreed-uponcontract price to which the U.S. Government has agreed.  A sole sourceprocess results in an agreed-upon contract with the U.S. Government, subject toan adjustment process at a later date, termed the “definitization process”. Thedefinitization process commences upon delivery of a product, whereby the U.S.Government completes a detailed review of the Company’s costs involved in themanufacturing and delivery process.  The U.S. Government and the Companythen work to determine an adequate and fair final contract price.  As aresult of the potential adjustments related to the definitization process, theCompany maintains an allowance in a contractual adjustments account.  Thisaccount is reviewed on a monthly basis to determine adequate adjustments, ifnecessary.  The allowance is maintained and deemed adequate based on theanalysis of historical data and calculation of pro-rata percentages of currentcontracts in place, which remain subject to the definitization process.

Historically, the Companyhas not encountered sales returns.  The Company does not anticipate salesreturns in the future.

7

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**Researchand Development**

Research, development,and engineering costs are expensed as incurred, in accordance with SFAS No. 2,*Accounting for Research and Development Costs*.  Research, development, and engineeringexpenses primarily include payroll and headcount related costs, contractorfees, infrastructure costs, and administrative expenses directly related toresearch and development support.

**CashEquivalents**

For purposes of reportingcash flows, the Company considers all highly liquid debt instruments purchasedwith maturity of three months or less to be cash equivalents.

**Inventories**

Inventories are stated atthe lower of cost or market. The cost is determined under thefirst-in-first-out valuation method.  An allowance for obsolescence andshrinkage is maintained by the Company.  The Company determines anappropriate balance in this account based on historical data and specificidentification of certain inventory items.

**Propertyand Equipment**

Property and equipmentare stated at cost or at the value of the operating agreement. The Companycapitalizes additions and improvements which include all material, labor andengineering cost to design, install or improve the asset. Routine repairs andmaintenance are expensed as incurred. Depreciation and amortization arecomputed using the straight-line method over the following estimated usefullives:

| Leasehold improvements   |   | 2-5 years |   |
|--------------------------|--------|-----------|--------|
| Furniture and  fixtures  |   | 3 years   |   |
| Machinery and  equipment |   | 7 years   |   |
| Tooling and  molds       |   | 7 years   |   |
| Vehicles                 |   | 5 years   |   |
| Buildings                |   | 29 years  |   |

 

Construction in progressprojects are not depreciated until placed into service.

**Impairmentof Long-Lived Assets**

The Company reviewslong-lived assets to be held and used for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable. If the sum of the expected future cash flows (undiscounted andwithout interest charges) is less than the carrying amount of the asset, theCompany would recognize an impairment loss based on the estimated fair value ofthe asset.

**Goodwilland Other Intangible Assets**

The Company has nogoodwill. Intangible assets include licenses, a non-compete agreement, customerlist and purchase expertise. Such intangible assets are amortized on a straightline basis over their useful life of 3 to 7 years.

**ForeignCurrency Transaction**

Assets and liabilities inforeign currencies are translated at the exchange rate prevailing at thebalance sheet date. Revenues and expenses are translated at the exchange rateprevailing at the transaction date, and the resulting gains and losses arereflected in the statements of operations. Gains and losses arising fromtranslation of a subsidiary’s foreign currency financial statements are shownas a component of shareholders’ equity (deficit) as accumulated comprehensiveincome (loss).

**JointVenture**

On December 15, 2006, theCompany entered into a Joint Venture (JV) Agreement (the “Agreement”) withGeneral Dynamics Land Systems Inc. (“GDLS”), pursuant to which a joint venturenamed Force Dynamics LLC was formed and the Company agreed to work togetherwith GDLS to win and execute a contract for the Mine Resistant Ambush Protected(“MRAP”) Vehicle Program and/or the Medium Mine Protected Vehicle Program (“MMPV”).Under the Agreement, the Program is defined to include any and allsolicitations and requests for proposals for MRAP and/or MMPV production andlifecycle support and/or any follow on work that may be performed. The scope ofwork to be undertaken by the joint venture is limited to the use of the Company’sCougar 4x4 and 6x6 armored vehicles for the MRAP Category I and Category II andthe MRAP Category II for MMPV requirements. The joint venture’s board ismade up of three designees from the Company and three designees from GLDS. Thejoint venture’s board will have authority to execute documents in accordancewith the terms of the Agreement. Decisions of the joint venture’s board shallbe made by majority vote. The Company agreed to operate the joint venture onthe principle of equitable division of burden and benefit with GDLS. This meansthat 

8

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parties are expected tocontribute resources equally to the venture. The Company agreed to divide thejoint venture revenues between the Company and GDLS on a 50%/50% basis.Wherever practicable, the joint venture will act as the prime contractor forjoint venture work, and the Company, along with GDLS, shall act as theexclusive subcontractors. For the three and six months ended June 30, 2007 thejoint venture had no activity as the MRAP contract has not been novated to thejoint venture.

**IncomeTaxes**

The Company uses theasset and liability method of accounting for income taxes. The asset andliability method accounts for deferred income taxes by applying enactedstatutory rates in effect for periods in which the difference between the bookvalue and the tax basis of assets and liabilities are scheduled to reverse. Theresulting deferred tax asset or liability is adjusted to reflect changes in taxlaws or rates. The Company records a valuation allowance for any deferred taxallowance that it believes will not be realized.

**Stock-BasedCompensation**

In December 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement No. 123(R),*Share-Based Payment,* which establishesaccounting standards for transactions in which an entity receives employeeservices in exchange for (a) equity instruments of the entity or(b) liabilities that are based on the fair value of the entity’s equityinstruments or that may be settled by the issuance of equity instruments.Effective July 1, 2005, the Company adopted SFAS 123(R), which requires theCompany to recognize the grant-date fair value of stock options and equitybased compensation issued to employees in the statement of operations. Thestatement also requires that such transactions be accounted for using thefair-value-based method, thereby eliminating use of the intrinsic method ofaccounting in APB No. 25,*Accountingfor Stock Issued to Employees,* which was permitted under Statement123, as originally issued.

**Earnings(Loss) per Common Share**

The Company utilizes SFASNo. 128, “Earnings per Share” to calculate earnings/loss per share. Basicearnings/loss per share is computed by dividing the earnings/loss available tocommon shareholders (as the numerator) by the weighted-average number of commonshares outstanding (as the denominator). Diluted earnings/loss per share iscomputed similar to basic earnings/loss per share except that the denominatoris increased to include the number of additional common shares that would havebeen outstanding if all potential common stock (including common stockequivalents) had all been issued, and if such additional common shares weredilutive. Under SFAS No. 128, if the additional common shares are anti-dilutive,they are not added to the denominator in the calculation. Where there is aloss, the inclusion of additional common shares is anti-dilutive (since theincreased number of shares reduces the per share loss available to commonshareholders). Earnings/loss available to common shareholders is derived fromnet income adjusted for preferred stock dividends and accretion on preferredstock.

**Estimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements, as well as the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates. Estimatesand assumptions are periodically reviewed and the effects of revisions arereflected in the consolidated financial statements in the period they aredetermined to be necessary.

**RecentAccounting Pronouncements**

In June 2006, the FASBissued FIN No. 48 “Accounting for Uncertainty in Income Taxes — aninterpretation of FASB Statement No. 109.” FIN No. 48 established a singlemodel to address accounting for uncertain tax positions. FIN No. 48 clarifiesthe accounting for income taxes by prescribing a minimum recognition thresholda tax position is required to meet before being recognized in the financialstatements. FIN No. 48 also provides guidance on de-recognition, measurementclassification, interest and penalties, accounting in interim periods,disclosure and transition.  FIN No. 48 was effective for the Company inthe first quarter of fiscal 2007.  The adoption of FIN No. 48 did not havea material effect on the Company’s financial position, results of operations orcash flows.

In December 2006, theFASB issued a Staff Position (“FSP”) on EITF 00-19-2, “Accounting forRegistration Payment Arrangements (“FSP EITF 00-19-2”).”  This FSPspecifies that the contingent obligation to make future payments or otherwisetransfer consideration under a registration payment arrangement, whether issuedas a separate agreement or included as a provision of a financial instrument orother agreement, should be separately recognized and measured in accordancewith SFAS No. 5, “Accounting for Contingencies”.  If the transfer ofconsideration under a registration payment arrangement is probable and can bereasonably estimated at inception, the contingent liability under theregistration payment arrangements is included in the allocation of proceedsfrom the related financing transaction (or recorded subsequent to the inceptionof a prior financing transaction) using the measurement guidance in SFAS No.5.  This FSP is effective immediately for registration paymentarrangements and the financial instruments subject to those arrangements thatare entered into or modified subsequent to the issuance of the FSP.  Forprior arrangements, the FSP is effective for financial statements issued forfiscal years beginning after December 15, 2006 and interim periods within thoseyears.  The Company adopted the FSP effective January 1, 2007.  SeeNote 12, Commitments and Contingencies.

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities - Including an amendment of SFAS No. 115”.  This statement permits, but does not require,entities to measure many financial instruments at fair value.  The objective is to provide entities with anopportunity to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply complexhedge accounting provisions.  Entitieselecting this option will apply it when the entity first recognizes an eligibleinstrument and will report unrealized gains and losses on such instruments incurrent earnings.  This statement 1)applies to all entities, 2) specifies certain election dates, 3) can be appliedon an instrument-by-instrument basis with some exceptions, 4) isirrevocable and 5) applies only to entire instruments.  One exception is demand deposit liabilitieswhich are explicitly excluded as qualifying for fair value.  With respect to SFAS No. 115, available forsale and held to maturity securities at the effective date are eligible for thefair value option at that date.  If thefair value option is elected for those securities at the effective date,cumulative unrealized gains and losses at that date shall be included in thecumulative-effect adjustment and thereafter, such securities will beaccounted for as trading securities. SFAS No. 159 is effective for the Company on January 1, 2008.  Earlier adoption is permitted in 2007 if theCompany also elects to apply the provisions of SFAS No. 157.  The Company did not early adopt SFAS No. 159and believes that it is unlikely that it will expand its use of fair valueaccounting upon the January 1, 2008 effective date.

9

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**NOTE 3 —CONCENTRATIONS**

The Company’s futureoperations and continued expansion is subject to a significant concentrationrisk.  During the three months ended June 30, 2007 and June 30, 2006, theCompany’s revenues from military units of the U.S. Government accounted for 98%and 96% of total revenues, respectively.  During the six months endedJune 30, 2007 and June 30, 2006, the Company’s revenues from military units ofthe U.S. Government accounted for 97% and 89% of total revenues,respectively.  The Company’s accounts receivable from military units ofthe U.S. Government as of June 30, 2007 and December 31, 2006 amounted to 99%and 81%, respectively, of total accounts receivable.

**NOTE 4 —STOCK BASED COMPENSATION PLANS**

The Company does not havea formal stock option plan. However, the Company has issued stock options toits employees.

Compensation cost relatedto stock options recognized in operating results (included in selling, general,and administrative expenses) under SFAS 123R was $420,661 and $860,904 for thethree and six months ended June 30, 2007, respectively. Compensation costrelated to stock options was $101,816 and $362,808 for the three and six monthsended June 30, 2006, respectively.

The following tablesummarizes the attributes used by the Company to determine compensation costfor stock options consistent with requirements of SFAS 123R. No stock optionswere granted during the six months ended June 30, 2007.
| ** **                                                  | ** ** | **For the three months ended  June 30** | ** ** | **For the six months ended  June 30** | ** **   |
|-------------------------------------------------------------|------------|------------------------------------------------------------------|------------|----------------------------------------------------------------|--------------|
| **Valuation assumptions**                              | ** ** | **2007**                                                         | ** ** | **2006**                                                       | ** **   | **2007** | ** ** | **2006** | ** ** |
| Stock price on date of  grant                               |       | —                                                           |       | $                                                              | 3.65         |   | — |   | $ | 0.77-$7.48 |   |
| Exercise Price                                              |       | —                                                           |       | $                                                              | 1.38 - $4.70 |   | — |   | $ | 0.72 - $4.70 |   |
| Expected option term  (in years)                            |       | —                                                           |       | 2                                                              |         | — |   | 2 |   |
| Expected duration from  grant to expiration date (in years) |       | —                                                           |       | 4 and 5                                                        |         | — |   | 4 and 5 |   |
| Option vesting term (in  years)                             |       | —                                                           |       | 1                                                              |         | — |   | 1 |   |
| Expected volatility                                         |       | —                                                           |       | 45.82                                                          | %            | — |   | 45.82-70.31 | % |
| Risk-free interest rate                                     |       | —                                                           |       | 4.40                                                           | %            | — |   | 4.40-4.97 | % |
| Expected forfeiture  rate                                   |       | —                                                           |       | 5                                                              | %            | — |   | 5 | % |
| Estimated corporate tax  rate                               |       | —                                                           |       | 38.5                                                           | %            | — |   | 38.5 | % |
| Expected dividend yield                                     |       | —                                                           |       | 0                                                              | %            | — |   | 0 | % |

 

The following table summarizes information about stockoption activity for the three and six months ended June 30, 2007.

| Options                           | ** ** | **Number of  options** | ** ** | **Weighted  average per  share  exercise  price** | ** ** | **Weighted  average  remaining  contractual  term** | ** ** | **Aggregate  intrinsic value** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding at  December 31, 2006 |       | 1,959,443                   |       | $                                                      | 2.53       |                                                | 2.60       |                                | $          | 29,293,673 |   |
| Options granted                   |       | —                      |       |                                                   |       |                                                |       |                                |       |
| Options  exercised                |       | (1,371,133                  | )          | $                                                      | 0.93       |                                                |       |                                |       |   |
| Outstanding at  June 30, 2007     |       | 588,310                     |       | $                                                      | 5.42       |                                                | 2.10       |                                | $          | 8,887,901 |   |
|                              |       |                        |       |                                                   |       |                                                |       |                                |       |
| Exercisable at June 30,  2007     |       | 338,310                     |       | $                                                      | 3.44       |                                                | 2.00       |                                | $          | 5,744,146 |   |

 

The following tablesummarizes information about non-vested stock grants activity for the six monthsended June 30, 2007.

| Non-vested shares         | ** ** | **Number of  shares** | ** ** | **Weighted average  per share grant  price** | ** ** |
|--------------------------------|------------|----------------------------|------------|-------------------------------------------------------------|------------|
| Outstanding  December 31, 2006 |       | 191,026                    |       | 5.48                                                        |       |
| Shares granted                 |       | —                     |       | —                                                      |       |
| Shares vested                  |       | (70,513                    | )          | 6.45                                                        |       |
| Outstanding June 30,  2007     |       | 120,513                    |       | 5.14                                                        |       |

 

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**NOTE 5 —TAXES**

The FASB has issuedStatement of Financial Accounting Standards Number 109 “Accounting for IncomeTaxes”, which requires the asset and liability method of accounting for incometaxes. Under the asset and liability method, deferred income taxes arerecognized for the tax consequences of “temporary differences” by applyingenacted statutory tax rates applicable to future years to differences betweenthe financial statement carrying amounts and the tax basis of existing assetsand liabilities.

The Company’s netdeferred tax asset consists of the following as of:

|                                      | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Net deferred tax  asset              |       |                        |       |                            |       |
| Provisions and allowances            |       | $                           | 9,178,444  |                            | $          | 5,745,308 |   |
| Depreciation tax loss difference     |       | (328,580                    | )          | (268,110                        | )          |
| Net operating loss carry forwards    |       | —                      |       | 6,849,293                       |       |
|                                 |       | 8,849,864                   |       | 12,326,491                      |       |
| Valuation  allowance                 |       | —                      |       | —                          |       |
| Deferred tax  benefit                |       | $                           | 8,849,864  |                            | $          | 12,326,491 |   |
|                                 |       |                        |       |                            |       |
| Current portion  of deferred taxes   |       | $                           | 8,849,864  |                            | $          | 9,562,500 |   |
| Long-term  portion of deferred taxes |       | —                      |       | 2,763,991                       |       |
| Total deferred taxes                 |       | $                           | 8,849,864  |                            | $          | 12,326,491 |   |

 

As of June 30, 2007 theCompany has no available operating loss carry-forwards.

The following is areconciliation of the provision for income taxes at the U.S. federal income taxrate to the income taxes reflected in the Consolidated Statements ofOperations:

|                                                 | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **June 30, 2007**      | ** ** | **June 30, 2006**    | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** |
| Tax expense  (credit) at statutory rate-federal |       | 35.00                            | %          | 35.00                          | %          | 35.00 | % | 35.00 | % |
| State tax  expense net of federal tax           |       | 3.25                             | %          | 3.25                           | %          | 3.25 | % | 3.25 | % |
| Other permanent  differences                    |       | (2.37)                           | %          | —                         |       | (1.00) | % | — |   |
| Changes in  valuation allowance                 |       | —                           | %          | (38.25)                        | %          | — | % | (38.25) | % |
| Tax expense at actual  rate                     |       | 35.88                            | %          | —                         | %          | 37.25 | % | — | % |

 

**NOTE 6 —EARNINGS/LOSS PER SHARE**

The Company utilizes SFASNo. 128, “Earnings per Share” to calculate earnings/loss per share. Basicearnings/loss per share is computed by dividing the earnings/loss available tocommon shareholders (as the numerator) by the weighted-average number of commonshares outstanding (as the denominator). Diluted earnings/loss per share iscomputed similar to basic earnings/loss per share except that the denominatoris increased to include the number of additional common shares that would havebeen outstanding if all potential common stock (including common stockequivalents) had all been issued, and if such additional common shares weredilutive.

Under SFAS No. 128, wherethere is a loss, the inclusion of additional common shares is anti-dilutive(since the increased number of shares reduces the per share loss available tocommon stockholders), and if the additional common shares are anti-dilutive,they are not added to the denominator in the calculation. For the three and sixmonth periods ended June 30, 2006 the following common stock equivalents havebeen excluded from the calculation of the diluted loss per share.

|                                       | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **June 30, 2006**      | ** ** | **June 30, 2006**    | ** ** |
| Convertible  Preferred Stock Series D |       | 3,151,906                        |       | 4,128,030                      |       |
| Warrants                              |       | 1,809,247                        |       | 2,219,014                      |       |
| Options                               |       | 1,463,514                        |       | 1,452,464                      |       |
| Stock Grants                          |       | 35,648                           |       | 17,912                         |       |
| Total                                 |       | 6,460,315                        |       | 7,817,420                      |       |

 

11

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**EarningsPer Share Computation**
| ** **                                             | ** ** | **For the three months ended June 30** | ** ** | **For the six  months ended June 30** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2007**                                                             | ** ** | **2006**                                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Basic  earning (loss) per common share computation** | ** ** | ** **                                                           | ** ** | ** **                                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings  (loss) available to common shareholders  |       | $                                                                    | 9,626,828  |                                                                     | $          | 424,047 |   | $ | 12,105,101 |   | $ | (989,267 | ) |
|                                                   |       |                                                                 |       |                                                                     |       |   |   |   |   |
| **Weighted-  average shares used to compute:**         | ** ** | ** **                                                           | ** ** | ** **                                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic earnings  per share                              |       | 68,120,787                                                           |       | 39,511,931                                                               |       | 67,874,796 |   | 38,487,506 |   |
|                                                   |       |                                                                 |       |                                                                     |       |   |   |   |   |
| **Earnings  (loss) per share of common stock:**        | ** ** | ** **                                                           | ** ** | ** **                                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                  |       | $                                                                    | 0.14       |                                                                     | $          | 0.01 |   | $ | 0.18 |   | $ | (0.03 | ) |

 
| ** **                                                | ** ** | **For the three months ended June 30** | ** ** | **For the six months ended June 30** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                                             | ** ** | **2006**                                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Dilutive  earning (loss) per common share computation** | ** ** | ** **                                                           | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings  (loss) available to common shareholders     |       | $                                                                    | 9,626,828  |                                                               | $          | 424,047 |   | $ | 12,105,101 |   | $ | (989,267 | ) |
|                                                      |       |                                                                 |       |                                                               |       |   |   |   |   |
| **Weighted-  average shares used to compute:**            | ** ** | ** **                                                           | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic earnings  per share                                 |       | 68,120,787                                                           |       | 39,511,931                                                         |       | 67,874,796 |   | 38,487,506 |   |
| Dilutive effect  of stock options                         |       | 663,713                                                              |       | Anti-dilutive                                                      |       | 893,409 |   | Anti-dilutive |   |
| Dilutive effect  of stock grants                          |       | 134,028                                                              |       | Anti-dilutive                                                      |       | 140,541 |   | Anti-dilutive |   |
| Dilutive  weighted earnings per share                     |       | 68,918,528                                                           |       | 39,511,931                                                         |       | 68,908,746 |   | 38,487,506 |   |
|                                                      |       |                                                                 |       |                                                               |       |   |   |   |   |
| **Earnings  (loss) per share of common stock:**           | ** ** | ** **                                                           | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Assuming dilution                                         |       | $                                                                    | 0.14       |                                                               | $          | 0.01 |   | $ | 0.18 |   | $ | (0.03 | ) |

 

**NOTE 7 —ACCOUNTS RECEIVABLES & “DEFINITIZATION”**

The majority of theCompany’s contracts are with the United States Government and as such they are “publicsector” contracts subject to the Federal Acquisition Regulations set forth inTitle 41 of the United States Code (“FAR”), and may result either fromcompetitive bidding or may be awarded as “sole source” contracts “subject todefinitization” as provided under FAR Section 252.217-7027.

Following the award of asole source contract, a central component of the definitization process is thenegotiation and finalization of the contract price between the contractor andthe United States contracting officer.  As part of this process, theparties make a mutual determination of the direct material and labor costs forthe work based upon the bill of materials and other purchasing information andthen the parties mutually agree upon “rates” for the indirect labor costs andthe General and Administrative costs and upon a “fee” (or profit).  Whilethe direct material costs and labor can be established through objectiveevidence, the “rates” and fee are more subjective and are based upon ananalysis of multiple factors including historical performance data andprojected operational factors.  The contractor has the right to submitproposed rates and fee, but these are subject to final review and approval bythe contracting officer, who may insist on using alternate rates and fee. As provided in section 252.217-7027(c):

*If agreement on a definitivecontract action to supersede this undefinitized contract action is not reachedby the target date in paragraph (b) of this clause, or within any extension ofit granted by the Contracting Officer, the Contracting Officer may, with theapproval of the head of the contracting activity, determine a reasonable priceor fee in accordance with subpart 15.4 and part 31 of the FAR, subject toContractor appeal as provided in the Disputes clause.*

Finally, although bothparties make an effort to definitize the contract as quickly as possible, theprocess is time consuming and can take months or even years to complete. During the definitization process the contractor is required to perform thecontract work and to make deliveries under the contract before the finalcontract price has been established.  For this reason, as part of theoriginal letter award, the contractor provides a rough order of magnitude priceto be used for invoicing and accounting purposes pending definitization.

As a result of thepotential adjustments related to the definitization process, the Companymaintains an allowance for contractual adjustments account.  This accountis reviewed on a regular basis to determine adequate adjustments, if necessary. The allowance is evaluated and deemed adequate based on the analysis ofhistorical data and calculation of pro-rata percentages of current contracts inplace, which remain subject to the definitization process.

12

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Below is a tabledetailing activity within the allowance for contractual adjustments account forthe six months ended June 30, 2007 and June 30, 2006, respectively.

|                        | ** ** | **For the six months ended June 30** | ** ** |
|------------------------|------------|--------------------------------------------------------------------|------------|
| ** **             | ** ** | **2007**                                                           | ** ** | **2006** | ** ** |
| Beginning  balance     |       | $                                                                  | 6,068,087  |   | $ | 1,018,051 |   |
| Additions to allowance |       | 2,814,664                                                          |       | 869,520 |   |
| Reduction to allowance |       | (2,049,305                                                         | )          | (423,916 | ) |
| Balance March 31       |       | $                                                                  | 6,833,446  |   | $ | 1,463,655 |   |
| Additions to allowance |       | 9,735,647                                                          |       | 216,213 |   |
| Reduction to allowance |       | (4,267,665                                                         | )          | (485,828 | ) |
| Balance June 30        |       | $                                                                  | 12,301,428 |   | $ | 1,194,040 |   |

 

 

The MRAP sole sourcecontract was definitized on July 31, 2007. The increase in the allowance forcontractual adjustments as of June 30, 2007 is due primarily to adjust theundefinitized price to the definitized price for sales recorded through June30, 2007.

The Company does notmaintain an allowance for doubtful accounts.  The Company’s significantsales for the quarter ended June 30, 2007 and June 30, 2006 involved contractssigned with the U.S. Government.

Historically, the Companyhas not encountered sales returns.  The Company does not anticipate salesreturns in the future.

**NOTE8—INVENTORIES**

Inventories consisted of the following:

|                                                 | ** ** | **June 30, 2007** | ** **  | **December 31, 2006** | ** ** |
|-------------------------------------------------|------------|-----------------------------|-------------|---------------------------------|------------|
| Finished Goods                                  |       | $                           | 11,638,699  |                            | $          | — |   |
| Raw materials  and supplies                     |       | 130,610,845                 |        | 45,131,126                      |       |
| Work in process                                 |       | 11,825,187                  |        | 17,688,784                      |       |
| Less: Allowance  for obsolescence and shrinkage |       | (5,708,420                  | )           | (2,423,613                      | )          |
| Net Inventories                                 |       | $                           | 148,366,311 |                            | $          | 60,396,297 |   |

 

As of June 30, 2007 there were vehicles which had beeninspected and accepted by the customer but the customer had not taken title(signed Form DD250). These vehicles were accounted for as finished goods.

**NOTE 9—ASSETS PURCHASED**

On March 9, 2007, theCompany purchased the Research and Developmental Testing Facility of NEWTECServices Group, Inc., located near Edgefield, SC for $5,500,000.  TheCompany intends to use the facility to expand the Company’s research and developmentactivities and support the verification and quality control validation of theCompany’s armored vehicles used to protect military personnel against explosivethreats. The acquisition consisted of land - $2,100,000, furniture and fixtures- $800,000, procedure manuals -$600,000 and intangible assets -$2,000,000.  These assets were reported in accordance with SFAS141.

On March 22, 2007, theCompany purchased real and personal property located in Summerville, SC for$4,100,000. The Company intends to use the facility as a product developmentand logistic services training center. The acquisition consisted of land -$1,320,000, building -  $2,502,000 and furniture and fixtures - $278,000.

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**NOTE10—PROPERTY AND EQUIPMENT**

Property and Equipment atJune 30, 2007 and December 31, 2006:

|                                     | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Furniture and  fixtures             |       | $                           | 3,403,423  |                            | $          | 1,022,984 |   |
| Leasehold  improvements             |       | 5,235,199                   |       | 1,534,057                       |       |
| Machinery and  equipment            |       | 5,886,830                   |       | 3,777,419                       |       |
| Test equipment                      |       | 27,179                      |       | 16,790                          |       |
| Manuals                             |       | 704,798                     |       | 104,797                         |       |
| Vehicles                            |       | 393,819                     |       | 143,464                         |       |
| Demo vehicles                       |       | 1,095,925                   |       | 1,095,925                       |       |
| Buildings                           |       | 2,502,000                   |       | —                          |       |
| Construction in  progress           |       | 6,544,529                   |       | —                          |       |
| Land                                |       | 3,420,000                   |       | —                          |       |
| Computers and  software             |       | 4,752,543                   |       | 2,757,131                       |       |
| Less  depreciation and amortization |       | (3,663,119                  | )          | (1,488,666                      | )          |
|                                |       |                        |       |                            |       |
| Net property and  equipment         |       | $                           | 30,303,126 |                            | $          | 8,963,901 |   |

 

During the first quarterof 2007, the Company entered into a contract to build a 90,000 square footwarehouse facility in Ladson, SC. As of June 30, 2007, the Company has expended$4,271,631 in progress payments (accounted for as construction in progress)against the total contract.

In June 2007, the Companymade a down payment of $1,529,836 to Superior Controls of Plymouth, Michigan tobegin work on a $15,300,000 low volume automotive assembly line at the Ladsonfacility.

In the second quarter of2007 the Company spent $1,200,000 on a systems network upgrade and $3,400,000on building and manufacturing improvements.

See Note 9 — AssetsPurchased for explanation of additional property plant and equipment increases.

Depreciation expense forthe six months ended June 30, 2007 and June 30, 2006 was $1,539,212 and$338,160, respectively.

**NOTE 11— ACQUIRED INTANGIBLE ASSETS**

As a result of theacquisition of the Research and Development Testing Facility (explained in Note9), the following is a summary of the intangible assets acquired:

|                       | ** ** | **Gross carrying** | ** ** | **Accumulated**  | ** ** | **June 30, 2007**  | ** ** |
|-----------------------|------------|-------------------------|------------|------------------|------------|------------------------------|------------|
| ** **            | ** ** | **amount**              | ** ** | **amortization** | ** ** | **net book value** | ** ** |
| Licenses              |       | $                       | 800,000    |             | $          | 88,889                       |       | $ | 711,111 |   |
| Non-compete agreement |       | 600,000                 |       | 75,000           |       | 525,000                      |       |
| Customer base         |       | 200,000                 |       | —           |       | 200,000                      |       |
| Special expertise     |       | 400,000                 |       | —           |       | 400,000                      |       |
| Total                 |       | $                       | 2,000,000  |             | $          | 163,889                      |       | $ | 1,836,111 |   |

 

Amortization expense forthe Research and Development Testing Facility for the six months ended June 30,2007 was $163,889. Estimated aggregate amortization expenses for each of thenext three years is $466,667, $466,667, and $429,167.

**NOTE12—COMMITMENTS AND CONTINGENCIES**

**OtherAccrued Liabilities**

The Company’s otheraccrued liabilities include the following:

|                            | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Compensation and  benefits |       | $                           | 1,773,210  |                            | $          | 1,222,143 |   |
| Vehicle Fee  Payable       |       | 845,848                     |       | 1,139,250                       |       |
| Settlement                 |       | —                      |       | 607,466                         |       |
| Liquidated  damages        |       | 2,785,903                   |       | —                          |       |
|                       |       | $                           | 5,404,961  |                            | $          | 2,968,859 |   |

 

**LiquidatedDamages**

On December 20, 2006, theCompany completed a private placement of 13,000,000 shares of its common stockto institutional investors at $11.75 per share, resulting in gross proceeds of$152,750,000.  The proceeds, net of commissions, were $146,640,000.

14

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Per the SecuritiesPurchase Agreement, the Company agreed to file a registration statement toregister all 13,000,000 shares of common stock for resale and distributionunder the Securities Act of 1933, as amended, within 30 calendar days (January 19, 2007) and cause the registrationstatement to be declared effective no later than 120 calendar days (April 19,2007). If the registration statement registering these shares is not declaredeffective on or before the effective date by the SEC, then the Company shalldeliver to each purchaser, as liquidated damages, an amount equal to one andone third percent (1 1/3%) for each thirty (30) days (or such lesser pro-rataamount for any period of less than thirty (30) days) of the total purchaseprice of the securities purchased and still held by such purchaser pursuant tothe Securities Purchase Agreement on the first day of each thirty (30) day orshorter period for which liquidated damages are calculable. The registrationstatement became effective July 26, 2007. In accordance with FSP EITF 00-19-2 —Accounting for Registration Payment Arrangements, the Company has recorded $4,860,658during the three months ended March 31, 2007 based on our original estimate oftiming and completing the registration of common stock and an additional chargefor liquidated damages of $1,775,820 as of June 30, 2007. Liquidated damageexpense for the three and six months ended June 30, 2007 was $1,775,820 and$6,636,478, respectively.

**ContractLiabilities**

The Company’s salescontracts generally include a warranty such that the Company’s products arefree from defects in design, material, and workmanship for a period of one yearfrom the acceptance date.  The warranty does not apply to any damage orfailure to perform caused by the misuse or abuse of the vehicle, combat damage,fair wear and tear items (brake shoes, track pads, wiper blades, etc.), or bythe customer’s failure to perform proper maintenance or service on thesupplies.

The Company routinelyreviews its exposure for warranty costs and determines warranty and pricingreserves based on historical data and known events. Below is a table detailingthe Company’s accruals for warranty-related costs as of June 30, 2007 andDecember 31, 2006:

|                      | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------|------------|-----------------------------|------------|---------------------------------|------------|
|                 |       |                        |       |                            |       |
| Contract liabilities |       | $                           | 4,397,653  |                            | $          | 1,850,000 |   |
|                      |            |                             |            |                                 |            |  |  |

 

**GainShare Program**

On March 1, 2007, theBoard of Directors approved a quarterly gain share program. The program willdistribute 10% of each quarter’s net earnings equally to employees.

**Constructionin Progress**

During the first quarter of2007, the Company entered into a contract to build a 90,000 square footwarehouse facility in Ladson, SC. As of June 30, 2007, the Company has expended$4,271,631 in progress payments (accounted for as construction in progress)against the total contract of $4,474,000. The construction was completed in July2007.  The remaining construction in progress is associated with theongoing development and implementation of various business operating systemssoftware.

In June of 2007, theCompany made a down payment of $1,529,836 to Superior Controls of Plymouth,Michigan to begin work on a $15,300,000 low volume automotive assembly line atthe Ladson facility.  Progress paymentstotaling $12,238,691 are due over the remainder of 2007 with the final paymentof $1,529,836 due upon completion of the project in January of 2008.

**LegalProceedings**

The Company may beinvolved from time to time in ordinary litigation that will not have a materialeffect on its operations or finances. The Company is not aware of any pendingor threatened litigation against the Company or its officers and directors intheir capacity as such that could have a material impact on the Company’soperations or finances.

15

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**NOTE13—LONG-TERM LIABILITIES**

In October of 2006, theCompany acquired capital equipment valued at $234,875 using a note with impliedinterest of 11.25% from the supplier with a repayment based on usage ofmaterials used with the equipment.  It is expected that based on usageestimates the note payments in 2007, 2008, and 2009 will be $92,608, $92,608and $69,456, respectively.

As part of the purchaseof NEWTEC Services Group, Inc, a non-compete arrangement was agreed upon wherethe President of NEWTEC Services Group Inc., would not operate a competitivebusiness during the period of employment with the Company and for two yearsthereafter.  As part of the non-compete provision, $450,000 was withheldpayable in three equal installments of $150,000 on January 1 of 2008, 2009, and2010.

**NOTE14—SHAREHOLDERS’ EQUITY**

During the three monthsended June 30, 2007, the Company recorded the following transactions within itsshareholders’ equity accounts:

Per Board of Director Resolution, a 20,513 sharecommon stock grant was issued. The valuation of these shares was recorded underSFAS123R.

Employees exercised stock options to purchase 176,800shares of the Company’s common stock valued at $295,970. The valuation ofthese shares was recorded under SFAS123R.

**NOTE 15— VALUATION AND QUALIFYING ACCOUNTS AND RESERVES**

The followingtable summarizes information about accounts and reserves for the three monthsending June 30, 2007:
| ** **                      | ** ** | ** **                                                 | ** ** | **For the three months ending March 31**  | ** ** | **For the three months ending June 30** | ** ** |
|---------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **Description**                 | ** ** | **Balance at   beginning   of period** | ** ** | **Additions   charged to cost   and expenses** | ** ** | **Write-offs**                                                        | ** ** | **Balance   March 31** | ** ** | **Additions   charged to   cost and   expenses** | ** ** | **Write-offs** | ** ** | **Balance   June 30** | ** ** |
|                            |       |                                                       |       |                                                                    |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Revenue based  provisions       |       |                                                       |       |                                                                    |       |                                                                  |       |   |   |   |   |   |   |   |   |
| 2007                            |       | $                                                          | 6,068,087  |                                                                    | $          | 2,814,664                                                             |       | $ | 2,049,305 |   | $ | 6,833,446 |   | $ | 9,735,647 |   | $ | 4,267,665 |   | $ | 12,301,428 |   |
| 2006                            |       | $                                                          | 1,018,051  |                                                                    | $          | 869,520                                                               |       | $ | 423,916 |   | $ | 1,463,655 |   | $ | 216,213 |   | $ | 485,828 |   | $ | 1,194,040 |   |
|                            |       |                                                       |       |                                                                    |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Allowance for inventory  losses |       |                                                       |       |                                                                    |       |                                                                  |       |   |   |   |   |   |   |   |   |
| 2007                            |       | $                                                          | 2,423,613  |                                                                    | $          | —                                                                |       | $ | 298,830 |   | $ | 2,124,783 |   | $ | 7,672,006 |   | $ | 4,088,369 |   | $ | 5,708,420 |   |
| 2006                            |       | $                                                          | 498,281    |                                                                    | $          | 150,000                                                               |       | $ | — |   | $ | 648,281 |   | $ | 2,574,647 |   | $ | 1,216,988 |   | $ | 2,005,940 |   |
|                            |       |                                                       |       |                                                                    |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Contract liabilities            |       |                                                       |       |                                                                    |       |                                                                  |       |   |   |   |   |   |   |   |   |
| 2007                            |       | $                                                          | 1,850,000  |                                                                    | $          | 527,043                                                               |       | $ | 527,043 |   | $ | 1,850,000 |   | $ | 2,572,430 |   | $ | 24,777 |   | $ | 4,397,653 |   |
| 2006                            |       | $                                                          | 380,045    |                                                                    | $          | 239,904                                                               |       | $ | — |   | $ | 619,949 |   | $ | 334,321 |   | $ | 211,942 |   | $ | 742,328 |   |

 

**NOTE16—SUBSEQUENT EVENTS**

On July 12, 2007 weannounced the purchase of a new 430,000 square foot facility in Roxboro, NC. Weplan to use this facility for additional capacity for current and futureproducts including our new Cheetah vehicle line.

On July 20, 2007, weentered into a Loan Agreement (the “Loan Agreement”) with Wachovia Bank,National Association (“Wachovia”), pursuant to which we agreed to certain termsthat govern a revolving credit facility made available to the Registrant byWachovia.  Concurrently with the execution of the Loan Agreement, theRegistrant issued a promissory note to Wachovia in the original principalamount of $50,000,000 (the “Note”).  The unpaid principal balance of theNote accrues interest at a floating rate per annum equal to the 1-month LIBORmarket index rate plus 2.0%.  Accrued interest is due and payable on amonthly basis, starting on August 31, 2007 and all outstanding principal is dueand payable on September 30, 2007, unless extended by Wachovia. We entered intothis agreement to assure continued flow of cash while administrativecontractual payment issues were worked out with government payment offices onrecently established MRAP programs.

On August 1, 2007, wewere awarded work totaling $5.3 million to produce more than 40 articulatinginterrogation arms for the Iraqi Light Armored Vehicle (ILAV). As part of thisaward, a total of 22 additional new vehicles will also be produced andscheduled for December 2007.

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**ITEM 2 — MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

The following Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, or MD&A, is intended to helpthe reader understand the results of operations and financial condition ofForce Protection, Inc. for the three and six months ended June 30, 2007. Thefinancial information as of June 30, 2007 should be read in conjunction withthe financial statements for the year ended December 31, 2006 contained in ourForm 10-K/A filed on July 12, 2007.

**CautionaryStatement Concerning Forward-Looking Statements**

This quarterly report on Form 10-Q containsforward-looking statements, including, without limitation, statementsconcerning possible or assumed future results of operations and those precededby, followed by or that include the words “believes,” “could,” “expects,” “intends,”“anticipates,” or similar expressions. Our actual results could differmaterially from these anticipated in the forward-looking statements for manyreasons, including our ability to raise capital when necessary; availability ofparts and raw materials for our products; continued customer acceptance of ourproducts; on-going success of our research and development efforts and otherrisks described in our Form 10-K and other reports filed with the Securitiesand Exchange Commission, or SEC, elsewhere in this Form 10-Q. Although webelieve the expectations reflected in the forward-looking statements are reasonable,they relate only to events as of the date on which the statements are made, andour future results, levels of activity, performance or achievements may notmeet these expectations. We do not intend to update any of the forward-lookingstatements after the date of this Form 10-Q to conform these statements toactual results or to changes in our expectations, except as required by law.

**Application ofCritical Accounting Policies**

Management’s Discussion and Analysis of  Financial Condition and Results of Operationsis based on the Company’s unaudited Consolidated Financial Statements, whichhave been prepared in accordance with U.S. generally accepted accountingprinciples, or GAAP. The preparation of financial statements in accordance withGAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements, as well as thereported amounts of revenues and expenses during the reporting period. On anongoing basis, management evaluates its estimates, including those related tolong-term contracts and programs, claims for unanticipated contract costs,goodwill and other intangible assets, income taxes, worker’s compensation,warranty obligations and contingencies and litigation. Management bases itsestimates on historical experience and on various other assumptions that itbelieves to be reasonable under the circumstances. The results of theseestimates form the basis for making judgments about the carrying values ofassets and liabilities that are not readily available from other sources.Actual results may differ from these estimates under different assumptions orconditions. There were no significant changes in the Company’s criticalaccounting policies during the first six months of 2007.

Dividend Policy:We have never declared or paid a cash dividend on our common stock, and we donot anticipate paying any cash dividends on our common stock in the foreseeablefuture. Any future determination to pay cash dividends on our common stock willbe at the discretion of our board of directors and will depend upon ourfinancial condition, operating results, capital requirements, restrictionscontained in our agreements and other factors which our board of directorsdeems relevant.

Off-Balance SheetArrangements*:*As of June 30, 2007, other than operating leases, the Company had nooff-balance sheet arrangements.  (Refer to Note 12 of the FinancialStatements included in this Form 10-Q)

Joint Venture Agreement: On December 15, 2006, we entered into a Joint Venture Agreement with GeneralDynamics Land Systems Inc. (“GDLS”), pursuant to which we agreed to worktogether with GDLS to win and execute a contract for the Mine Resistant AmbushProtected (“MRAP”) Vehicle Program and/or the Medium Mine Protected VehicleProgram (“MMPV”). Under the Agreement, the Program is defined to include anyand all solicitations and requests for proposals for MRAP production and lifecyclesupport and/or any follow on work that may be performed. The scope of work tobe undertaken by the joint venture is limited to the use of our Cougar 4x4 and6x6 armored vehicles for the MRAP Category I and Category II and the MRAPCategory II for MMPV requirements. The joint venture board is made up ofthree designees from the Company and three designees from GLDS. The joint ventureboard will have authority to execute documents in accordance with the terms ofthe Agreement. Decisions of the joint venture board shall be made by majorityvote. We agreed to operate the joint venture on the principle of equitabledivision of burden and benefit with GDLS. This means that parties are expectedto contribute resources equally to the venture. We agreed to divide the joint venturerevenues between us on a 50%/50% basis. Wherever practicable, the joint venturewill act as the prime contractor for joint venture work, and we, along withGDLS, shall act as the exclusive subcontractors.

**FinancialCondition and Results of Operations**

Overview:For the second quarter ended June 30, 2007 we generated net earnings of$9,626,828. Sales for this period from all sources were $134,701,640, againstwhich we incurred total cost of goods of $101,944,855 resulting in a grossprofit of $32,756,785, or 24.3%. We incurred selling, general and administrativeexpenses of $18,806,422 which includes a final charge of $1,775,820 forliquidated damages for late effective registration of stock from the PIPE transactionof December 20, 2006, plus research and development expenses in the amount of$3,305,514 resulting in an operating profit of $13,950,363. During this threemonth period,

17

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we delivered a total of 229 vehicles consisting of 17Buffalo and 212 Cougars (all variants).

Results ofOperations—Three and six months ended June 30, 2007 compared with the three andsix months ended June 30, 2006.

The followingtable sets forth our unaudited consolidated statements of operations for thethree month and six month periods ended June 30 for the years 2007 and 2006.The discussion and analysis that follows should be read in conjunction with ourconsolidated financial statements and related notes included elsewhere in thisreport.

**ConsolidatedStatements of Operations(unaudited)**
| ** **                                     | ** ** | **For the three months ended June 30** | ** **  |
|------------------------------------------------|------------|----------------------------------------------------------------------|-------------|
| ** **                                     | ** ** | **2007**                                                             | ** **  | **2006** | ** ** | **Difference** | ** ** | **% Change** | ** ** |
| Revenues                                       |       | $                                                                    | 134,701,640 |   | $ | 56,074,537 |   | $ | 78,627,103 |   | 140.2 |   |
| Cost of sales                                  |       | 101,944,855                                                          |        | 45,917,751 |   | 56,027,104 |   | 122.0 |   |
| Gross profit                                   |       | 32,756,785                                                           |        | 10,156,786 |   | 22,599,999 |   | 222.5 |   |
|                                           |       |                                                                 |        |   |   |   |   |   |   |
| S,G&A  expense                             |       | 15,500,908                                                           |        | 7,744,435 |   | 7,756,473 |   | 100.2 |   |
| R&D expense                                |       | 3,305,514                                                            |        | 641,215 |   | 2,664,299 |   | 415.5 |   |
| Total S,G&A                                |       | 18,806,422                                                           |        | 8,385,650 |   | 10,420,772 |   | 124.3 |   |
|                                           |       |                                                                 |        |   |   |   |   |   |   |
| Operating profit                               |       | 13,950,363                                                           |        | 1,771,136 |   | 12,179,227 |   | 687.7 |   |
|                                           |       |                                                                 |        |   |   |   |   |   |   |
| Interest expense                               |       | (44,060                                                              | )           | (818,985 | ) | 774,925 |   | 94.6 |   |
| Other income                                   |       | 1,106,423                                                            |        | 20,873 |   | 1,085,550 |   | N/M |   |
| Net earnings  before tax                       |       | 15,012,726                                                           |        | 973,024 |   | 14,039,702 |   | N/M |   |
|                                           |       |                                                                 |        |   |   |   |   |   |   |
| Tax expense                                    |       | 5,385,898                                                            |        | — |   | 5,385,898 |   | N/M |   |
| Net earnings after  tax                        |       | 9,626,828                                                            |        | 973,024 |   | 8,653,804 |   | 889.4 |   |
| Series D  stock dividend and accretion    |       | —                                                               |        | 548,977 |   | (548,977 | ) | N/M |   |
| Net earnings available  to common shareholders |       | $                                                                    | 9,626,828   |   | $ | 424,047 |   | $ | 9,202,781 |   | N/M |   |

** **
| ** **                                     | ** ** | **For the six months ended June 30** | ** **  |
|------------------------------------------------|------------|--------------------------------------------------------------------|-------------|
| ** **                                     | ** ** | **2007**                                                           | ** **  | **2006** | ** ** | **Difference** | ** ** | **% Change** | ** ** |
| Revenues                                       |       | $                                                                  | 234,860,406 |   | $ | 90,877,122 |   | $ | 143,983,284 |   | 158.4 |   |
| Cost of sales                                  |       | 179,573,991                                                        |        | 74,082,567 |   | 105,491,424 |   | 142.4 |   |
| Gross profit                                   |       | 55,286,415                                                         |        | 16,794,555 |   | 38,491,860 |   | 229.2 |   |
|                                           |       |                                                               |        |   |   |   |   |   |   |
| S,G&A  expense                             |       | 30,663,008                                                         |        | 13,705,788 |   | 16,957,220 |   | 123.7 |   |
| R&D expense                                |       | 8,147,333                                                          |        | 1,304,805 |   | 6,842,528 |   | 524.4 |   |
| Total S,G&A                                |       | 38,810,341                                                         |        | 15,010,593 |   | 23,799,748 |   | 158.6 |   |
|                                           |       |                                                               |        |   |   |   |   |   |   |
| Operating profit                               |       | 16,476,074                                                         |        | 1,783,962 |   | 14,692,112 |   | 823.6 |   |
|                                           |       |                                                               |        |   |   |   |   |   |   |
| Interest expense                               |       | (79,591                                                            | )           | (1,626,309 | ) | 1,546,718 |   | 95.1 |   |
| Other income                                   |       | 2,894,516                                                          |        | 47,922 |   | 2,846,594 |   | N/M |   |
| Net earnings  before tax                       |       | 19,290,999                                                         |        | 205,575 |   | 19,085,424 |   | N/M |   |
|                                           |       |                                                               |        |   |   |   |   |   |   |
| Tax expense                                    |       | 7,185,898                                                          |        | — |   | 7,185,898 |   | N/M |   |
| Net earnings after  tax                        |       | 12,105,101                                                         |        | 205,575 |   | 11,899,526 |   | N/M |   |
| Series D  stock dividend and accretion    |       | —                                                             |        | 1,194,842 |   | 1,194,842 |   | N/M |   |
| Net earnings available  to common shareholders |       | $                                                                  | 12,105,101  |   | $ | (989,267 | ) | $ | 13,094,368 |   | N/M |   |

 

N/M — not meaningful

18

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| ** **                           | ** ** | **For the period ended June 30** | ** **  |
|--------------------------------------|------------|-----------------------------------------------------------|-------------|
| ** **                           | ** ** | **Second Quarter**                                   | ** **  | **Year to Date** | ** ** |
| **Net Sales**                   | ** ** | **2007**                                                  | ** **  | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net Sales                            |       | $                                                         | 134,701,640 |   | $ | 56,074,537 |   | $ | 234,860,406 |   | $ | 90,877,122 |   |
| % change compared with  prior period |       | 140.2                                                     | %           |   |   | 158.4 | % |   |   |
|                                      |            |                                                           |             |  |  |  |  |  |  |  |  |  |  |

 

The increase insales in the second quarter and year to date ended June 30, 2007 compared withthe second quarter and year to date ended June 30, 2006 is attributable to bothan increase in volume of vehicle deliveries to the U.S. government under ourgovernment contracts as well as the mix of vehicles delivered as follows:
| ** **                      | ** ** | **Second Quarter** | ** ** | **Year to Date** | ** ** |
|---------------------------------|------------|-------------------------|------------|----------------------------|------------|
| Buffalo vehicles                |       | 8.3                     | %          | 17.4                       | %          |
| Cougar vehicles  (all variants) |       | 131.7                   | %          | 137.0                      | %          |
| Spares/Logistics                |       | 0.2                     | %          | 4.0                        | %          |
| Total                           |       | 140.2                   | %          | 158.4                      | %          |

 

Sales for thesecond quarter and year to date 2007 and 2006 is comprised of:

|                              | ** ** | **Second Quarter** | ** **  | **Year to Date** | ** ** |
|------------------------------|------------|-------------------------|-------------|----------------------------|------------|
| ** **                   | ** ** | **2007**                | ** **  | **2006**                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Vehicles                     |       | $                       | 126,162,138 |                       | $          | 47,632,283 |   | $ | 221,574,187 |   | $ | 81,219,496 |   |
| Spares,  Logistics and other |       | 8,539,502               |        | 8,442,254                  |       | 13,286,219 |   | 9,657,626 |   |
| Total                        |       | $                       | 134,701,640 |                       | $          | 56,074,537 |   | $ | 234,860,406 |   | $ | 90,877,122 |   |

 
| ** **                             | ** ** | **For the period ended June 30** |
|----------------------------------------|------------|----------------------------------|
| ** **                             | ** ** | **Second Quarter**               | ** ** | **Year to Date** | ** ** |
| **Cost of Products and Services Sold** | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Cost of products and services sold     |       | $101,944,855                     |   | $45,917,751 |   | $179,573,991 |   | $74,082,567 |   |
| Gross Margin %                         |       | 24.3                             | % | 18.1 | % | 23.5 | % | 18.5 | % |

 

Gross marginsincreased by 6.2 percentage points in the second quarter of 2007 compared withthe second quarter of 2006 and by 5.0 percentage points for year to date June30, 2007 compared with year to date June 30, 2006 due primarily to improvedmaterial and labor cost performance as a result of implementation of new andimproved processes and leveraging of fixed costs over an increased productionvolume.
| ** **                                                           | ** ** | **For the period ended June 30** |
|----------------------------------------------------------------------|------------|-----------------------------------------------------------|
| ** **                                                           | ** ** | **Second Quarter**                                   | ** ** | **Year to Date** | ** ** |
| **Selling, General and Administrative Expenses** | ** ** | **2007**                                                  | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Selling, general  and administrative expenses                        |       | $                                                         | 15,500,908 |   | $ | 7,744,435 |   | $ | 30,663,008 |   | $ | 13,705,788 |   |
| Percent of sales                                                     |       | 11.5                                                      | % | 13.8 | % | 13.1 | % | 15.1 | % |
|                                                                      |            |                                                           |  |  |  |  |  |  |  |  |  |  |  |

 

Selling, generaland administrative expenses as a percentage of sales decreased in the secondquarter of 2007 compared with the second quarter of 2006 by 2.3 percentagepoints and by 2.0 percentage points for the year to date ended June 30, 2007compared with the year to date ended June 30, 2006. The decrease in bothperiods is due primarily to increased leverage of administrative cost tosupport the business, partially offset by the establishment of a liquidateddamages charge in the second quarter of 2007 of $1,775,820 (1.3 percentagepoints) and year to date 2007 of $6,636,478 (2.8 percentage points) resultingfrom the delayed registration (which became effective July 26, 2007) of ourDecember 2006 sale of common stock in a private placement  (see Footnote12 of the unaudited consolidated financial statements of this Form 10-Q).
| ** **                                           | ** ** | **For the period ended June 30** |
|------------------------------------------------------|------------|----------------------------------|
| ** **                                           | ** ** | **Second Quarter**               | ** ** | **Year to Date** |
| **Research and Development Expenses** | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Research and  development expenses                   |       | $                                | 3,305,514 |   | $ | 641,215 |   | $ | 8,147,333 |   | 1,304,805 |   |
| Percent of sales                                     |       | 2.5                              | % | 1.1 | % | 3.5 | % | 1.4 | % |
|                                                      |            |                                  |  |  |  |  |  |  |  |  |  |  |

 

19

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Research and development expenses as a percentage of salesincreased by 1.4 percentage points in the second quarter of 2007 compared tothe second quarter of 2006 and by 2.1 percentage points for the year to datefor the period ended June 30, 2007 compared to the year to date for the periodended June 30, 2006. The increase in both periods is due primarily to increasedexpenditures related to the development of the Cheetah vehicle. The secondquarter of 2007 costs are down from the first quarter of 2007 due to the heavypurchase of materials for the Cheetah development in the first quarter of 2007.
| ** **                            | ** ** | **For the period ended June 30** |
|---------------------------------------|------------|----------------------------------|
| ** **                            | ** ** | **Second Quarter**               | ** ** | **Year to Date** | ** ** |
| **Interest Expenses**            | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest and  other financial charges |       | $                                | (44,060 | ) | $ | (818,985 | ) | $ | (79,591 | ) | $ | (1,626,309 | ) |
| % change compared with  prior period  |       | -94.6                            | % |   |   | -95.1 | % |   |   |
|                                       |            |                                  |  |  |  |  |  |  |  |  |  |  |  |

 

Interest chargesdecreased in the second quarter of 2007 and the year to date 2007 compared withthe second quarter of 2006 and the year to date 2006 due to pay-off of theshort term Longview Capital loan (August 2006) and the termination of theaccounts receivable factoring agreement (June 2006), facilitated by the sale ofcommon stock through private placements. Current year interest charges are dueto various equipment financing arrangements (see Note 13 of the unauditedconsolidated financial statements of this Form 10-Q).
| ** **            | ** ** | **For the period ended  June 30** | ** ** |
|-----------------------|------------|-----------------------------------|------------|
| ** **            | ** ** | **Second Quarter**                | ** ** | **Year to Date** | ** ** |
| **Other Income** | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Other income          |       | $                                 | 1,106,423  |   | $ | 20,873 |   | $ | 2,894,516 |   | $ | 47,922 |   |
|                       |            |                                   |            |  |  |  |  |  |  |  |  |  |  |

 

Other incomeincreased in the second quarter of 2007 and the year to date 2007 compared withthe second quarter of 2006 and the year to date 2006 due to the interest incomeearned on investing of the funds received from the December 2006 privateplacement of common stock.
| ** **           | ** ** | **For the period ended  June 30** | ** ** |
|----------------------|------------|-----------------------------------|------------|
| ** **           | ** ** | **Second Quarter**                | ** ** | **Year to Date** | ** ** |
| **Tax Expense** | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Tax expense          |       | $                                 | 5,385,898  |   | $ | 0 |   | $ | 7,185,898 |   | $ | 0 |   |
| Effective tax rate   |       | 36.0                              | %          |   |   | 37.2 | % |   |   |
|                      |            |                                   |            |  |  |  |  |  |  |  |  |  |  |

 

The Company hasstarted to incur tax expense in 2007 as a result of  increased contract activities and thecontinued profitability since the second quarter of 2006.
| ** **                                         | ** ** | **For the period ended June 30** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **Second Quarter**               | ** ** | **Year to Date** | ** ** |
| **Preferred  Stock  Dividends and Accretion** | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Preferred stock  dividends and accretion           |       | —                           |       | $ | 548,977 |   | — |   | 1,194,842 |   |
|                                                    |            |                                  |            |  |  |  |  |  |  |  |

 

There are nopreferred stock dividends or accretion in 2007 as a result of the conversion ofall preferred stock shares to common stock by year end 2006.
| ** **                                                 | ** ** | **For the period ended June 30** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                 | ** ** | **Second Quarter**                                   | ** ** | **Year to Date** | ** ** |
| **Net Income**                                        | ** ** | **2007**                                                  | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income  (loss) available to common shareholders        |       | $                                                         | 9,626,828  |   | $ | 424,047 |   | $ | 12,105,101 |   | $ | (989,267 | ) |
| Earnings per share of  common stock—assuming dilution |       | $                                                         | 0.14       |   | $ | 0.01 |   | $ | 0.18 |   | $ | (0.03 | ) |

 

Earning per share ofcommon stock, assuming dilution, increased by $0.13 per share in the secondquarter of 2007 compared with the second quarter of 2006 and by $0.21 per sharefor the year to date June 30, 2007 compared to the same period in 2006. Theincrease is the result of increased earnings due to, sales volume increases,improved material and labor cost, leveraging of fixed and administrativesupport cost, higher interest income, lower interest expense, increase taxexpense and the elimination of preferred stock dividends and accretion.

Backlog:On January 15, 2007, the U.S. Marine Corps awarded us a firm fixed pricecontract for 15 Cougar JERRV’s.  The value of this contract isapproximately $9.4 million.

On January 26, 2007, theCompany was one of several companies that the U.S. Marine Corps awarded an IndefiniteDelivery, Indefinite Quantity, or IDIQ, contract for the MRAP program. This contract allows the U.S. Marine Corps to place delivery orders with any ofthose companies for up to a total of 4,100 MRAP vehicles per ordering year for5 years for a total possible vehicle quantity of 20,500.  On January 26,2007, the U.S. Marine Corps issued a delivery order to the Company for 4 MRAPvehicles to be used in survivability and mobility testing.  On February14, 2007, the Marine Corps issued a second delivery order to the Company for125 MRAP production vehicles.  The total value of these delivery orders is$74,636,994.

On February 14, 2007, theCompany

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announced it has received a $67.4 million contractaward from the U.S. Marine Corps to produce 125 vehicles for its MRAP program.

On March 9, 2007, theU.S. Marine Corps issued a delivery order for an additional 19 Buffalomine-protected vehicles for a value of approximately $16.2 million.  OnMarch 14, 2007, the Cougar Mastiff Protected Patrol Vehicle (“Mastiff PPV”)contract with the British Ministry of Defence was modified to add 22 additionalMastiff PPV’s increasing the total number of Mastiff PPV’s to be delivered to108 vehicles.

On April 18, 2007, the U.S. Marine Corps announced a $6.9 million contract awarded to the Company toprovide sustainment Integrated Logistics Support  for the U.S. Marine Corp’sMRAP program.

On April 24, 2007, the U.S. Marine Corps released a delivery order for 300 Category I Cougar 4X4 and 700Category II Cougar 6X6 vehicles for the U.S. Marine Corps’ MRAP program with avalue of approximately $490 million.

 On May 3, 2007, we received an $8.867 millioncontract to produce Buffalo and Cougar mine-protected vehicles for the CanadianExpeditionary Force Command. Marine Corps Systems Command will administer thecontract under a foreign military sales agreement.

On May 30, 2007, the U.S.Marine Corps awarded us a Delivery Order under Contract Agreement No.M67854-07-D-5006 for 14 Mine Resistant Ambush Protected (MRAP) Category IIIBuffalo vehicles for a value of approximately $11,991,406.

On June 20, 2007, we wereawarded a delivery order by the U.S. Marine Corps, under a contract datedJanuary 25, 2007, for 455 Mine Resistant Ambush Protected (MRAP) vehicles, for avalue of approximately $221 million.  This order calls for 395 Category ICougar 4X4 and 60 Category II 6X6 vehicles, which will be used by differentbranches of the United States military.

On August 1, we wereawarded work totaling $5.3 million to produce more than 40 articulating interrogationarms for the Iraqi Light Armored Vehicle (ILAV). As part of this award, a totalof 22 additional new vehicles will also be produced and scheduled for deliveryin December 2007.

Future Results:During the remainder of calendar year 2007, we expect to incur the majority ofour presently anticipated infra-structure expansion costs which will result ina substantially increased level of vehicle production capacity. The increase inproduction capacity and the reduction in expenses related to expansion isexpected to result in increased revenues and profitability for such upcomingperiod. Set out below is a table showing actual deliveries of our vehiclesduring 2006 and the first two quarters of 2007.

**Vehicle Deliveries and Backlog**
| ** **             | ** ** | **Q1-  2006** | ** ** | **Q2-  2006** | ** ** | **Q3-  2006** | ** ** | **Q4-  2006** | ** ** | **Q1-  2007** | ** ** | **Q2-   2007** | ** ** | **Funded  Backlog (1)   June 30,  2007** | ** ** |
|------------------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------------|------------|---------------------------------------------------------|------------|
| Buffalo                |       | 3             |       | 5             |       | 3             |       | 15            |       | 18            |       | 17                  |       | 104                                                     |       |
| Cougar (all  variants) |       | 45            |       | 59            |       | 55            |       | 100           |       | 181           |       | 212                 |       | 1558                                                    |       |
| Total                  |       | 48            |       | 64            |       | 58            |       | 115           |       | 199           |       | 229                 |       | 1662                                                    |       |

----

(1)             Thisdoes not include any post June 30, 2007 awards.

**Trends,Risks And Uncertainties**

The results of ouroperations for the second quarter ended June 30, 2007 reflect the costsassociated with our  continued growth, as we expand our manufacturingfacility and capabilities to meet the expected demand for our vehicles forpotential future and follow-on orders. This included substantial vehicle andautomotive engineering work, manufacturing engineering development, hiring andtraining workforce and the expansion of our manufacturing, warehousing andadministrative facilities. We continue to face the challenges of expanding ourmanufacturing capacity to fully exploit all opportunities. These activitieshave required a significant commitment of short term resources, but we expectthe long term benefits will be substantial.

We recognize there arerisks associated with our on-going expansion activities. We continue to relyupon the U.S. Army and the U.S. Marine Corps for our sales, and if eithercustomer elects not to issue further orders to us, it would have a dramaticimpact upon our financial performance. In addition, if we are delayed inmeeting the delivery schedule under outstanding contracts, we may be obligatedto pay liquidated damages for any delayed vehicle, and in the event of anysubstantial failure to perform, the customer could cancel the contract and/orclaim additional damages. Payment of liquidated damages could negatively impactour future liquidity, and since we are incurring significant costs associatedwith our expansion program based on the expectation of future contractrevenues, loss of contracts would have a dramatic impact on both our liquidityand our financial performance. We currently do not have any reason to expectthat our customers will choose to stop buying our vehicles or that anysignificant contracts will be cancelled.

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In the past, we have encountered some difficulties insecuring the necessary components for our vehicles, including armor steel,truck chassis, axle sets and ballistic glass. To mitigate this risk, we haveidentified multiple vendors for certain components. Additionally, we haveimplemented a program of advance purchasing and stockpiling certain criticalmaterials. For example, we currently have pre-purchased steel and truck partsto ensure availability of material needed for current and some potential futureorders. While we do not currently expect the potential non-availability ofparts or raw materials to materially affect our operations, there is apossibility that delays or increased costs could negatively impact ourfinancial performance if circumstances change. Apart from the foregoing, themain uncertainty about our future operations is whether we will continue toreceive additional orders for our vehicles. It is impossible to predict withcertainty whether such future orders will be placed by existing or newcustomers. If we do not receive future orders, it is unlikely that our businesswill continue. However, we believe our vehicles provide proven blast andballistic protection, and that for so long as there is a risk of bodily harm toservice personnel from explosive blasts, there will be a market for ourproducts. We believe that a number of recent market surveys and requests forinformation issued by the U.S. military for armored vehicles withcharacteristics substantially similar to ours, support this view.

**Liquidity AndCapital Resources**

Cash Flow Summary: Our cash flows from operating, investing and financing activities, as reflectedin the Consolidated Statement of Cash Flows for the six months ended June 30,2007 and 2006, are summarized as follows:

|                                                       | ** ** | **For the six months ended June 30** | ** **   |
|-------------------------------------------------------|------------|--------------------------------------------------------------------|--------------|
| ** **                                            | ** ** | **2007**                                                           | ** **   | **2006** | ** ** |
| Cash provided by  (used for):                         |       |                                                               |         |   |   |
| Operating  activities                                 |       | $                                                                  | (94,621,944  | ) | $ | 5,152,048 |   |
| Investing  activities                                 |       | (25,513,678                                                        | )            | (2,348,493 | ) |
| Financing  activities                                 |       | 1,687,197                                                          |         | 593,182 |   |
| Net increase (decrease)  in cash and cash equivalents |       | $                                                                  | (118,448,425 | ) | $ | 3,396,737 |   |

 

Cash provided by operating activities decreased by $99,773,992during the first six months of 2007 compared with the first six months of 2006primarily due to increased inventory and receivables as a result of highersales and production volumes, increased past due receivables of $45 million onthe MRAP program due to contract billing and customer funding issues,  the termination of the factoring agreementwith G.C. Financial and reduced performance based payments, partially offset byincreased earnings and higher accounts payables for purchases.

Cash used for investing activities increased by $23,165,185during the first six months of 2007 compared with the first six months of 2006due primarily to the purchase of a research and test facility ($5,500,000), afacility to expand development and logistics training activities ($4,100,000),warehousing facilities, manufacturing equipment and infrastructure to supportexisting and future planned growth of the business.

Cash provided by financing activities increased by $1,094,015during the first six months of 2007 compared with the first six months of 2006primarily due to the issuance of common stock to support the financing needs ofthe business.

Uncertainties: The amount of working capital that we will require depends on severalfactors, including without limitation, the extent and timing of sales of ourproducts, future inventory costs, the timing and costs associated with theexpansion of our manufacturing, development, engineering and customer supportcapabilities, the timing and cost of our product development and enhancementactivities and our operating results. The realization of a major portion of theassets shown on our balance sheet is dependent upon the success of such futureoperations.  We expect to be able to generate cash flows from operationssufficient to satisfy our cash requirements for the remainder of 2007, but ifwe are unable to do so, we may need to seek alternative sources of cash,including additional borrowings.

On July 20, 2007, weentered into a Loan Agreement (the “Loan Agreement”) with Wachovia Bank,National Association (“Wachovia”), pursuant to which we agreed to certain termsthat govern a revolving credit facility made available to the Registrant byWachovia.  Concurrently with the execution of the Loan Agreement, theRegistrant issued a promissory note to Wachovia in the original principalamount of $50,000,000 (the “Note”).  The unpaid principal balance of theNote accrues interest at a floating rate per annum equal to the 1-month LIBORmarket index rate plus 2.0%.  Accrued interest is due and payable on amonthly basis, starting on August 31, 2007 and all outstanding principal is dueand payable on September 30, 2007, unless extended by Wachovia. We entered intothis agreement to assure continued flow of cash during the term of the loanwhile administrative contractual payment issues are worked out with governmentpayment offices on recently established MRAP programs.

Inflation andMaterial Cost:  We do not believe that inflation has hador is likely to have any significant impact on our revenues, and we currentlyare not facing any material shortages of material or parts. We currently haveenough steel on hand or on order to manufacture our existing contracts, and wecontinue to purchase steel anticipating future requirements. If the price ofsteel increases 

22

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significantly, the cost of our products couldincrease, and we may not be able to pass on this cost under our currentcontracts. As a result, if the cost of our raw materials increases, ourprofitability on such current contracts, if any, could decrease.

**ITEM 3 —QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Commodity Prices

We are exposed to marketrisk from changes in commodity prices. If the price of commodities increasessignificantly, the cost of our products could increase. It is unlikely we willbe able to pass on this cost under our current contracts. As a result, if thecost of our raw materials increases, our profitability, if any, could decrease.

Foreign Currency

The majority of ourbusiness is denominated in U.S. dollars and as such, movement in the foreigncurrency markets will have a minimal direct impact on our business.

Interest Rates

We have a money marketaccount where excess cash is invested at LIBOR minus 40 basis points.

Our current equipment financingis at a fixed rate while our recently acquired bank line of credit entered intoon July 20, 2007 as noted above in Item 2 “Liquidity and Resources”is at a floating rate. We are not currently directly at risk of interest ratefluctuations. Interest rate risk may become a more significant issue for us, asour financing needs change in the future.

To date, we have not usedany derivative financial instruments for the purpose of reducing our exposureto adverse fluctuations in interest rates, foreign currency exchange, orcommodity prices. We are not a party to leveraged derivatives nor do we hold orissue financial investments for speculative purposes.

**ITEM 4 — CONTROLSAND PROCEDURES**

Disclosure Controls andProcedures

Our management evaluated,with the participation of our Chief Executive Officer and our Chief FinancialOfficer, the effectiveness of our disclosure controls and procedures as of theend of the period covered by this quarterly report on Form 10-Q. Based onthis evaluation, our Chief Executive Officer and our Chief Financial Officerhave concluded that our disclosure controls and procedures are effective toensure that information we are required to disclose in reports that we file orsubmit under the Securities Exchange Act of 1934, as amended  (i) is recorded, processed, summarizedand reported within the time periods specified in Securities and ExchangeCommission rules and forms, and (ii) is accumulated and communicatedto our management, including our Chief Executive Officer and our ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure. Our disclosure controls and procedures are designed to providereasonable assurance that such information is accumulated and communicated toour management. Our disclosure controls and procedures include components ofour internal control over financial reporting. Management’s assessment of theeffectiveness of our internal control over financial reporting is expressed atthe level of reasonable assurance that the control system, no matter how welldesigned and operated, can provide only reasonable, but not absolute, assurancethat the control system’s objectives will be met.

Changes in InternalControls over Financial Reporting

As of the beginning of2007, we have an Audit Committee comprised of three outside board members.They, along with management interviewed and engaged an outside audit firm moreappropriate for the size and growth of our Company. During the first quarter of2007, our Interim Chief Financial Officer was replaced with a permanent ChiefFinancial Officer. In the second quarter of the current fiscal year wecompleted the integration of a more robust ERP system. These actions have hadand are expected to have a continued positive material affect over ourfinancial reporting.

Code of Ethics

We have adopted a Code ofEthics that applies to all executive officers and other employees. Our Code ofEthics is available for review on our website at www.forceprotection.net.

**PART II — OTHERINFORMATION**

**ITEM 1 — LEGALPROCEEDINGS**

There have been nomaterial changes with respect to this item from the disclosure included in ourAnnual Report on Form 10-K/A for the year ended December 31, 2006.

23

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**ITEM 1A — RISKFACTORS**

There have been nomaterial changes with respect to this item from the disclosure included in ourAnnual Report on Form 10-K/A for the year ended December 31, 2006.

**ITEM 2 —UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

We do not have a formalstock compensation plan; however we have issued stock to employees andnon-employees from time to time as compensation for services rendered.

**ITEM 3 — DEFAULTSUPON SENIOR SECURITIES**

None.

**ITEM 4 —SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

On June 21, 2007at 10:00 a.m., we held our general shareholder’s meeting at the Embassy SuitesHotel Convention Center, 5055 International Boulevard, Charleston, SC29418.  The meeting was held pursuant to a printed notice mailed on orabout April 30, 2007 to each stockholder of record as of April 25, 2007, therecord date for the meeting. The single issue to be voted on at such meetingwas the election of Mr. Michael Moody and Mr. Roger Thompson as Class IIdirectors. As of the record date there were a total of 68,064,336 shares ofcommon stock outstanding and entitled to vote.  A total of 25,166,657shares were present either in person or by proxy at the meeting.  Both directorswere duly elected to the Board of Directors. The votes for each director are asfollows:
| ** **                 | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|----------------------------|------------|------------|------------|--------------|------------|
| Michael Moody  (Class II)  |       | 23,482,016 |       | 1,684,641    |       |
| Roger Thompson (Class  II) |       | 23,833,285 |       | 1,333,372    |       |

 

The following are theother directors of the Company whose terms of office continued after thegeneral shareholder’s meeting: Mr. Gordon McGilton and Mr. Jack Daviswhose terms expire in 2009

**ITEM 5 — OTHERINFORMATION**

None.

**ITEM 6 — EXHIBITS**

**EXHIBIT INDEX**
| NUMBER | ** ** | **DESCRIPTION**                                                                                                                                                                                                            |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                       |
| 2.1    |       | Agreement and Plan of Merger (included as Attachment  A to exhibit 99.2 to the Form DEF 14A filed November 19, 2004, and  incorporated herein by reference).                                                     |
|   |       |                                                                                                                                                                                                                       |
| 3.1    |       | Articles of Incorporation (included as Attachment B  to exhibit 99.2 to the Form DEF 14A filed November 19, 2004, and  incorporated herein by reference).                                                        |
|   |       |                                                                                                                                                                                                                       |
| 3.2    |       | By-Laws (included as Attachment C to exhibit 99.2 to  the Form DEF 14A filed November 19, 2004, and incorporated herein  by reference).                                                                          |
|   |       |                                                                                                                                                                                                                       |
| 3.3    |       | Amended Articles of Incorporation (included as  Attachment D to exhibit 99.2 to the Form DEF 14A filed November 19,  2004, and incorporated herein by reference).                                                |
|   |       |                                                                                                                                                                                                                       |
| 4.1    |       | Certificate of Designation for Series D  Convertible Preferred Stock, dated January 19, 2006 (included as exhibit  4.1 to the Form 8-K filed January 27, 2006, and incorporated herein  by reference). |
|   |       |                                                                                                                                                                                                                       |
| 4.2    |       | Form of Common Stock Purchase Warrant, dated  January 19, 2006, (included as Exhibit 4.2 to the Form 8-K  filed January 27, 2006, and incorporated herein by reference).                          |
|   |       |                                                                                                                                                                                                                       |
| 4.3    |       | Securities Purchase Agreement, dated  January 19, 2006 (included as Exhibit 4.3 to the Form 8-K  filed January 27, 2006, and incorporated herein by reference).                                        |
|   |       |                                                                                                                                                                                                                       |
| 4.4    |       | Registration Rights Agreement, dated  January 19, 2006 (included as Exhibit 4.4 to the Form 8-K  filed January 27, 2006, and incorporated herein by reference).                                        |
|   |       |                                                                                                                                                                                                                       |
| 4.5    |       | Amended and Restated Certificate of Designation for  Series B Convertible Preferred Stock (included as exhibit 4.1 of the  Form 8-K filed February 15, 2006, and incorporated herein by  reference).        |

 

24

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| 4.6    |   | Amended and Restated Certificate of Designation for  Series C Convertible Preferred Stock (included as exhibit 4.2 of the  Form 8-K filed February 15, 2006, and incorporated herein by  reference).           |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                          |
| 4.7    |   | Bridge Facility between the Company and GC Financial  Services, Inc., dated September 29, 2006 (included as  Exhibit 4.1 to the Form 8-K filed July 8, 2006, and  incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                          |
| 4.8    |   | Demand Note between the Company and GC Financial  Services, Inc., dated September 29, 2006 (included as  Exhibit 4.2 to the Form 8-K filed July 8, 2006, and  incorporated herein by reference).     |
|   |   |                                                                                                                                                                                                                          |
| 10.1   |   | Loan Agreement between the Company and Wachovia  Bank, National Association, dated July 20, 2007.                                                                                                                        |
|   |   |                                                                                                                                                                                                                          |
| 10.2   |   | Security Agreement between the Company and Wachovia  Bank, National Association, dated July 20, 2007.                                                                                                                    |
|   |   |                                                                                                                                                                                                                          |
| 10.3   |   | Promissory Note between the Company and Wachovia  Bank, National Association dated July 20, 2007.                                                                                                                        |
|   |   |                                                                                                                                                                                                                          |
| 10.4   |   | Joint Venture Agreement by and between General  Dynamics Land Systems, Inc. and Force Protection, Inc., dated  December 15, 2006, as amended.                                                                            |
|   |   |                                                                                                                                                                                                                          |
| 10.5   |   | Modification of Contract Agreement with the United  States Marine Corps, dated April 17, 2007.                                                                                                                                |
|   |   |                                                                                                                                                                                                                          |
| 10.6   |   | Delivery Order under Contract No. M67854-07-D-5031  with the United States Marine Corps, dated April 23, 2007.                                                                                                                |
|   |   |                                                                                                                                                                                                                          |
| 10.7   |   | Delivery Order under Letter Contract, dated January  25, 2007, with the United States Marine Corps, dated June 20, 2007.                                                                                                      |
|   |   |                                                                                                                                                                                                                          |
| 31.1   |   | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                 |
|   |   |                                                                                                                                                                                                                          |
| 31.2   |   | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                 |
|   |   |                                                                                                                                                                                                                          |
| 32.1   |   | Certification of Officers pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                               |

 

25

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

**FORCEPROTECTION, INC.**
| Date: August 9, 2007       |                                       |                |
|----------------------------|--------------------------------------------|---------------------|
|                       | By:                                        | /s/ Gordon McGilton |
|                       | Gordon McGilton                            |
|                       | Chief Executive Officer                    |
|                       |                                       |
|                       |                                       |                |
| Date: August  9, 2007 | By:                                        | /s/ Michael Durski  |
|                       | Michael Durski                             |
|                       | Chief Financial Officer                    |
|                       | Principal Financial and Accounting Officer |
|                       | Officer                                    |

 

 

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