** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

** **

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark One)** |
|----------------|
|           |   |   |
| **x**          | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|           |   |   |
|           |   | **For the quarterly period ended September 30,  2007** |
|           |   |   |
|           |   | or |
|           |   |   |
| **o**          | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|           |   |   |
|           |   | **For the transition period from                           to** |

 

**Commission File Number: 001-33253**

 

**FORCE PROTECTION, INC.**

(Exact name of registrant as specified in its charter)

 

| **Nevada**                                                     | ** ** | **84-1383888**                       |
|----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization) |       | (I.R.S. Employer Identification No.) |

 

**9801Highway 78, Building No. 1, Ladson, SC 29456**

 (Address of principal executive offices) (zipcode)

 

**(843) 740-7015**

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed sincelast report)

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.    x Yes    o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):
| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |
|--------------------------------|--------|--------------------------|--------|------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). o Yes    x No

 

Thenumber of shares outstanding of each of the registrant’s common stock, as ofOctober 31, 2007: 68,247,649

 

** **

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TABLE OF CONTENTS

 
| **PART I -  FINANCIAL INFORMATION**                                                                | ** ** | **1**      |
|----------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                         | ** ** | ** ** |
| Item 1. Financial Statements                                                                  |       | 1          |
|                                                                                               |       |       |
| Item 2.Management’s Discussion and Analysis of  Financial Condition and Results of Operations |       | 24         |
|                                                                                               |       |       |
| Item 3. Quantitative and Qualitative Disclosures  About Market Risk                           |       | 39         |
|                                                                                               |       |       |
| Item  4. Controls and Procedures                                                              |       | 39         |
|                                                                                               |       |       |
| **PART  II—OTHER INFORMATION**                                                                | ** ** | **41**     |
| ** **                                                                                         | ** ** | ** ** |
| Item  1. Legal Proceedings                                                                    |       | 41         |
|                                                                                               |       |       |
| Item 1A. Risk Factors                                                                         |       | 41         |
|                                                                                               |       |       |
| Item 2. Unregistered Sales Of Equity Securities  And Use Of Proceeds                          |       | 54         |
|                                                                                               |       |       |
| Item 3. Defaults Upon Senior Securities                                                       |       | 54         |
|                                                                                               |       |       |
| Item 4. Submission of Matters to a Vote of  Security Holders                                  |       | 54         |
|                                                                                               |       |       |
| Item  5.  Other Information                                                                   |       | 54         |
|                                                                                               |       |       |
| Item 6. Exhibits                                                                              |       | 55         |

 

i

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# ** **

# **PART I - FinancialInformation**

#  

## **Item 1.   FinancialStatements**

##  

**FORCE PROTECTION, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

** **

**(unaudited)**

 

**(in dollars)**

** **
| ** **                                                             | ** ** | **Three months ended  September 30,** | ** **  | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------|-------------|-----------------------------------------------------|------------|
| ** **                                                             | ** ** | **2007**                                             | ** **  | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                             | ** ** | ** **                                           | ** **  | **(Restated)**                                      | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| **Net sales**                                                          |       | $                                                    | 206,291,488 |                                                | $          | 42,160,858 |   | $ | 441,151,894 |   | $ | 133,037,980 |   |
| Cost of sales                                                          |       | 165,678,182                                          |        | 34,242,350                                          |       | 345,252,174 |   | 108,324,917 |   |
| **Gross profit**                                                       |       | 40,613,306                                           |        | 7,918,508                                           |       | 95,899,720 |   | 24,713,063 |   |
|                                                                   |       |                                                 |        |                                                |       |   |   |   |   |
| General and administrative expense                                     |       | 20,029,739                                           |        | 6,715,419                                           |       | 50,642,242 |   | 20,421,207 |   |
| Research and development expense                                       |       | 2,526,305                                            |        | 545,717                                             |       | 10,673,638 |   | 1,850,522 |   |
| **Operating profit**                                                   |       | 18,057,262                                           |        | 657,372                                             |       | 34,583,840 |   | 2,441,334 |   |
|                                                                   |       |                                                 |        |                                                |       |   |   |   |   |
| Other income                                                           |       | 594,143                                              |        | 121,041                                             |       | 3,488,660 |   | 168,963 |   |
| Interest expense                                                       |       | (61,979                                              | )           | (110,493                                            | )          | (141,570 | ) | (1,736,802 | ) |
| **Net earnings before tax**                                            |       | 18,589,426                                           |        | 667,920                                             |       | 37,930,930 |   | 873,495 |   |
| ** **                                                             | ** ** | ** **                                           | ** **  | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Tax expense                                                            |       | 7,227,855                                            |        | —                                              |       | 14,413,753 |   | — |   |
| **Net earnings after tax**                                             |       | 11,361,571                                           |        | 667,920                                             |       | 23,517,177 |   | 873,495 |   |
| ** **                                                             | ** ** | ** **                                           | ** **  | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Series D convertible preferred stock  dividend                         |       | —                                               |        | (64,408                                             | )          | — |   | (325,685 | ) |
| Accretion of series D convertible preferred  stock to redemption value |       | —                                               |        | (363,569                                            | )          | — |   | (1,297,134 | ) |
| **Net earnings (loss) available to common  shareholders**              |       | $                                                    | 11,361,571  |                                                | $          | 239,943 |   | $ | 23,517,177 |   | $ | (749,324 | ) |
| ** **                                                             | ** ** | ** **                                           | ** **  | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Earnings (loss) per common share**                                   | ** ** | ** **                                           | ** **  | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                  |       | $                                                    | 0.17        |                                                | $          | 0.00 |   | $ | 0.35 |   | $ | (0.02 | ) |
| Diluted                                                                |       | $                                                    | 0.16        |                                                | $          | 0.00 |   | $ | 0.34 |   | $ | (0.02 | ) |
|                                                                   |       |                                                 |        |                                                |       |   |   |   |   |
| **Weighted-average shares used to compute:**                           | ** ** | ** **                                           | ** **  | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                  |       | 68,207,649                                           |        | 49,014,150                                          |       | 67,984,665 |   | 42,050,762 |   |
| Diluted                                                                |       | 68,929,117                                           |        | 49,014,150                                          |       | 68,913,511 |   | 42,050,762 |   |
|                                                                   |       |                                                 |        |                                                |       |   |   |   |   |

 

The accompanying notes are an integral partof these financial statements.

 

1

----

 

**FORCE PROTECTION, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(in dollars)**

** **
| ** **                                                                                                                                                                      | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                      | ** ** | **2007**               | ** **  | **2006**              | ** ** |
| ** **                                                                                                                                                                      | ** ** | **(Unaudited)**        | ** **  | **(Restated)**        | ** ** |
| **ASSETS**                                                                                                                                                                      | ** ** | ** **             | ** **  | ** **            | ** ** |
| Current assets:                                                                                                                                                                 |       |                   |        |                  |       |
| Cash and cash equivalents                                                                                                                                                       |       | $                      | 72,273,632  |                  | $          | 156,319,004 |   |
| Accounts receivable, net of allowance for  contractual obligations of $15,907,940 and $6,068,088 as of September 30,  2007 and December 31, 2006, respectively                  |       | 37,757,524             |        | 36,011,568            |       |
| Inventories                                                                                                                                                                     |       | 182,473,512            |        | 60,396,297            |       |
| Prepaid asset                                                                                                                                                                   |       | 16,277,223             |        | —                |       |
| Current portion of deferred taxes                                                                                                                                               |       | 7,472,720              |        | 9,562,500             |       |
| Other current assets                                                                                                                                                            |       | —                 |        | 374,051               |       |
| Total current assets                                                                                                                                                            |       | 316,254,611            |        | 262,663,420           |       |
| Long term portion of deferred taxes                                                                                                                                             |       | 59,875                 |        | 2,763,991             |       |
| Property and equipment, net                                                                                                                                                     |       | 47,630,413             |        | 8,963,901             |       |
| Intangible assets, net                                                                                                                                                          |       | 1,581,944              |        | —                |       |
| **Total assets**                                                                                                                                                                |       | $                      | 365,526,843 |                  | $          | 274,391,312 |   |
| ** **                                                                                                                                                                      | ** ** | ** **             | ** **  | ** **            | ** ** |
| **LIABILITIES & SHAREHOLDERS’ EQUITY**                                                                                                                            | ** ** | ** **             | ** **  | ** **            | ** ** |
| Current liabilities:                                                                                                                                                            |       |                   |        |                  |       |
| Accounts payable                                                                                                                                                                |       | $                      | 47,855,805  |                  | $          | 38,653,813 |   |
| Other accrued liabilities                                                                                                                                                       |       | 6,883,979              |        | 2,968,859             |       |
| Contract liabilities                                                                                                                                                            |       | 4,943,456              |        | 1,850,000             |       |
| Current portion of long term liabilities                                                                                                                                        |       | 221,685                |        | 71,685                |       |
| Current tax liability                                                                                                                                                           |       | 8,984,968              |        | —                |       |
| Deferred revenue                                                                                                                                                                |       | 52,303,293             |        | 12,824,211            |       |
| Total current liabilities                                                                                                                                                       |       | 121,193,186            |        | 56,368,568            |       |
|                                                                                                                                                                            |       |                   |        |                  |       |
| Long-term debt                                                                                                                                                                  |       | 267,375                |        | —                |       |
| Other long term liabilities                                                                                                                                                     |       | 77,085                 |        | 167,937               |       |
| **Total liabilities**                                                                                                                                                           |       | 121,537,646            |        | 56,536,505            |       |
|                                                                                                                                                                            |       |                   |        |                  |       |
| Commitments and Contingencies (See NOTE 13)                                                                                                                                     |       |                   |        |                  |       |
|                                                                                                                                                                            |       |                   |        |                  |       |
| **SHAREHOLDERS’ EQUITY**                                                                                                                                                   |       |                   |        |                  |       |
| Common stock, $0.001 par value, 300,000,000  shares authorized, 68,207,649 shares at September 30, 2007 and  66,762,566 shares at December 31, 2006 issued and outstanding |       | 68,208                 |        | 66,763                |       |
| Par value of shares of common stock to be  issued                                                                                                                               |       | 40                     |        | 31                    |       |
| Additional Paid-in Capital                                                                                                                                                      |       | 251,812,713            |        | 249,694,850           |       |
| Accumulated deficit                                                                                                                                                             |       | (7,891,764             | )           | (31,906,837           | )     |
| **Total shareholders’ equity**                                                                                                                                             |       | 243,989,197            |        | 217,854,807           |       |
| ** **                                                                                                                                                                      | ** ** | ** **             | ** **  | ** **            | ** ** |
| **Total liabilities and shareholders’ equity**                                                                                                                             |       | $                      | 365,526,843 |                  | $          | 274,391,312 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

2

----

 

**FORCE PROTECTION, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited; in dollars)**

** **
| ** **                                                                           | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** **                                                                           | ** ** | **(Unaudited)**                                     | ** ** | **(Restated)** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                             | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net earnings after taxes                                                             |       | $                                                   | 23,517,177 |   | $ | 873,495 |   |
| **Adjustments to reconcile net earnings to  net cash used in operating activities:** | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Depreciation and amortization                                                        |       | 4,555,413                                           |       | 587,982 |   |
| Deferred tax expense                                                                 |       | 4,793,896                                           |       | — |   |
| Stock-based compensation (FAS 123R)                                                  |       | 1,281,566                                           |       | 691,828 |   |
| Other employee compensation paid in common  stock                                    |       | —                                              |       | 681,112 |   |
| Common stock issued per settlement  agreement                                        |       | —                                              |       | 187,500 |   |
|                                                                                 |       |                                                |       |   |   |
| Increase (decrease) in allowance for  contractual adjustments (definitization)       |       | 9,839,853                                           |       | — |   |
| Increase (decrease) in inventory reserve                                             |       | 1,358,572                                           |       | — |   |
| Increase (decrease) in contract liabilities  – warranty reserve                 |       | 3,093,456                                           |       | 188,976 |   |
|                                                                                 |       |                                                |       |   |   |
| Change in assets and liabilities:                                                    |       |                                                |       |   |   |
| Decrease (increase) in accounts receivable                                           |       | (11,585,809                                         | )          | (12,537,358 | ) |
| Decrease (increase) in inventories                                                   |       | (123,435,787                                        | )          | (1,071,403 | ) |
| Decrease (increase) in prepaid assets                                                |       | (16,277,223                                         | )          | 0 |   |
| Decrease (increase) in other current assets                                          |       | 374,051                                             |       | (147,952 | ) |
| Increase (decrease) in accounts payable                                              |       | 9,201,992                                           |       | 7,596,440 |   |
| Increase (decrease) in other accrued  liabilities                                    |       | 3,915,120                                           |       | 43,561 |   |
| Increase (decrease) in tax liability                                                 |       | 8,984,968                                           |       | — |   |
| Increase (decrease) in deferred revenue                                              |       | 39,479,082                                          |       | (5,432,547 | ) |
| **Net cash used in operating activities**                                            |       | (40,903,673                                         | )          | (8,338,366 | ) |
| ** **                                                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                             | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Purchase of property and  equipment—intangibles                                 |       | (1,550,000                                          | )          | — |   |
| Purchase of property and equipment                                                   |       | (42,803,869                                         | )          | (4,371,788 | ) |
| **Net cash used in investing activities**                                            |       | (44,353,869                                         | )          | (4,371,788 | ) |
| ** **                                                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Proceeds from exercise of options                                                    |       | 1,335,647                                           |       | — |   |
| Proceeds from the sale of common stock (net  of issuance cost)                       |       | —                                              |       | 46,017,765 |   |
| Preferred stock dividends paid in cash                                               |       | —                                              |       | (276,860 | ) |
| Increase in long term liabilities                                                    |       | 117,375                                             |       | — |   |
| Payment on loans, net                                                                |       | (150,000                                            | )          | (7,500,000 | ) |
| Payments on capitalized leases                                                       |       | (90,852                                             | )          | — |   |
| **Net cash provided by financing activities**                                        |       | 1,212,170                                           |       | 38,240,905 |   |
| **Net increase (decrease) in cash**                                                  |       | (84,045,372                                         | )          | 25,530,751 |   |
| **Cash and cash equivalents—beginning of  period**                              |       | 156,319,004                                         |       | 1,217,509 |   |
| **Cash and cash equivalents—end of period**                                     |       | $                                                   | 72,273,632 |   | $ | 26,748,260 |   |
| ** **                                                                           |       |                                                |       |   |   |
| **Supplemental disclosure:**                                                         | ** ** | ** **                                          | ** ** | ** ** | ** ** |

 

3

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| Cash paid for interest                                                    |       | $          | 141,570    |       | $          | 1,736,802 |   |
|---------------------------------------------------------------------------|------------|------------|------------|------------|------------|-----------|--------|
| Cash paid for taxes                                                       |       | $          | 700,000    |       | $          | —    |   |
| Non-cash dividends and accretion on Series  D convertible preferred stock |       | $          | —     |       | $          | 1,345,959 |   |
|                                                                      |       |       |       |       |       |
| **NON CASH INVESTING AND FINANCING ACTIVITY:**                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Note payable issued as consideration for  non-compete agreement           |       | $          | 450,000    |       | $          | —    |   |
| Conversion of Series D Preferred Stock into  common stock                 |       | —     |       | 9,198,572  |       |

 

The accompanying notes are an integral part of these financialstatements.

 

4

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**FORCE PROTECTION, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**These notes are an integral part of the Company’s financialstatements set forth above.**

 

**NOTE 1—BASIS OF PRESENTATION**

 

Theunaudited interim consolidated financial statements and related notes have beenprepared pursuant to the rules and regulations of the Securities and ExchangeCommission, or SEC. Accordingly, certain information and footnote disclosuresnormally included in complete financial statements prepared in accordance withgenerally accepted accounting principles have been omitted pursuant to suchrules and regulations. The accompanying unaudited interim consolidated financialstatements and related notes should be read in conjunction with theconsolidated financial statements and notes thereto included in the Form 10-K/Afor Force Protection, Inc. and its subsidiaries for the year ended December 31,2006, originally filed March 16, 2007, and as amended by our Annual Reports onForm 10-K/A filed with the SEC on June 11, 2007, July12, 2007 and October 15,2007. The results of operations for the period ended September 30, 2007are not necessarily indicative of the operating results which may be expectedfor a full year. The consolidated balance sheet as of December 31, 2006contains financial information taken from the audited financial statements asof that date.

 

**2006 Year End Amendment and Q3Restatement**

 

Thefinancial information included in this Form 10-Q referring to the threeand  nine months ended September 30, 2006has been restated for the effects of stock-based compensation to employees, theeffect on the basic earning per share (“EPS”) of accretion on preferred stock,and the calculation of weighted average common shares used to compute dilutedearnings per share pursuant to the Financial Accounting Standards Board’s (“FASB”)Statement of Financial Accounting Standards No. 123(R), “*Share-Based Payment*,” (“SFAS 123(R)”).

 

**Effects of Restatement**

 

**Stock Based Compensation**

 

TheCompany has restated its calculation of stock-based compensation pursuant toSFAS 123(R) for the three and nine months ended September 30, 2006. Theimpact is as follows:
| ** **                                                            | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **September 30, 2006** | ** ** | **September 30, 2006** | ** ** |
| Increase (decrease) in general and  administrative cost               |       | $                                | (65,222    | )                                | $          | 297,585 |   |
| Increase (decrease) in net earnings                                   |       | $                                | 65,222     |                             | $          | (297,585 | ) |
| Increase (decrease) in net earnings  available to common shareholders |       | $                                | 65,222     |                             | $          | (297,585 | ) |
| Increase (decrease) in basic earnings per  common share               |       | $                                | (0.00      | )                                | $          | (0.01 | ) |
| Increase (decrease) in diluted earnings per  common share             |       | $                                | (0.00      | )                                | $          | (0.01 | ) |

 

**Earnings Per Share**

 

TheCompany has reviewed the FASB’s Statement of Financial Accounting StandardNo. 128—”*Earnings per Share*,”(“SFAS 128”) and determined that income available to common shareholders didnot include the accretion related to preferred stock and the weighted averagenumber of common shares outstanding used to calculate diluted earnings per 

 

5

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sharedid not give effect to common shares issued upon conversion of the Series Dconvertible preferred stock for the three and nine months ended September 30,2006. The impact is as follows:

 
| ** **                                                   | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                   | ** ** | **September 30, 2006** | ** ** | **September 30, 2006** | ** ** |
| (Decrease) in net earnings available to  common shareholders |       | $                                | (427,977   | )                                | $          | (1,622,819 | ) |
| (Decrease) in basic earnings per common share                |       | $                                | (0.01      | )                                | $          | (0.04 | ) |
| (Decrease) in diluted earnings per common  share             |       | $                                | (0.01      | )                                | $          | (0.04 | ) |

 

**NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Nature of the Business**

 

ForceProtection, Inc. and its subsidiaries (the “Company”) design, manufactureand market blast and ballistics armored vehicles for sale to military and othercustomers, primarily the U.S. government.

 

**Principles of Consolidation**

 

Theconsolidated financial statements include the accounts of ForceProtection, Inc., and its two wholly-owned subsidiaries, Force ProtectionIndustries, Inc. and Force Protection Technologies, Inc.  Allmaterial inter-company balances and transactions are eliminated inconsolidation.

 

**General Statement**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date of thefinancial statements, as well as the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

 

TheSEC has issued Financial Reporting Release No. 60, “Cautionary AdviceRegarding Disclosure About Critical Accounting Policies,” (“FRR 60”),suggesting companies provide additional disclosure and commentary on their mostcritical accounting policies. In FRR 60, the SEC defined the most criticalaccounting policies as the ones that are both most important to the portrayalof a company’s financial condition and operating results, and requiremanagement to make its most difficult and subjective, or complex judgments,often as a result of the need to make estimates about the effect of mattersthat are inherently uncertain. The methods, estimates, and judgments theCompany uses in selecting and applying its most critical accounting policieshave a significant impact on the results the Company reports in its financialstatements. Estimates and assumptions are periodically reviewed by management,and the effects of revisions are reflected in the consolidated financialstatements in the period they are determined to be necessary.

 

TheCompany believes the following critical accounting policies and procedures,among others, affect its more significant judgments and estimates used in thepreparation of the Company’s consolidated financial statements:

 

**Revenue Recognition**

 

TheCompany’s revenue is derived principally from the sale of its vehicles, and, toa lesser extent, sale of associated spare parts and training services to theU.S. government. The Company recognizes revenue when earned under the unit ofdelivery method, pursuant to American Institute of Certified Public Accountants(“AICPA”) Statement of Position (SOP) 81-1, *Accountingfor Performance of Construction-Type and Certain Production-Type Contracts*.Revenue from vehicle sales and spare part sales, net of an allowance forcontractual adjustments, is recognized when the vehicles or spare parts 

 

6

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aredelivered to and “formally” accepted by the customer. The Company defines “formalacceptance” under the U.S. government contract as taking place when arepresentative of the U.S. government signs the United States Form DD250entitled “Material Inspection and Receiving Report.” Under the FederalAcquisition Regulation, a signed Form DD250 signifies contractual inspectionand acceptance by the United States of the work performed by the Company. A signed Form DD250 also acts as the contractual invoice obligating the U.S.government to pay the Company for the approved goods or services (subject toany “definitization” contractual adjustment(s), as discussed below).

 

Inaccordance with standard industry practice, there is a representative from theUnited States Defense Contract Management Agency (“DCMA”) acting as acontractual representative of the U.S. government present at the Company’sfacilities.  This DCMA representative inspects each vehicle as it is deliveredby the Company, and upon confirmation of the vehicle’s conformity with thecontractual 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.

 

Undersome of the Company’s U.S. government contracts, it receives performance-basedpayments based on completion of specific milestones stipulated under thecontract (for example, delivery of raw material to the Company’s Ladson, SouthCarolina facility). These payments are recorded as “deferred revenue” andcarried on the Company’s balance sheet until the final delivery of the productsand formal acceptance by the U.S. government pursuant to the Form DD250. Uponacceptance of the products and the execution of the Form DD250, the Companyrecognizes the full sale price of the product as revenue.

 

Revenuesfrom services provided are recorded in accordance with specific contractualterms.  Services have historically consisted of the Company providing bothforeign and domestic user training, field support (including vehicle repairs),performing vehicle modifications, and providing test support to the U.S.government for its vehicle testing.

 

TheCompany negotiates contracts with its customers that may include revenuearrangements with multiple deliverables, as outlined by Emerging Issues TaskForce No. 00-21 (“EITF 00-21”).  The Company’s accounting policies aredefined such that each deliverable under a contract is accounted forseparately.  Historically, the Company has negotiated and signed contractswith its customers who outline the contract amount and specific terms andconditions associated with each deliverable.

 

**Allowance for Contractual Adjustments - Definitization**

 

TheCompany’s contracts with the U.S. government are negotiated as either a “solesource” or “open competition” bid process.  A sole source process is onein which the Company is the sole bidder for the contract.  An opencompetition could involve various bidders.  Once a bid is accepted, theU.S. government usually expects work to commence immediately.  An opencompetition results in a final agreed-upon contract price to which the U.S.government has agreed.  A sole source process results in an agreed-uponcontract with the U.S. government, subject to an adjustment process at a laterdate, termed the “definitization process.” The definitization process commencesupon delivery of a product, whereby the U.S. government completes a detailedreview of the Company’s costs involved in the manufacturing and deliveryprocess.  The U.S. government and the Company then work to determine anadequate and fair final contract price. We have the right to submitproposed prices, but they are subject to final review and approval by thecontracting officer, who may require that we use different prices. In addition,if an agreement is not reached as to price by a specific date, the contractingofficer may unilaterally determine a price. During definitization, we areusually required to perform the contract work and make deliveries before thefinal contract price has been established.

 

Asa result of the potential adjustments related to the definitization process,the Company maintains an allowance in a contractual adjustments account, whichis accounted for as a deduction from gross sales to arrive at net sales in 

 

7

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accordancewith Accounting Research Bulletin (“ARB”) 43, Chapter 11.  This allowanceaccount is reviewed quarterly and is adjusted as the Company deemsnecessary.  The allowance is maintained and deemed adequate based on theanalysis of historical data, and a calculation of pro-rata percentages ofcurrent contracts in place that remain subject to the definitization process. SeeNOTE 15, Allowance and Reserve Accounts.

 

Historically,the Company has not encountered sales returns.  The Company does notanticipate sales returns in the future.

 

**Research and Development**

 

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

 

**Inventories**

 

Inventoriesare stated at the lower of cost or market, pursuant to ARB 43, Chapter 4, *Inventory Pricing*, as amended. The Companyaccounts for its inventory costs under the first-in-first-out valuationmethod.  An allowance for obsolescence and shrinkage is maintained by theCompany.  The Company determines an appropriate balance in this account basedon historical data and specific identification of certain inventory items. SeeNOTE 8, Inventories.

 

**Propertyand Equipment & Depreciation**

 

Propertyand equipment are stated at cost. The Company capitalizes additions andimprovements which include all material, labor and engineering cost to design,install or improve the asset. Routine repairs and maintenance are expensed asincurred. Depreciation and amortization are computed using the straight-linemethod over the following estimated useful lives:

 
| 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  |   |

 

Amountspaid for construction in progress projects are not depreciated until placed inservice. See NOTE 9, Property and Equipment, and NOTE 10, Asset Acquisitionsand Construction in Progress Payments.

 

**Joint Venture – Force Dynamics LLC**

 

OnDecember 15, 2006, the Company entered into a joint venture agreement (the “Agreement”)with General Dynamics Land Systems Inc. (“GDLS”), pursuant to which a Delawarelimited liability company named Force Dynamics LLC was formed. The Companyagreed to work with GDLS to pursue and execute contracts for the Mine ResistantAmbush Protected (“MRAP”) Vehicle Program. Under the Agreement, the MRAPProgram is defined to include any and all solicitations and requests forproposals for MRAP production and lifecycle support and/or any follow-on workthat may be performed related to the MRAP vehicles. However, the Agreementprovides that the scope of work to be undertaken by the joint venture islimited to the use of the Company’s Cougar 4-wheeled and 6-wheeled armoredvehicles for the MRAP Category I and Category II requirements, and the MRAPCategory II vehicle requirements do not include any other 

 

8

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existingor future contracts or programs for any of the Company’s or GDLS’ othervehicles. The joint venture was amended on March 28, 2007 to include bids forawards under the Medium Mine Protective Vehicle, or MMPV, Program.  The joint venture submitted a proposal forawards under the MMPV Program.  OnOctober 23, 2007, the joint venture was notified that its proposal would not beaccepted and it would not receive awards under the MMPV program as a result ofthe proposal’s noncompliance to the solicitation.

 

Theboard of the joint venture is comprised of three designees from the Company andthree designees from GDLS. The board of the joint venture has the authority toexecute documents in accordance with the terms of the Agreement. Decisions ofthe joint venture’s board shall be made by majority vote. It is contemplatedthat the Company and GDLS will each handle 50% of the manufacturing and otherwork required under the joint venture (with the divisional work to be based onrevenues rather than number of vehicles), although the Agreement indicates thatthe work may not be allocated 50% - 50% initially. Both the Company and GDLSare expected to contribute administrative resources equally to the jointventure. It is expected that, where practicable, Force Dynamics LLC will act asthe prime contractor for joint venture work, and the Company, along with GDLS,shall act as the exclusive subcontractors.

 

Weare currently seeking to have our MRAP contract with the U.S. Marine Corpsassigned or “novated from” Force Protection, Inc. to Force Dynamics LLC, thejoint venture. Because this contract was awarded to the Company and has not yetbeen novated to the joint venture, 100% of the revenues from the MRAP contract(including revenue from vehicles manufactured by GDLS) have been included asnet sales in our financial statements, and will continue to be included untilsuch time as the MRAP contract is novated to the joint venture, at which pointwe will recognize revenues only from vehicles subcontracted by the jointventure that we actually manufacture. Per the current subcontract agreementwith GDLS, included in the Company cost of sales, (and until the MRAP contractis novated will continue to include), is an amount equal to 100% of revenuesfrom vehicles manufactured by GDLS. To offset the inclusion of revenue fromvehicles manufactured by GDLS in our net sales, in our financial statements, wehave also included (and, until the contract is novated, will continue toinclude) an amount equal to 100% of the revenues from vehicles manufactured byGDLS as cost of sales in our financial statements. Notwithstanding theinclusion of revenues from vehicles manufactured by GDLS in net sales . GDLS isentitled to all of the revenue from vehicles manufactured by GDLS pursuant tothe joint venture. See “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in Part I, Item 2 of this report for adiscussion of the joint venture’s impact on the Company’s net sales, cost ofsales, gross profit, and net income.

 

**Stock-Based Compensation**

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement No. 123(R),*Share-BasedPayment,* which establishes accounting standards for transactions inwhich an entity receives employee services in exchange for (a) equityinstruments of the entity or (b) liabilities that are based on the fairvalue of the entity’s equity instruments or that may be settled by the issuanceof equity instruments. Effective July 1, 2005, the Company adopted SFAS 123(R),which requires the Company to recognize the grant-date fair value of stockoptions and equity based compensation issued to employees in the statement ofoperations as an expense in an amount equal to the estimated value of stockoptions granted over the time period the stock options vest. The statement alsorequires that such transactions be accounted for using the fair-value-basedmethod, thereby eliminating use of the intrinsic method of accounting in APBNo. 25,*Accounting for Stock Issued toEmployees,* which was permitted under Statement 123, as originallyissued. See NOTE 4, Stock Options and Stock Grants.

 

**Deferred Revenue**

 

Certainvehicle sales contracts the Company has with the U.S. government provides forperformance based payments in accordance with agreed milestones. These paymentsreceived from the U.S. government are recorded by the Company as deferredrevenue, a liability, since they represent moneys that will ultimately berecognized as revenues after the Company has manufactured and the customer hasaccepted delivery of the completed product. This accounting treatment is inaccordance with the FASB’s Statement of Financial Concepts No. 6 (“SFAC 6”),Elements of Financial Statements.

 

9

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**Recent Accounting Pronouncements**

 

InJune 2006, the FASB issued FIN No. 48 “*Accountingfor Uncertainty in Income Taxes — an Interpretation of FASB StatementNo. 109*.” FIN No. 48 established a single model to addressaccounting for uncertain tax positions. FIN No. 48 clarifies the accounting forincome taxes by prescribing a minimum recognition threshold a tax position isrequired to meet before being recognized in the financial statements. FIN No.48 also provides guidance on de-recognition, measurement classification,interest and penalties, accounting in interim periods, disclosure andtransition.  FIN No. 48 was effective for the Company in the first quarterof fiscal 2007.  The adoption of FIN No. 48 did not have a material effecton the Company’s financial position, results of operations or cash flows.

 

InDecember 2006, the FASB issued a Staff Position (“FSP”) on EITF 00-19-2, “*Accounting for Registration Payment Arrangements*(“FSP EITF 00-19-2”).”  This FSP specifies that the contingent obligationto make future payments or otherwise transfer consideration under aregistration payment arrangement, whether issued as a separate agreement orincluded as a provision of a financial instrument or other agreement, should beseparately recognized and measured in accordance with SFAS No. 5, “Accountingfor Contingencies.”  If the transfer of consideration under a registrationpayment arrangement is probable and can be reasonably estimated at inception,the contingent liability under the registration payment arrangements isincluded in the allocation of proceeds from the related financing transaction(or recorded subsequent to the inception of a prior financing transaction)using the measurement guidance in SFAS No. 5.  This FSP is effectiveimmediately for registration payment arrangements and the financial instrumentssubject to those arrangements that are entered into or modified subsequent tothe issuance of the FSP.  For prior arrangements, the FSP is effective forfinancial statements issued for fiscal years beginning after December 15, 2006and interim periods within those years.  The Company adopted FSP EITF00-19-2 effective January 1, 2007.  See NOTE 12, Other Accrued Liabilities.

 

InSeptember 2006, the SEC issued SAB No. 108, Staff Accounting Bulletin No. 108, “*Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements”*(“SAB No. 108”). SAB No. 108 provides guidance on the consideration of theeffects of prior year misstatements in quantifying current year misstatementsfor the purpose of determining whether the current year’s financial statementsare materially misstated. SAB No. 108 is effective for the Company beginningJune 11, 2007. The adoption of SAB No. 108 is not expected to have a materialimpact on the Company’s consolidated financial statements. The Company hasreported the impact of having filed amended Forms 10-K for preceding years inNOTE 1.

 

InSeptember 2006, the FASB issued SFAS 157, Statement of Financial AccountingStandards No. 157, “*Fair Value Measurements*”(SFAS No. 157). SFAS No. 157 establishes a framework for measuring fair valueunder GAAP, and requires expanded disclosures regarding fair valuemeasurements. This accounting standard is effective for financial statementsissued for fiscal years beginning after November 15, 2007, or earlier in 2007if the Company elected early adoption, which the Company did not elect. TheCompany believes it is unlikely it will expand its use of fair valuemeasurements upon the January 1, 2008 effective date.

 

InFebruary 2007, the FASB issued SFAS No. 159, “*TheFair Value Option for Financial Assets and Financial Liabilities - Including anamendment of SFAS No. 115*.”  This statement permits, but doesnot require, entities to measure many financial instruments at fairvalue.  The objective is to provide entities with an opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions.  Entities electing this option will apply it when the entityfirst recognizes an eligible instrument and will report unrealized gains andlosses on such instruments in current earnings.  This statement 1) appliesto all entities, 2) specifies certain election dates, 3) can be applied on aninstrument-by-instrument basis with some exceptions, 4) is irrevocable and 5)applies only to entire instruments.  One exception is demand depositliabilities which are explicitly excluded as qualifying for fair value. With respect to SFAS No. 115, available for sale and held to maturitysecurities at the effective date are eligible for the fair value option at thatdate.  If the fair value option is elected for those securities at theeffective date, cumulative unrealized gains and losses at that date shall beincluded in the cumulative-effect adjustment and thereafter, such securitieswill be accounted for as trading securities.  SFAS No. 159 is effectivefor the Company on

 

10

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January1, 2008.  Earlier adoption is permitted in 2007 if the Company also electsto apply the provisions of SFAS No. 157.  The Company did not early adoptSFAS No. 159 and believes that it is unlikely that it will expand its use offair value accounting upon the January 1, 2008 effective date.

 

**NOTE 3 — CONCENTRATIONS: Revenues and Accounts Receivable**

 

TheCompany’s future operations and continued expansion is subject to a significantconcentration risk due to its high percentage of military sales to the U.S.government.

 

TheCompany’s revenues from sales to military units of the U.S. government duringthe three months ended September 30, 2007 and September 30, 2006 accounted for98% and 92%, respectively, of total revenues.  During the nine monthsended September 30, 2007 and September 30, 2006, the Company’s revenues fromsales to military units of the U.S. government accounted for97% and 92%, respectively, of total revenues.

 

TheCompany’s accounts receivable from sales to military units of the U.S. governmentas of September 30, 2007 and December 31, 2006 amounted to 94% and 95%,respectively, of total accounts receivable.

 

**NOTE 4 — STOCK OPTIONS AND STOCK GRANTS**

 

TheCompany does not have a formal stock option plan. However, the Company hasissued stock options (“Stock Options”) and shares of common stock (“StockGrants”) to some of its employees. During 2006 and 2005, the Company issuedstock options to purchase 1,508,125 and 652,833 shares of its unregisteredcommon stock, respectively. No stock options were issued in 2007. On January12, 2007, the Company filed a Registration Statement on Form S-8 to register1,972,291 shares of common stock issuable upon the exercise of the outstandingStock Options for the sale in public markets. During 2007, the Company did notmake any Stock Options grants, and at the nine months ended September 30, 2007there were outstanding Stock Options totaling 548,532 shares of common stock.

 

**STOCK OPTION EXPENSE**:

 

Stockoption expense includes the expense associated with both stock options grantedto employees and also the expense associated with stock grants issued toemployees and is recognized in operating results (included in general, andadministrative expenses) under SFAS 123R. For the three and nine months endedSeptember 30, 2007, stock option expense was as follows:

 
| ** **               | ** ** | **For the three months  ended September 30,** | ** ** | **For the nine months  ended September 30,** | ** ** |
|--------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **               | ** ** | **2007**                                                               | ** ** | **2006**                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **               | ** ** | ** **                                                             | ** ** | **(Restated)**                                                        | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| **Stock option expense** |       | $                                                                      | 420,661    |                                                                  | $          | 329,021 |   | $ | 1,281,566 |   | $ | 691,828 |   |
|                          |            |                                                                        |            |                                                                       |            |  |  |  |  |  |  |  |  |

 

11

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Thefollowing table summarizes information about stock option activity based uponthe weighted average method for the three and nine months ended September 30,2007.

 
| **Options**                                   | ** ** | **Common  stock shares  subject to  options** | ** ** | **Weighted  average  exercise price** | ** ** | **Remaining  contractual  term** | ** ** | **Aggregate  intrinsic value** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------|------------|----------------------------------|------------|-------------------------------------|------------|
| Outstanding at December 31, 2006              |       | 1,959,443                                               |       | $                                          | 2.63       |                             | 2.60       |                                | $          | 37,286,034 |   |
| Options granted                               |       | —                                                  |       |                                       |       |                             |       |                                |       |
| Options exercised                             |       | (1,410,911                                              | )          | $                                          | 0.95       |                             |       |                                |       |   |
| Outstanding at September 30, 2007             |       | 548,532                                                 |       | $                                          | 6.96       |                             | 3.08       |                                | $          | 8,062,407 |   |
|                                          |       |                                                    |       |                                       |       |                             |       |                                |       |
| Vested and Exercisable at September 30,  2007 |       | 423,532                                                 |       | $                                          | 6.79       |                             | 2.98       |                                | $          | 6,295,907 |   |

 

Theaggregated intrinsic value is calculated as the difference between the exerciseprice of the underlying awards and the closing stock price of $21.66 of ourcommon stock on September 28, 2007.  The aggregate intrinsic value isprovided for informational purposes only.  All stock options are recordedusing the fair value methodology mandated under SFAS 123(R).

 

Thefollowing table summarizes the attributes used by the Company to determinecompensation cost for stock options consistent with requirements of SFAS 123R.No stock options were granted during the three or nine month periods endedSeptember 30, 2007.

 
| ** **                                                  | ** ** | **For the three months  ended September 30,** | ** ** | **For the nine months  ended September 30,** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **Valuation assumptions**                              | ** ** | **2007**                                                               | ** ** | **2006**                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                  | ** ** | ** **                                                             | ** ** | **Restated**                                                          | ** ** | ** ** | ** ** | **Restated** | ** ** |
| Stock price on date of grant                                |       | —                                                                 |       | —                                                                |       | — |   | $ | 0.77 - $7.48 |   |
| Exercise price                                              |       | —                                                                 |       | —                                                                |       | — |   | $ | 0.72 - $7.48 |   |
| Expected option term (in years)                             |       | —                                                                 |       | —                                                                |       | — |   | 2 |   |
| Expected duration from grant to expiration  date (in years) |       | —                                                                 |       | —                                                                |       | — |   | 4 and 5 |   |
| Option vesting term (in years)                              |       | —                                                                 |       | —                                                                |       | — |   |   | (a) |
| Expected volatility                                         |       | —                                                                 |       | —                                                                |       | — |   | 45.82-70.31 | % |
| Risk-free interest rate                                     |       | —                                                                 |       | —                                                                |       | — |   | 4.40-4.97 | % |
| Expected forfeiture rate                                    |       | —                                                                 |       | —                                                                |       | — |   | 5 | % |
| Estimated corporate tax rate                                |       | —                                                                 |       | —                                                                |       | — |   | 38.5 | % |
| Expected dividend yield                                     |       | —                                                                 |       | —                                                                |       | — |   | 0 | % |

 

----

(a)Options vest between 1 day and 14 months.

 

**STOCK GRANTS**:

 

During2007, the Company did not make any Stock Grants, and at the nine months endedSeptember 30, 2007 there were outstanding Stock Grants totaling 120,513 sharesof common stock.

 

Stockoption expense attributable to Stock Grants is included within the total amountof stock option expense reported above under Stock Option Expense. The StockGrant expense attributable to Stock Grants for the three and nine months endedSeptember 30, 2007, was as follows:  

 
| ** **                                   | ** ** | **For the three months  ended September 30,** | ** ** | **For the nine months  ended September 30,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                                               | ** ** | **2006**                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                   | ** ** | ** **                                                             | ** ** | **(Restated)**                                                        | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| **Stock option expense – stock grants** |       | 91,000                                                                 |       | $                                                                     | 262,250    |   | 283,000 |   | $ | 277,250 |   |
|                                              |            |                                                                        |            |                                                                       |            |  |  |  |  |  |  |

 

12

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Thefollowing table summarizes supplemental information about non-vested stockgrants activity for the nine months ended September 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 September 30, 2007 |       | 120,513                    |       | $                                                           | 5.14       |   |

 

**NOTE 5 — INCOME TAXES**

 

The FASB has issued Statement of Financial Accounting Standards No.109, “*Accounting for Income Taxes*,”which requires the asset and liability method of accounting for income taxes.Under the asset and liability method, deferred income taxes are recognized forthe tax consequences of “temporary differences” by applying enacted statutorytax rates applicable to future years to differences between the financialstatement carrying amounts and the tax basis of existing assets andliabilities.

 

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

 
| ** **                           | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | ** **                       | ** ** | **(Restated)**             | ** ** |
| Net deferred  tax asset (liability)  |       |                             |       |                       |       |
| Provisions  and allowances           |       | $                                | 7,472,720  |                       | $          | 5,745,308 |   |
| Property and  equipment              |       | 59,875                           |       | (268,110                   | )          |
| Net  operating loss carry forwards   |       | —                           |       | 6,849,293                  |       |
|                                 |       | 7,532,595                        |       | 12,326,491                 |       |
| Valuation  allowance                 |       | —                           |       | —                     |       |
| Deferred tax  asset                  |       | $                                | 7,532,595  |                       | $          | 12,326,491 |   |
|                                 |       |                             |       |                       |       |
| Current  portion of deferred taxes   |       | $                                | 7,472,720  |                       | $          | 9,562,500 |   |
| Long-term  portion of deferred taxes |       | 59,875                           |       | 2,763,991                  |       |
| Total  deferred taxes                |       | $                                | 7,532,595  |                       | $          | 12,326,491 |   |

 

As of December 31, 2006, there were federal net operating loss carryforwards of $17,730,065 available to offset future taxable income and SouthCarolina net operating loss carry forwards of $6,581,521.  All netoperating losses are expected to be utilized for the year ended December 31,2007.

 

The following is a reconciliation of the provision for income taxes atthe U.S. federal income tax rate to the income taxes reflected in theConsolidated Statements of Operations:

 
| ** **                                     | ** ** | **Three months ended** | ** ** | **Nine months ended**        | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|----------------------------------------|------------|
| ** **                                     | ** ** | **September 30, 2007** | ** ** | **September 30, 2006 ** | ** ** | **September 30, 2007** | ** ** | **September 30, 2006** | ** ** |
| ** **                                     | ** ** | ** **                       | ** ** | **Restated**                           | ** ** | ** ** | ** ** | **Restated** | ** ** |
| Tax expense  benefit at statutory rate-federal |       | 35.00                            | %          | 35.00                                  | %          | 35.00 | % | 35.00 | % |
| State tax  expense, net of federal benefit     |       | 3.25                             | %          | 3.25                                   | %          | 3.25 | % | 3.25 | % |
| Other  permanent differences                   |       | .65                              | %          | —                                 |       | (.25 | )% | — |   |
| Changes in  valuation allowance                |       | —                           | %          | (38.25                                 | )%         | — | % | (38.25 | )% |
| Tax expense  at actual rate                    |       | 38.90                            | %          | —                                 | %          | 38.00 | % | — | % |

 

13

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**NOTE 6 — EARNINGS/LOSS PER SHARE**

 

TheCompany utilizes SFAS No. 128, “*Earnings perShare*” to calculate earnings/loss per share for 2007 and comparativeamounts for 2006. Basic earnings/loss per share is computed by dividing theearnings/loss available to common shareholders (as the numerator) by theweighted-average number of common shares outstanding (as the denominator).Diluted earnings/loss per share is computed similar to basic earnings/loss pershare except that the denominator is increased to include the number ofadditional common shares that would have been outstanding if all potentialcommon stock (including common stock equivalents) had all been issued, and ifsuch additional common shares were dilutive.

 

UnderSFAS No. 128, where there is a loss the inclusion of additional common sharesis anti-dilutive (since the increased number of shares reduces the per shareloss available to common stockholders), and if the additional common shares areanti-dilutive, they are not added to the denominator in the calculation of thefully-dilutive stock  During the ninemonths ended September 30, 2006, the Company incurred a loss. For the three andnine month periods ended September 30, 2006 the following common stockequivalents have been excluded from the calculation of the diluted loss per share.

 
| ** **                           | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|--------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **September 30, 2006** | ** ** | **September 30, 2006** | ** ** |
| ** **                           | ** ** | **Restated**                     | ** ** | **Restated**                     | ** ** |
| Series D convertible preferred stock |       | 1,161,364                        |       | 3,128,275                        |       |
| Warrants                             |       | 892,495                          |       | 1,771,982                        |       |
| Options                              |       | 1,463,514                        |       | 1,456,188                        |       |
| Stock Grants                         |       | 180,244                          |       | 72,618                           |       |
| Total                                |       | 3,697,617                        |       | 6,429,063                        |       |

 

**Earnings Per Share Computation**

** **
| ** **                                             | ** ** | **For the three months  ended September 30,** | ** ** | **For the nine months  ended September 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2007**                                                               | ** ** | **2006**                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                             | ** ** | ** **                                                             | ** ** | **(Restated)**                                                        | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| **Basic earning (loss) per common share  computation** | ** ** | ** **                                                             | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings (loss) available to common  shareholders  |       | $                                                                      | 11,361,571 |                                                                  | $          | 239,943 |   | $ | 23,517,177 |   | $ | (749,324 | ) |
|                                                   |       |                                                                   |       |                                                                  |       |   |   |   |   |   |   |   |   |
| **Weighted- average shares used to compute:**          | ** ** | ** **                                                             | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic earnings per share                               |       | 68,207,649                                                             |       | 49,014,150                                                            |       | 67,984,665 |   | 42,050,762 |   |
|                                                   |       |                                                                   |       |                                                                  |       |   |   |   |   |
| **Earnings (loss) per share of common stock:**         | ** ** | ** **                                                             | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                  |       | $                                                                      | 0.17       |                                                                  | $          | 0.00 |   | $ | 0.35 |   | $ | (0.02 | ) |

 

14

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| ** **                                                | ** ** | **For the three months  ended September 30,** | ** ** | **For the nine months  ended September 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                                               | ** ** | **2006**                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                | ** ** | ** **                                                             | ** ** | **(Restated)**                                                        | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| **Dilutive earning (loss) per common share  computation** | ** ** | ** **                                                             | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings (loss) available to common  shareholders     |       | $                                                                      | 11,361,571 |                                                                  | $          | 239,943 |   | $ | 23,517,177 |   | $ | (749,324 | ) |
|                                                      |       |                                                                   |       |                                                                  |       |   |   |   |   |
| **Weighted- average shares used to compute:**             | ** ** | ** **                                                             | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic earnings per share                                  |       | 68,207,649                                                             |       | 49,014,150                                                            |       | 67,984,665 |   | 42,050,762 |   |
| Dilutive effect of stock options                          |       | 587,440                                                                |       | Anti-dilutive                                                         |       | 795,057 |   | Anti-dilutive |   |
| Dilutive effect of stock grants                           |       | 134,028                                                                |       | Anti-dilutive                                                         |       | 133,789 |   | Anti-dilutive |   |
| Dilutive weighted average share                           |       | 68,929,117                                                             |       | 49,014,150                                                            |       | 68,913,511 |   | 42,050,762 |   |
|                                                      |       |                                                                   |       |                                                                  |       |   |   |   |   |
| **Earnings (loss) per share of common stock:**            | ** ** | ** **                                                             | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Assuming dilution                                         |       | $                                                                      | 0.16       |                                                                  | $          | 0.00 |   | $ | 0.34 |   | $ | (0.02 | ) |

 

**NOTE 7 — ALLOWANCE FOR CONTRACTUAL ADJUSTMENTS**

 

AccountsReceivable and “Definitization”

 

Substantiallyall of the Company’s contracts are with the U.S. government and as such theyare “public sector” contracts subject to the Federal Acquisition Regulation setforth in Title 41 of the United States Code (“FAR”). Public sector contractsmay result either from competitive bidding, or may be awarded as “sole source”contracts subject to “definitization” as provided under FAR Section252.217-7027.

 

Followingthe award of a sole source contract, a central component of the definitizationprocess is the negotiation and finalization of the contract price between thecontractor and the United States contracting officer.  As part of thisprocess, the parties make a mutual determination of the direct material andlabor costs for the work based upon the bill of materials and other purchasinginformation and then the parties mutually agree upon “rates” for the indirectlabor costs and the general and administrative costs and upon a “fee” (orprofit).  While the direct material costs and labor can be establishedthrough objective evidence, the “rates” and fee are more subjective and arebased upon an analysis of multiple factors including historical performancedata and projected operational factors.  The contractor has the right tosubmit proposed rates and fees, but these are subject to final review andapproval by the contracting officer, who may insist on using alternate rates andfee.  As provided in FAR section 252.217-7027(c):

 

*If agreement on a definitive contract action tosupersede this undefinitized contract action is not reached by the target datein paragraph (b) of this clause, or within any extension of it granted by theContracting Officer, the Contracting Officer may, with the approval of the headof the contracting activity, determine a reasonable price or fee in accordancewith subpart 15.4 and part 31 of the FAR, subject to Contractor appeal asprovided in the Disputes clause.*

 

Finally,although both parties make an effort to definitize the contract as quickly aspossible, the process is time consuming and can take months or even years tocomplete.  During the definitization process, the contractor is requiredto perform the contract work and to make deliveries under the contract beforethe final contract price has been established.  For this reason, as partof the original award, the Company bills the U.S. government at a predeterminedprice that is used for invoicing and accounting purposes pending finaldefinitization.

 

Asa result of the potential adjustments related to the definitization process,the Company maintains an allowance for contractual adjustments account that issubtracted from gross sales to arrive at net sales in accordance with ARB 43,Chapter 11.  This allowance account is reviewed on a quarterly basis andis adjusted as the Company deems necessary.  The allowance is based on theanalysis of historical data, and calculation of pro-rata percentages of currentcontracts in place that remain subject to the definitization process.

 

Belowis a table detailing activity within the allowance for contractual adjustmentsaccount for the nine months ended September 30, 2007 and September 30, 2006,respectively.

 

15

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| ** **                   | ** ** | **For the nine months ended September 30,** | ** ** |
|------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                                                  | ** ** | **2006** | ** ** |
| ** **                   | ** ** | ** **                                                                | ** ** | **(Restated)** | ** ** |
| Beginning Balance- January 1 |       | $                                                                         | 6,068,088  |   | $ | 1,018,051 |   |
| Additions to allowance       |       | 19,474,461                                                                |       | 1,485,733 |   |
| Reduction to allowance       |       | (9,634,609                                                                | )          | (1,236,743 | ) |
| Balance—September 30    |       | $                                                                         | 15,907,940 |   | $ | 1,267,041 |   |

 

TheCompany’s MRAP sole source contract was definitized on July 31, 2007. Theincrease in the allowance for contractual adjustments as of September 30, 2007is due primarily to adjust the undefinitized price to the definitized price forsales recorded through September 30, 2007.

 

TheCompany does not maintain an allowance for doubtful accounts. Substantially all of the Company’s sales for the quarters ended September 30,2007 and September 30, 2006 involved contracts with the U.S. government.

 

Historically,the Company has not encountered sales returns.  The Company does notanticipate sales returns in the future.

 

**NOTE 8—INVENTORIES**

 

Inventories consisted of the following:

 
| ** **                                      | ** ** | **September 30, 2007** | ** **      | **December 31, 2006** | ** ** |
|-------------------------------------------------|------------|----------------------------------|-----------------|---------------------------------|------------|
| ** **                                      | ** ** | ** **                       | ** **      | **(Restated)**                  | ** ** |
| Finished Goods                                  |       | $                                |  1,715,695 |                            | $          |  — |   |
| Raw materials and supplies                      |       | 137,365,409                      |            | 45,131,126                      |       |
| Work in process                                 |       | 47,174,593                       |            | 17,688,784                      |       |
| Less: Allowance for obsolescence and  shrinkage |       | (3,782,185                       | )               | (2,423,613                      | )          |
| Net Inventories                                 |       | $                                | 182,473,512     |                            | $          | 60,396,297 |   |

 

**Inventory Allowance**

 

TheCompany maintains inventory reserves to account for obsolescence and waste. Theinventory reserve amounts reflected above represent expenses for inventoryobsolescence and waste recorded by the Company.

 

Asof September 30, 2007 there were vehicles which had been inspected and acceptedby the customer but the customer had not taken title (signed Form DD250). Thesevehicles were accounted for as finished goods.

 

**NOTE 9—PROPERTY AND EQUIPMENT**

 

Propertyand Equipment at September 30, 2007 and December 31, 2006:

 
| ** **                         | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | ** **                       | ** ** | **(Restated)**                  | ** ** |
| Furniture and fixtures             |       | $                                | 3,607,625  |                            | $          | 1,022,984 |   |
| Leasehold improvements             |       | 11,518,066                       |       | 1,534,057                       |       |
| Machinery and equipment            |       | 6,032,699                        |       | 3,794,209                       |       |
| Manuals                            |       | 704,798                          |       | 104,797                         |       |
| Vehicles                           |       | 468,344                          |       | 143,464                         |       |
| Demo vehicles                      |       | 1,530,605                        |       | 1,095,925                       |       |
| Buildings                          |       | 6,013,111                        |       | —                          |       |
| Construction in progress           |       | 13,265,474                       |       | —                          |       |
| Land                               |       | 3,420,000                        |       | —                          |       |
| Computers and software             |       | 6,695,715                        |       | 2,757,131                       |       |
| Less depreciation and amortization |       | (5,626,024                       | )          | (1,488,666                      | )          |
|                               |       |                             |       |                            |       |
| Net property and equipment         |       | $                                | 47,630,413 |                            | $          | 8,963,901 |   |

 

16

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**Leasehold Improvements and Depreciation**

 

Inaddition to leasehold expenditures for the warehouse facility discussed in NOTE10, the Company incurred $1,443,000 for leasehold improvements that wereprimarily attributable to renovations made to buildings at Ladson, SC.

 

Depreciationexpense for property and equipment for the nine months ended September 30, 2007and for 2006 was $4,137,358 and $587,982, respectively.

 

SeeNOTE 10 — Asset Acquisitions and Construction in Progress Payments for adescription of the Company’s purchase of its Roxboro, NC facility andconstruction in progress payments made during the current quarter.

 

**NOTE 10 —ASSET ACQUISITIONS AND CONSTRUCTION IN PROGRESSPAYMENTS**

 

**Roxboro, NC Manufacturing Plant Purchase**

 

InJuly 2007, the Company purchased land and an approximately 430,000 square footbuilding in Roxboro, NC for $3.5 million, which it plans to use as amanufacturing plant.  The Company acquired the property for cash.

 

**Construction in Progress Payments**

 

The Company paid approximately $10 million for construction in progresspayments during the third quarter of 2007. These payments were primarily toconstruct assembly lines at both its Ladson, SC and Roxboro, NC manufacturingplants:

 

•                  In June 2007, the Company made a down paymentof $1,529,836 to Superior Controls of Plymouth, Michigan to begin work on avehicle assembly line (the estimated total cost of which is approximately $15.3million) at the Ladson, SC facility. During the third quarter, the Company madeadditional progress payments to Superior Controls totaling $6,119,345, whichare being accounted for as construction in progress payments.

 

•                  During the third quarter of 2007, the Companymade a down payment of $4,356,555 to Tecstar of Troy, Michigan to begin work ona vehicle assembly line (the estimated total cost of which is approximately$12.9 million) at the recently purchased Roxboro, NC facility. The down paymentand future payments will be accounted for as construction in progress payments.

 

Duringthe third quarter of 2007, the Company completed construction on anapproximately 90,000 square foot warehouse facility at its corporateheadquarters in Ladson, SC The Company paid $350,000 in construction inprogress payments in the third quarter of 2007 to complete construction. Thetotal cost of construction was $4,621,207, and was capitalized at the time ofcompletion when placed into service in July 2007.

 

17

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**NOTE 11 — ACQUIRED INTANGIBLE ASSETS**

 

Thefollowing is a summary of the Company’s intangible assets at September 30,2007, after giving effect to the acquisition of a research and developmenttesting facility located in Edgefield, SC in March 2007:

 
| ** **            | ** ** | **Gross carrying** | ** ** | **Accumulated**  | ** ** | **September 30, 2007** | ** ** |
|-----------------------|------------|-------------------------|------------|------------------|------------|----------------------------------|------------|
| ** **            | ** ** | **amount**              | ** ** | **amortization** | ** ** | **net book value**     | ** ** |
| Licenses              |       | $                       | 800,000    |             | $          | 155,556                          |       | $ | 644,444 |   |
| Non-compete agreement |       | 600,000                 |       | 87,500           |       | 512,500                          |       |
| Customer base         |       | 200,000                 |       | 58,333           |       | 141,667                          |       |
| Special expertise     |       | 400,000                 |       | 116,667          |       | 283,333                          |       |
| Total                 |       | $                       | 2,000,000  |             | $          | 418,056                          |       | $ | 1,581,944 |   |

 

**NOTE 12—OTHER ACCRUED LIABILITIES**

 

TheCompany’s other accrued liabilities are comprised of the following accounts:

 
| ** **                | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | ** **                       | ** ** | **(Restated)**                  | ** ** |
| Compensation and benefits |       | $                                | 3,492,595  |                            | $          | 1,222,143 |   |
| Vehicle fee payable       |       | 1,876,293                        |       | 1,139,250                       |       |
| Settlement                |       | —                           |       | 607,466                         |       |
| Liquidated damages        |       | 1,459,573                        |       | —                          |       |
| Other misc. payables      |       | 55,518                           |       | —                          |       |
|                      |       |                             |       |                            |       |
|                      |       | $                                | 6,883,979  |                            | $          | 2,968,859 |   |

 

**Compensation and Benefits** - **GainShare Program**

 

Thecompensation and benefits accrued liabilities account balance includes wagesand benefits that were earned at the end of the applicable quarter, and not yetpaid. Additionally, the compensation and benefits account balance may includean accrued liability amount attributable to the Company’s gain share programfor quarters in which gain share was approved but not paid. The gain shareprogram was authorized by the Board of Directors on March 1, 2007 and providesfor additional compensation that is paid quarterly to employees during periodsin which the Company earns net income. Under the gain share program, theCompany distributes 10% of each quarter’s net earnings (after taxes) equally toall employees.

 

**Liquidated Damages**

 

OnDecember 20, 2006, the Company completed a private placement of 13,000,000shares of its common stock to institutional investors at $11.75 per share,resulting in gross proceeds of $152,750,000.  The proceeds, net ofcommissions, were $146,640,000. Per the Securities Purchase Agreement, theCompany agreed to file a registration statement to register all 13,000,000shares of common stock for resale and distribution under the Securities Act of1933, as amended, within 30 calendar days thereafter (January 19, 2007)and cause the registration statement to be declared effective by the SEC  no later than 120 calendar days thereafter(April 19, 2007). If the registration statement registering these shares wasnot declared effective on or before the applicable date, then the Company wasrequired to deliver to each purchaser, as liquidated damages, an amount equalto one and one third percent (1 1/3%) for each thirty (30) days (or such lesserpro-rata amount for any period of less than thirty (30) days) of the totalpurchase price of the securities purchased and still held by such purchaserpursuant to the Securities Purchase Agreement on the first day of each thirty(30) day or 

 

18

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shorterperiod for which liquidated damages were calculable. The registration statementfor the shares issued became effective July 26, 2007. After conversations withmembers of the Staff of the SEC, the Company filed amended Annual Reports onForm 10-K for the years ended December 31, 2005 and 2006, which were filed withthe SEC on October 15, 2007. On October 15, 2007, the Company filed aprospectus supplement with respect to the registration statement.

 

Inaccordance with FSP EITF 00-19-2 — Accounting for Registration PaymentArrangements, the Company recorded $4,860,658 during the three months endedMarch 31, 2007 based on its original estimate of the time it would take toeffectuate the registration of common stock. The Company recorded an additionalcharge for liquidated damages of $1,775,820 for the three months ended June 30,2007. As of the quarter ended September 30, 2007, the Company had incurred anadditional $830,365 in liquidated damages charges accrued through the effectivedate of October 15, 2007. Liquidated damage expense for the three and ninemonths ended September 30, 2007 was $830,365 and $7,466,843, respectively.

 

** ****NOTE 13—COMMITMENTS ANDCONTINGENCIES**

 

**Financing Commitments - $50 Million Credit Facility**

 

OnJuly 20, 2007, the Company entered into a $50 million revolving creditagreement with Wachovia Bank, National Association. Borrowings under the creditagreement bear interest at a floating rate per annum equal to the 1-monthLIBOR-rate  plus 2.0%. All amountspayable under this credit agreement were originally due and payable onSeptember 30, 2007. However, the Company entered into a modification agreementwith the lender which extended the maturity of the credit agreement to January9, 2008. Amounts payable under the credit agreement are secured by a pledge ofall the Company’s personal property and fixtures. As of September 30, 2007, noborrowings were outstanding under the credit agreement.

 

Thereare no assurances that Wachovia will extend the terms of this financingagreement beyond January 9, 2008. See “Management’s Discussion and Analysis ofFinancial Condition and Results from Operations - Liquidity And CapitalResources” in Part I, Item 2 of this report for additional information.

 

**Contract Liabilities – Warranty Reserves**

 

TheCompany’s sales contracts generally include a warranty such that the Company’sproducts are warranted to be free from defects in design, material, andworkmanship for a period of one year from the acceptance date.  Thewarranty does not apply to any damage or failure to perform caused by themisuse or abuse of the vehicle, combat damage, fair wear and tear items (brakeshoes, wiper blades, etc.), or by the customer’s failure to perform propermaintenance or service on the supplies.

 

TheCompany reviews its exposure for warranty expense on a quarterly basis anddetermines warranty and pricing reserves based on historical data and known events.As of September 30, 2007, the current contract liabilities – warranty reservesbalance equaled $4,943,456. See NOTE 15, which provides a presentation of theCompany’s accruals for warranty-related costs for 2007 and comparative amountsfor 2006.

 

**Litigation Matters**

 

TheCompany is not aware of any existing or threatened litigation that wouldrequire the accrual of a contingent liability under SFAS 5, “*Accounting For Contingencies.*”  See “Legal Proceedings” in Part II, Item I ofthis report.

 

19

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**NOTE 14—SHAREHOLDERS’ EQUITY**

 

During the three months ended March 31, 2007, the Company recorded thefollowing transactions within its shareholders’ equity accounts:

 

•      27,700 shares were cancelled relating to theDecember 2006 PIPE (Private Investment in Public Equity) offering.

 

•      50,000 shares of common stock granted inJune 2006 to an employee vested and were issued on January 1, 2007. Thevaluation of these shares was recorded in 2006 under SFAS123R.

 

•      26,789 shares of common stock were issuedto members of the Board of Directors as 2006 compensation. These shares wereclassified as shares to be issued as December 31, 2006.

 

•      Employees exercised stock options topurchase 1,198,681 shares of the Company’s common stock valued at $1,011,500.The valuation of these shares was recorded in 2006 under SFAS123R.

 

During the three months ended June 30, 2007, the Company recorded thefollowing transactions within its shareholders’ equity accounts:

 

•      Employees exercised stock options topurchase 176,800 shares of the Company’s common stock valued at $295,970. Thevaluation of these shares was recorded under SFAS123R.

 

Duringthe three months ended September 30, 2007, the Company recorded the followingtransactions within its shareholders’ equity accounts:

 

•                  Employees exercised stock options to purchase40,000 shares of the Company’s common stock for $60,000 during September 2007.These shares of common stock had not been issued as of September 30, 2007.

 

20

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**NOTE 15 — ALLOWANCE AND RESERVE ACCOUNTS**

 

Thethree allowance and reserve accounts listed below reflect accounts where theCompany has recorded an expense under the accrual method of accounting, whichdid not require an outlay of cash. The following table reflects the amounts ofthese accounts for the years for the three months and nine months endedSeptember 30, 2006 and 2007:

 

**Allowanceand Reserve Accounts**

 
| ** **                             | ** ** | **For the  three months ended September 30,** | ** ** | ** **                    | ** ** | **For the nine months ended September 30,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------|------------|-------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                             | ** ** | ** **                                    | ** ** | ** **                    | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | **Additions** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | ** **                                    | ** ** | **Additions**                 | ** ** | ** **                                                                | ** ** | **Balance** | ** ** | **Balance** | ** ** | **charged  to** | ** ** | ** ** | ** ** | **Balance** | ** ** |
| ** **                             | ** ** | **Balance**                                   | ** ** | **charged to cost** | ** ** | ** **                                                                | ** ** | **September 30,** | ** ** | **December 31, ** | ** ** | ** cost** | ** ** | ** ** | ** ** | **September** | ** ** |
| **Description**                        | ** ** | **June 30, 2007**                   | ** ** | **and expenses**         | ** ** | **Write-offs**                                                            | ** ** | **2007** | ** ** | **2006** | ** ** | **and expenses** | ** ** | **Write-offs** | ** ** | **30, 2007** | ** ** |
| ** **                             | ** ** | ** **                                    | ** ** | ** **                    | ** ** | ** **                                                                | ** ** | ** ** | ** ** | **(Restated)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                   |       |                                          |       |                          |       |                                                                      |       |   |   | ** ** |   |   |   |   |   |   |   |
| Allowance for  contractual obligations |       |                                          |       |                          |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
|                                   |       |                                          |       |                          |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| 2007                                   |       | $                                             | 12,301,428 |                          | $          | 4,043,255                                                                 |       | $ | 436,743 |   | $ | 15,907,940 |   | $ | 6,068,088 |   | $ | 19,474,461 |   | $ | 9,634,609 |   | $ | 15,907,940 |   |
|                                   |       |                                          |       |                          |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| 2006                                   |       | $                                             | 1,194,040  |                          | $          | 400,000                                                                   |       | $ | 326,999 |   | $ | 1,267,041 |   | $ | 1,018,051 |   | $ | 1,485,733 |   | 1,236,743 |   | $ | 1,267,041 |   |
|                                   |       |                                          |       |                          |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Inventory  Reserves                    |       |                                          |       |                          |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
|                                   |       |                                          |       |                          |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| 2007                                   |       | $                                             | 5,708,420  |                          | $          | 3,782,185                                                                 |       | $ | 5,708,420 |   | $ | 3,782,185 |   | $ | 2,423,613 |   | $ | 10,621,588 |   | $ | 9,263,016 |   | $ | 3,782,185 |   |
|                                   |       |                                          |       |                          |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| 2006                                   |       | $                                             | 2,005,940  |                          | $          | 1,159,540                                                                 |       | $ | 1,674,647 |   | $ | 1,490,833 |   | $ | 498,281 |   | $ | 3,884,187 |   | $ | 2,891,635 |   | $ | 1,490,833 |   |
|                                   |       |                                          |       |                          |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Contract  Liabilities                  |       |                                          |       |                          |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
|                                   |       |                                          |       |                          |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| 2007                                   |       | $                                             | 4,397,653  |                          | $          | 3,187,289                                                                 |       | $ | 2,641,486 |   | $ | 4,943,456 |   | $ | 1,850,000 |   | $ | 6,286,762 |   | $ | 3,193,306 |   | $ | 4,943,456 |   |
|                                   |       |                                          |       |                          |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| 2006                                   |       | $                                             | 742,328    |                          | $          | 59,710                                                                    |       | $ | 150,000 |   | $ | 652,038 |   | $ | 380,044 |   | $ | 633,936 |   | $ | 361,942 |   | $ | 652,038 |   |

 

21

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**NOTE 16****—PREPAID ASSETS**

 

The Company’s prepaid assets consist ofadvances paid on the MRAP contract to GDLS based upon the achievement ofcontractual performance milestones. These advances are a flow through from theCompany’s contract with the U.S. government.

 

A review of the milestone achievements isperformed monthly by a representative of the U.S. government. Payments formilestones achieved by GDLS are paid to the Company, which it in turn passesthrough to GDLS. Liquidation of the advances are based upon a fixed rateapplied against billings to the Company by GDLS when completed vehicles areaccepted by the U.S. government via the signing of a Form DD250.

 
| **Prepaid assets** | ** ** | **September 30, 2007** | ** ** | **December 31, 2006 ** | ** ** |
|-------------------------|------------|----------------------------------|------------|---------------------------------------|------------|
| ** **              | ** ** | ** **                       | ** ** | **(Restated)**                        | ** ** |
| Prepaid to GDLS         |       | $                                | 15,645,299 |                                  | $          | — |   |
| Other                   |       | 631,924                          |       | —                                |       |
| Total                   |       | $                                | 16,277,223 |                                  | $          | — |   |
|                         |            |                                  |            |                                       |            |  |  |  |  |

 

**NOTE 17****—DEFERRED REVENUE**

 

The Company’s deferred revenue consists ofthe following contracts:

 
| ** **                 | ** ** | **September 30, 2007** | ** **     | **December 31, 2006** | ** ** |
|----------------------------|------------|----------------------------------|----------------|---------------------------------|------------|
| ** **                 | ** ** | ** **                       | ** **     | **(Restated)**                  | ** ** |
|                       |       |                             |           |                            |       |
| **MRAP**                   |       | $                                | 48,065,101     |                            | $          | — |   |
| **ILAV**                   |       | 4,238,192                        |           | 4,260,340                       |       |
| **Mastiff**                |       | —                           |           | 7,487,914                       |       |
| **Other**                  |       | —                           |           | 1,075,957                       |       |
|                       |       |                             |           |                            |       |
| **Total Deferred Revenue** | ** ** | **$**                            | **52,303,293** | ** **                      | **$**      | **12,824,211** | ** ** |

 

Theseperformance based payments received from the U.S. government are recorded bythe Company as deferred revenue since they represent moneys that the Companyexpects will ultimately be recognized as revenues after the Company hasmanufactured and the customer has accepted delivery of the vehicles.

 

**NOTE 18—SUBSEQUENT EVENTS**

 

OnOctober 8, 2007, the Company was awarded a contract with an estimated value ofapproximately $3.5 million from BAE Systems for the supply of labor and for thefabrication and final integration of forty-five (45) Iraq Light ArmoredVehicles (“ILAV”). Under this contract, BAE Systems will provide all materialand will be responsible for the automotive integration.

 

OnOctober 15, 2007, the Company filed amendments to its Annual Report on Form10-K for the year ended December 31, 2005 (the “2005 Annual Report”) andAnnual Report on Form 10-K for the year ended December 31, 2006 (the “2006 

 

22

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Annual Report”). The 2005 and 2006 annual reports were amended toreflect, among other things, the conclusion of the Company’s management thatthe Company’s internal control over financial reporting and disclosure controlsand procedures were not effective as of December 31, 2005 and 2006 because ofcertain material weaknesses in its internal control over financial reporting. Inboth the 2005 Annual Report and 2006 Annual Report, the Company disclosed thecontrol deficiencies that contributed to the Company’s materialweaknesses,  including its lack of asufficient complement of personnel with an appropriate level of accountingknowledge, experience with the Company, and training in the application of GAAPcommensurate with the Company’s financial reporting requirements. Foradditional information, see the amendments to the Company’s 2005 and 2006Annual Reports filed on Form 10-K/A with the SEC on October 15, 2007.

 

OnOctober 18, 2007, the Company was awarded a delivery order by the U.S. MarineCorps for 553 Cougar Category I and 247 Cougar Category II MRAP vehicles, withan estimated value of approximately $376 million. Approximately fifty percentof the work under this contract will be performed by GDLS, pursuant to ourjoint venture agreement with GDLS. The award was made pursuant to a lettercontract between the Company and the U.S. Marine Corps dated January 25, 2007and pertains to the testing, production, and sustainability for its MRAPvehicle program.

 

OnNovember 5, 2007, the Company was awarded a contract from the U.S. Marine Corpsfor the purchase of services in support of operation of the Mine ResistantAmbush Protected (MRAP) Vehicles University, which is an MRAP training programat Red River Army Depot, integrated logistics support, and field servicerepresentative support. Total approximate value of the contract isapproximately $83.6 million. Approximately fifty percent of the work under thiscontract will be performed by GDLS, pursuant to the Company’s joint ventureagreement with GDLS.

 

OnNovember 8, 2007, the Company was awarded a contract from the U.S. Army’s TankAutomotive and Armaments Command, or TACOM, for the production of an additional29 Buffalo mine-protected vehicles. The approximate total value of the contractis $22.3 million.

 

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## **Item 2.        Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

##  

Thefollowing Management’s Discussion and Analysis of Financial Condition andResults of Operations, or MD&A, is intended to help the reader understandthe results of operations and financial condition of Force Protection, Inc. andits subsidiaries for the three and nine months ended September 30, 2007. Theunaudited statements and other financial information as of and for the threeand nine months ended September 30, 2006 and 2007 and the following MD&Adiscussion should be read in conjunction with the Company’s 2006 annual report,including the audited financial statements, for the year ended December 31, 2006,originally filed March 16, 2007, as amended by the Company’s Annual Report onForm 10-K/A filed with the SEC on June 11, 2007, July 12, 2007 and October 15,2007.

 

**Special Note Regarding Forward-Looking Statements**

 

This Quarterly Report onForm 10-Q contains both historical and forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, or theSecurities Act, and Section 21E of the Securities Exchange Act of 1934, asamended, or the Exchange Act. All statements other than statements ofhistorical fact included in this Form 10-Q that address activities, events ordevelopments that we expect, believe or anticipate will or may occur in thefuture are forward-looking statements including, in particular, the statementsabout our plans, objectives, strategies and prospects regarding, among otherthings, our financial condition, results of operations and business. We haveidentified some of these forward-looking statements with words like “believe,” “may,”“will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate”or “continue” and other words and terms of similar meaning. These forward–lookingstatements include, among other things:

 

•                  statements regarding the growth in the worldmarket for mine–protected vehicles;

 

•                  the pace at which the U.S. may seek toincrease the armor and blast protection of its military vehicles;

 

•                  quantities of vehicles that may be purchasedor ordered by various customers;

 

•                  statements regarding the U.S. military’s plansor intentions to replace the Humvee fleet with armored vehicles, including thepossible timeframe of this replacement and the potential number of armoredvehicles that might be required under this program;

 

•                  information regarding the number of varioustypes of MRAP and other armored vehicles that may be purchased by the U.S.Marine Corps, the U.S. Army and other U.S. and foreign customers under variousprograms, including the MRAP, GSTAMIDS and JERRV programs, and the value ofvehicles that may be acquired;

 

•                  statements with respect to our expectationsregarding our ability to obtain materials, components and supplies necessary tomanufacture our vehicles, our ability to improve cost efficiencies, including,without limitation, as a result of volume purchasing, improvements in ourmanufacturing process and possible future changes in the efficiencies in ouroperations;

 

•                  statements regarding the future market forour vehicles and other blast protected vehicles;

 

•                  statements regarding any changes in our costof sales or our general and administrative expenses as a percentage of grossrevenue or gross sales;

 

•                  statements regarding our future expenses toexpand our infrastructure, future capital expenditures, future cash flow,future liquidity and future vehicle production and whether cash flows will besufficient to satisfy our cash requirements;

 

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•                  statements regarding the revenues that may bederived from, and the quantities of vehicles that may be purchased or orderedpursuant to, existing or possible future contracts or orders by variouscustomers, including statements regarding the estimated value of those ordersand contracts;

 

•                  statements regarding our ability to utilizenet operating loss carry-forwards for income tax purposes;

 

•                  statements regarding our backlog and theestimated value of any U.S. military and other governmental contracts;

 

•                  statements regarding the rate at which we andGDLS will produce MRAP vehicles and the date as of which we will achieve anyparticular monthly production rate of these vehicles;

 

•                  the number of MRAP vehicles that will berequired by the Department of Defense and the value of those vehicles;

 

•                  statements regarding the capabilities,relative performance or advanced nature of our engineering or the technologyincluded in our vehicles or their various features or our production processes;and

 

•                  statements regarding our future businessplans and strategies, including with respect to expanding our product line, ourresearch and development efforts, strategic alliances with industry partners,our marketing efforts and changes in our revenue mix and the portion of ourrevenue generated by the sale of spare parts.

 

Since our actual results,performance or achievements could differ materially from those expressed in, orimplied by, these forward-looking statements, we cannot give any assurance thatany of the events or circumstances anticipated by these forward-lookingstatements will occur or, if any of them do, what impact they will have on ourbusiness, results of operations and financial condition. You are cautioned notto place undue reliance on these forward-looking statements. We do notundertake any obligation to update these forward-looking statements to reflectnew information, future events or otherwise.

 

These forward-lookingstatements are based on current expectations about future events and aresubject to numerous uncertainties and factors, all of which are difficult topredict and many of which are beyond our control. Many factors mentioned in ourdiscussion in this Form 10-Q, including the risks outlined under “Risk Factors,”will be important in determining future results. We do not know whether theexpectations reflected in these forward-looking statements will prove correct.They can be affected by inaccurate assumptions we might make or by known orunknown risks and uncertainties, including those described under “Risk Factors.”

 

*ACCOUNTING RESTATMENT AND MATERIAL WEAKNESSES*

 

On June 27, 2007, wefiled an amendment to our Annual Report on Form 10-K for the year endedDecember 31, 2005 to amend and restate our financial statements and otherinformation for the years 2005, 2004 and 2003. On June 11, 2007 and on July 12,2007, we filed amendments to our Annual Report on Form 10-K for the yearended December 31, 2006 to amend and restate our financial statements andother information for the years ended December 31, 2005 and 2004. Therestatements adjusted our accounting for preferred stock and warrants issued toinvestors, accounting for stock-based compensation to employees andnon-employees and accounting for rent expense on a straight-line basis and alsorestated earnings per share of common stock to give effect to accretion relatedto preferred stock and to give effect to common shares issued upon conversionof preferred stock. The financial information included in this report for theyears ended December 31, 2005 and 2004 reflects these restatements. Foradditional information, see “Risk Factors” and note 1 to our consolidatedfinancial statements included elsewhere herein.

 

The items identified by usrelate to the valuation method used to account for certain equity issuanceswhich did not properly include a full analysis of the embedded conversionfeature associated with such issuances as required under EITF 98-5, Accountingfor Convertible Securities with Beneficial Conversion Features or ContingentlyAdjustable 

 

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Conversion Ratios, or which were otherwiseincorrectly valued. As a result, a number of shares of our stock issued ascompensation to certain executives and other third parties and recorded asgeneral and administrative compensation expense appear to have been valued atless than fair value.

 

We believe that this issueis limited to a small number of equity issuances made during 2003, 2004 and2005, with a total combined value of not more than an additional cumulative netloss of approximately $3.75 million for the years 2003 and 2004, and an approximaterealized gain in the range of $2 to $4 million in 2005. Our management andaudit committee have discussed the subject matter giving rise to thisconclusion with Jaspers + Hall, PC, our independent accounting firm for thefiscal years ended December 31, 2005 and 2006.

 

We subsequently concludedthat, as a result of the foregoing matters, there were material weaknesses inour internal control over financial reporting. Accordingly, on October 15,2007, we filed a further amendment to our Annual Report on Form 10-K for theyear ended December 31, 2006 to reflect management’sreassessment of the effectiveness of our internal control over financialreporting as of December 31, 2006 and management’s conclusion that our internalcontrol over financial reporting and our disclosure controls and procedureswere not effective as of December 31, 2006 because of these materialweaknesses. Management’s revised assessment is contained, and the materialweaknesses are described, in Item 9A of the foregoing amendment to our Annual Report on Form 10-K for theyear ended December 31, 2006 filed with the SEC on October 15, 2007. On October 15, 2007, we also filed a secondamendment to our Annual Report on Form 10-K for the year ended December 31,2005 to reflect management’s reassessment of the effectiveness of ourinternal control over financial reporting as of December 31, 2005 andmanagement’s conclusion that our internal control over financial reporting andour disclosure controls and procedures were not effective as of December 31,2005, because of those material weaknesses.

 

The June 11, 2007 and July12, 2007 amendments to our Annual Report on Form 10-K for the year endedDecember 31, 2006 also amended certain financial information for the year ended December 31,2006 to include the effect of the restatement of our 2005 financial statementsand the effect on basic earnings per share of accretion on preferred stock andthe calculation of weighted average common shares used to compute dilutedearnings per share. In addition, on July 19, 2007, we filed an amendment to ourQuarterly Report on Form 10-Q for the quarter ended March 31, 2007 to includethe effect of the amended financial statements for the year ended December 31,2006 and to restate certain financial information in that Quarterly Report forthe effects of stock-based compensation to employees and the effect on basicearnings per share of accretion on preferred stock and the calculation ofweighted average common shares used to compute diluted earnings per share. For information on the effects of theseamendments and restatements on certain of our financial information for theyear ended December 31, 2006 and the quarter ended March 31, 2007, see “Notesto Consolidated Financial Statements—Note 1–Basis of Presentation—2006 Year EndAmendment and Q1 Restatement” in our Form 10-Q/A for the quarterly period endedMarch 31, 2007 filed with the SEC on July 19, 2007.

 

Forinformation on the effects of these amendments and restatements on certainfinancial information for the three and nine months ended September 30, 2006,see Note 1 of our consolidated financial statements included elsewhere herein.

 

**Certain Matters that may affect our Results of Operations**

 

As described below under “RiskFactors,” the primary uncertainty about our future operations is whether or notwe will continue to receive additional orders and contracts for our vehicles. Itis impossible to predict with certainty whether we will receive any such futureorders or contracts from existing or new customers. If we do not receive futureorders and contracts, our business, prospects, financial conditions andoperating results would be seriously harmed and it is unlikely that ourbusiness will continue. In particular, we continue to rely on the U.S. Army andthe U.S. Marine Corps for substantially all of our net sales, and if eithercustomer ceases to issue further orders or contracts to us or significantly

 

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decreases its orders or contracts, our business mayfail. Likewise, increases or decreases in the number of vehicles ordered willcause our operating results to fluctuate, perhaps substantially.

 

Our operating results arealso subject to fluctuations as a result of the government contracting process,including the right of the U.S. government to delay or withhold certainpayments and the “definitization” process described under “Allowance ofContractual Adjustments - Definitization” in note 2 to our consolidated financial statements included elsewhere herein.Likewise, our allowance for contracts undergoing definitization is an estimatebased on our limited operating history, and our results of operation may bematerially adversely affected if these estimates are incorrect.

 

As discussed under “RiskFactors” in Part II, Item 1A of this report, we have in the past been awardedsingle source contracts by the U.S. military, meaning that our competitors werenot entitled to bid for these contracts. However, a recent report of theInspector General of the U.S. Department of Defense has recommended, amongother things, that future contracts be subject to competitive bidding. Many ofour competitors have substantially greater financial and other resources thanwe do, and there can be no assurance that we will be successful in winning newcontracts or orders that are subject to competitive bidding, which wouldadversely affect our results of operations.

 

As discussed  under “Risk Factors” in Part II, Item 1A ofthis report, our accounting and financial systems do not currently meet DCAAstandards. Efforts to remediate these material weaknesses and bring ourfinancial and accounting systems into compliance with DCAA standards will beongoing, and have resulted and are expected to continue to result insubstantial additional costs even after such time as our accounting andfinancial systems are brought into compliance with DCAA standards. Any failureto comply with these DCAA standards could have a material adverse affect on ourbusiness.

 

We experienced substantialgrowth in net sales during fiscal year 2006 and the first nine months of 2007. Asa result, our general and administrative expenses and certain of our otherexpenses increased substantially as well. We expect that general andadministrative expenses and certain other expenses will continue to increase. However,we are unable to predict whether general and administrative expenses, cost ofsales and other expenses, expressed as a percentage of our net sales, willincrease or decrease.

 

We may encounter some difficultiesin securing the necessary components for our vehicles, including steel, truckchassis, axle sets and ballistic glass. Delays in obtaining required componentsand raw materials, or increased costs of those components and raw materials,could negatively impact our financial performance and liquidity. To the extentthat the cost of these or other components or raw materials increase further,our results of operations may be adversely affected, perhaps substantially. Inthat regard, a substantial portion of our current contracts are fixed-pricecontracts where we do not have any ability (or, in certain cases, have only alimited ability) to pass on increased costs of components or raw materials tothe customer.

 

Our results of operationsfor the nine months ended September 30, 2007 reflect costs associated with ourcontinued growth, as we expand our manufacturing facilities and capabilities. Thisincludes substantial vehicle and automotive engineering work, manufacturingengineering development, hiring and training work force and the expansion ofour manufacturing, warehousing and administrative facilities, including the newfacility where we intend to produce our Cheetah vehicle. We continue to facechallenges of expanding our managerial capacity, which is required andcontinues to require significant capital and significant commitment of ourmanagerial and other resources. To the extent that these expenditures do notresult in substantially increased net sales, our results of operations andliquidity will suffer. In particular, we have made and will continue to makesubstantial expenditures to equip a new facility to produce our Cheetah vehicle.We have not sold nor do we have any orders for Cheetah vehicles. If we do notreceive orders for our Cheetah vehicle in the amount we anticipate or at all,or if those orders are delayed, our operating results and financial conditionwill be materially adversely affected. See “Risk Factors” in Part II, Item 1Aof this report or if we are unable to achieve anticipated production abilitiesin manufacturing the Cheetah at this new facility.

 

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***Matters relating to our JointVenture with GDLS***

 

As described below, we haveentered into a joint venture with GDLS for the production of our Cougar vehiclefor the MRAP Category I and Category II program requirements. Ourability to successfully deliver vehicles and obtain additional orders underthis program is critical to our success, and any failure to do so would have amaterial adverse effect on us. As of September 30, 2007, Category I andCategory II vehicles order under this program accounted for approximately 96.7%of our backlog.

 

We and GDLS are eachexpected to handle 50% of the manufacturing and other work requirements underthese programs (with the division of work to be based on revenues rather thannumber of vehicles), although the joint venture agreement indicates that workmay not be allocated 50%-50% initially. However, because our MRAP contract withthe U.S. Marine Corps was awarded to the Company and has not yet been novatedto the joint venture, 100% of the revenues from the this contract (includingrevenue from vehicles manufactured by GDLS) have been included as net sales inour financial statements and will continue to be included until such time asthe MRAP contract is novated to the joint venture, at which point we willrecognize revenues only from vehicles subcontracted by the joint venture thatwe actually manufacture. Per the current subcontract agreement with GDLS,included in the Company cost of sales (and until the MRAP contract is novatedwill continue to include) is an amount equal to 100% of revenues from vehiclesmanufactured by GDLS.

 

So long as we continue toinclude 100% of the revenues from vehicles manufactured by GDLS as net salesand an amount equal to 100% of those revenues as cost of sales in our financialstatements, it is expected to cause our cost of sales, expressed as apercentage of our net sales, to increase, and we expect that this increase willbe greater if and to the extent that revenue from vehicles sold by the Companybut manufactured by GDLS through the joint venture increase (although, as notedabove, this adverse effect will cease at such time as the relevant contractsare novated to the joint venture and thereafter our cost of sales and net saleswill no longer reflect revenues from vehicles manufactured by GDLS).Notwithstanding the foregoing accounting treatment, we have not retained any ofthe proceeds from the sale of vehicles manufactured by GDLS under the jointventure agreement.

 

For the nine months endedSeptember 30, 2007, the adverse impact described in the precedingparagraph****was limited, as our net sales includedonly approximately $33.3 million attributable to vehicles manufactured and soldby GDLS pursuant to the joint venture, compared to our total net sales of$441.2 million for that period. However, we expect that revenues from the MRAPcontract will increase substantially in the fourth quarter of 2007 and, as aresult, the adverse impact on cost of sales as a percentage of net sales isexpected to increase, perhaps substantially. If and to the extent that revenuesfrom the joint venture increase, then, until the MRAP contract is novated tothe joint venture, we expect that our cost of sales as a percentage of netsales will continue to increase.

 

*APPLICATION OF CRITICALACCOUNTING POLICIES*

 

Management’sdiscussion 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 

 

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notreadily available from other sources. Actual results may differ materially fromthese estimates under different assumptions or conditions. There were nosignificant changes in the Company’s critical accounting policies during thefirst nine months of 2007

 

*Dividend Policy**:*** We have never declared or paid a cashdividend on our common stock. We currently intend to retain all of ouravailable funds for use in our business and therefore we do not anticipatepaying any cash dividends on our common stock in the foreseeable future. Anyfuture determination to pay cash dividends on our common stock will be at thediscretion of our board of directors and will depend upon our financialcondition, operating results, capital requirements, restrictions contained inour agreements and other factors which our board of directors deems relevant.

 

*Off-Balance Sheet Arrangements**:* As of September 30, 2007, other thanoperating leases, the Company had no material off-balance sheet financingarrangements.

 

*Force Dynamics Joint Venture Agreement*:   On December 15, 2006, the Company entered into a joint ventureagreement, referred to as the Agreement with General Dynamics Land SystemsInc., GDLS, pursuant to which a Delaware limited liability company named ForceDynamics LLC was formed. The Company agreed to work with GDLS to pursue andexecute a contract for the Mine Resistant Ambush Protected, or MRAP, VehicleProgram. Under the Agreement, the MRAP Program is defined to include any andall solicitations and requests for proposals for MRAP production and lifecyclesupport and/or any follow-on work that may be performed related to theMRAP  vehicles. However, the Agreementprovides that the scope of work to be undertaken by the joint venture islimited to the use of the Company’s Cougar 4-wheeled and 6-wheeled armoredvehicles for the MRAP Category I and Category II requirements and does notinclude any other existing or future contracts or programs for any of theCompany’s or GDLS’ other vehicles.  Thejoint venture was amended on March 28, 2007 to include bids for awards underthe Medium Mine Protective Vehicle, or MMPV, Program.  The joint venture submitted a proposal forawards under the MMPV Program.  OnOctober 23, 2007, the joint venture was notified that its proposal would not beaccepted and it would not receive awards under the MMPV program as a result ofthe proposal’s noncompliance to the solicitation.

 

Theboard of the joint venture is comprised of three designees from the Company andthree designees from GDLS. The board of the joint venture has the authority toexecute documents in accordance with the terms of the Agreement. Decisions ofthe joint venture’s board shall be made by majority vote. It is contemplatedthat the Company and GDLS will each handle 50% of the manufacturing and otherwork requirements under the joint venture (with the divisional work to be basedon revenues rather than number of vehicles), although the Agreement indicatesthat the work may not be allocated 50% - 50% initially. Both the Company andGDLS are expected to contribute administrative resources equally to the jointventure. It is expected that, where practicable, Force Dynamics LLC will act asthe prime contractor for joint venture work, and the Company, along with GDLS,shall act as the exclusive subcontractors.

 

Weare currently seeking to have our MRAP contract with the U.S. Marine Corpsassigned or “novated from” Force Protection, Inc. to Force Dynamics LLC, thejoint venture. Because this contract was awarded to the Company and has not yetbeen novated to the joint venture, 100% of the revenues from the MRAP contract(including revenue from vehicles manufactured by GDLS) have been included asnet sales in our financial statements and will continue to be included untilsuch time as the MRAP contract is novated to the joint venture, at which pointwe will recognize revenues only from vehicles subcontracted by the jointventure that we actually manufacture. Per the current subcontract agreementwith GDLS, included in the Company cost of sales  (and until the MRAP contract is novated willcontinue to include) is an amount equal to 100% of revenues from vehicles manufacturedby GDLS. The impact is more fully discussed under Results of Operations, below.

 

*RESULTSOF OPERATIONS—THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED WITH THETHREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006.*

 

**NON-GAAPFINANCIAL MEASURES**

 

Thefollowing financial tables and all related discussion contain certain non-GAAPfinancial measures as defined under SEC rules, such as adjusted net sales andas adjusted gross profit for the three and nine months ended September 30, 

 

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2007.These amounts have been adjusted from GAAP measures to exclude amounts relatedto the Force Dynamics LLC joint venture agreement between General Dynamics LandSystems, Inc., or GDLS, and the Company.

 

Theinitial MRAP contract awarded to the Company, subject to the joint ventureagreement, has not been novated from the Company to Force Dynamics LLC as ofSeptember 30, 2007. Therefore the Company is responsible for and required toaccount for and report all revenues and related costs associated with thiscontracts. This accounting has no effect on overall net income of the Companybut grosses up net sales and costs of goods sold as a result of GDLS’participation in the work orders for the MRAP contract. The Company hasprovided reconciliations of these measures to the GAAP measures which are alsoincluded in the consolidated statement of operations table, as presented below.The Company believes that the disclosed non-GAAP financial measures improvesthe transparency of the Company’s financial reporting and provides a moremeaningful analysis of these measures and their reporting if and when novationof the contracts from Force Protection, Inc. to Force Dynamics LLC isaccomplished.

 

**Financial Condition and Results ofOperations**

 

*Overview.* Forthe quarter ended September 30, 2007, we generated net earnings after taxes of$11,361,571. Net sales for this period were $206,291,488 as reported and$173,021,504 as adjusted (excluding vehicles delivered by GDLS, pursuant to thejoint venture), against which we incurred total cost of goods of $165,678,182as reported and $132,408,198 as adjusted (also excluding vehicles delivered byGDLS) resulting in a gross profit of $40,613,306, or 23.5% as adjusted. Weincurred general and administrative expenses of $20,029,739 which includes acharge of $830,365 for liquidated damages resulting from our suspension of theavailability of a registration statement that we were required to file and keepeffective with the SEC to register shares of common stock that we issued in aprivate placement in December 2006. We incurred research and developmentexpenses in the amount of $2,526,305  resulting in an operating profitof $18,057,262. During thisthree month period, we delivered a total of 312 vehicles consisting of 21Buffalo and 291 Cougars (all variants) (excluding vehicles delivered by GDLS).

 

Thefollowing table sets forth our unaudited summary consolidated statements ofoperations data for the three month and nine month periods ended September 30,2007 and 2006. The only as adjusted data referred to in the following table isnet sales and cost of sales. The figures contained in the “% Change” columnreflect the “2007 as Adjusted” data as a percentage of the “2006 as Reported”data. Please refer to note (1) below. The discussion and analysis that followsshould be read in conjunction with our consolidated financial statements andrelated notes included elsewhere in this report.

 
| ** **                                                    | ** ** | **For the three months ended September 30,** | ** **  |
|---------------------------------------------------------------|------------|----------------------------------------------------------------------------|-------------|
| ** **                                                    | ** ** | **(unaudited)**                                                            | ** **  |
| ** **                                                    | ** ** | **2007 as   Reported**                                           | ** **  | **Less Vehicles  Delivered by  GDLS** | ** ** | **2007 as  Adjusted (1)** | ** ** | **2006 as Reported** | ** ** | **Difference(1)** | ** ** | **%  Change(1)** | ** ** |
| ** **                                                    | ** ** | ** **                                                                 | ** **  | ** ** | ** ** | ** ** | ** ** | **(Restated)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Sales                                                     |       | $                                                                          | 206,291,488 |   | $ | (33,269,984 | ) | $ | 173,021,504 |   | $ | 42,160,858 |   | $ | 130,860,646 |   | 310 |   |
| Cost of sales                                                 |       | 165,678,182                                                                |        | (33,269,984 | ) | 132,408,198 |   | 34,242,350 |   | 98,165,848 |   | 287 |   |
| Gross profit                                                  |       | 40,613,306                                                                 |        | — |   | 40,613,306 |   | 7,918,508 |   | 32,694,798 |   | 413 |   |
|                                                          |       |                                                                       |        |   |   |   |   |   |   |   |   |   |   |
| General and administrative expense                            |       | 20,029,739                                                                 |        |   |   | 20,029,739 |   | 6,715,419 |   | 13,314,320 |   | 198 |   |
| Research and development expense                              |       | 2,526,305                                                                  |        |   |   | 2,526,305 |   | 545,717 |   | 1,980,588 |   | 363 |   |
|                                                          |       |                                                                       |        |   |   |   |   |   |   |   |   |   |   |
| Operating profit (loss)                                       |       | 18,057,262                                                                 |        |   |   | 18,057,262 |   | 657,372 |   | 17,399,890 |   | N/M |   |
| Other income                                                  |       | 594,143                                                                    |        |   |   | 594,143 |   | 121,041 |   | 473,102 |   | 391 |   |
| Interest expense                                              |       | (61,979                                                                    | )           |   |   | (61,979 | ) | (110,493 | ) | 48,514 |   | (44 | ) |
| Net earnings/(loss) before tax                                |       | 18,589,426                                                                 |        |   |   | 18,589,426 |   | 667,920 |   | 17,921,506 |   | N/M |   |
|                                                          |       |                                                                       |        |   |   |   |   |   |   |   |   |   |   |
| Tax expense                                                   |       | 7,227,855                                                                  |        |   |   | 7,227,855 |   | — |   | 7,227,855 |   | — |   |
|                                                          |       |                                                                       |        |   |   |   |   |   |   |   |   |   |   |
| Net earnings/(loss) after tax                                 |       | $                                                                          | 11,361,571  |   |   |   | $ | 11,361,571 |   | $ | 667,920 |   | $ | 10,693,651 |   | N/M |   |
| Series D convertible preferred stock  dividends and accretion |       | —                                                                     |        |   |   | — |   | 427,977 |   | (427,977 | ) | 100 |   |
| Net earning available to common  shareholders                 |       | $                                                                          | 11,361,571  |   |   |   | $ | 11,361,571 |   | $ | 239,943 |   | $ | 11,121,628 |   | N/M |   |
|                                                               |            |                                                                            |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

N/M:  not meaningful

 

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| ** **                                                    | ** ** | **For the nine months ended September 30,** | ** **  |
|---------------------------------------------------------------|------------|---------------------------------------------------------------------------|-------------|
| ** **                                                    | ** ** | **(unaudited)**                                                           | ** **  |
| ** **                                                    | ** ** | **2007 as  Reported**                                                | ** **  | **Less Vehicles  Delivered by GDLS** | ** ** | **2007 as  Adjusted (1)** | ** ** | **2006 as  Reported** | ** ** | **Difference (1)** | ** ** | **%  Change(1)** | ** ** |
| ** **                                                    | ** ** | ** **                                                                | ** **  | ** ** | ** ** | ** ** | ** ** | **(Restated)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Sales                                                     |       | $                                                                         | 441,151,894 |   | $ | (33,269,984 | ) | $ | 407,881,910 |   | $ | 133,037,980 |   | $ | 274,843,930 |   | 207 |   |
| Cost of sales                                                 |       | 345,252,174                                                               |        | (33,269,984 | ) | 311,982,190 |   | 108,324,917 |   | 203,657,273 |   | 188 |   |
| Gross profit                                                  |       | 95,899,720                                                                |        | — |   | 95,899,720 |   | 24,713,063 |   | 71,186,657 |   | 288 |   |
|                                                          |       |                                                                      |        |   |   |   |   |   |   |   |   |   |   |
| General and administrative expense                            |       | 50,642,242                                                                |        |   |   | 50,642,242 |   | 20,421,207 |   | 30,221,035 |   | 148 |   |
| Research and development expense                              |       | 10,673,638                                                                |        |   |   | 10,673,638 |   | 1,850,522 |   | 8,823,116 |   | 477 |   |
|                                                          |       |                                                                      |        |   |   |   |   |   |   |   |   |   |   |
| Operating profit (loss)                                       |       | 34,583,840                                                                |        |   |   | 34,583,840 |   | 2,441,334 |   | 32,142,506 |   | N/M |   |
| Other income                                                  |       | 3,488,660                                                                 |        |   |   | 3,488,660 |   | 168,963 |   | 3,319,697 |   | N/M |   |
|                                                          |       |                                                                      |        |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                              |       | (141,570                                                                  | )           |   |   | (141,570 | ) | (1,736,802 | ) | 1,595,232 |   | (92 | ) |
|                                                          |       |                                                                      |        |   |   |   |   |   |   |   |   |   |   |
| Net earnings/(loss) before tax                                |       | 37,930,930                                                                |        |   |   | 37,930,930 |   | 873,495 |   | 37,057,435 |   | N/M |   |
|                                                          |       |                                                                      |        |   |   |   |   |   |   |   |   |   |   |
| Tax expense                                                   |       | 14,413,753                                                                |        |   |   | 14,413,753 |   | — |   | 14,413,753 |   |   |   |
|                                                          |       |                                                                      |        |   |   |   |   |   |   |   |   |   |   |
| Net earnings/(loss) after tax                                 |       | $                                                                         | 23,517,177  |   |   |   | $ | 23,517,177 |   | $ | 873,495 |   | $ | 22,643,682 |   | N/M |   |
| Series D preferred convertible stock  dividends and accretion |       | —                                                                    |        |   |   | — |   | 1,622,819 |   | (1,622,819 | ) | 100 |   |
| Net earning available to common  shareholders                 |       | $                                                                         | 23,517,177  |   |   |   | $ | 23,517,177 |   | $ | (749,324 | ) | $ | 24,266,501 |   | N/M |   |
|                                                               |            |                                                                           |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

N/M:  notmeaningful

 

----

**(1):**TheCompany management’s uses the financial measures “2007 as Adjusted” and “Difference”to supplement its consolidated financial statements, which are presented inaccordance with accounting principles generally accepted in the United States,or GAAP. The figures contained in the “2007 as adjusted” and “Difference”columns are not presented in accordance with GAAP as these contracts do notinclude the number of vehicles delivered by GDLS pursuant to the joint ventureagreement with GDLS. The figures contained in the “% Change” column reflect the“2007 as Adjusted” data as a percentage of the “2006 as Reported” data. Asrequired by GAAP, the Company records in its consolidated financial statementsall of vehicles delivered pursuant to its joint venture agreement with GDLS,including the vehicles delivered by GDLS. The initial MRAP contract awarded tothe Company, subject to the joint venture agreement, has not been novated fromthe Company to Force Dynamics LLC as of September 30, 2007. Therefore theCompany is responsible for and required to account for and report all revenuesand related costs 

 

31

----

 

associatedwith those contracts. This accounting has no effect on overall net income ofthe Company but grosses up net sales and costs of goods sold as a result ofGDLS’ participation through these work orders. The Company has providedreconciliations of these measures to the GAAP measures which are also includedin the consolidated statement of operations, as presented above. The Company’smanagement believes that the disclosed non-GAAP financial measures improves thetransparency of the Company’s financial reporting and provides a moremeaningful analysis of these measures and their reporting if and when novationof the contracts from Force Protection, Inc. to Force Dynamics LLC isaccomplished. The presentation of non-GAAP “2007 as Adjusted” and “Difference”figures are not meant to be a substitute for “2007 as Reported” and “2006 asReported” presented in accordance with GAAP, but rather should be evaluated inconjunction with the “2007 as Reported” and “2006 as Reported” numbers  The Company’s definition of “2007 as Adjusted”and/or “Difference” may differ from similar measures used by other companiesand may differ from period to period.

 
| ** **                          | ** ** | **Three months ended September 30,** | ** **  | **Nine months ended September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|-------------|---------------------------------------------------------|------------|
| **Net Sales**                  | ** ** | **2007**                                                 | ** **  | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **As Reported**                                     | ** **  | **(Restated)**                                          | ** ** | **As Reported** | ** ** | **(Restated)** | ** ** |
| Net Sales                           |       | $                                                        | 206,291,488 |                                                    | $          | 42,160,858 |   | $ | 441,151,894 |   | $ | 133,037,980 |   |
| % change compared with prior period |       | 389.3                                                    | %           |                                                    |       | 231.6 | % |   |   |
|                                     |            |                                                          |             |                                                         |            |  |  |  |  |  |  |  |  |

 
| ** **                          | ** ** | **As Adjusted** | ** **  | **(Restated)** | ** ** | **As Adjusted** | ** ** | **(Restated)** | ** **  |
|-------------------------------------|------------|----------------------|-------------|----------------|------------|----------------------|------------|----------------|-------------|
| Net Sales                           |       | $                    | 173,021,504 |           | $          | 42,160,858           |       | $              | 407,881,910 |   | $ | 133,037,980 |   |
| % change compared with prior period |       | 310.4                | %           |           |       | 206.6                | %          |           |        |
|                                     |            |                      |             |                |            |                      |            |                |             |  |  |  |  |

 

Theincrease in net sales as reported and as adjusted in the three months and ninemonths ended September 30, 2007 compared with the three months and nine monthsended September 30, 2006 is attributable to both an increase in volume ofvehicle deliveries to the U.S. government under our government contracts aswell as the mix of vehicles delivered as set forth in the following table. Thepercentages in the following table reflect the increase in the number of thevehicles sold in the three and nine months ended September 30, 2007 as reportedand as adjusted over the respective numbers of vehicles sold in the comparableperiods in 2006 based on revenues.

 
| ** **                     | ** ** | **Three months ended September 30, 2007** | ** ** | **Nine months ended September 30, 2007** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                     | ** ** | **As Reported**                                               | ** ** | **As Reported**                                              | ** ** |
| Buffalo vehicles               |       | 26.9                                                               | %          | 18.7                                                              | %          |
| Cougar vehicles (all variants) |       | 340.0                                                              | %          | 195.2                                                             | %          |
| Spares/Logistics               |       | 22.4                                                               | %          | 17.7                                                              | %          |
| Total                          |       | 389.3                                                              | %          | 231.6                                                             | %          |

 
| ** **                     | ** ** | **Three months ended September 30, 2007** | ** ** | **Nine months ended September 30, 2007** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                     | ** ** | **As Adjusted**                                               | ** ** | **As Adjusted**                                              | ** ** |
| Buffalo vehicles               |       | 26.9                                                               | %          | 18.7                                                              | %          |
| Cougar vehicles (all variants) |       | 261.1                                                              | %          | 170.2                                                             | %          |
| Spares/Logistics               |       | 22.4                                                               | %          | 17.7                                                              | %          |
| Total                          |       | 310.4                                                              | %          | 206.6                                                             | %          |

 

Netsales for the three months and nine months ended September 30, 2007 and 2006 iscomprised of:

 
| ** **                  | ** ** | **Three months ended September 30,** | ** **  | **Nine months ended September 30,** | ** ** |
|-----------------------------|------------|----------------------------------------------------------|-------------|---------------------------------------------------------|------------|
| ** **                  | ** ** | **2007**                                                 | ** **  | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **As Reported**                                     | ** **  | **(Restated)**                                          | ** ** | **As Reported** | ** ** | **(Restated)** | ** ** |
| Vehicles                    |       | $                                                        | 193,385,480 |                                                    | $          | 38,712,147 |   | $ | 404,487,130 |   | $ | 119,931,643 |   |
| Spares, Logistics and other |       | 12,906,008                                               |        | 3,448,711                                               |       | 36,664,764 |   | 13,106,337 |   |
| Total                       |       | $                                                        | 206,291,488 |                                                    | $          | 42,160,858 |   | $ | 441,151,894 |   | $ | 133,037,980 |   |

 
| ** **                  | ** ** | **Three months ended September 30** | ** **  | **Nine months ended September 30,** | ** ** |
|-----------------------------|------------|---------------------------------------------------------|-------------|---------------------------------------------------------|------------|
| ** **                  | ** ** | **2007**                                                | ** **  | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **As Adjusted**                                    | ** **  | **(Restated)**                                          | ** ** | **As Adjusted** | ** ** | **(Restated)** | ** ** |
| Vehicles                    |       | $                                                       | 160,115,496 |                                                    | $          | 38,712,147 |   | $ | 371,217,146 |   | $ | 119,931,643 |   |
| Spares, Logistics and other |       | 12,906,008                                              |        | 3,448,711                                               |       | 36,664,764 |   | 13,106,337 |   |
| Total                       |       | $                                                       | 173,021,504 |                                                    | $          | 42,160,858 |   | $ | 407,881,910 |   | $ | 133,037,980 |   |

 

32

----

 
| ** **                  | ** ** | **Three months ended September 30** | ** **  | **Nine months ended September 30,** | ** ** |
|-----------------------------|------------|---------------------------------------------------------|-------------|---------------------------------------------------------|------------|
| **Cost of sales** | ** ** | **2007**                                                | ** **  | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **As Reported**                                    | ** **  | **(Restated)**                                          | ** ** | **As Reported** | ** ** | **(Restated)** | ** ** |
| Cost of sales               |       | $                                                       | 165,678,182 |                                                    | $          | 34,242,350 |   | $ | 345,252,174 |   | $ | 108,324,917 |   |
| Gross Margin %              |       | 19.7                                                    | %           | 18.8                                                    | %          | 21.7 | % | 18.6 | % |
|                             |            |                                                         |             |                                                         |            |  |  |  |  |  |  |  |  |

 
| ** **                  | ** ** | **Three months ended September 30** | ** **  | **Nine months ended September 30,** | ** ** |
|-----------------------------|------------|---------------------------------------------------------|-------------|---------------------------------------------------------|------------|
| **Cost of sales** | ** ** | **2007**                                                | ** **  | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **As Adjusted**                                    | ** **  | **(Restated)**                                          | ** ** | **As Adjusted** | ** ** | **(Restated)** | ** ** |
| Cost of sales               |       | $                                                       | 132,408,198 |                                                    | $          | 34,242,350 |   | $ | 311,982,190 |   | $ | 108,324,917 |   |
| Gross Margin %              |       | 23.5                                                    | %           | 18.8                                                    | %          | 23.5 | % | 18.6 | % |
|                             |            |                                                         |             |                                                         |            |  |  |  |  |  |  |  |  |

 

Adjustedcost of sales for the three and nine months ended September 30, 2007 (excludingcost of sales attributed to vehicles delivered by GDLS pursuant to our jointventure) increased by 286.7% and 188.0% respectively, (on a GAAP basis, 383.8%and 218.7% respectively) over the corresponding periods of 2006, due primarilyto increased sales of our vehicles and the corresponding increase in direct andindirect labor and material costs associated with manufacturing activities. Adjusted gross margins increased by 4.7 percentage points (on a GAAPbasis 0.9%) in the three months ended September 30, 2007 compared with thethree months ended September 30, 2006 and by 4.9 percentage points (on a GAAPbasis 3.6%) for nine months ended September 30, 2007 compared with the ninemonths ended September 30, 2006 due primarily to improved material and laborcost performance as a result of implementation of new and improvedmanufacturing processes and leveraging of fixed costs over an increasedproduction volume from the previous year. We define gross margin as cost ofsales divided by net sales.

 
| ** **                                             | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **General and Administrative Expenses** | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                             | ** ** | **As Reported**                                     | ** ** | **(Restated)**                                          | ** ** | **As Reported** | ** ** | **(Restated)** | ** ** |
| General and administrative expenses                    |       | $                                                        | 20,029,739 |                                                    | $          | 6,715,419 |   | $ | 50,642,242 |   | $ | 20,421,207 |   |
| Percent of net sales                                   |       | 11.6                                                     | %          | 15.9                                                    | %          | 12.4 | % | 15.3 | % |
|                                                        |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

Generaland administrative expenses as a percentage of adjusted net sales for the threeand nine month periods ended September 30, 2007 were 11.6% and 12.4%respectively (on a GAAP basis, 9.7% and 11.4%, respectively), reflecting adecrease of 4.3 percentage points and 2.9 percentage points compared to generaland administrative expenses as a percentage of as reported net sales for thecomparable periods in 2006 (on a GAAP basis, 6.2% and 3.9%, respectively),. Thesedecreases were due primarily to the fact that the percentage increase in theCompany’s as adjusted net sales for the 2007 periods over as reported net salesfor the corresponding periods in 2006 were substantially greater than thepercentage increases in general and administrative expenses over the sameperiods, partially offset by a liquidated damage charge of $830,365 in thethird quarter of 2007. See note 12 of our consolidated financial statements forthe nine months ended September 30, 2007 included elsewhere in this report.

 
| ** **                                          | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **Research and Development Expense** | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **As Reported**                                     | ** ** | **(Restated)**                                          | ** ** | **As Reported** | ** ** | **(Restated)** | ** ** |
| Research and development expenses                   |       | $                                                        | 2,526,305  |                                                    | $          | 545,717 |   | $ | 10,673,638 |   | 1,850,522 |   |
| Percent of sales                                    |       | 1.5                                                      | %          | 1.3                                                     | %          | 2.6 | % | 1.4 | % |
|                                                     |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |

 

33

----

 

Researchand development expense for the three and nine months ended September 30, 2007increased by $1,980,588 and $8,823,116 over the corresponding periods in 2006due primarily to increased expenditures related to the development of theCheetah vehicle. The third quarter of 2007 research and development expensesare down from the first quarter of 2007 due to the additional cost of materialprocurement for the Cheetah development in the first quarter of 2007.

 
| ** **                          | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **Other Income**               | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **As Reported**                                     | ** ** | **(Restated)**                                          | ** ** | **As Reported** | ** ** | **(Restated)** | ** ** |
| Other income                        |       | $                                                        | 594,143    |                                                    | $          | 121,041 |   | $ | 3,488,660 |   | $ | 168,963 |   |
|                                |       |                                                     |       |                                                    |       |   |   |   |   |
| % change compared with prior period |       | 390.9                                                    | %          |                                                    |       | 1964.7 | % |   |   |
|                                     |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

Otherincome increased in the three months and nine months ended September 30, 2007 compared with the three months andnine months ended September 30, 2006 due primarily to the interest incomeearned on investment of the funds received from our December 2006 privateplacement of common stock.

 
| ** **                | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **Interest Expense** | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                | ** ** | **As Reported**                                     | ** ** | **(Restated)**                                          | ** ** | **As Reported** | ** ** | **(Restated)** | ** ** |
| Interest expense          |       | $                                                        | 61,979     |                                                    | $          | 110,493 |   | $ | 141,570 |   | $ | 1,736,802 |   |
|                           |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

Interestexpense decreased for the three and nine months ended September 30, 2007 comparedwith the three and  nine months endedSeptember 30, 2006 due to the repayment of a short term loan in August 2006 andthe termination of an accounts receivable factoring agreement in June 2006,facilitated by the sale of common stock through private placements.

 
| ** **           | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|----------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **Tax Expense** | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **           | ** ** | **As Reported**                                     | ** ** | **(Restated)**                                          | ** ** | **As Reported** | ** ** | **(Restated)** | ** ** |
| Tax expense          |       | $                                                        | 7,227,855  |                                                    | $          | 0 |   | $ | 14,413,753 |   | $ | 0 |   |
| Effective tax rate   |       | 38.9                                                     | %          |                                                    |       | 38.0 | % |   |   |
|                      |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

We incurred tax expense inboth periods in 2007 as a result of the increase in our net sales andprofitability compared to 2006.

 
| ** **                                                            | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **Preferred Stock  Dividends and Accretion** | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                            | ** ** | **As Reported**                                     | ** ** | **(Restated)**                                          | ** ** | **As Reported** | ** ** | **(Restated)** | ** ** |
| Preferred stock dividends and accretion                               |       | —                                                   |       | $                                                       | 427, 977   |   | — |   | 1,622,819 |   |
|                                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
|                                                                       |            |                                                          |            |                                                         |            |  |  |  |  |  |

 

 Thereare no preferred stock dividends or accretion of preferred stock in 2007 as a resultof the conversion of all preferred stock to common stock by year end 2006.

 
| ** **                                              | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **Net Income**                                     | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                              | ** ** | **As Reported**                                     | ** ** | **(Restated)**                                          | ** ** | **As Reported** | ** ** | **(Restated)** | ** ** |
| Net earnings (loss) available to common  shareholders   |       | $                                                        | 11,361,571 |                                                    | $          | 239,943 |   | $ | 23,517,177 |   | $ | (749,324 | ) |
| Earnings (loss) per share of common  stock—diluted |       | $                                                        | 0.16       |                                                    | $          | 0.00 |   | $ | 0.34 |   | $ | (0.02 | ) |

 

34

----

 

Netearning (loss) available to common shareholders for the three and nine monthperiods ended September 30, 2007 increased over the comparable periods in 2006due primarily to increased net sales and, to a lesser extent, increased otherincome, lower interest expense and the elimination of preferred stock dividendsand accretion, offset in part by a substantial increase in tax expense.

 

Dilutedearnings per share of common stock increased by $0.16 per share in the thirdquarter of 2007 compared with the third quarter of 2006 and by $0.36 per sharefor the nine months ended September 30, 2007 compared to the nine months endedSeptember 30, 2006.

 

***Backlog***

 

Our backlog reflects thenumber of vehicles for which we have received orders as of the measurement date.The calculation of backlog is subject to uncertainties and estimates,and there can be no assurance that we will deliver or receive payment for thevehicles we have included in our backlog. Likewise, our estimate of a contract’sor order’s potential value is subject to similar uncertainties and estimatesand there can be no assurance that the actual revenues we realize from anycontract or order will not be substantially less than our estimates. Inaddition, we may never generate vehicle sales or revenues from some of thecontracts and orders that are included in our backlog or described below. Theactual sales of vehicles and receipt of revenues from orders included inbacklog may never occur or may change because a program’s schedule could changeor the program could be cancelled or a program could be reduced, modified orterminated.

 

*Recent Orders*. The following summarizes certain ordersthat we received from January 1, 2007 through September 30, 2007. As noted inthe foregoing discussion, the value of these contracts is estimated and whetheror not we will in fact deliver or receive payment for these vehicles is subjectto a number of uncertainties and any payments we do receive may be differentfrom the estimated amounts set forth below. In addition, some of the vehiclesmanufactured to fill these orders will be produced pursuant to  our joint venture with GDLS described aboveand GDLS will therefore be entitled to receive all of the proceeds from salesof the vehicles that it manufactures pursuant to the joint venture.

 

On January 11, 2007, theU.S. Marine Corps awarded us a fixed price contract for 15 Cougar JERRVs. Thevalue of this contract is approximately $9.4 million.

 

On January 26, 2007, we wereone of several companies that the U.S. Marine Corps awarded an IndefiniteDelivery, Indefinite Quantity, or ID/IQ, contract for the MRAP program. Thiscontract 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. However, the U.S.Marine Corps is not required to order any additional vehicles under thiscontract and, as a result, we cannot give you any assurance as to the actualnumber of vehicles that may be ordered or whether those orders will be awardedto us. Some of the vehicles that may be ordered from us under this contractwill be manufactured pursuant to our joint venture with GDLS. On January 26,2007, the U.S. Marine Corps issued a delivery order to us for four MRAPvehicles to be used in survivability and mobility testing.

 

On February 14, 2007, weannounced that we had received approximately $67.4 million contract award fromthe U.S. Marine Corps to produce 125 vehicles for its MRAP program. The workunder these orders will be performed through our joint venture with GDLS, andGDLS will therefore be entitled to approximately 50% of the revenue under thiscontract.

 

On March 9, 2007, the U.S.Marine Corps issued a delivery order to us for 19 Buffalo mine-protectedvehicles for a value of approximately $16.2 million.

 

35

----

 

On March 14, 2007, theCougar Mastiff Protected Patrol Vehicle, or the Mastiff PPV, contract with theBritish Ministry of Defence was modified to add 22 additional Mastiff PPV’s,increasing the total number of Mastiff PPV’s to be delivered to 108 vehicles.

 

On April 18, 2007, the U. S.Marine Corps announced approximately $6.9 million contract awarded to us toprovide sustainment integrated logistics support for the U.S. Marine Corps’MRAP program.

 

On April 24, 2007, the U. S.Marine Corps released a delivery order to us****for772 Category I Cougar 4-wheeled and 228 Category II Cougar 6-wheeled vehiclesfor the U.S. Marine Corps’ MRAP program with a value of approximately $490million. The work under these orders will be performed by our joint venturewith GDLS, and GDLS will therefore be entitled to approximately 50% of therevenue under this contract.

 

On May 3, 2007, we receivedan $8.9 million contract to produce Buffalo and Cougar mine-protected vehiclesfor the Canadian Expeditionary Force Command. The U.S. Marine Corps SystemsCommand will administer the contract under a foreign military sales agreement.

 

On May 30, 2007, the U.S. MarineCorps awarded us a delivery order for 14 Buffalo vehicles for a value ofapproximately $12.0 million.

 

On June 20, 2007, we wereawarded a delivery order by the U.S. Marine Corps for 455 MRAP vehicles, with avalue of approximately $221 million. This order calls for 395 Category I Cougarfour-wheeled and 60 Category II six-wheeled vehicles, which will be used bydifferent branches of the United States military. The work under this orderwill be performed through our joint venture with GDLS, and GDLS will thereforebe entitled to approximately 50% of the revenue under this contract.

 

On August 1, 2007 we wereawarded work totaling approximately $5.3 million to produce more than 40articulating interrogation arms for the Iraqi Light Armored Vehicle, or ILAV. Aspart of this award, a total of 22 additional new ILAV vehicles are also to beproduced.

 

On August 10, 2007, we wereawarded a delivery order by the U.S. Marine Corps for 125 Cougar Category I andII vehicles for MRAP Program, for a total consideration of approximately $69million. The work under this order will be performed through our joint venturewith GDLS, and GDLS will therefore be entitled to approximately 50% of therevenue under this contract.

 

The following table setsforth our vehicle deliveries for the respective periods shown below as well asour total backlog as of September 30, 2007**.**The backlogshown in the following table is “funded” backlog, meaning that it reflectsvehicles for which we have received orders and for which funding has beenappropriated and authorized for expenditure by the applicable agency.

 

**Vehicle Deliveries and Backlog**

 
| ** **            | ** ** | **Three Months Ended** | ** ** | ** **              |
|-----------------------|------------|----------------------------------|------------|-------------------------|
| ** **            | ** ** | **March  31, 2006**         | ** ** | **June 30,  2006** | ** ** | **Sept 30,  2006** | ** ** | **Dec 31,  2006** | ** ** | **March  31, 2007** | ** ** | **June 30,  2007** | ** ** | **Sept 30,  2007 (3)** | ** ** | **Funded  Backlog (1)  Sept 30,  2007** | ** ** |
| Buffalo               |       | 3                                |       | 5                       |   | 3 |   | 15 |   | 18 |   | 17 |   | 21 |   | 47 |   |
| Cougar (all variants) |       | 45                               |       | 59                      |   | 55 |   | 100 |   | 181 |   | 212 |   | 353 |   | 1,367 |   |
| Total                 |       | 48                               |       | 64                      |   | 58 |   | 115 |   | 199 |   | 229 |   | 374 |   | 1,414 | (2) |

 

----

(1)  This does not include any post September 30,2007 awards. See note 18, Subsequent Events of our consolidated financialstatements included elsewhere in this report.

 

(2)  Of the 1,414 vehicles  included in the Company’s backlog as ofSeptember 30, 2007, 706 vehicles are expected to be manufactured and deliveredby the Company while GDLS is expected to manufacture and deliver the remainingvehicles pursuant to the Company’s joint venture with GDLS.

 

36

----

 

(3)Included in the quarter ended September 30, 2007 are 62 vehicles produced byGDLS under the joint venture.

 

**Trends, Risks And Uncertainties**

 

Theresults of our operations for the nine months ended September 30, 2007 reflectthe costs associated with continued expansion of our manufacturing facility andcapabilities to meet the expected demand for our vehicles for potential futureand follow-on orders. This included substantial vehicle and automotiveengineering work, manufacturing engineering development, hiring and trainingworkforce 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 expectto achieve long term benefits.

 

Inthe past, we have encountered some difficulties in securing the necessarycomponents for our vehicles, including armor steel, truck chassis, axle setsand ballistic glass. To mitigate this risk, we have identified multiple vendorsfor certain components. Additionally, we have implemented a program of advancepurchasing and stockpiling certain critical materials. For example, wecurrently have pre-purchased steel and truck parts to ensure availability ofmaterial needed for current and some potential future orders. While we do notcurrently expect the potential non-availability of parts or raw materials tomaterially affect our operations, there is a possibility that delays orincreased costs could negatively impact our financial performance ifcircumstances change. Apart from the foregoing, the main uncertainty about ourfuture operations is whether we will continue to receive additional orders forour vehicles. It is impossible to predict with certainty whether such futureorders will be placed by existing or new customers. If we do not receive futureorders, it is unlikely that our business will continue. However, we believe ourvehicles provide proven blast and ballistic protection, and that for so long asthere is a risk of bodily harm to service personnel from explosive blasts,there will be a market for our products. We believe that a number of recentmarket surveys and requests for information issued by the U.S. military forarmored vehicles with characteristics substantially similar to ours, supportthis view.

 

**Liquidity And Capital Resources**

 

Ourcash flows from operating, investing and financing activities for the ninemonths ended September 30, 2007 and 2006, are summarized as follows:

 
| ** **                                            | ** ** | **For the nine months ended September 30,** | ** **  |
|-------------------------------------------------------|------------|---------------------------------------------------------------------------|-------------|
| ** **                                            | ** ** | **2007**                                                                  | ** **  | **2006** | ** ** |
| ** **                                            | ** ** | ** **                                                                | ** **  | **(As Restated)** | ** ** |
| Cash provided by (used for):                          |       |                                                                      |        |   |   |
| Operating activities                                  |       | $                                                                         | (40,903,673 | ) | $ | (8,338,366 | ) |
| Investing activities                                  |       | (44,353,869                                                               | )           | (4,371,788 | ) |
| Financing activities                                  |       | 1,212,170                                                                 |        | 38,240,905 |   |
| Net increase (decrease) in cash and cash  equivalents |       | $                                                                         | (84,045,372 | ) | $ | 25,530,751 |   |

 

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Cashused by operating activities was $40,903,673 during the first nine months of2007 compared to $8,338,366 the first nine months of 2006. This change wasprimarily due to increased inventory as a result of higher volumes, increasedpast due receivables of $45 million on the MRAP program due to contract billingand customer funding issues, and reduced performance based payments, partiallyoffset by increased earnings and higher accounts payable.

 

Cashused for investing activities was $44,353,869 during the first nine months of2007 compared to $4,371,788 the first nine months of 2006. This change was dueprimarily to the purchase of a research and test facility (approximately $5.5 million),a facility to expand development and logistics training activities (approximately$4.1 million), warehousing facilities (approximately $4.6 million),manufacturing equipment and infrastructure costs (approximately $21.4 million) tosupport planned growth of the business and the purchase of our newmanufacturing facility for production of our Cheetah vehicle in Roxboro, NC.(approximately $5.5 million).

 

Cashprovided by financing activities was $1,212,170 during the first nine months of2007 compared to $38,240,905 the first nine months of 2006. This change wasprimarily due to the issuance of common stock in a private placement in July2006.

 

Capitalrequired for costs associated with the expansion of our manufacturing capabilityand capacity is estimated to be up to $45 million in the fourth quarter of2007.

 

Theamount of capital that we will require depends on several factors, includingwithout limitation, the extent and timing of sales of our products, inventorycosts, costs of raw materials and components, labor costs, costs of improvingour financial and accounting systems, the timing and costs associated with the expansion of our manufacturing,development, engineering and customer support capabilities, the timing and costof our product development and enhancement activities and our operating results.We currently estimate that the cash flow that we anticipate will be generatedby our business, will be sufficient to meet our presently budgeted capitalexpenditures and our other presently anticipated cash needs for the remainderof 2007. We expect that we will require additional sources of capital afterthat time****and, to the extent that our cash needsare greater than we anticipate, we may require additional capital before thattime. We will therefore be required to obtain additional sources of capital,which may include borrowings or the issuance of debt or equity securities,including common stock, and there can be no assurance that such financing willbe available to us when we need it or, if available, that the terms of any suchfinancing will be satisfactory to us and not dilutive to our shareholders. Anyfailure to obtain necessary capital as and when required could have a material adverseeffect on our business, prospects, results of operations and financialconditions.

 

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OnJuly 20, 2007, we entered into a $50 million revolving credit agreement withWachovia Bank, National Association. Borrowings under the credit agreement bearinterest at a floating rate per annum equal to the 1-month LIBOR rate plus 2.0%.All amounts payable under this credit agreement were originally due and payableon September 30, 2007. However, we entered into a modification agreement withthe lender which extended the maturity of the credit agreement to January 9,2008. Amounts payable under the credit agreement are secured by an interest inall of our personal property and fixtures. As of September 30, 2007, noborrowings were outstanding under the credit agreement.

 

*Inflation and Material Cost*:  We do not believe that inflation hashad any significant impact on our net operating results for the years endedDecember 31, 2004, 2005 and 2006 and the nine months ended September 30, 2007. However,if the price of steel or other raw materials or components increases, ourproduct expenses will increase. Because some of our current contracts are fixed-price contracts, we will not be ableto pass on any such increase in costs to our customers under such contracts,which would adversely affect our operating results.

 

## **Item 3.   Quantitative andQualitative Disclosures About Market Risk.**

##  

Weare exposed to market risk from changes in commodity prices. If the price ofcommodities increases significantly, the cost of our products could increase.It is unlikely we will be able to pass on this cost under our currentcontracts. As a result, if the cost of our raw materials increases, our resultsof operations will be adversely affected.

 

ForeignCurrency

 

Themajority of our business is denominated in U.S. dollars and as such, movementin the foreign currency markets will have a minimal direct impact on ourbusiness.

 

InterestRates

 

Wehave a money market account where excess cash is invested at LIBOR minus 40basis points.

 

Ourcurrent equipment financing is at a fixed rate while our bank line of creditentered into on July 20, 2007 as noted above in “Management’s Discussionand Analysis of Financial Condition and Results of Operations - Liquidity andResources” in Part I, Item 2 of this report is at a floating rate. As wedid not have any borrowings under this line of credit as of September 30, 2007,we are not currently directly at risk of interest rate fluctuations. Interestrate risk may become a more significant issue for us, as our financing needschange in the future.

 

Todate, we have not used any derivative financial instruments for the purpose ofreducing our exposure to adverse fluctuations in interest rates, foreign currencyexchange, or commodity prices. We are not a party to leveraged derivatives nordo we hold or issue financial investments for speculative purposes.

 

 

**Item 4.   Controls andProcedures.**

 

Disclosure Controls and Procedures

 

Our management evaluated, with the participation of our Chief ExecutiveOfficer and our Chief Financial Officer, the effectiveness of our disclosurecontrols and procedures as of the end of the period covered by this quarterlyreport on Form 10-Q. Based on this evaluation, and in light of the materialweaknesses in our internal control over financial reporting that are discussedin our Annual Report on Form 10-K for the fiscal year ended December 31, 2006,as amended, our Chief Executive Officer and our Chief Financial Officer haveconcluded that our disclosure controls and procedures, including internalcontrol over financial reporting, were not effective to ensure that informationwe are required to disclose in reports that we file or submit under theSecurities Exchange Act of 1934, as amended (i) is recorded, processed,summarized, and reported within the time periods specified in Securities andExchange Commission 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 intended to be designedto provide reasonable assurance that such information is accumulated andcommunicated to our management. Our management concluded so, in part, because(1) we did not maintain effective policies and procedures related to theaccounting for specific equity issuances, including accounting for stock-basedcompensation in accordance with statement of Financial Accounting Standard (“SFAS”)No. 123, *Share-Based Payment*, and accounting forconvertible and redeemable preferred stock and warrants. This deficiencyresulted in errors in the Company’s accounting and disclosures for these equityissuances and related earnings per share calculations. (2) We did not maintaineffective controls to ensure the accuracy of disclosures in our financialstatements and classification of certain financial transactions in thefinancial statements. Specifically, we failed to classify the allowance forcontractual adjustments as a reduction in receivables and had incorret orinadequate disclosures in financial statement disclosures related to thenon-recurring warranty, statement of shareholder’s equity, deferred tax assets,liabilities and related income tax expense, deferred tax assets, liabilitiesand related income tax expense, contingency losses, discontinued operations,receivables and factoring accounts, debt and the statement of cash flows in ourfinancial statements. (3) As discussed below in changes in internal controls,during the third quarter, we have also encountered turnover in financialreporting personnel and implementation issues of our new Enterprise ResourcePlanning (“ERP”) computer system.

 

Our disclosure controls and procedures include components of ourinternal control over financial reporting. In designing and evaluating ourdisclosure controls and procedures.

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management recognizes that any controls, no matter how well designedand operated, can provide only reasonable, but not absolute, assurance thatmisstatements due to error or fraud will not occur or that all control issuesand instances of fraud, if any, with the Company have been detected.

 

See Part II, Item 1A, Risk Factors, of this report.

 

Changes in Internal Controls over FinancialReporting

 

Our management, with the participation of our Chief Executive Officerand Chief Financial Officer, evaluates any changes in our internal control overfinancial reporting that occured during each fiscal quarter that havematerially affected, or are reasonably likely to materially affect, suchinternal control over financial reporting.

 

We believe the following changes in internal control over financial reporting(as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) occurredduring the third quarter of 2007 that materially affected or were, reasonablylikely to materially affect our internal control over financial reporting.

 

Throughout 2007 and including the third quarter of 2007, we havededicated a significant amount of time and resources to revise our internalcontrols to remediate the material weaknesses noted in our Annual Report onForm 10-K/A filed on October 15, 2007 and to enhance existing internal controlsbecause of our significant growth. We have added new in house legal counsel andkey management in financial operations. Financial operations role is to focuson implementation of our new ERP system and its communication with all othersignificant business systems in the Company to ensure accurate financialreporting. We have also engaged a third party with expertise in internalcontrols to review documents and revise (as necessary) internal controls in ananalysis of our key business operating systems.

 

In the third quarter of 2007, we implemented the inventory component ofour ERP system and encountered issues in reconciliation of the physicalinventory to the ERP system balances, requiring us to add additional manualcontrols to the process to correct these issues. This has delayed ourimplementation to the new ERP system. Also, we have encountered financialreporting personnel turnover in our financial reporting department which hasdelayed our quarterly reporting.

 

We continue to remediate material weaknesses and enhance our internalcontrols for our continued growth but cannot guarantee that our efforts willresult in remediation of our material weakness or that new issues will not beexposed in this process.

 

*Chief Executive Officer and Chief FinancialOfficer Certifications*. The certifications of ourChief Executive Officer and Chief Financial Officer, which are attached asExhibits 31.1 and 31.2 to this report, include information about our disclosurecontrols and procedures and internal control over financial reporting. Thesecertifications should be read in conjunction with the information contained inthis Item 4 for a more complete understanding of the matters covered by thecertifications.

 

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# **PART II—OTHER INFORMATION**

#  

## **Item 1.   LegalProceedings.**

##  

On August 21, 2007the Company filed suit against Protected Vehicles, Inc. (“PVI”) and three ofPVI’s employees (all of whom are former Company employees) in the United StatesDistrict Court for the District of South Carolina alleging that the nameddefendants used the confidential information and trade secrets of the Companyto set up a competing business, and seeking injunctive relief, unspecifieddamages, and attorneys’ fees and costs.  The defendants answered thecomplaint and filed counterclaims against the Company alleging*, among other things*, that the Company andseveral of its current and former officers and directors engaged in certaintransactions in which such officers and directors maintained a financialinterest,  engaged in allegedly wrongful acts with respect to aprocurement contract with a foreign government, and engaged in certainallegedly retaliatory acts in connection with defendants’ prior attempts tobring such activities to the attention of Company personnel or governmentalagencies.  Since filing the counterclaims, Defendants have agreed towithdraw several of their causes of action.  Defendants seekunspecified monetary damages and attorneys’ fees and costs.

 

From February 2007through October 2007, the Company has received a total of 60 complaints fromcurrent and former employees filed with the United States Equal EmploymentOpportunity Commission.  The Company has responded to the complaints assuch responses have become due, and is investigating the allegations.

 

The Company isalso a party to other litigation which it considers routine and incidental toour business.

 

## **Item 1A.   Risk Factors.**

 

# **RISK FACTORS**

 

*You shouldcarefully consider the risks described below, together with the otherinformation contained in this Quarterly Report on Form 10-Q and the riskfactors contained in our Annual Report on Form 10-K/A. These risks could have amaterial and adverse impact on our business, prospects, results of operations,financial condition and cash flows. The risks and uncertainties we havedescribed below are not the only ones we face. Additional risks anduncertainties, including risks and uncertainties not presently known to us orthat we currently deem immaterial, may also adversely affect us.*

 

**Areduction of U.S. force levels in Iraq may adversely affect our results ofoperations.**

 

We havereceived substantial orders from the U.S. military for the U.S. Department ofDefense for Mine Resistant Ambush Protected (“MRAP”) vehicles, which accountedfor substantially all of the increase in our net sales during the first ninemonths of 2007. These orders have resulted, in significant part, from theparticular combat situations encountered by the U.S. military in Iraq andAfghanistan, especially the use of Improvised Explosive Devices (“IEDs”) byenemy combatants. We cannot be certain, therefore, to what degree the U.S.military will continue placing orders under the MRAP program, and these ordersmay decrease significantly or cease, particularly, if the U.S. military were toreduce its force levels or withdraw completely from Iraq. A significantreduction in orders from the U.S. military MRAP program would have a materialadverse effect on our business, financial condition, results of operations andliquidity.

 

**Uncertaintyabout future orders could adversely affect our business prospects andnegatively impact our stock price.**

 

The mainuncertainty about our future operations is whether we will continue to receiveadditional orders or contracts for our vehicles. Our current orders for MRAPvehicles allow us to continue production through April 2008. It is impossibleto predict with certainty whether such future orders or contracts will beplaced by existing or new customers. If we do not receive future orders orcontracts, it is unlikely that our business will continue.

 

**We rely heavily on U.S. government contractsand if the U.S. government does not continue purchasing our products, ourbusiness may fail.**

 

Substantially all of our income comes from our U.S. governmentcontracts either as a prime contractor or as a subcontractor to another primecontractor to the U.S. government. In addition to normal business risks,contracts with the U.S. government are subject to unique risks, many of whichare beyond our control.

 

At thepresent, we serve the U.S. defense market and our sales are highly concentratedwithin the U.S. government, including foreign military sales. For the calendaryear ending December 31, 2006 and the nine months ended September 30, 2007,substantially all of our net sales were derived from the U.S. government andsubstantially all of our accounts receivable were attributable to direct salesto the U.S. government or as a subcontractor to another prime contractor to theU.S. government.

 

Our twolargest contracts, in terms of value, are with the U.S. Marine Corps under theMRAP program. The largest contract, which was competitively bid, is expected tobe assigned to Force Dynamics, LLC pursuant to our joint venture with GeneralDynamics Land Systems (“GDLS”) described in “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” in Part I, Item IIof this report, if the U.S. government agrees to the novation of that contractto the joint venture. This contract is an indefinite delivery/indefinitequantity (“ID/IQ”) contract which allows the U.S. government to order a maximumof 4,100 MRAP vehicles for a period of five years. It was awarded in January of2007 and expires in 2012. However, the U.S. government is not required to

 

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issue any further vehicleorders under this contract. At least eight other contractors were awardedsimilar contracts and two (2) of these other contractor groups have receivedsubstantial orders. Together, the company and these two others contractorgroups account for approximately 39% of the current MRAP vehicles awarded todate with approximately 2% going to the remaining contractors. There areapproximately 59% of the remaining 20,080 MRAP vehicles to be awarded.

 

The secondlargest contract, which was awarded to us on a sole source basis, is also underthe MRAP program. It will continue to be performed exclusively by us because itis not part of our joint venture arrangement with GDLS. These two contractscollectively generated approximately 71% of our net sales for the nine monthsended September 30, 2007.

 

We cannot becertain to what degree the U.S. military will continue placing orders for theMRAP program, and these orders may cease if the U.S. military were to withdrawcompletely from Iraq and Afghanistan. A significant reduction in future ordersfrom the U.S. military MRAP program would have a material adverse effect on ourbusiness, financial condition, operations and liquidity.

 

**Ourbusiness may be materially affected if we are unable to sell the Cheetaharmored vehicle, a new product, in the quantities that we anticipate.**

 

We plan tomake substantial expenditures to equip a facility to manufacture our Cheetaharmored vehicle, and our business may be materially adversely affected if weare unable to sell the Cheetah in the quantities we anticipate or at all.

 

The Cheetah isour newest vehicle. We believe that the U.S. military is planning to replacethe High Mobility Multi-wheeled Vehicle, or Humvee, under the Joint LightTactical Vehicle, or JLTV, program. We are developing the Cheetah as apotential replacement for the Humvee and we are currently outfitting a newfacility to produce the Cheetah. We currently estimate that we will spend atotal of approximately $50 million to outfit and equip this new facility,although the actual amount we expend for that purpose may be greater, of whichapproximately $10 million had been expended through September 30, 2007.

 

In addition,we have begun to purchase components and other raw materials, hire and trainemployees and incur other expenses in order to produce the Cheetah at this newfacility. However, we have not received any orders for the Cheetah and theCheetah is still undergoing evaluation by the U.S. military and defenseagencies of foreign countries. To the extent that we do not receive orders forthe Cheetah in the quantities we anticipate, or if those orders are receivedlater than we anticipate, or if we incur delays or unforeseen expenses inconnection with outfitting and equipping this facility, our business,prospects, results of operations and financial condition may be materiallyadversely affected. Likewise, it is possible that the U.S. military may requirechanges to the Cheetah, which may result in additional expense and delays.

 

We have not yet begun to manufacture the Cheetah vehicle in commercialquantities. As of September 30, 2007, we had manufactured a limited number ofCheetah vehicles, all of which have been used solely for testing anddemonstration purposes. We currently anticipate that we will begin productionof the Cheetah at this new facility in the first quarter of 2008, althoughthere can be no assurance that the commencement of production will not bedelayed beyond this date. However, we intend to begin production at thisfacility whether or not we have any orders or contracts for the Cheetah at thetime. This means that we may be incurring expenses for components, rawmaterials, wages and salaries and other expenses in connection with producingthe Cheetah without any contracts or orders from customers to purchase thevehicles we manufacture, which would expose us to additional risk. Moreover, wemay experience difficulties, expenses and delays in starting up production atthis new facility, as we have no prior experience in manufacturing the Cheetahvehicle in commercial quantities and it may take a substantial period of timefor us and our employees to develop sufficient familiarity with this newfacility in order for us to achieve requisite efficiencies in producing theCheetah.

 

**We are now a large business and may be precludedfrom entering into new contracts with the U.S. government unless our financialand accounting systems are improved sufficiently to meet government standards.**

 

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In order to enter into contracts with the U.S.military, a contractor’s financial and accounting systems must generally meetthe standards established by the Federal Acquisition Regulation (“FAR”) and theCost Accounting Standards (“CAS”). Compliance is usually reviewed by theDefense Contract Audit Agency (“DCAA”), an arm of the Department of Defense.Contractors who do not meet these standards generally are not eligible to winnew contracts from the U.S. government.

 

Because we previously were a small business, we werenot required to comply with all of the financial and accounting requirements inorder to enter into contracts with the U.S. military. However, as a result ofthe growth of our business, we are no longer a small business, and we thereforewill be required to meet these additional financial and accounting standards.We have been advised by the DCAA that our financial and accounting systems do notmeet these requirements and, although we have been seeking to improve thesesystems, we have extensive work remaining in order to meet these standards.There can be no assurance as to when we will be able to meet these standardsand, until we are able to do so, we may not be eligible for new contract awardsby the U.S. military. Accordingly, any failure to meet these standards willlikely have a material adverse effect on our business.

 

**The DCAA has issued audit reports that have beenhighly critical of our finances and financial accounting system, that havequestioned our ability to perform our government contracts, and that havequestioned or disallowed significant proposed charges under some of ourgovernment contracts.**

 

U.S. government agencies, generally through the DCAA, routinely auditand investigate government contracts and government contractors’ administrativeprocesses and systems. The audits may review the costs we incur on our U.S.government contracts, including allocated indirect costs. The auditor may alsoreview our compliance with applicable laws, government regulations, policiesand standards and the adequacy of our internal control systems and policies,including our purchasing, property, estimating, compensation and managementinformation systems. An adverse finding under a DCAA audit could resultin the disallowance of our costs under a U.S. government contract, terminationof U.S. government contracts, forfeiture of profits, suspension of payments,fines and suspension or prohibition from doing business with the U.S.government. Any costs found to be improperly allocated or otherwiseimproperly accounted for may not be paid or reimbursed, and any such costspreviously paid or reimbursed may have to be refunded. We have recorded contractrevenues based upon costs we expect to realize upon the final audit. However,we do not know the outcome of any future audits and adjustments and we may berequired to reduce our revenues or profits upon completion and finalnegotiation of audits. If any audit uncovers improper or illegal activities, wemay be subject to civil and criminal penalties and administrative sanctions,including termination of contracts, forfeiture of profits, suspension ofpayments, fines and suspension or prohibition from doing business with the U.S.government. In addition, responding to governmental audits may involvesignificant expense and divert management attention.

 

Moreover, if any of our administrative processes and systems are foundnot to comply with the applicable requirements, we may be subjected toincreased government scrutiny or required to obtain additional governmentalapprovals that could delay or otherwise adversely affect our ability to competefor or perform contracts. Therefore, an unfavorable outcome to an audit by theDCAA or another government agency, could materially adversely affect ourcompetitive position and result in a substantial reduction of our revenues.

 

The DCAA has issued a number of audit reports concerning some of ourcontracts with the U.S. military. These reports have generally been highlycritical of our finances and financial accounting systems. The DCAA has issuedat least eight audit reports on our operations and contracts from May of 2004through  October of  2007. Some of these audit reports focused onproposals that we submitted or on our accounting systems. With respect to ourproposal submissions, DCAA has repeatedly found that we did not submit ourproposals in the correct format, that required data were missing, and that ourproposal often lacked a proper basis for the costs submitted. In several

 

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of these audits, DCAA foundthat our accounting systems were inadequate, that our books failed to reconcileour general ledger with our cost summaries, that our systems did not track andproperly account for direct and indirect costs, and that our systems are unableto segregate pre-production and production costs. In addition, DCAA auditreports in September 2006 and March 2007 considered us to have an unfavorablefinancial condition.

 

On January 25, 2006, the U.S. Army Tank-automotive andArmaments Command (“TACOM”) audited the company to evaluate the adequacy of ourISO-9001:2000 Quality System. The audit report identified critical areas ofnon-compliances and weaknesses in our quality system of control and providedvarious recommendations to address the deficiencies.

 

The Company is taking steps to improve its financial systems and toaddress the issues raised by the DCAA, TACOM and the Department of DefenseInspector General. For example, we are implementing a new financial system,.Although we indicated in our responses to certain audit responses that weplanned to have the system operational by July 2007, it is still not fully operational.There can be no assurance as to whether we will be able to address these issuesto the satisfaction of these agencies and, if we are unable to do so, we may besubject to price reductions, contract terminations, civil and criminalpenalties, and other sanctions, including forfeitures of profits, suspension ofpayments, fines and suspension or debarment from doing business with thefederal government as a prime or subcontractor. Accordingly, any failure tomeet these standards could have a material adverse effect on our business.

 

**The Inspector General of the U.S. Department ofDefense has issued a report questioning the award of sole source contracts tous and criticizing our performance.**

 

Because of the need to accelerate deliveries of blastresistant vehicles to U.S. forces in Iraq, certain of our contracts with theU.S. government were awarded to us on a “sole source” basis, meaning that ourcompetitors were not permitted to bid for the contracts. In a report dated June27, 2007, the Inspector General of the U.S. Department of Defense criticizedthe award of these contracts without competitive bidding, noting that therewere other vehicles that could have competed with our Cougar vehicle, andrecommended that future contracts for JERRV vehicles be awarded through acompetitive bidding process. The report further indicated that the U.S. MarineCorps agreed that future contracts should be awarded through competitivebidding. To the extent that future U.S. military contracts for blast resistantvehicles are subjected to competitive bidding, it is likely that a number ofother companies, most of which have substantially greater resources than we do,will bid for those contracts. Accordingly, the use of competitive bidding couldhave a material adverse effect on our ability to obtain future awards andcontracts and on our operating results, cash flow, liquidity and prospects.

 

The report further indicates that we “did not performas a responsible contractor and repeatedly failed to meet contractual deliveryschedules.”  The criticism that we didnot perform as a “responsible contractor” indicates that, in the view of theInspector General of the Department of Defense, our performance under thecontracts reviewed in the report did not meet the requirements of the federalregulations establishing “responsibility” as a prerequisite to qualifying forthe award of U.S. government contracts. To the extent that Department ofDefense officials in charge of the awarding of procurement contracts for ourtypes of vehicles conclude that we are not “responsible,” we would not be ableto receive any such contracts.

 

In addition, in its description of the late deliveryof vehicles by us, the report states that, of 233 Cougar, JERRV and Buffalovehicles ordered by the Marine Corps under our contracts, 60% of the vehicleswere delivered more than 30 days late under their original delivery schedulesand that a substantial percentage were also more than 30 days late underrevised delivery schedules. Moreover, in a contract relating to 122 JERRVvehicles, we agreed to pay liquidated damages of approximately $55,000 pervehicle (or a maximum of up to $6.7 million) in the event of late deliveries.The contract schedules were bilaterally modified and any liquidated damagesthat were due for late deliveries were paid by us. The report recommends thatthe U.S. military include in future contracts and enforce a provision requiringus to pay liquidated damages for late deliveries, which also could require usto make substantial payments and adversely affect our liquidity and results ofoperations. None of our current active contracts provide for liquidateddamages.

 

 

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**We have identified materialweaknesses in our internal control over financial reporting, which couldadversely affect our ability to report our financial condition and results ofoperations accurately or on a timely basis, and we have concluded that ourdisclosure controls and procedures were not effective as of December 31, 2005,December 31, 2006 and September 30, 2007.   As a result, current andpotential stockholders could lose confidence in our financial reporting, whichcould harm our business and the trading price of our stock**.

 

Following ourrestating and amending of our financial statements and certain other additionalfinancial information appearing in our Annual Reports on Form 10-K for theyears ended December 31, 2006 and 2005 and in our Quarterly Report on Form 10-Qfor the quarter ended March 31, 2007, we identified a number of materialweaknesses in our internal control over financial reporting and have nowconcluded that, as of December 31, 2005 and 2006 and September 30, 2007, we didnot maintain effective control over financial reporting. Specifically, the controldeficiencies that contributed to our material weaknesses included our lack of asufficient complement of personnel with an appropriate level of accountingknowledge, experience with our company and training in the application ofgenerally accepted accounting principles, or GAAP, commensurate with ourfinancial reporting requirements.

 

As a result inpart of these material weaknesses, we also have concluded that our disclosurecontrols and procedures were not effective as of December 31, 2005, December 31,2006 and September 30, 2007 to ensure that information we are required todisclose in reports that we file or submit under the Securities and ExchangeAct of 1934 is (i) recorded, processed, summarized and reported within the timeperiod specified in the SEC rules and forms and (ii) is accumulated andcommunicated to our management as appropriate to allow timely decisionsregarding required disclosure. For a more detailed discussion of the previouslyidentified matters, see “Item 9A: Controls and Procedures” in our Annual Report on Form 10-K/A for theyear ended December 31, 2006 filed on October 15, 2007.

 

Each of ourmaterial weaknesses results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements that we prepare willnot be prevented or detected. As a result, we must perform extensive additionalwork to obtain reasonable assurance regarding the reliability of our financialstatements. Even with this additional work, there is a risk of additional errorsnot being prevented or detected, which could result in additional restatements.Moreover, other material weaknesses may be identified.

 

Materialweaknesses in our internal control over financial reporting could adverselyimpact our ability to provide timely and accurate financial information. If weare unsuccessful in implementing or following our remediation plan, or fail toupdate our internal control over financial reporting as our business evolves,we may be unable to report financial information timely and accurately or tomaintain effective disclosure controls and procedures. Any such failure in thefuture could also adversely affect the results of periodic managementevaluations and annual auditor attestation reports regarding and theeffectiveness of our internal control over financial reporting required underSection 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgatedthereunder and periodic management evaluation of our disclosure controls andprocedures. If we are unable to report financial information in a timely andaccurate manner or to maintain effective disclosure controls and procedures, wecould be subject to, among other things, regulatory or enforcement actions bythe SEC and NASDAQ, including a delisting from the NASDAQ Capital Market,securities litigation, and a general loss of investor confidence, any one ofwhich could adversely affect our business prospects and the market value of ourcommon stock.

 

We also have extensive work remaining to remedy the identified materialweaknesses in our internal control over financial reporting and disclosurecontrols and this work will continue for the balance 2007 and perhaps beyond.There can be no assurance as to when all of the material weaknesses will beremedied. Until our remedial efforts are completed, management will continue todevote significant time and attention to these efforts, and we will continue toincur expenses associated with the additional procedures and resources requiredto prepare our

 

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financial statements and toremediate these weaknesses. Certain of our remedial actions, such as efforts tohire additional qualified personnel and implement a new operating system, willbe ongoing and will result in our incurring substantial additional costs evenafter our material weaknesses are remedied.

 

**We may besubject to lawsuits resulting from the material weaknesses in our internalcontrol over financial reporting.**

 

As describedin the preceding risk factor, we recently announced that we have identifiedmaterial weaknesses in our internal control over financial reporting. It ispossible that stockholders may institute securities class action or similarlawsuits against us as a result of this announcement seeking the payment ofdamages. We are aware that at least one law firm has issued a press releaseseeking clients that currently hold or have sold  our stock in 2007 because of a loss intrading value possibly due to our recent restatements. If any such lawsuits areinstituted, they would likely be costly to defend and could involve thesubstantial diversion of management time and resources and have other adverseeffects, and we may be required to make substantial payments to settle any suchlawsuits or to satisfy any judgments that may be rendered against us.

 

**We experienced a substantial increase in our netsales in 2006 and the nine months ended September 30, 2007 and our businesscould be adversely affected if we are unable to effectively manage our growthand deliver vehicles on schedule.**

 

Our net saleshave grown from approximately $10.2 million in 2004 and $49.7 million in 2005to $196 million in 2006 and $441 million for the nine months ended September30, 2007. We have sought to rapidly expand our operations and productioncapacity, and this growth has placed significant demands on our management andour administrative, operating and financial resources. This includessubstantial vehicle and automotive engineering work, manufacturing engineeringdevelopment, hiring and training our work force and the expansion of ourmanufacturing and administrative facilities. Moreover, we have nevermass-produced vehicles and we have in the past encountered difficulties in bothquality control and meeting delivery schedules. We continue to face thechallenge of expanding our manufacturing capacity.

 

To the extentthat this growth continues, it can be expected to continue to place asignificant strain on our resources. Among other things, we will need toincrease our production capacity, which will require time and significantcapital, and will require that we hire and train additional qualified employeesand managers, and we have in the past encountered difficulties in identifyingand hiring qualified personnel and managers. Our future performance and resultsof operations will depend in large part on our ability to attract and retainqualified employees, management and other key personnel, our ability toimplement successful increases to our production capacity and enhancements toour management, accounting and information technology systems, and our abilityto adapt our facilities and systems, as necessary, to respond to growth in ourbusiness.

 

In addition,if we or our joint venture partner, GDLS, are unable to substantially perform,the customer could terminate the contract or claim damages, any of which couldhave a material adverse effect on our results of operations and financialcondition. In addition, we have incurred and are continuing to incursignificant costs associated with our expansion based on the expectation offuture contract revenues, and the loss of contracts or a reduction inanticipated orders could have a material adverse effect on our liquidity,results of operations and financial condition.

 

**We have entered into a joint venturethat provides for a third party to manufacture our vehicles, which will reduceour potential profit from the sale of these vehicles and may pose additionalrisks.**

 

In December 2006, we entered into a joint venture withGDLS. The joint venture provides for the production and life cycle support forour Cougar 4-wheeled and 6-wheeled vehicles for the MRAP Category I andCategory II program requirements. The joint venture was amended on March 28,2007 to include bids for awards under the Medium Mine Protective Vehicle, orMMPV, Program.  The joint venturesubmitted a proposal for awards under the MMPV Program.  On October 23, 2007, the joint venture wasnotified that its proposal would not be accepted and it would not receiveawards under the MMPV program as a result of the proposal’s noncompliance tothe solicitation. See “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in Part I, Item II of this report. Ourability to successfully deliver vehicles and obtain additional orders underthese programs is critical to our success, and any failure to do so would havea material adverse effect on us.

 

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We and GDLS are each expected to handle 50% of themanufacturing and other work required under these programs (with the divisionof work to be based on revenues rather than number of vehicles), although thejoint venture agreement indicates that the work may not be allocated 50% - 50%initially. We entered into this joint venture, in part, because we did not havesufficient production capacity to meet the existing and anticipated orders forthese vehicles.

 

Since inception of the joint venture, 100% of therevenues from the contract to be assigned to the  joint venture (including revenues fromvehicles manufactured by GDLS) have been included as net sales in our financialstatements and 100% of the revenues from the contract to be assigned to thejoint venture will continue to be included as net sales in our financial statementsuntil such time as the relevant contract is novated from the Company tothe joint venture as described in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inPart I, Item II of this report, at which point we will thereafter recognizerevenues only from those vehicles sold through the joint venture that weactually manufacture. To offset the inclusion of revenue from vehiclesmanufactured by GDLS in our financial statements, we also include (and,until contract novation, will continue to include) in ourfinancial statements an amount equal to 100% of those revenues as cost ofsales.

 

So long as we continue to include 100% of the revenuesfrom vehicles manufactured by GDLS as net sales and an amount equal to100% of those revenues as cost of sales in our financial statements, it is expected to cause our cost of sales,expressed as a percentage of our net sales, to increase, and weexpect that this increase will be greater if and to the extent thatrevenues from vehicles sold by the joint venture increase. Notwithstandingthe foregoing accounting treatment, we do receive and are entitled to receivelicense fees on each vehicle manufactured by GDLS under the joint ventureagreement.

 

For the ninemonths ended September 30, 2007, the adverse impact described in thepreceding paragraph was limited, as our net sales included only approximately$33 million attributable to vehicles manufactured and sold by GDLS pursuant tothe joint venture, compared to our total net sales of $441 million for thatperiod. However, we expect that revenues from the joint venture will increasesubstantially in the fourth quarter of 2007 and, as a result, the adverseimpact on cost of sales as a percentage of net sales is expected to increase, perhapssubstantially. If and to the extent that revenues from the joint ventureincrease, then, until such time as the contract with the U.S. Marine Corps isnovated from us to Force Dynamics, we expect that our cost of sales as apercentage of net sales will continue to increase.

 

In addition, GDLS will manufacture Cougar vehiclespursuant to the joint venture at its own facilities pursuant to a licenseagreement in accordance with our design. However, we do not have any directcontrol over GDLS’ manufacturing processes. If GDLS does not deliver vehiclesas and when required by our customers or that meet the terms of the applicableorders, our reputation may be harmed and our results of operations and abilityto obtain new orders may suffer.

 

In the event that GDLS desires to sell or transfer its interest in thejoint venture, we will have the option to purchase the GDLS’ interest in thejoint venture at the price offered by GDLS. If we decide not to purchase GDLS’interest, then GDLS may sell its interest in the joint venture to a thirdparty. As a result, we may become subject to a joint venture agreement with athird party with whom we will be required to share program developmentresponsibilities. Although the new party to the joint venture agreement will bebound by the same terms of our joint venture agreement with GDLS, we can makeno assurances that such third party will discharge its joint ventureresponsibilities and otherwise comply with the terms of the joint ventureagreement.

 

**Our results of operations may be adverselyaffected by the “definitization” of our sole source contracts**.

 

Many of the contracts we have previously received fromthe U.S. military have been sole source contracts that are subject to “definitization,”meaning that the contract price is not agreed upon at contract inception.Instead, following award of the contract, we and the U.S. government seek toagree upon a contract price based upon our cost of performing the contract. Wehave the right to submit a proposed price, but our price is subject to finalreview and approval by the contracting officer, who may require that we use adifferent price. In addition, if agreement is not reached by a specified date,the contracting officer may unilaterally determine a price. The definitizationprocess can be time consuming and can take months or even years to complete.During the

 

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definitizationprocess, we are required to perform the contract work and make deliveriesbefore the final contract price has been established. For this reason, as partof the original award, we provide a rough order of magnitude, or “ROM”, priceto be used for invoicing and accounting purposes pending definitization.

 

As result of the potential adjustments related to thedefinitization process, we maintain an allowance for contractual adjustments.This allowance is based on historical data and is reviewed and adjustedperiodically.

 

In the past,the definitization process has adversely affected our operating results. Forexample, in 2004 we received an order to produce Buffalo vehicles and wecompleted delivery of these vehicles in 2005. However, we were unable to reachagreement with the U.S. government on the price of these vehicles and, inSeptember 2005, the contracting officer unilaterally modified the contract toprovide for a definitized price that was approximately $1.2 million less thanthe amount we had requested. Likewise, a contract for certain JERRV Cougars wasdefinitized in 2006. We initially accrued approximately $367,000 as acontingency reserve related to the definitization of this contract, but thefinal definitized contract price represented a reduction of approximately $3.4million from our original proposal. Accordingly, there can be no assurance thatour allowances for the definitization process will be accurate or that theactual prices we receive under contracts subject to definitization will not besubstantially less than our estimates, which would adversely affect ouroperating results and could result in losses.

 

**We rely on subcontractors to perform some of theassembly of our vehicles and the loss of any critical subcontractors could haltour manufacturing operations; in addition, subcontractors may increase theamounts they charge us, adversely affecting our operating results.**

 

 Some of themajor components of our vehicles are installed by subcontractors. For example,the capsules of our  Cougars are shippedto Spartan Chassis, Inc. in Charlotte, MI, which supplies and installs theengine, transmission, transfer case, drive shafts, differentials, axleassemblies, tires, fuel tank, steering and associated hardware. If any of ourcritical subcontractors were to cease doing business with us (whethervoluntarily or due to other events), we would be required to locate asubstitute subcontractor or where possible perform the work ourselves.Likewise, any inability of these subcontractors to perform these services on atimely basis may result in a delay in deliveries to our customers.

 

 The amounts wepay to some of these subcontractors represent a very significant portion of theoverall costs of our Cougar vehicles. However, certain of our subcontractorshave not entered into subcontracts with us to provide these services, althoughwe do have purchase orders covering scope, price and quantities but other termsand conditions have yet to be agreed upon. This means that we may have issuesregarding some terms and conditions, any of which could have a material adverseaffect on our business and results of operations

 

**We had losses from ourinception through the fiscal year ended December 31, 2005****.**

 

We have historically generatedsubstantial losses, which made it difficult to fund our operations and  execute our business plan and adverselyaffected our stock price. We experienced net losses of approximately $8.1million for 2003, approximately $12.0 million for 2004 and approximately $14.4million for 2005 and have experienced negative cash flows from operations inthe amount of approximately $3.4 million for 2003,  approximately $12.1 million for 2004,approximately $18.6 million for 2005, approximately $25.9 million for 2006 andapproximately $40.9 million for the nine months ended September 30, 2007.

 

Some of the losses were incurred asa result of investments in new product development, inefficiencies while webuilt up our operations and marketing costs. While we did notincur net losses in 2006 and the first nine months of 2007, there can be noassurance that we will not incur net losses again in the future. In particular,we have made and will continue to make substantial expenditures to expand ourfacilities and production capacity and there is a risk that we will not be ableto generate revenues sufficient to offset these expenses. Inaddition, because large portions of our expenses are fixed, we generally areunable to reduce expenses significantly in the short-term to compensate for anyunexpected delay or decrease in anticipated revenues. As a result, we mayexperience net losses in the future, which may make it difficult to fund ouroperations and achieve our business plan.

 

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**We have recently added significantmanufacturing capacity to our leased facilities. If demand for our productsdeclines, we may have inefficient or under-utilized capacity, and our grossmargins and cash flow may suffer and we may incur losses.**

 

In response tothe increased demand for our ballistic- and blast- protected vehicles, we haveadded significant manufacturing capacity during each of the past several years,and we expect to expand our capacity further in the future. Specifically, theseinclude improvements to our leased facilities we are further equipping tomanufacture our Buffalo and Cougar vehicles. Demand for these products may notremain at levels sufficient to utilize all of the manufacturing capacity thatwe have added and that we are in the process of adding and plan to add. Much ofour manufacturing facilities and production equipment are special purpose innature and cannot be adapted easily to make other products. If the demand formine protected vehicles declines substantially from current levels, ourfacilities may have significant under-utilized capacity. Therefore, asubstantial decline in demand for our mine protected vehicles could result insignificant excess manufacturing capacity, which would  adversely affect our results of operationsand could result in losses.

 

**We expectthat we will require additional capital to finance our capital expenditures andto provide for our working capital needs.**

 

We expect thatwe may require substantial additional capital to finance our planned capitalexpenditures and provide for our working capital and other cash needs. Based onour currently anticipated capital expenditures and other cash needs, wecurrently anticipate that we will be required to obtain additional capital in2008. See “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Liquidity and Capital Resources” in Part I, Item II ofthis report. We may seek to obtain this additional capital through, among otherthings, borrowings or the issuance of debt or equity securities. There can beno assurance that we will be able to obtain any such additional capital onacceptable terms or at all. Any inability to obtain additional capital as andwhen required could have a material adverse effect on our business, prospectsand results of operations.

 

**Our U.S.government contracts generally are not fully funded at inception and aresubject to termination. Our contracts with the federal government may beterminated or adversely modified prior to completion, which could adverselyaffect our business.**

 

U.S.government contracts and subcontracts typically involve long purchase andpayment cycles, competitive bidding, qualification requirements, delays orchanges in funding, extensive specification development, price negotiations andmilestone requirements. Each U.S. government agency often also maintains itsown rules and regulations with which we must comply and which can varysignificantly among agencies. Governmental agencies also often retain someportion of fees payable upon completion of a project and collection of thesefees may be delayed for several months or even years, in some instances.

 

U.S.government contracts generally are subject to termination or renegotiation atthe convenience of the government, which could result in a large decline inrevenue in any given quarter. Although government contracts have provisionsproviding for the reimbursement of costs associated with termination underthese circumstances, the termination of a material contract could also resultin a reduction in the number of employees. In addition, the timing of paymentsfrom government contracts is also subject to significant fluctuation andpotential delay, depending on the government agency involved. Any such delaycould result in a shortage in working capital. Should orders, production, ordeliveries of our vehicles be significantly delayed, deferred, interrupted,reduced, or cancelled, such changes could have a material adverse effect on ourbusiness, financial condition, results of operations and liquidity.

 

Federalgovernment contracts generally contain provisions, and are subject to laws andregulations, that give the federal government rights and remedies not typicallyfound in commercial contracts, including provisions permitting the federalgovernment to:

 

•                                          terminateour existing contracts;

•                                          reducepotential future income from our existing contracts;

•                                          modifysome of the terms and conditions in our existing contracts;

•                                          suspendor permanently prohibit us from doing business with the federal government orwith any specific government agency;

 

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•                                          imposefines and penalties;

•                                          subjectus to criminal prosecution;

•                                          subjectthe award of some contracts to protest or challenge by competitors, which mayrequire the contracting federal agency or department to suspend our performancepending the outcome of the protest or challenge and which may also require thegovernment to solicit new bids for the contract or result in the termination,reduction or modification of the awarded contract;

•                                          suspendwork under existing multiple year contracts and related delivery orders if thenecessary funds are not appropriated by Congress; and

•                                          claimrights in technologies and systems invented, developed or produced by us.

 

The federalgovernment may terminate a contract with us either “for convenience” (forinstance, due to a change in its perceived needs) or if we default due to ourfailure or the failure of our joint venture partner to perform under thecontract. If the federal government terminates a contract with us forconvenience, we generally would be entitled to recover only our incurred orcommitted costs, settlement expenses and profit on the work completed prior totermination. If the federal government terminates a contract with us based uponour default, we generally would be denied any recovery for undelivered work,and instead may be liable for excess costs incurred by the federal governmentin procuring undelivered items from an alternative source. As is common withgovernment contractors, we have experienced and continue to experienceoccasional performance issues under some of our contracts. We have in the pastreceived and may in the future receive****show-cause orcure notices under contracts that, if not addressed to the federal government’ssatisfaction, could give the government the right to terminate those contracts fordefault or to cease procuring our services under those contracts

 

**Ourbusiness may be materially affected by our inability to obtain or to maintainvalid U.S. government security clearances.**

 

Our businessmay suffer if our facilities or certain of our employees are unable to obtainor retain the security clearances or other qualifications needed to performservices for our clients.

 

Many of ourFederal government contracts require certain of our employees and facilitiesused in specific engagements to hold security clearances and to clear NationalAgency Checks and Defense Security Service checks. Our failure to comply withthese contract terms, rules or regulations could expose us to substantialpenalties, including the loss of these contracts and disqualification as a U.S.government contractor. Depending on the level of clearance, security clearancescan be difficult and time-consuming to obtain. To the extent we cannot obtainor maintain the security clearances necessary for our facilities or our employeesworking on a particular contract or to the extent our facilities or ouremployees do not successfully clear necessary National Agency Checks or DefenseSecurity Service checks, we may not derive the revenue anticipated from thecontract, and our operating results could be materially adverselyaffected.

 

**We mustcomply with numerous miscellaneous federal national security laws, regulations,and procedures,  and our failure tocomply could harm our operating results.**

 

We mustobserve laws and regulations relating to the formation, administration andperformance of federal government contracts that affect how we do business withour clients and impose added costs on our business. For example, the FAR andthe industrial security regulations of the Department of Defense and relatedlaws include provisions that:

 

•                                          allowour federal government clients to terminate or not renew our contracts if wecome under foreign ownership, control or influence;

•                                          requireus to prevent unauthorized access to classified information; and

•                                          requireus to comply with laws and regulations intended to promote various social oreconomic goals.

 

We are subjectto industrial security regulations of the Department of Defense and otherfederal agencies that are designed to safeguard against foreigners’ access toclassified information. If we were to come under foreign ownership, control orinfluence, we could lose our facility security clearances, which could resultin our federal

 

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government customersterminating or deciding not to renew our contracts, and could impair ourability to obtain new contracts.

 

Our failure tocomply with applicable laws, regulations or procedures, including federalregulations regarding the protection of classified information, could result incontract termination, loss of security clearances, suspension or prohibitionfrom contracting with the federal government, civil fines and damages andcriminal prosecution and penalties, any of which could materially adverselyaffect our business.

 

**Ourbacklog and the value of contracts and orders we have received is subject tonumerous uncertainties, and we may not sell or receive payment for all of thevehicles we have included in backlog and our estimate of the value of thesecontracts and orders may be inaccurate, any of which reduce our revenue infuture periods.**

 

Our backlogreflects the number of vehicles for which we have received orders****as of the measurement date. Our backlog does includevehicles to be manufactured by GDLS under the joint venture described under “Management’sDiscussion and Analysis of Financial Condition and Results of Operation” inPart I, Item II of this report.

 

Our backlog issubject to numerous uncertainties and estimates, and there can be no assurancethat we will deliver or receive payment for the vehicles we have included inour backlog. Likewise, our estimate of a contract’s or order’s potential valueis subject to similar uncertainties and estimates and there can be no assurancethat the actual revenues we realize from any contract or order will not besubstantially less than our estimate. In addition, federal contracts typicallyare only partially funded at any point during their term, and all or some ofthe work to be performed under a contract may remain unfunded unless and untilCongress makes subsequent appropriations and the procuring agency allocatesfunding to the contract.

 

Our estimateof backlog and the potential value of our contracts and orders is likely to beinaccurate because the timing of any of these vehicles sales andrevenues is dependent upon subsequent appropriation and allocation of fundingand is subject to various contingencies, such as timing of delivery orders,many of which are beyond our control. In addition, we may never generatevehicle sales or  revenues from some ofthe engagements that are included in our backlog and this risk is greater withrespect to unfunded backlog. The actual sales of vehicles and receipt of revenueson engagements included in backlog may never occur or may change because aprogram schedule could change, the program could be canceled, the governmentalagency could elect not to exercise renewal options under a contract or couldselect other contractors to perform services, or a contract could be reduced,modified or terminated. We adjust our backlog on a quarterly basis to reflectmodifications to or renewals of existing contracts or delivery orders, awardsof new contracts or delivery orders. Additionally, the maximum contract value specifiedunder a government contract or delivery order awarded to us is not necessarilyindicative of the revenues that we will realize under that contract. We alsoderive revenues from ID/IQcontracts, which typically do not require the government to purchase a specificamount of goods or services under the contract other than a minimum quantitywhich is generally very small. If we fail to sell vehicles or realize revenueincluded in our backlog, our revenues and operating results could be materially adversely affected.

 

**Most ofour contracts are firm fixed-price, which could subject us to losses if thereare cost overruns.**

 

Most of ourcurrent U.S. government projects are contracted on a fixed-price basis. Under afixed-price contract, we receive only the amount indicated in the contract,regardless of the actual cost to produce the goods. While firm fixed-pricecontracts allow us to benefit from potential cost savings, they also expose usto the risk of cost overruns. If the initial estimates that we use to calculatethe contract price and the cost to perform the work prove to be incorrect, wecould incur losses. In addition, some of our contracts has specific provisionsrelating to cost, scheduling, and performance. If we fail to meet the termsspecified in those contracts, then our cost to perform the work could increaseor our price could be reduced, which would adversely affect our financialcondition. We may incur losses on fixed price contracts that we hadexpected to be profitable, or such contracts may be less profitable thanexpected, which could have a material adverse effect on our business, financialcondition, results of operations and liquidity.

 

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**Our current credit facility is due to expireon January 9, 2008.**

 

We currently have a $50 million creditfacility that expires on January 9, 2008. Although we did nothave any borrowings outstanding under this credit facility as ofSeptember 30, 2007, it provides us with the ability to obtain capital if cashavailable from other sources is insufficient to meet our needs. In the event that we do not renewthis credit facility or obtain another credit facility, we will not havethe ability to make revolving credit borrowings to finance our business, whichcould have a material adverse effect on our results of operations and financialconditions.

 

**We may be named in lawsuits for numerousreasons, the outcome of which cannot be determined.**

 

Doing business in today’s litigious environment inherently has severalassociated risks concerning our business, our products or other unforeseenreasons. If we were named as defendants in litigation resulting from productliability, contractual breaches or any other grounds, those claims would divertfinancial and management resources that would otherwise be used to benefit ourcompany. Although we may have meritorious defenses to these claims, noassurances can be given that the results of any litigation matter would befavorable to us. An adverse resolution of any lawsuit could have a materialaffect on our financial position and results of operation.

 

Wehave also become aware of potential claims by a temporary reporting contractorwhose services were recently terminated. The contractor alleges that theCompany terminated his engagement in retaliation for his allegations of certaincorporate governance, government contracting, accounting, and otherirregularities. We are investigating the issues raised by the individual.

 

See “Legal Proceedings” in Part II, Item I of this report.

 

**Our products are subject to exportlimitations and we may be prevented from shipping our products to certainnations or buyers.**

 

Weare subject to federal licensing requirements with respect to the sale andsupport in foreign countries of certain of our products and import ofcomponents for our products. In addition, we are obligated to comply with avariety of federal, state and local regulations, both domestically and abroad,governing certain aspects of our international sales and support, includingregulations promulgated by, among others, the U.S. Departments of Commerce,Defense, State and the U.S. Department of Justice, Bureau of Alcohol, Tobacco,Firearms and Explosives.

 

Suchlicenses may be denied for reasons of U.S. national security or foreign policy.In the case of certain large orders for exports of defense equipment, theDepartment of State must notify Congress at least 15-30 days, depending on thesize and location of the sale, prior to authorizing certain sales of defenseequipment and services to foreign governments. During that time, Congress maytake action to block the proposed sale. We can give no assurance that we willcontinue to be successful in obtaining the necessary licenses or authorizationsor that Congress will not prevent or delay certain sales. Any significantimpairment of our ability to sell products outside of the U.S. could negativelyimpact our results of operations and financial condition

 

For products and technology exported from the U.S. or otherwise subjectto U.S. jurisdiction, we are subject to U.S. laws and regulations governinginternational trade and exports, including, but not limited to theInternational Traffic in Arms Regulations (“ITAR”), the Export AdministrationRegulations (“EAR”), the Foreign Military Sales (“FMS”) program and tradesanctions against embargoed countries and destinations administered by theOffice of Foreign Assets Control (“OFAC”), U.S. Department of the Treasury. Wehave discovered shortcomings in our export compliance procedures. We arecurrently analyzing product shipments and technology transfers, working withU.S. government officials to ensure compliance with applicable U.S. export lawsand regulations, and enhancing our export compliance system. We have madevoluntary disclosures to the Department of State and provided additionaldocumentation to the U.S. Department of State regarding compliance issues. Adetermination by the U.S. government that we have failed to comply with one ormore of these export controls or trade sanctions could result in civil orcriminal penalties, including the imposition of significant fines, denial ofexport privileges, loss of revenues from certain customers, and debarment fromU.S. participation in government contracts. Any one or more of these sanctionscould have a material adverse effect on our business, financial condition andresults of operations.

 

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Like other companies operating internationally, we are subject to theForeign Corrupt Practices Act (“FCPA”) and other laws which prohibit improperpayments to foreign governments and their officials by U.S. and other businessentities. We operate in countries known to experience endemic corruption. Ourextensive operations in such countries create the risk of an unauthorizedpayment by one of our employees or agents which would be in violation ofvarious laws including the FCPA. Violations of the FCPA may result in severecriminal penalties which could have a material adverse effect on our business,financial condition and results of operations.

 

Additionally, the failure to obtain applicable governmental approvaland clearances could materially adversely affect our ability to continue toservice the government contracts we maintain. Exports of some of our productsto certain international destinations may require pre-shipment authorizationfrom U.S. export control authorities, including the U.S. Departments ofCommerce and State, and authorizations may be conditioned on end-userestrictions. Failure to receive these authorizations may materially adverselyaffect our revenues and in turn our business, financial condition, results ofoperations and liquidity from international sales.

 

While we continually work to enhance our international trade complianceprograms, we cannot assure you that we are or will be in full compliance at alltimes with applicable laws and regulations governing the export and deemedexport of defense articles, defense services, and dual-use products andservices that are controlled by U.S. and/or foreign governments. In thoseinstances where we have identified non-compliances with applicable laws orregulations, we have taken affirmative steps to correct or mitigate suchidentified failures and to self-report them to the cognizant U.S. or foreigngovernment agencies. We also import foreign-made components and materials foruse in our manufacturing processes, which may be subject to import duties andother regulations. Violations of international trade (Export/Import) controlsin the U.S. and elsewhere may result in severe criminal and/or civil penalties,which could have a material adverse effect on our business, financialcondition, results of operations and liquidity.

 

Ourinternational business may pose greater risks than our domestic business due tothe greater potential for changes in foreign economic and politicalenvironments. Our international business is also highly sensitive to changes inforeign national priorities and government budgets. Sales of military productsare affected by defense budgets (both in the U.S. and abroad) and U.S. foreignpolicy.

 

Salesof our products and services internationally are subject to U.S. and localgovernment regulations and procurement policies and practices includingregulations relating to import-export control.

 

**We must comply with environmental regulationsor we may have to pay expensive penalties or clean up costs.**

 

We are subject to federal, state and local laws and regulationsregarding the protection of the environment, including air, water and soil. Ourmanufacturing business involves the use, handling, storage and contracting forthe recycling or disposal of, hazardous or toxic substances or wastes,including environmentally sensitive materials, such as batteries, solvents,lubricants, degreasing agents, gasoline and resin. We must comply with certainrequirements for the use, management, handling and disposal of thesesmaterials. If we are found responsible for any hazardous contamination, we mayhave to pay expensive fines or penalties or perform costly clean-up. Even if weare charged, and later found not responsible for such contamination andclean-up, the costs of defending the charges could be high.

 

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## **Item 2.   Unregistered SalesOf Equity Securities And Use Of Proceeds**

##  

Wedo not have a formal stock compensation plan. However we have issued stock andstock options to employees and non-employees in the form of stock grants (andgranted stock options) from time to time as compensation for services rendered.See note 4, Stock Options and Stock Grants of our consolidated financialstatement included in Part I, Item I of this report.

 

## **Item 3.   Defaults UponSenior Securities.**

##  

None.

 

## **Item 4.   Submission of Matters toa Vote of Security Holders.**

##  

None.

 

## **Item 5.    Other Information.**

##  

None.

 

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## **Item6.   Exhibits.**

##  

The following in an index of the exhibits includedin this report:

 
| **Item** | ** ** | **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).        |
|     |       |                                                                                                                                                                                                                       |
| 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).        |
|     |       |                                                                                                                                                                                                                       |
| 10.1     |       | Delivery  Order 5 under Contract M67854-07-D- 5031 with the United States Marine Corps  dated August 10, 2007                                                                                                              |
|     |       |                                                                                                                                                                                                                       |
| 10.2     |       | Delivery  Order 6 under Contract M67854-07-D- 5031 with the United States Marine Corps  dated October 18, 2007                                                                                                             |
|     |       |                                                                                                                                                                                                                       |
| 10.3     |       | Technology  and License Agreement among Force Protection, Inc., General Dynamics Land Systems  Inc. and Force Dynamics LLC dated April 3, 2007                                                                             |
|     |       |                                                                                                                                                                                                                       |
| 10.4     |       | License  Agreement between Force Protection Industries, Inc. and the CSIR dated July  6, 2007                                                                                                                              |
|     |       |                                                                                                                                                                                                                       |
| 10.5     |       | Modification  Number One to Promissory Note between the Company, its subsidiaries and  Wachovia Bank, National Association dated September 30, 2007                                                                        |

 

55

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| **Item**   | ** ** | **Description**                                                                                                                                                                                                           |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                |
| 10.6       |       | Ground  Lease among Force Protection, Inc., Force Protection Industries, Inc., and  Aerospace/Defense, Inc. dated as of February 1, 2007                                                                                  |
|       |       |                                                                                                                                                                                                                      |
|  10.7 |       | First  Amendment to Ground Lease among Force Protection, Inc., Force Protection  Industries, Inc., and Aerospace/Defense, Inc. dated as of July 1, 2007                                                                   |
|       |       |                                                                                                                                                                                                                      |
| 10.8       |       | Building  No. 1 Office Lease among Force Protection, Inc., Force Protection Industries,  Inc., and Aerospace/Defense, Inc. dated as of June 1, 2005                                                                       |
|       |       |                                                                                                                                                                                                                      |
| 10.9       |       | First  Amendment to Building No. 1 Office Lease among Force Protection, Inc., Force  Protection Industries, Inc., and Aerospace/Defense, Inc. dated as of July 1,  2007                                                   |
|       |       |                                                                                                                                                                                                                      |
| 10.10      |       | Building  No. 1 Industrial Lease among Force Protection, Inc., Force Protection  Industries, Inc., and Aerospace/Defense, Inc. dated as of January 15, 2006                                                               |
|       |       |                                                                                                                                                                                                                      |
| 10.11      |       | First  Amendment to Building No. 1 Industrial Lease among Force Protection, Inc.,  Force Protection Industries, Inc., and Aerospace/Defense, Inc. dated as of  May 1, 2006                                                |
|       |       |                                                                                                                                                                                                                      |
| 10.12      |       | Second  Amendment to Building No. 1 Industrial Lease among Force Protection, Inc.,  Force Protection Industries, Inc., and Aerospace/Defense, Inc. dated as of  dated July 1, 2006                                        |
|       |       |                                                                                                                                                                                                                      |
| 10.13      |       | Third  Amendment to Building No. 1 Industrial Lease among Force Protection, Inc.,  Force Protection Industries, Inc., and Aerospace/Defense, Inc. dated as of  dated October 1, 2006                                      |
|       |       |                                                                                                                                                                                                                      |
| 10.14      |       | Fourth  Amended and Restated Building No. 1 Industrial Lease among Force Protection,  Inc., Force Protection Industries, Inc., and Aerospace/Defense, Inc. dated as  of July 1, 2007                                      |
|       |       |                                                                                                                                                                                                                      |
| 10.15      |       | Letter  Agreement among Force Protection, Inc., Force Protection Industries, Inc.,  and Aerospace/Defense, Inc., dated as of July 18, 2006 regarding Building No.  2 Industrial Lease and Building No. 3 Industrial Lease |
|       |       |                                                                                                                                                                                                                      |
| 10.16      |       | Second  Amendment to Building No. 2 Industrial Lease among Force Protection, Inc.,  Force Protection Industries, Inc., and Aerospace/Defense, Inc. dated as of  February 1, 2007                                          |
|       |       |                                                                                                                                                                                                                      |
| 10.17      |       | Third  Amendment to Building No. 2 Industrial Lease among Force Protection, Inc.,  Force Protection Industries, Inc., and Aerospace/Defense, Inc. dated as of  July 1, 2007                                               |
|       |       |                                                                                                                                                                                                                      |
| 10.18      |       | Second  Amendment to Building No. 3 Industrial Lease among Force Protection, Inc.,  Force Protection Industries, Inc., and Aerospace/Defense, Inc. dated as of  July 1, 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.                                                                           |

 

56

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----

*  This exhibit shall not be deemed “filed” for purposes of Section 18 ofthe Securities Exchange Act of 1934, as amended (15 U.S.C. 78r), or otherwisesubject to the liabilities of that Section, nor shall it be deemed incorporatedby reference in any filings under the Securities Act of 1933, as amended, orthe Securities Exchange Act of 1934, as amended, whether made before or afterthe date hereof and irrespective of any general incorporation language in anyfilings.

 

57

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**SIGNATURES**

 

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

 
| ** **               | ** ** | **FORCE PROTECTION, INC** | * *                                       |
|--------------------------|------------|---------------------------|------------------------------------------------|
| ** **               | ** ** | *(Registrant)*            | * *                                       |
|                     |       |                      |                                           |
| * *                 | * *   | *By:*                     | /s/ Gordon McGilton                            |   |
| * *                 | * *   | * *                  |                                           |   |
| Date:  November 13, 2007 | * *   | * *                  | *Chief  Executive  Officer and President* | * * |
| ** **               | ** ** | ** **                | *(Principal Executive Officer)*                | ** ** |
| ** **               | ** ** | ** **                | * *                                       | ** ** |
| Date:  November 13, 2007 |       | By:                       | /s/ Michael Durski                             |   |
|                     |       |                      |                                           |   |
|                     |       |                      | *Chief Financial Officer*                      | * * |
|                     |       |                      | *(Principal Accounting and Financial Officer)* | * * |

 

58

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| **Item**   | ** ** | **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).        |
|       |       |                                                                                                                                                                                                                       |
| 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).        |
|       |       |                                                                                                                                                                                                                       |
| 10.1       |       | Delivery Order 5 under Contract M67854-07-D- 5031  with the United States Marine Corps dated August 10, 2007                                                                                                               |
|       |       |                                                                                                                                                                                                                       |
| 10.2       |       | Delivery Order 6 under Contract M67854-07-D- 5031  with the United States Marine Corps dated October 18, 2007                                                                                                              |
|       |       |                                                                                                                                                                                                                       |
| 10.3       |       | Technology and License Agreement among Force  Protection, Inc. General Dynamics Land Systems Inc. and Force Dynamics LLC  dated April 3, 2007                                                                              |
|       |       |                                                                                                                                                                                                                       |
| 10.4       |       | License Agreement between Force Protection Technologies,  Inc. and the CSIR dated July 6, 2007                                                                                                                             |
|       |       |                                                                                                                                                                                                                       |
| 10.5       |       | Modification Number One to Promissory Note between  the Force Protection, Inc. its subsidiaries and Wachovia Bank, National  Association dated September 30, 2007                                                          |
|       |       |                                                                                                                                                                                                                       |
| 10.6       |       | Ground Lease among Force Protection, Inc. Force  Protection Industries, Inc., and Aerospace/Defense, Inc. dated as of February  1, 2007                                                                                    |
|       |       |                                                                                                                                                                                                                       |
|  10.7 |       | First Amendment to Ground Lease among Force  Protection, Inc., Force Protection Industries, Inc., and Aerospace/Defense,  Inc. dated as of July 1, 2007                                                                    |

 

59

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| 10.8   |   | Building No. 1 Office Lease among Force  Protection, Inc., Force Protection Industries, Inc., and Aerospace/Defense,  Inc. dated as of June 1, 2005                                                                       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                      |
| 10.9   |   | First Amendment to Building No. 1 Office Lease among  Force Protection, Inc., Force Protection Industries, Inc., and  Aerospace/Defense, Inc. dated as of July 1, 2007                                                    |
|   |   |                                                                                                                                                                                                                      |
| 10.10  |   | Building No. 1 Industrial Lease among Force  Protection, Inc., Force Protection Industries, Inc., and Aerospace/Defense,  Inc. dated as of January 15, 2006                                                               |
|   |   |                                                                                                                                                                                                                      |
| 10.11  |   | First Amendment to Building No. 1 Industrial Lease  among Force Protection, Inc., Force Protection Industries, Inc., and  Aerospace/Defense, Inc. dated as of May 1, 2006                                                 |
|   |   |                                                                                                                                                                                                                      |
| 10.12  |   | Second Amendment to Building No. 1 Industrial  Lease among Force Protection, Inc., Force Protection Industries, Inc., and  Aerospace/Defense, Inc. dated as of dated July 1, 2006                                         |
|   |   |                                                                                                                                                                                                                      |
| 10.13  |   | Third Amendment to Building No. 1 Industrial Lease  among Force Protection, Inc., Force Protection Industries, Inc., and  Aerospace/Defense, Inc. dated as of dated October 1, 2006                                       |
|   |   |                                                                                                                                                                                                                      |
| 10.14  |   | Fourth Amended and Restated Building No. 1 Industrial  Lease among Force Protection, Inc., Force Protection Industries, Inc., and  Aerospace/Defense, Inc. dated as of July 1, 2007                                       |
|   |   |                                                                                                                                                                                                                      |
| 10.15  |   | Letter Agreement among Force Protection, Inc.,  Force Protection Industries, Inc., and Aerospace/Defense, Inc., dated as of  July 18, 2006 regarding Building No. 2 Industrial Lease and Building No. 3  Industrial Lease |
|   |   |                                                                                                                                                                                                                      |
| 10.16  |   | Second Amendment to Building No. 2 Industrial  Lease among Force Protection, Inc., Force Protection Industries, Inc., and  Aerospace/Defense, Inc. dated as of February 1, 2007                                           |
|   |   |                                                                                                                                                                                                                      |
| 10.17  |   | Third Amendment to Building No. 2 Industrial Lease  among Force Protection, Inc., Force Protection Industries, Inc., and  Aerospace/Defense, Inc. dated as of July 1, 2007                                                |
|   |   |                                                                                                                                                                                                                      |
| 10.18  |   | Second Amendment to Building No. 3 Industrial  Lease among Force Protection, Inc., Force Protection Industries, Inc., and  Aerospace/Defense, Inc. dated as of July 1, 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.                                                                           |

 

----

*  This exhibit shall not be deemed “filed” for purposes of Section 18 ofthe Securities Exchange Act of 1934, as amended (15 U.S.C. 78r), or otherwisesubject to the liabilities of that Section, nor shall it be deemed incorporatedby reference in any filings under the Securities Act of 1933, as amended, orthe Securities Exchange Act of 1934, as amended, whether made before or afterthe date hereof and irrespective of any general incorporation language in anyfilings.

 

60

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