** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

** **

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

 

**FOR THE QUARTERLY PERIOD ENDEDSEPTEMBER 30, 2006**

**OR**

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

** **

**FOR THE TRANSITION PERIOD FROM   _____________   TO _______________**

**COMMISSION FILE NUMBER: 000-22273**

**FORCE PROTECTION, INC.**

 

| **Nevada**                    |   | **84-1383888** |
|-------------------------------|--------|----------------|
| (State of  Incorporation)     |   | (I.R.S. EIN)   |
|                          |   |           |
| **9801  Highway 78, Bldg #1** |
| **Ladson,  South Carolina**   |
| **29456**                     |

 

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

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the past 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. Yes x   No o

Indicateby checkmark 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 o |   | Non-accelerated  filer x |
|---------------------------|--------|----------------------|--------|--------------------------|

 

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

**As of September 30, 2006 the Issuer had 53,005,765 shares ofcommon stock issued and outstanding.**

Transitional Small Business Disclosure Format (checkone): Yes o   No x

 

----

 

**Table of Contents**
| Part I : Financial  Information |
|--------------------------------------|
|                                 |   |   |
|                                 | Item 1 — Consolidated Financial Statements |   |
|                                 |   | Report  On Review By Registered Independent Public Accounting Firm | 1 |
|                                 |   | Consolidated        Balance Sheet As Of September 30, 2006  and December 31, 2005 | 2 |
|                                 |   | Consolidated Statement Of Operations For The Three and  Nine Months Ended   September 30, 2006 and 2005 | 3 |
|                                 |   | Consolidated Statement Of Cash Flows For The Nine  Months Ended   September 30, 2006 and 2005 | 4 |
|                                 |   | Notes To Consolidated Financial Statements | 5 |
|                                 | Item 2 — Management’s Discussion And Analysis | 19 |
|                                 | Item 3 — Quantitative and Qualitative Disclosure About  Market Risk | 28 |
|                                 | Item  4 —Controls and Procedures | 28 |
|                                 |   |   |
| Part II  : Other Information    |
|                                 |   |   |
|                                 | Item 1 — Legal Proceedings | 28 |
|                                 | Item 2 — Unregistered Sales Of Equity Securities And  Use of Proceeds | 29 |
|                                 | Item 3 — Defaults Upon Senior Securities | 30 |
|                                 | Item 4 — Submission Of Matters To A Vote Of Security  Holders | 30 |
|                                 | Item 5 — Other Information | 30 |
|                                 | Item 6 — Exhibits And Reports On Form 8-K | 31 |
|                                 |   |
|                                 |   |
|                                 |   |
|                                      |  |  |  |  |

 

----

 
|                                                                        |
|------------------------------------------------------------------------|
|                                                                   |
| **PART I  — FINANCIAL INFORMATION**                          |
|                                                                   |
| **ITEM  1 - FINANCIAL STATEMENTS**                                |
|                                                                   |
| **REPORT  ON REVIEW BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM** |
|                                                                   |

 

***JASPERS + HALL, PC****CERTIFIED PUBLIC ACCOUNTANTS*

----

***9175 E.Kenyon Avenue, Suite 100Denver, CO 80237303-796-0099***

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors andShareholders of Force Protection Inc., and Subsidiaries 

We have reviewed the condensed balance sheet of ForceProtection Inc., and Subsidiaries as of September 30, 2006, and the relatedcondensed statements of income for the three-month and nine-month period(s)ended September 30, 2006 and 2005, and condensed statements of cash flows forthe nine-month periods then ended. These financial statements are theresponsibility of the company’s management. 

We conducted our review in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Areview of interim financial information consists principally of applyinganalytical procedures and making inquiries of persons responsible for financialand accounting matters. It is substantially less in scope than an auditconducted in accordance with standards of the Public Company AccountingOversight Board (United States), the objective of which is the expression of anopinion regarding the financial statements taken as a whole. Accordingly, we donot express such an opinion. 

Based on our reviews, we are not aware of any materialmodifications that should be made to the accompanying interim financialstatements referred to above for them to be in conformity with accountingprinciples generally accepted in the United States of America. 

We have previously audited, in accordance withauditing standards of the Public Company Accounting Oversight Board (UnitedStates), the balance sheet of Force Protection Inc., and Subsidiaries as ofDecember 31, 2005, and the related statements of income, retained earnings andcomprehensive income, and cash flows for the year then ended (not presentedherein); and in our report dated March 17, 2006, we expressed an unqualifiedopinion on those financial statements. In our opinion, the information setforth in the accompanying condensed balance sheet as of September, 2006, isfairly stated, in all material respects, in relation to the balance sheet fromwhich it has been derived. 

/s/Jaspers + Hall, PCDenver, ColoradoNovember 13, 2006 

1

----

 

**FORCEPROTECTION, INC.**

**CONSOLIDATED BALANCE SHEET**
| ** **                                                                                                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                         | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                                                                                                         | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current Assets:                                                                                                                    |       |                   |       |                  |       |
| Cash                                                                                                                               |       | $                      | 26,748,260 |                  | $          | 1,217,509 |   |
| Accounts  receivable, net of allowance for contractualobligations of $1,441,039 and  $1,018,051 for 2006 and 2005                  |       | 16,203,716             |       | 3,666,358             |       |
| Inventories                                                                                                                        |       | 33,558,179             |       | 32,486,776            |       |
| Other current  assets                                                                                                              |       | 415,141                |       | 267,189               |       |
| Total current assets                                                                                                               |       | 76,925,296             |       | 37,637,832            |       |
| Investment in Xtreme  Companies, Inc., net                                                                                         |       | —                 |       | —                |       |
| Property and equipment,  net                                                                                                       |       | 5,922,509              |       | 2,138,703             |       |
| **Total  Assets**                                                                                                                  |       | $                      | 82,847,805 |                  | $          | 39,776,535 |   |
| ** **                                                                                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| **LIABILITIES & SHAREHOLDERS’  EQUITY**                                                                                   | ** ** | ** **             | ** ** | ** **            | ** ** |
| **LIABILITIES**                                                                                                                    | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current Liabilities:                                                                                                               |       |                   |       |                  |       |
| Accounts payable                                                                                                                   |       | $                      | 22,285,295 |                  | $          | 14,688,855 |   |
| Other accrued  liabilities                                                                                                         |       | 1,941,581              |       | 1,618,451             |       |
| Contract  liabilities                                                                                                              |       | 1,875,038              |       | 1,686,062             |       |
| Loans payable                                                                                                                      |       | —                 |       | 7,500,000             |       |
| Deferred revenue                                                                                                                   |       | 7,166,374              |       | 12,598,921            |       |
| Total Current  Liabilities                                                                                                         |       | 33,268,288             |       | 38,092,289            |       |
| **Total  Liabilities**                                                                                                             |       | $                      | 33,268,288 |                  | $          | 38,092,289 |   |
|                                                                                                                               |       |                   |       |                  |       |
| **SHAREHOLDERS’ EQUITY**                                                                                                      | ** ** | ** **             | ** ** | ** **            | ** ** |
| Preferred stock: $0.001  par value, authorized: 10,000,000 shares                                                                  |       |                   |       |                  |       |
| Preferred stock series  D, $0.001 par value, authorized, 20,000 shares: issued and outstanding: 2006,  shares; 2005, 13,004 shares |       | —                 |       | 13                    |       |
| Common stock, par value  $0.001, authorized, 300,000,000 shares: issued and outstanding:                                           |       |                   |       |                  |       |
| 2006, 53,005,765  shares; 2005, 36,114,217 shares                                                                                  |       | 53,005                 |       | 36,114                |       |
| Warrants                                                                                                                           |       | 1,500                  |       | 1,500                 |       |
| Shares to be issued                                                                                                                |       | —                 |       | 122,000               |       |
| Additional Paid-in  Capital                                                                                                        |       | 97,910,611             |       | 50,830,371            |       |
| Accumulated deficit                                                                                                                |       | (48,385,599            | )          | (49,305,752           | )          |
| **Total  Shareholders’ Equity**                                                                                               |       | $                      | 49,579,517 |                  | $          | 1,684,246 |   |
|                                                                                                                               |       |                   |       |                  |       |
| **Total Liabilities and Shareholders’ Equity**                                                                                |       | $                      | 82,847,805 |                  | $          | 39,776,535 |   |

 

See accountants’ review report.

2

----

 

**FORCEPROTECTION, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**
| ** **                                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **September 30**            | ** ** | **September 30**           | ** ** |
| ** **                                            | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  Sales**                                        |       | $                                | 42,160,858 |                            | $          | 9,303,526 |   | $ | 133,037,980 |   | $ | 33,452,306 |   |
| Cost of sales                                         |       | 34,242,350                       |       | 10,618,349                      |       | 108,324,917 |   | 31,274,970 |   |
| Gross profit                                          |       | 7,918,508                        |       | (1,314,823                      | )          | 24,713,063 |   | 2,177,336 |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| General and  administrative expense                   |       | 6,780,641                        |       | 3,741,220                       |       | 20,123,622 |   | 10,087,554 |   |
| Research and  development                             |       | 545,717                          |       | 203,730                         |       | 1,850,522 |   | 782,511 |   |
| **Operating Income (Loss)**                           |       | 592,150                          |       | (5,259,773                      | )          | 2,738,919 |   | (8,692,729 | ) |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Other income                                          |       | 121,041                          |       | 18,797                          |       | 168,963 |   | 86,821 |   |
| Interest expense                                      |       | (110,493                         | )          | (364,235                        | )          | (1,736,802 | ) | (844,993 | ) |
| ** **                                            | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net Income/(Loss)**                                 |       | $                                | 602,698    |                            | $          | (5,605,211 | ) | $ | 1,171,080 |   | $ | (9,450,901 | ) |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| **Basis  Earnings/Loss Per Share of common share**    |       | $                                | 0.01       |                            | (0.17      | ) | 0.03 |   | (0.29 | ) |
| ** **                                            | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Diluted  Earning/(Loss) Per Share of common share** |       | $                                | 0.01       |                            | (0.17      | ) | 0.03 |   | (0.29 | ) |
| ** **                                            | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Weighted-Average  common shares used to compute:**  | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basis  earnings/(loss) per share                      |       | 49,014,150                       |       | 34,267,811                      |       | 42,050,762 |   | 34,267,811 |   |
| Diluted profit/(loss)  per share                      |       | 51,691,633                       |       | 34,267,811                      |       | 44,728,245 |   | 34,267,811 |   |

 

See accountants’ review report.

3

----

 

**FORCEPROTECTION, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

** (Unaudited)**

 
| ** **                                                                                | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **September 30**           | ** ** |
| ** **                                                                                | ** ** | **2006**                        | ** ** | **2005** | ** ** |
|                                                                                      |       |                            |       |   |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                                 | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net income  (loss) from operations                                                        |       | $                               | 1,171,080  |   | $ | (9,450,901 | ) |
| **Adjustments  to reconcile net income (loss) to net cash used in operating activities:** | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Depreciation and  amortization                                                            |       | 587,982                         |       | 272,633 |   |
| Common stock  issued for services                                                         |       | 633,997                         |       | — |   |
| Issuance of  employee stock options                                                       |       | 394,243                         |       | — |   |
| Issuance of  stock in lieu of cash for royalty obligations                                |       | —                          |       | 336,000 |   |
| Change in assets  and liabilities:                                                        |       |                            |       |   |   |
| Decrease (increase) in accounts receivable                                                |       | (12,537,358                     | )          | (684,688 | ) |
| Decrease (increase) in inventories                                                        |       | (1,071,403                      | )          | (12,988,642 | ) |
| Decrease (increase) in other current assets                                               |       | (147,952                        | )          | (59,786 | ) |
| Increase (decrease) in accounts payable                                                   |       | 7,596,440                       |       | 7,989,490 |   |
| Increase (decrease) in other accrued liabilities                                          |       | 323,130                         |       | (234,721 | ) |
| Increase (decrease) in contract liabilities                                               |       | 188,976                         |       | 1,526,367 |   |
| Increase (decrease) in deferred revenue                                                   |       | (5,432,547                      | )          | (1,112,452 | ) |
| **Net  cash used in operating activities**                                                |       | $                               | (8,293,412 | ) | $ | (14,406,700 | ) |
|                                                                                      |       |                            |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                                 | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Purchase of property  and equipment                                                       |       | (4,371,788                      | )          | (1,471,347 | ) |
| Proceeds from  sale of property and equipment                                             |       | —                          |       | 155,442 |   |
| **Net  cash used in investing activities**                                                |       | $                               | (4,371,788 | ) | $ | (1,315,905 | ) |
|                                                                                      |       |                            |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Proceeds from  issuance of Preferred Stock                                                |       | —                          |       | 15,800,000 |   |
| Proceeds from  the sale of common stock                                                   |       | 46,265,044                      |       | 233,510 |   |
| Payments on  short term debts                                                             |       | —                          |       | (360,975 | ) |
| Payments on  capitalized lease obligations                                                |       | —                          |       | (110,732 | ) |
| Preferred stock  dividends paid                                                           |       | (569,093                        | )          | — |   |
| Proceeds from  (payments on) loans, net                                                   |       | (7,500,000                      | )          | (854,916 | ) |
| **Net  cash provided by financing activities**                                            |       | $                               | 38,195,951 |   | $ | 14,706,887 |   |
|                                                                                      |       |                            |       |   |   |
| **Net  increase (decrease) in cash**                                                      |       | $                               | 25,530,751 |   | $ | (1,015,718 | ) |
|                                                                                      |       |                            |       |   |   |
| **CASH -  beginning of period**                                                           |       | $                               | 1,217,509  |   | $ | 2,264,406 |   |
|                                                                                      |       |                            |       |   |   |
| **CASH - end of period**                                                                  |       | $                               | 26,748,260 |   | $ | 1,248,688 |   |

 

See accountants’ review report.

4

----

 

**FORCEPROTECTION, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSeptember 30, 2006**(Unaudited)

**NOTE1 — PRESENTATION OF CONSOLIDATED INTERIM INFORMATION**

ForceProtection, Inc. and its subsidiaries (the “Company”) design, manufactureand market mine and blast protected vehicles for sale to military units of theU.S. Government and certain other military units of foreign nations.

In the opinion ofthe management of Force Protection, Inc. and its wholly-owned subsidiaries, theaccompanying unaudited consolidated financial statements include all normaladjustments considered necessary to present fairly the financial position as ofSeptember 30, 2006, and the results of operations and cash flows for the threeand nine month periods ended September 30, 2006. Interim results are notnecessarily indicative of results for a full year.

The consolidatedfinancial statements and notes are presented as permitted by Regulation S-X, asdefined by the United States Securities and Exchange Commission, and do notcontain certain information included in Force Protection Inc.’s auditedconsolidated financial statements and notes to the financial statements for thefiscal year ended December 31, 2005.

The consolidated financial statements include theaccounts of Force Protection, Inc., and our two wholly owned subsidiaries,Force Protection Industries, Inc. and Force Protection Technologies, Inc.for the three and nine month periods ended September 30, 2006. Allinter-company balances and transactions have been eliminated in consolidation.

**RevenueRecognition**

TheCompany’s revenue is derived principally from the sale of its vehicles andassociated spare parts and training services. Revenue from product sales andspare part sales, net of an allowance for contractual adjustments, isrecognized when the products or spare parts are delivered to and “formally”accepted by the customer. The Company defines “formal acceptance” as takingplace when a representative of the United States government signs the UnitedStates Form DD250 entitled “Material Inspection and Receiving Report” whichunder the Federal Acquisition Regulations signifies contractual inspection andacceptance of the work performed by the contractor.  It also acts as the contractual invoicecreating payment liability on the United States Government.  In accordance with standard industrypractice, there is a representative from the United States Defense ContractorManufacturing Agency (“DCMA”) acting as a contractual representative of theUnited States Government present at the Company’s facilities.  This DCMA representative inspects eachvehicle as it is delivered by the Company and upon confirmation of the vehicle’sconformity with the contractual specifications the inspector signs the FormDD250 and formally accepts delivery of the vehicle.  The Company only recognizes revenues arisingfrom its U.S. Government contracts upon execution of the Form DD250 by the DCMAinspector. Under some of the Company’s U.S. Government contracts, it receivesperformance based payments based on completion of specific milestonesstipulated under the contract (for example, delivery of raw material to ourLadson facility). These payments are recorded as “deferred revenue” and carriedon the Company’s balance sheet as until the final delivery of the products andformal 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 historicallyconsisted of the Company providing on-site personnel on an as-needed basis in atimely manner, and have generally been provided in foreign locations.

TheCompany negotiates contracts with its customers which may include revenuearrangements with multiple deliverables, as outlined by Emerging Issues TaskForce No. 00-21 (EITF 00-21).  TheCompany’s accounting policies are defined such that each deliverable under acontract is accounted for separately. Historically, the 

5

----

 

Company has negotiated and signed contracts with itscustomers which outline the contract amount and specific terms and conditionsassociated with each deliverable.

**Stock-BasedCompensation**

TheCompany has historically accounted for stock-based compensation using theintrinsic value method prescribed in Accounting Principles Board Opinion No.25, “Accounting for Stock Issued to Employees.” Compensation cost for stock options, if any, is measured as the excessof the fair value of the Company’s stock at the date of grant over the amountan employee must pay to acquire the stock. Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accountingfor Stock-Based Compensation,” established accounting and disclosurerequirements using a fair-value-based method of accounting for stock-basedemployee compensation plans.

InDecember 2004, the FASB issued SFAS No. 123 (Revised), “Share-based Payment” (“SFAS123(R)”).  SFAS 123(R) replaces SFAS 123and supersedes APB 25.  SFAS 123(R) iseffective as of the beginning of the first interim period or annual reportingperiod that begins after December 15, 2005. SFAS 123(R) requires that the costs resulting from all share-basedpayments transactions be recognized in the financial statements.  SFAS 123(R) applied to all awards grantedafter the required effective date and shall not apply to awards granted inperiods before the required effective date, except if prior awards aremodified, repurchased, or cancelled after the effective date. Additionally,compensation cost for the portion of awards for which the requisite service hasnot been rendered that are outstanding as of the required effective date shouldbe recognized as the requisite service is rendered on or after the requiredeffective date.

**Reclassifications**

Certainreclassifications to the Company’s balance sheet and statement of operationshave been made in 2006, in order for the 2005 financial statements to conformto the presentation of these financial statements.  These reclassifications did not impact theCompany’s net income/(loss) for the three and nine months ended September 30,2006 and 2005, respectively.

**NOTE 2 — CONCENTRATIONS**

The Company’sfuture operations and continued expansion is subject to a significantconcentration risk.  During the nine months ended September 30, 2006 and2005, the Company’s revenues from military units of the U.S. Governmentaccounted for 89% and 91% of total revenues, respectively.  The Company’saccounts receivable from military units of the U.S. Government at September 30,2006 and December 31, 2005 amounted to 75% and 83%, of total accountsreceivable, respectively.  However, the Company currently has asignificant backlog and has signed contracts to provide additional products ofsignificant value to the U.S. Government and its first international customer,the British Ministry of Defense.

**NOTE 3 —ACCOUNTS RECEIVABLES & “DEFINITIZATION”**

The majority of the Company’s contracts are with theUnited States Government and as such they are “public sector” contracts subjectto the Federal Acquisition Regulations set out at Title 41 of the United StatesCode (the “FAR”), and may result either from competitive bidding or may beawarded as “sole source” contracts “subject to definitization” as providedunder FAR Section 252.217-7027.

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 this process, the parties make amutual determination of the direct material and labor costs for the work basedupon the bill of materials and other purchasing information and then theparties mutually agree upon “rates” for the indirect labor costs and the Generaland Administrative costs and upon  a “fee”(or profit).  While the direct materialcosts and labor can be established through objective evidence, the “rates” andfee are more subjective and are based upon an analysis of multiple factorsincluding historical performance data and projected operational factors.  The contractor has the right to submitproposed rates and fee, but these are subject to final review and approval bythe contracting officer, who may insist on using alternate rates and fee.  As provided in section 252.217-7027(c):

*Ifagreement on a definitive contract action to supersede this undefinitizedcontract action is not reached by the target date in paragraph (b) of thisclause, or within any extension of it granted by the Contracting Officer, theContracting Officer may, with the approval of the head of the contractingactivity, determine a reasonable price or fee in accordance with subpart 15.4and part 31 of the FAR, subject to Contractor appeal as provided in theDisputes clause.*

6

----

 

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 definitizationprocess the contractor is required to perform the contract work and to makedeliveries under the contract before the final contract price has beenestablished.  For this reason, as part ofthe original letter award, the contractor provides a rough order of magnitude (“ROM”)price to be used for invoicing and accounting purposes pending definitization.

As a result of the potential adjustments related tothe definitization process, the Company maintains an allowance for contractualadjustments account.  This account isreviewed on a regular basis to determine adequate adjustments, ifnecessary.  The allowance is evaluatedand deemed adequate based on the analysis of historical data and calculation ofpro-rata percentages of current contracts in place, which remain subject to thedefinitization process.

Below is a table detailing activity within theallowance for contractual adjustments account for the nine months endedSeptember 30, 2006 and year ended December 31, 2005, respectively.

|                         | ** ** | **Nine Months Ended** | ** ** | **Year Ended**         | ** ** |
|-------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **Sept. 30, 2006**    | ** ** | **Dec. 31, 2005** | ** ** |
| Beginning  balance      |       | $                               | 1,018,051  |                        | $          | — |   |
| Additions to  allowance |       | 422,988                         |       | 1,018,051                   |       |
| Reduction to  allowance |       | —                          |       | —                      |       |
| Ending balance          |       | $                               | 1,441,039  |                        | $          | 1,018,051 |   |

 

The Company does not maintain an allowance fordoubtful accounts.  The Company’ssignificant sales for the nine months ended September 30, 2006 and 2005involved contracts signed with the U.S. Government.  The Company does not believe an allowance fordoubtful accounts is necessary due to the credit-worthiness of the U.S.Government.

Historically, the Company has not encountered salesreturns.  The Company does not anticipatesales returns in the future.

**NOTE 4 — INVESTMENT IN XTREME COMPANIES, INC.**

On June 1, 2003, and modified on September 15, 2003,the Company sold its title, interest in and rights in the tangible andintangible assets of Rockwell Power Systems, Inc., which subsequently mergedwith Xtreme Companies, Inc.  The Company received 1/3 of Xtreme Companies’outstanding common stock, which was distributed directly to the Company’scommon stock shareholders.  Additionally, the Company was to receive 500shares of Xtreme Companies’ Series A Preferred Stock.  The Company hasbeen in communications with Xtreme Companies but has yet to receive theseshares.  The Company has provided for a full valuation allowance againstthe fair market value of these shares as of December 31, 2005, 2004 and 2003,respectively.

|                                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Xtreme  Companies, Inc. Series A Preferred Stock |       | —   |       | —   |       | —   |       |
| Valuation  Allowance                             |       | —   |       | —   |       | —   |       |
| Net Investment in  Xtreme Companies, Inc         |       | —   |       | —   |       | —   |       |

 

**NOTE 5 —INVENTORIES**

Inventory at September30, 2006 and December 31, 2005 consisted of the following:

|                                                 | ** ** | **Sept. 30, 2006** | ** ** | **Dec. 31, 2005** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw materials  and supplies                     |       | $                            | 22,134,030 |                        | $          | 15,222,503 |   |
| Work in process                                 |       | 12,914,982                   |       | 17,762,554                  |       |
| Less: Allowance  for obsolescence and shrinkage |       | (1,490,833                   | )          | (498,281                    | )          |
| Net Inventories                                 |       | $                            | 33,558,179 |                        | $          | 32,486,776 |   |

 

**NOTE 6 — PROPERTY AND EQUIPMENT**

Property, plant andequipment at September 30, 2006 and December 31, 2005 consisted of thefollowing:

7

----

 

|                                     | ** ** | **Sept. 30, 2006** | ** ** | **Dec. 31, 2005** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Furniture and  fixtures             |       | $                            | 532,302    |                        | $          | 227,613 |   |
| Leasehold improvements              |       | 448,927                      |       | 59,928                      |       |
| Machinery and  equipment            |       | 4,945,457                    |       | 2,024,436                   |       |
| Test Equipment                      |       | 16,790                       |       | 16,790                      |       |
| Manuals                             |       | 104,798                      |       | 104,798                     |       |
| Vehicles                            |       | 143,463                      |       | 56,464                      |       |
| Demo vehicles                       |       | 1,095,925                    |       | 425,845                     |       |
| Less  depreciation and amortization |       | (1,365,153                   | )          | (777,171                    | )          |
| Net property and  equipment         |       | $                            | 5,922,509  |                        | $          | 2,138,703 |   |

 

Depreciation expense forthe three and nine month periods ended September 30, 2006 and 2005 was $249,822and $587,982, and $89,779 and $272,633 respectively.

**NOTE 7 —COMMITMENTS AND CONTINGENCIES**

**Compensationof Executive Officers & Directors**

Mr.Michael Moody joined the Board of Directors on September 18, 2006 as anon-employee, independent Board member. As of September 30, 2006, Mr. Moody has received no compensation for hisservices as a director in 2006.

On May1, 2006, the Company entered into an employment agreement with Mr. RaymondPollard to act as its Chief Operating Officer. Under the terms of the agreement, Mr. Pollard is to receive compensationof $240,000 per year, plus relocation expenses of $30,000.  In addition, Mr. Pollard is to receive anannual grant of shares of 20,513 shares of our unregistered common stock valuedat $40,000 based on the closing share price for the Company’s stock on the dateof Mr. Pollard’s acceptance of employment with the Company.  These share grants will vest on the first andsecond anniversary of his employment. Mr. Pollard also served as a member of the Board of Directors and as ofSeptember 30, 2006 has received $12,000 in cash and 7,733 shares of unregisteredcommon stock as compensation for his services as a director in 2006. Mr.Pollard resigned from the Board of Directors effective August 4, 2006.

Mr. Jack Davis joined the Board of Directors onJanuary 13, 2006 as a non-employee, independent Board member. As of September30, 2006, Mr. Davis has received $12,000 in cash and 7,733 shares ofunregistered common stock as compensation for his services as a director in2006.

On February 4, 2005, theCompany entered into an agreement with Mr. Ted McQuinn to act as President ofits subsidiary Force Protection Industries, Inc. Under the terms of theagreement, Mr. McQuinn is to receive compensation of $180,000 per year, plus anannual grant (for a period of three years) of unregistered common stock valued at$100,000 and a one time grant of unregistered common stock valued at$20,000.  Mr. McQuinn resigned effectiveMarch 31, 2006.

On January 27, 2005, the Company entered into anagreement with Mr. Gordon McGilton to act as its Chief Quality Officer. Under theterms of such agreement, Mr. McGilton is to receive a base salary of $180,000plus an annual bonus of $180,000 and reimbursement for travel, lodging andother out of pocket expenses incurred during employment. The Company alsoagreed to provide Mr. McGilton stock options once it adopts a stock optionplan.

8

----

 

Effective April 18, 2005, the Company appointed Mr.McGilton as its Chief Executive Officer. During 2005 Mr. McGilton received “in kind” compensation in the amountof $20,000 in the form of a Vortex jet boat which the Company gave Mr. McGiltontitle to. This “in kind” compensation was for work performed for the Company byMr. McGilton as an independent contractor during 2001and 2002. EffectiveJanuary 1, 2006 the Company modified Mr. McGilton’s compensation to includecash compensation of $35,000 per month, relocation expense of $30,000 uponseparation for the Company, a one time grant of 300,000 shares of the Company’sunregistered common stock and options to purchase 1,000,000 shares of theCompany’s stock at an exercise price of $0.72 per share, such options to veston January 1, 2007 (or earlier upon the occurrence of specified events).  Mr. McGilton joined the board of directors onApril 18, 2005. Mr. McGilton received no compensation for his services as adirector during 2005. As of September 30, 2006 Mr. McGilton has received$12,000 in cash and 7,733 shares of unregistered common stock as compensationfor his services as a director in 2006.

On November 15,2004, the Company entered into an employment agreement with Mr. R. Scott Ervinto act as its General Counsel. Under the terms of such agreement, Mr. Ervin isto receive compensation of $118,000 per year, plus relocation expenses of$15,000, plus a grant of unregistered common stock valued at $108,000.Effective January 1, 2005, the annual compensation under such agreement wasincreased to $140,000. On January 27, 2005, Mr. Ervin was appointed by theBoard to act as Interim Chief Executive Officer during the Company’s search fora Chief Executive Officer. Upon the appointment of the new Company ChiefExecutive Officer on April 18, 2005, Mr. Ervin ceased to serve as the InterimChief Executive Officer but continues to serve as General Counsel. Mr. Ervinreceived no compensation for his services as a director during 2005. OnNovember 14, 2005, the Board appointed Mr. Ervin to serve as the Acting ChiefFinancial Officer following the resignation of the former Chief Financial Officer.Effective February 10, 2006, the Company increased Mr. Ervin’s compensation to$180,000 per annum. On May 21, 2006, the Board of Directors agreed tocompensate our independent (non-employee) directors $1,000 for each month ofservice to the Company during 2004 and 2005. The Company paid Mr. Ervin $7,000for his services as an independent director in 2004. As of September 30, 2006,Mr. Ervin has received $12,000 in cash and 7,733 shares of unregistered commonstock as compensation for his services as a director in 2006. Mr. Ervin resignedfrom the Board of Directors effective October 3, 2006.

On November 8,2004, the Company entered into an employment agreement with Director Mr. GaleAguilar to act as the Interim Chief Executive Officer. Under the terms of suchagreement, Mr. Aguilar received compensation of $180,000 per year, plus a grantof 20,833 shares of unregistered common stock vesting on November 18, 2004valued at $40,000 and a grant of 20,833 shares of unregistered common stockplus one share of the Company’s Series C stock vesting on January 1, 2005valued at $82,000. Mr. Aguilar’s employment agreement was terminated effectiveJanuary 27, 2005. On May 21, 2006, the Board of Directors agreed to compensateour independent (non-employee) directors $1,000 for each month of service tothe Company during 2004 and 2005. The Company paid Mr. Aguilar $10,000 for hisservices as an independent director in 2004 and $11,000 for his service as anindependent director in 2005. As of September 30, 2006 Mr. Aguilar has received$12,000 in cash and 7,733 shares of unregistered common stock as compensationfor his services as a director in 2006. Mr. Aguilar’s term as a director endedon September 18, 2006.

On September 30,2003, the Company entered into an employment agreement with Mr. Frank Kavanaughto act as its Vice President of Business Development. Under the terms of suchagreement, Mr. Kavanaugh is to receive compensation of $180,000 per year. Inaddition, on December 31, 2004, Mr. Kavanaugh received a one time grant of 10Series C shares and 41,667 common shares valued at $180,000. On May 14, 2005,Mr. Kavanaugh resigned from his employment with the Company, but continues toserve on the Board of Directors as Chairman. In connection with Mr. Kavanaugh’sresignation, the Company agreed to pay for 24 months of health coverage valuedat $24,178. On June 2, 2006, the Company issued Mr. Kavanaugh 12,500 shares ofits unregistered stock valued at $40,500 as compensation due under his 2003employment contract. On May 21, 2006, the Board of Directors agreed tocompensate the Company’s independent (non-employee) directors $1,000 for eachmonth of service to the Company during 2004 and 2005. The Company paid Mr.Kavanaugh $7,000 for his services as an independent director in 2005. As ofSeptember 30, 2006, Mr. Kavanaugh has received $12,000 in cash and 7,733 sharesof unregistered common stock as compensation for his services as a director in2006.

9

----

 

**ContractDefinitization**

The Companycontracts for the sale of its vehicles to the U.S. Government under fixed pricesales contracts, subject to the provisions of the U.S. Federal AcquisitionRegulations (“FAR”).  Under FAR52.216-25, contract awards may be made subject to future “ContractDefinitization” pursuant to which the contractor agrees to negotiate with theGovernment following commencement of the contract work to finalize detailedconditions of the contract, including pricing, scheduling and other applicablerequirements.  As part of suchnegotiations, the contractor is subject to audit by the U.S. Defense ContractAudit Agency (“DCAA”) of its direct material and labor costs, manufacturingoverhead and margin. Based on such audit and the negotiations with theGovernment, the final “definitized” contract price may be less than the amountoriginally established (see additional discussion at Note 3 above).

**LegalProceedings**

On August 8, 2006,the Company settled all claims brought by Atlantis Partners, Inc. againstthe Company in the Circuit Court for the 15th Judicial Circuit, Palm BeachCounty Florida arising out of an alleged finder’s fee agreement.  The Company agreed to compensation in theform of 30,000 shares of the Company’s unregistered common stock. Thesettlement award of 30,000 shares was valued at $187,500.

During the threemonth period ended June 30, 2006, the Company confirmed that two formeremployees had filed claims under 31 U.S.C. §3730 alleging *inter alia*that the Company had failed to comply with the terms of the JERRV contract inrespect to the allocation and use of the initial contract milestone payment forsuch “accelerated delivery costs.” On August 23, 2006, the Company agreed tosettle with the United States Government and with these former employees allclaims relating to or arising under the JERRV contract and the payment of suchaccelerated delivery costs for a total of $1,905,000 plus interest of $23,000.As of September 30, 2006 the Company has paid $705,000 under the terms of suchsettlement agreement and the Company has established a provision of $1,223,000against this liability.

**OtherAccrued Liabilities**

The Company’s other accrued liabilities include thefollowing:

|                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Compensation and  benefits    |       | $        | 1,915,380  |     | $          | 1,341,101 |   |
| Dividends on  preferred stock |       | 0        |       | 260,080  |       |
| Other                         |       | 26,201   |       | 17,270   |       |
|                          |       | $        | 1,941,581  |     | $          | 1,618,451 |   |

 

**ContractLiabilities**

Accruals for contract liabilities include the following:

|                               | ** ** | **2006**  | ** ** | **2005** | ** ** |
|-------------------------------|------------|-----------|------------|----------|------------|
| Twin Disc  warranty           |       | $         | 0          |     | $          | 1,306,018 |   |
| General warranty              |       | 652,038   |       | 380,044  |       |
| Liquidated damage  settlement |       | 1,223,000 |       | —   |       |
|                          |       | 1,875,038 |       | $        | 1,686,062  |   |
|                               |            |           |            |          |            |  |  |

 

**VehicleFees**

On September 13,2006, the Company entered into a Memorandum of Understanding with Mechem, adivision of Denel PTY, a South African company pursuant to which Mechem agreedfor a period of five years to work exclusively with the Company and not tocede, dispose or transfer to any third party other than the Company any of itstechnology, IPR or other proprietary information relating to its armoredvehicles systems including, but not

10

----

limited to, designs, drawings, full technicalspecifications, test data, hardware and software designs and technologies,supplier’s list, know-how and all and every piece of information and datarelevant to such systems. Mechem also agreed upon request by the Company toprovide expertise and know-how on a “work for hire” basis to advise, assist andsupport the Company in its marketing activities. In exchange for suchexclusivity and such services by Mechem the Company agreed to pay Mechem a “vehiclefee,” for every Buffalo, Cougar and Tempest the Company manufactures and sells.The Company is not obligated to pay a vehicle fee in respect of other vehiclesit manufactures and sells. The Company also agreed to make a one time paymentof $394,500 to Mechem, representing vehicle fees in respect of Cougar vehiclespreviously delivered and sold by the Company during 2005 and 2006. Theagreement with Mechem expires in September 2011.

The Company is also party to an agreement with CSIRDefencetek (a division of the Council for Scientific and Industrial Research) astatutory council established in accordance with the Laws of the Republic ofSouth Africa, pursuant to which the Company is obligated to pay the CSIR asimilar vehicle fee. The agreement with the CSIR expires in March 2007.

The followingtable is a summary of the vehicle fees to be paid per vehicle:
| ** ** | ** ** | **Mechem** | ** ** | **CSIR** | ** ** |
|------------|------------|------------|------------|----------|------------|
| Buffalo    |       | $5,000     |       | $3,000   |       |
| Cougar     |       | $1,500     |       | $0       |       |
| Tempest    |       | $3,000     |       | $1500    |       |
| Cheetah    |       | $0         |       | $0       |       |

 

**Table ofContractual Obligations**

The following is atable outlining the Company’s actual and projected significant contractualobligations under non-cancelable operating leases agreements.
| ** **                   | ** ** | **For the Years Ended** | ** ** |
|------------------------------|------------|----------------------------------------|------------|
| ** **                   | ** ** | **2006**                               | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Total** | ** ** |
| Operating Lease  Commitments |       | $777,092                               |       | $831,426 |   | $492,844 |   | $18,305 |   | $0 |   | $2,119,667 |   |

 

**NOTE 8 — DEFERREDREVENUE**

The Company only recognizes revenue from the sales ofits vehicles upon formal written acceptance by its customers. However, undersome contracts, the Company receives performance based payments and long leadmaterial payments prior to such formal acceptance in accordance with agreedcontractual milestones. The Company records such long lead payments andperformance based payments as deferred revenue and carries the payments on theCompany’s balance sheet until formal acceptance by the customer. As ofSeptember 30, 2006 and December 31, 2005, the Company has recorded $7,166,374and $12,598,921 as deferred revenue consisting of performance-based and longlead material payments associated with certain contracts with the U.S. Army andU.S. Marines.

**NOTE 9 — DEBT**

On November 18, 2005, Longview Fund, LP andLongview Equity Fund, LP (collectively, “Longview”) issued secured promissorynotes (the “Notes”) to the Company for gross proceeds of $7,500,000. The Notesmatured on February 18, 2006. Interest is payable on the Notes at theannualized rate of 24%. The Company also executed a 

11

----

Security Agreement that granted Longview a firstpreferred UCC-1 security interest in all of the Company’s assets and property.

On February 18, 2006, the Company entered into aModification and Assignment Agreement with Longview pursuant to which theCompany paid $1,250,000 against the principle balance of the Notes and extendedthe maturity date of the Notes for an additional 60 days. In addition, theCompany consented to the assignment of $2,500,000 of the Notes to Fort AshfordFunds LLC (the “Ashford Note”). Frank Kavanaugh, a director of the Company, isthe principal owner of Fort Ashford Funds and a substantial shareholder of theCompany’s common stock. Mr. Kavanaugh’s relationship to Fort Ashford Funds LLCwas fully disclosed to the Company and Mr. Kavanaugh did not participate in thenegotiations or decision process in respect of the Modification and AssignmentAgreement. The Company paid $87,510 to Longview and $50,000 to Fort Ashford incash as compensation for the extension of the maturity dates of the Notes.

On April 20, 2006, the Company paid $1,000,000 againstthe principle balance of the Notes and extended the maturity date on the Notesand the Ashford Note for an additional 60 days, through June 20, 2006. TheCompany paid $55,000 to Longview and $50,000 to Fort Ashford in cash ascompensation for this extension

On June 20, 2006, the Company paid off the principlebalance and all applicable accrued interest under the Notes. Additionally, theCompany extended the maturity date of the Ashford Note for an additional 30days, through July 20, 2006. The Company paid $50,000 to Fort Ashford in cashas compensation for the extension of the Ashford Note.

On August 9, 2006, the Company paid off the principlebalance of the Ashford Note, and all applicable accrued interest under theAshford Note.

As of September 30, 2006, the Company has no furtherobligation under the Notes, the Ashford Note, the Security Agreement or anyother associated documents.

**NOTE 10 —FACTORING OF ACCOUNTS RECEIVABLE**

The Companyentered into an agreement (the “Factoring Agreement”) with GC FinancialServices, Inc. (the “Factor”) on June 29, 2005, pursuant to which the Companyagreed to sell accounts receivables under our JERRV Contract (M67854-05-D-5091)in an amount not to exceed $63,000,000. Under the terms of such agreement, theCompany receives 98.1% of the value of receivables sold to the Factor within24-48 hours of delivery of the invoice. During June 2006, the Company exceededthe agreed maximum value of receivable to be factored under the FactoringAgreement. On June 22, 2006, the Factoring Agreement was terminated and nofurther obligation remained between the Company and GC Financial Services, Inc.The Company’s factoring transactions in 2006 and 2005 are summarized below:
| ** **                     | ** ** | **Nine Months Ended**  | ** **  | **Year Ended**             | ** ** |
|--------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| ** **                     | ** ** | **September 30, 2006** | ** **  | **December 31, 2005** | ** ** |
|                           |       |                             |        |                            |       |
| Sale of  receivables to Factor |       | $                                | 46,536,262  |                            | $          | 17,170,086 |   |
| Payments to  Factor            |       | $                                | (46,536,262 | )                               | $          | (16,380,214 | ) |
| Balance at end  of period      |       | —                           |        | 789,872                         |       |
|                           |       |                             |        |                            |       |
| Charges by  Factor             |       | $                                | 851,216     |                            | $          | 311,443 |   |

 

12

----

**NOTE 11 —STOCKHOLDERS’ EQUITY**

The Company was originally incorporated on November27, 1996 as a Colorado corporation. The Company incorporated Force Protection,Inc, a Nevada corporation on December 13, 2004 and effected a merger with ForceProtection, Inc., a Colorado corporation, on January 1, 2005. The ColoradoCorporation was dissolved upon the merger. The Company has continued itsoperations as the Nevada Corporation from January 1, 2005 forward. The Companyhas the authority to issue is 310,000,000 shares, in aggregate, consisting of300,000,000 shares of common stock and 10,000,000 shares of preferred stock, ofwhich 1,600 have been designated “Series A,” 25 of which have been designatedas “Series B,” 150 of which have been designated as “Series C” and 20,000 ofwhich have been designated as “Series D.” At all times through December 31,2004, the Company stock was all issued at “no par value.” By shareholder’sresolution effective January 1, 2005, all classes of stock were declared tohave a par value of $0.001 per share.

The preferred stock has the following characteristics:

Dividends — Each holder of preferred stock shall beentitled to receive dividends in cash, stock or otherwise, if, when and asdeclared by the Company’s board of directors, with the exception of thepreferred stock designated as Series A, which shall not be entitled to receivedividends. However, the Company will not declare or pay a dividend to commonstockholders without first declaring and paying a dividend to the preferredshareholders. Each share of Series D Preferred Stock is specifically entitledto 6% cumulative dividends, payable semi-annually in cash or common stock.

Liquidation — Inthe event of any voluntary or involuntary liquidation, dissolution orwinding-up of the Company, the assets of the Company available for distributionto its stockholders shall be distributed as follows:

(a)                                  SeriesA Preferred Stock shall rank senior to Series B Preferred Stock, Series CPreferred Stock, Series D Preferred Stock and common stock;

(b)                                 SeriesB Preferred Stock shall rank junior to Series A Preferred Stock, senior toSeries C Preferred Stock and common stock

(c)                                  SeriesC Preferred Stock shall rank junior to Series A Preferred Stock, Series BPreferred Stock and senior to Series D Preferred Stock and common stock;

(d)                                 SeriesD Preferred stock shall rank junior to Series A Preferred Stock Series BPreferred Stock, Series C Preferred Stock and senior to common stock; and

(e)                                  Commonstock shall rank junior to Series A, B, C and D Preferred Stock

Additionally, upon a liquidation event, holders ofSeries A Preferred Stock will receive $1,000 per share of Series A PreferredStock. Holders of Series B Preferred Stock will receive the greater of $2,500or the pro-rata share of the Company’s remaining net assets to be distributed,after rank considerations. Holders of Series C Preferred Stock will receive a150% return on the face value of the share of Series C Preferred Stock, or$1,500, after rank considerations. In any event whereby the precedingdistributions are unable to be met, the rank considerations outlined aboveshall be considered and the distribution of the Company’s net assets shall bedetermined according to rank and on a pro-rata basis.

Conversion — Series A Preferred Stock shall convertinto common stock at a rate of $4.00 per share, as adjusted accordingly. Eachshare of Series B Preferred Stock shall convert into 9,110,000 shares of commonstock. Each share of Series C Preferred Stock shall convert into 911,000 sharesof common stock. Each share of Series D Preferred Stock shall convert intocommon stock at $2.10 per share.

In connection with the private placement sale of theCompany’s common stock on January 19, 2005, the Company and the holders ofSeries B and Series C Preferred Stock agreed to convert all shares of theSeries B and Series C Preferred Stock outstanding to shares of the Company’scommon stock. As a result, all shares of Series B and Series C Preferred Stockwere converted into common effective January 19, 2005. The Series D PreferredStock issued in connection with the January 19, 2005 private placement remainedoutstanding following the conversion of the Series 

13

----

B and Series C Preferred Stock. All outstanding sharesof the Series D Preferred Stock were converted in full during 2005 and 2006,and no shares of the Series D Preferred Stock remain outstanding as ofSeptember 30, 2006.

On January 18, 2005, the Company’s board of directors,acting pursuant to a resolution of the Company’s shareholders, approved areverse split of the Company’s stock whereby each 12 shares of common stockoutstanding on the date of record, February 4, 2005, would be exchanged for 1new share of common stock. All references to common stock in the Company’spublic filings refers to “post reverse split” shares.

**Stockholders’equity transactions during 2006:**

Effective January 1, 2006, the Company’s board ofdirectors granted the Company’s Chief Executive Officer 300,000 shares of theCompany’s unregistered common stock valued at $216,000. The shares were fullyvested upon issuance.

On April 21, 2006 the board of directors adopted a resolutionapproving payment of annual compensation to each member of the Company’s boardof directors. Each member is to receive annual cash compensation of $24,000. Inaddition, each member received a guarantee of an annual grant of 15,353 sharesof the Company’s unregistered common stock. The shares of the Company’sunregistered common stock are required to be held until the individual’sservice as a member of the Company’s board of directors is complete.

On June 2, 2006, the Company granted 12,500 shares ofits unregistered common stock to Frank Kavanaugh, a member of the Company’sboard of directors, valued at $40,500 and were issued as compensation due undera previous employment contract with the Company.

On July 24, 2006, the Company closed a privateplacement sale and issued 8,250,000 shares of common stock to investors forgross proceeds of $41,250,000. Net proceeds received after expenses were$39,187,500.

During the three months ended September 30, 2006,4,877 shares of Series D Preferred Stock were converted to 2,322,381 shares ofcommon stock. All shares of common stock were issued during the three monthsended September 30, 2006.

During the three month period ended September 30,2006, warrants to purchases shares of Series D Preferred Stock were exercisedto purchase 290,537 shares of common stock, for gross proceeds of $933,750. Allshares of common stock were issued during the three months ended September 30,2006.

During the three month period ended September 30,2006, 8,315 shares of common stock were issued in lieu of cash dividends forthe holders of Series D Preferred Stock. The shares issued were valued at$40,193. All shares of common stock were issued during the three months endedSeptember 30, 2006.

On August 8, 2006, the Company agreed to issue 30,000shares of common stock under a settlement agreement with Atlantis Partners,Inc. The shares issued were valued at $187,500. All shares of common stock wereissued during the three months ended September 30, 2006.

During the three month period ended September 30,2006, 22,962 shares of the Company’s common stock were issued for compensationof the Company’s board of directors. The shares issued were valued at $116,417.All shares of common stock were issued during the three months ended September30, 2006.

In accordance with EITF 98-5, “Accounting forConvertible Securities with Beneficial Conversion Features or ContingentlyAdjustable Conversion Rates,” the Company records “beneficial conversionfeature expense” when and if the Company issues debt or equity instrumentswhich are convertible into shares of the Company’s common stock, at aconversion price which is favorable to the holder of the debt or equityinstrument. Valuation of this favorable conversion feature is based on thecircumstances of each debt or equity issuance but is generally based on 

14

----

the actual or estimated difference between the fairmarket value of the underlying common stock less the cost of acquiring thecommon stock.

**NOTE 12 — STOCKOPTIONS**

The Company does not have a formal stock option plan. However,the Company has offered its employees stock options. During 2005, the Companyissued options to purchase 659,833 shares of its unregistered common stock tocertain of its employees at an exercise price of $1.50 per share. All suchoptions vested in full effective April 15, 2006. During 2006, the Companyissued options to purchase 1,000,000 shares of its unregistered common stock ata fixed exercise price of $0.72 per share. These options were approved by theBoard of Directors on November 18, 2005 to be granted on January 1,2006 at 100% of the then current market price for the Company’s shares. Theseoptions vest in full on January 1, 2007.
| ** **                    | ** ** | **Number of Shares** | ** ** | ** **                    | ** ** |
|-------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **Under Options**         | ** ** | **Price Per Share** | ** ** |
|                          |       |                           |       |                          |       |
| Balance at January  1, 2005   |       |                           |       |                          |       |
| Granted                       |       | 660,958                        |       | $1.50                         |       |
| Cancelled                     |       | (196,167                       | )          | 1.50                          |       |
| Exercised                     |       | —                         |       | —                        |       |
| Balance at  December 31, 2005 |       | 464,791                        |       | 1.50                          |       |
|                          |       |                           |       |                          |       |
| Granted                       |       | 1,000,000                      |       | 0.72                          |       |
| Cancelled                     |       | —                         |       |                          |       |
| Exercised                     |       | —                         |       |                          |       |
| Balance at  September 30,2006 |       | 1,464,791                      |       | $0.72 — 1.50             |       |

 

Effective January 1, 2006, the Company adopted theprovisions of SFAS No. 123R requiring that compensation cost relating toshare-based payment transactions be recognized in the financial statements. Thecost is measured at the grant date, based on the calculated fair value of theaward, and is recognized as an expense over the employee’s requisite serviceperiod (generally the vesting period of the equity award). Prior to January 1,2006, we accounted for share-based compensation to employees in accordance withAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees” (APB No. 25), and related interpretations. We also followed thedisclosure requirements of SFAS No. 123, “Accounting for Stock-BasedCompensation”, as amended by SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure”. We adopted SFAS No. 123R using themodified prospective method and, accordingly, financial statement amounts forprior periods presented in this Form 10-Q have not been restated to reflect thefair value method of recognizing compensation cost relating to non-qualifiedstock options.

The valuation of non-qualified share-based awardsgranted in 2006 have been included in selling, general and administrativeexpenses and totaled $131,414 and $394,243 for the three and nine month periodsended September 30, 2006, respectively.

The fair value of nonqualified share-based awards isestimated on the date of grant using the Black-Scholes option-pricing model.Expected volatility is calculated using the Company’s historical stock price asquoted on the Over-the-Counter Bulletin Board. The expected term represents anestimate of the time options are expected to remain outstanding. The risk-freeinterest rate for periods within the contractual life of the option is based onthe U.S. treasury yield curve in effect at the time of grant.

The followingtable sets forth the weighted-average assumptions used to determinecompensation cost for our non-qualified stock options consistent with therequirements of SFAS No. 123R.

15

----

 
| Expected option  terms (years)  |   | 8                           |   |
|---------------------------------|--------|-----------------------------|--------|
| Risk-free  interest rate        |   |    4.35-5.07 | %      |
| Expected annual  dividend yield |   | 0                           | %      |

 

Under APB No. 25there was no compensation cost recognized for our non-qualified stock optionsawarded in the three and nine month periods ended September 30, 2005 as thesenon-qualified stock options had an exercise price equal to the market value ofthe underlying stock at the grant date. The following table sets forth proforma information as if compensation cost had been determined using SFAS No.123 for the three and nine month periods ended September 30, 2005.
| ** **                                                                                                             | ** ** | **Three Months  Ended  September 30, 2005** | ** ** | **Nine Months Ended   September 30, 2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| Loss available  to common shareholders                                                                                 |       | $                                                          | (5,800,217 | )                                                                   | $          | (10,034,688 | ) |
| Deduct: Total  stock-based employee compensation cost determined under fair value method for  fixed stock option plans |       | (102,560                                                   | )          | (201,120                                                            | )          |
| Pro forma loss  available to common shareholders                                                                       |       | $                                                          | (5,902,777 | )                                                                   | $          | (9,833,568 | ) |
|                                                                                                                   |       |                                                       |       |                                                                |       |
| Earnings per  share of common stock:                                                                                   |       |                                                       |       |                                                                |       |
| Basic                                                                                                                  |       | $                                                          | (0.17      | )                                                                   | $          | (0.29 | ) |
| Basic — pro forma                                                                                                 |       | $                                                          | (0.17      | )                                                                   | $          | (0.29 | ) |
|                                                                                                                   |       |                                                       |       |                                                                |       |
| Earnings per  share of common stock:                                                                                   |       |                                                       |       |                                                                |       |
| Assuming dilution                                                                                                      |       | $                                                          | (0.17      | )                                                                   | $          | (0.29 | ) |
| Assuming  dilution — pro forma                                                                                    |       | $                                                          | (0.17      | )                                                                   | $          | (0.30 | ) |

 

**NOTE 13 — WARRANTSTO PURCHASE COMMON STOCK**

As of September30, 2006, the following warrants to purchase shares of the Company’s commonstock remained outstanding:

·                                          Warrantsto purchase 83,333 shares of unregistered common stock at $0.84/share expiringNov. 15, 2008

·                                          Warrantsto purchase 896,666 shares of common stock at $3.75/share expiringJanuary 19, 2008

·                                          Warrants topurchase 41,667 shares of unregistered common stock at $3.96/share expiringJanuary 13, 2007

All warrants are immediately exercisable. The fair values of all thesewarrants were insignificant at the issuance date.

**NOTE 14 — OTHERCOMPREHENSIVE INCOME/ (LOSS)**

Other comprehensive income/(loss) consists of thefollowing:

16

----

 
| ** **                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                             | ** ** | **2005**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                    |       |                                                 |       |                                                      |       |   |   |   |   |
| Net income                              |       | $                                                    | 602,698    |                                                      | $          | (5,605,211 | ) | $ | 1,171,080 |   | $ | (9,450,901 | ) |
|  Other comprehensive income/(loss) |       | —                                               |       |                                                      |       | — |   | — |   |
|                                    |       | $                                                    | 602,698    |                                                      | $          | (5,605,211 | ) | $ | 1,171,080 |   | $ | (9,450,901 | ) |

 

**NOTE 15 — TAXES**

The Financial Accounting Standards Board (FASB) has issuedStatement of Financial Accounting Standards Number 109 (“SFAS 109”). “Accountingfor Income Taxes”, which requires a change from the deferred method to theasset and liability method of accounting for income taxes. Under the asset andliability method, deferred income taxes are recognized for the tax consequencesof “temporary differences” by applying enacted statutory tax rates applicableto future years to differences between the financial statement carrying amountsand the tax basis of existing assets and liabilities.

The Company’s net deferred tax asset as of September30, 2006 and December 31, 2005 consisted of the following:
| ** **                       | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Deferred tax  assets:            |       |                             |       |                            |       |
| Provisions and allowances        |       | $                                | 2,714,966  |                            | $          | 2,293,477 |   |
| Depreciation tax loss difference |       | (122,206                         | )          | (204,486                        | )          |
| Net operating loss carryforwards |       | 11,119,855                       |       | 12,056,207                      |       |
|                             |       | 13,712,615                       |       | 14,145,198                      |       |
| Valuation  allowance             |       | (13,712,615                      | )          | (14,145,198                     | )          |
| Net Deferred Tax  asset          |       | $                                | —     |                            | $          | — |   |

 

The Company has provided a full valuation allowancefor the deferred tax assets since these future benefits may not be realized. Ifthe Company achieves future profitability, a significant portion of thesedeferred tax assets could be available to offset future income taxes. The Company’svaluation allowance was decreased $453,318 during the three months endedSeptember 30, 2006 and increased $6,212,234 for the year ended December 31,2005, respectively.

As of September 30, 2006 and December 31, 2005, theCompany has available Federal operating loss carry-forwards of $30,412,750 and$32,868,929, expiring through 2025 and state operating loss carry-forwards of$20,152,334 and $22,545,754, expiring through 2010, respectively.

**NOTE 16 —GAIN/LOSS PER SHARE**

The Company utilizes SFAS No. 128, “Earnings per Share”to calculate gain/loss per share. Basic gain/loss per share is computed bydividing the gain/loss available to common stockholders (as the numerator) bythe weighted-average number of common shares outstanding (as the denominator).Diluted gain/loss per share is computed similar to basic gain/loss per shareexcept that the denominator is increased to include the number of additionalcommon shares that would have been outstanding if all potential common stock(including common stock equivalents) had all been issued, and if suchadditional common shares were dilutive. Under SFAS No. 128, where there is aloss, the inclusion of additional common shares is anti-dilutive (since theincreased number of shares reduces the per share loss available to common stockholders), and if the additional common shares are anti-dilutive, they are notadded to the denominator in the calculation. For periods, where the additionalcommon shares are anti-dilutive, the following common stock equivalents havebeen excluded from the calculation of diluted loss per share:

17

----

**Common StockEquivalents excluded from calculation**
| ** **                           | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                           | ** ** | **2006**                             | ** ** | **2005**                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                 |       |                                 |       |                                |       |   |   |   |   |
| Convertible Preferred Stock Series D |       | —                               |       | 6,192,381                           |       | — |   | 6,192,381 |   |
| Warrants                             |       | —                               |       | 3,334,586                           |       | — |   | 3,334,586 |   |
| Options                              |       | —                               |       | 464,791                             |       | — |   | 464,791 |   |
| Total                                |       | 0                                    |       | 9,991,758                           |       | 0 |   | 9,991,758 |   |

 

**Basic Earning PerShare Computation:**
| ** **                                      |       | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                            | ** ** | **2006**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(in dollars)**                                    | ** ** | **(in dollars)**                                   | ** ** |
|                                            |       |                                                |       |                                               |       |   |   |   |   |
| Net Profit/(Loss)                               |       | 602,698                                             |       | (5,605,211                                         | )          | 1,171,080 |   | (9,450,901 | ) |
|                                            |       |                                                |       |                                               |       |   |   |   |   |
| Preferred Dividends                             |       | —                                              |       | (195,006                                           | )          | — |   | (583,787 | ) |
|                                            |       |                                                |       |                                               |       |   |   |   |   |
| Profit/(Loss) available  to common shareholders |       | 602,698                                             |       | (5,800,217                                         | )          | 1,171,080 |   | (10,034,688 | ) |
|                                            |       |                                                |       |                                               |       |   |   |   |   |
| Basics Profit/(Loss)  per common share          |       | $                                                   | 0.01       |                                               | $          | (0.17 | ) | $ | 0.03 |   | $ | (0.29 | ) |
|                                            |       |                                                |       |                                               |       |   |   |   |   |
| **Weighted-average shares used to  compute:**   |       |                                                |       |                                               |       |   |   |   |   |
| Basic profit/(loss) per share                   |       | 49,014,150                                          |       | 34,267,811                                         |       | 42,050,762 |   | 34,267,811 |   |
|                                                 |            |                                                     |            |                                                    |            |  |  |  |  |  |  |  |  |

 

**Dilutive EarningPer Share Computation:**
| ** **                                      | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                            |       |                                                |       |                                               |       |   |   |   |   |
| Net  Profit/(Loss)                              |       | 602,698                                             |       | (5,605,211                                         | )          | 1,171,080 |   | (9,450,901 | ) |
|                                            |       |                                                |       |                                               |       |   |   |   |   |
| Preferred  Dividends                            |       | —                                              |       | (195,006                                           | )          | — |   | (583,787 | ) |
|                                            |       |                                                |       |                                               |       |   |   |   |   |
| Profit/(Loss)  available to common shareholders |       | 602,698                                             |       | (5,800,217                                         | )          | 1,171,080 |   | (10,034,688 | ) |
|                                            |       |                                                |       |                                               |       |   |   |   |   |
| Diluted  Profit/(Loss) per common share         |       | $                                                   | 0.01       |                                               | $          | (0.17 | ) | $ | 0.03 |   | $ | (0.29 | ) |
|                                            |       |                                                |       |                                               |       |   |   |   |   |
| **Weighted-average  shares used to compute:**   |       |                                                |       |                                               |       |   |   |   |   |
| Diluted profit/(loss)  per share                |       | 51,691,633                                          |       | 34,267,811                                         |       | 44,728,245 |   | 34,267,811 |   |
|                                                 |            |                                                     |            |                                                    |            |  |  |  |  |  |  |  |  |

 

**NOTE 17 — CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

The Company’s Chief Executive Officer, GordonMcGilton, is a principle of APT Leadership, a consulting firm hired by theCompany to provide business consulting services, training seminars and certainbusiness software. During the three month period ended September 30, 2006, APTLeadership has billed the Company a total of $225,500 for such services,training and software.  In addition, theCompany has entered into an agreement with APT Leadership pursuant to which APThas granted to the Company a non-exclusive right and license (the “License”) touse the 

18

----

diagrams, methods, concepts and business operatingsystem functionality contained in APT Leadership’s “APT Tool” software andpresented in APT Leadership’s training seminars, specifically including the useof system diagrams, process flow diagrams and actively linked inputs, outcomesand feedback loops to represent business “conversion processes” and to designand redesign “value added” versus “non-value added” process flow diagrams.  Under the terms of the agreement, the Companypaid a one time license fee of $60,000 and agreed to pay an annual license feethereafter of $50,000.

On February 18, 2006, the Company entered into aModification and Assignment Agreement with Longview pursuant to which theCompany paid $1,250,000 against the principle balance of the Notes and extendedthe maturity date of the Notes for an additional 60 days. In addition, theCompany consented to the assignment of $2,500,000 of the Notes to Fort AshfordFunds LLC (the “Ashford Note”). Frank Kavanaugh, a director of the Company, isthe principal owner of Fort Ashford Funds and a substantial shareholder of theCompany’s common stock.  Mr. Kavanaugh’srelationship to Fort Ashford Funds LLC was fully disclosed to the Company andMr. Kavanaugh did not participate in the negotiations or decision process inrespect of the Modification and Assignment Agreement. The Company paid $87,510to Longview and $50,000 to Fort Ashford in cash as compensation for theextension of the maturity dates of the Notes.

On April 20, 2006, the Company paid $1,000,000 againstthe principle balance of the Notes and extended the maturity date on the Notesand the Ashford Note for an additional 60 days, through June 20, 2006. TheCompany paid $55,000 to Longview and $50,000 to Fort Ashford in cash ascompensation for this extension

On June 20, 2006, the Company paid off the principlebalance and all applicable accrued interest under the Notes.   Additionally, the Company extended thematurity date of the Ashford Note for an additional 30 days, through July 20,2006. The Company paid $50,000 to Fort Ashford in cash as compensation for theextension of the Ashford Note.

On August 9, 2006, the Company paid off the principlebalance of the Ashford Note, and all applicable accrued interest under theAshford Note.

As of September 30, 2006, the Company has no furtherobligation under the Notes, the Ashford Note, the Security Agreement or anyother associated documents.

**NOTE 18 —SUBSEQUENT EVENTS**

On October 31, 2006, the Company awarded its ChiefExecutive Officer warrants to purchase 500,000 shares of the Company’s commonstock, valued at $496,989. The warrant exercise price is $7.48 per share.  The warrants vest on a pro-rata basis onMarch 31, 2007, June 30, 2007, September 30, 2007 and December 31, 2007,respectively.

On November 10, 2006, the Company announced it hadsigned a U.S. Marine Corps contract for approximately 200 Cougar Joint EODRapid Response vehicles, 80 Buffalo mine-protected clearance vehicles, partsand services. The contract, which will be administered by the Marine CorpsSystems Command is worth an estimated $214,124,450 subject to contract definitization.

**ITEM 2 —MANAGEMENT’S DISCUSSION AND ANALYSIS**

**CAUTIONARY STATEMENT CONCERNINGFORWARD-LOOKING STATEMENTS**

This Report contains forward-looking statements,including, without limitation, statements concerning possible or assumed futureresults of operations and those preceded by, followed by or that include thewords “believes,” “could,” “expects,” “intends,” “anticipates,” or similarexpressions. Our actual results could differ materially from these anticipatedin the forward-looking statements for many reasons including our ability toraise capital when necessary; availability of parts and raw materials for ourproducts; continued customer acceptance of our products; 

19

----

on-going success of our research and developmentefforts and other risks described elsewhere in this report and in our otherfilings with the Securities and Exchange Commission including our annual reporton Form 10-K. Although we believe the expectations reflected in theforward-looking statements are reasonable, they relate only to events as of thedate on which the statements are made, and our future results, levels ofactivity, performance or achievements may not meet these expectations. We donot intend to update any of the forward-looking statements after the date ofthis document to conform these statements to actual results or to changes inour expectations, except as required by law.

**SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

The Securities and Exchange Commission, or SEC, issuedFinancial Reporting release No. 60, “Cautionary Advice RegardingDisclosure About Critical Accounting Policies,” or FRR 60, suggesting companiesprovide additional disclosure and commentary on their most critical accountingpolicies. In FRR 60, the SEC defined the most critical accounting policies as theones that are most important to the portrayal of a company’s financialcondition and operating results, and require management to make its mostdifficult and subjective judgments, often as a result of the need to makeestimates of matters that are inherently uncertain. The methods, estimates andjudgments we use in applying these most critical accounting policies have asignificant impact on the results we report in our financial statements.

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements, as well as the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

As a general rule, financial information is accountedfor and based on cost, not current market value. Revenues and gains should bematched using the accrual method with the expenses giving rise to the revenuesand gains to determine earnings for the period. Expenses are necessarilyincurred to produce revenue. Expenses are then “matched” in the same accountingperiod against the revenue generated. Revenues are recognized when they areearned and expenses are recognized in the same period as the related revenue(matching or using a systematic and rational allocation or expensing in theperiod in which they expire), not necessarily in the period in which we receiveor expend cash.

We believe thefollowing critical accounting policies and procedures, among others, affect ourmore significant judgments and estimates used in the preparation of ourconsolidated financial statements:

·                                          Revenuerecognition;

·                                          Inventorycost and associated reserves; and

·                                          Allocationof direct and indirect cost of sales.

In December 2004, FASB issued StatementNo. 123(R), Share-Based Payment, which establishes accounting standards fortransactions in which an entity receives employee services in exchange for(a) equity instruments of the entity or (b) liabilities that arebased on the fair value of the entity’s equity instruments or that may besettled by the issuance of equity instruments. Effective October 1, 2005, SFAS123(R) will require us to recognize the grant-date fair value of stock optionsand equity based compensation issued to employees in the statement ofoperations. The statement also requires that such transactions be accounted forusing the fair-value method, thereby eliminating use of the intrinsic method ofaccounting in APB No. 25.  Weutilized APB No. 25 prior to January 1, 2006.

In November 2004, the FASB issued StatementNo. 151, Inventory Costs, to amend the guidance in Chapter 4, InventoryPricing, of the FASB Accounting Research Bulletin No. 43, Restatement andRevision of Accounting Research Bulletins, which became effective on January 1,2006. Statement No. 151 clarifies the accounting for abnormal amounts of idlefacility expense, freight, handling costs, and wasted materials. The Statementrequires that those items be recognized as current-period charges.Additionally, Statement No. 151 requires that allocation of fixedproduction overhead to the costs of conversion be based on normal capacity ofthe production facility. We 

20

----

have adopted Statement No. 151 and do not believethat Statement No. 151 will have a significant impact on our financialcondition and results of operations.

Principles of Consolidation: Theconsolidated financial statements include the accounts of ForceProtection, Inc., and our two wholly owned subsidiaries, Force ProtectionIndustries, Inc. (formerly Technical Solutions Group, Inc.) and ForceProtection Technologies, Inc (formerly TSG International, Inc.) for thethree and nine month period ended September 30, 2006. All inter-companybalances and transactions are eliminated in consolidation.

Cash Equivalents:**For purposes of reporting cash flows, we consider allhighly liquid debt instruments purchased with maturity of three months or lessto be cash equivalents..

Inventories:****Inventories are stated at the lower ofcost or market. The cost is determined under the first-in, first-out, (FIFO)valuation method.

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

| Leasehold and improvements |   | 20 years |   |
|----------------------------|--------|----------|--------|
| Furniture and  fixtures    |   | 3 years  |   |
| Machinery and equipment    |   | 7 years  |   |
| Tooling and  molds         |   | 7 years  |   |
| Vehicles                   |   | 5 years  |   |

 

Goodwill:**Under SFAS No. 142, Goodwill and other IntangibleAssets, all goodwill amortization ceased effective January 1, 2002. Rather,goodwill is now subject to annual impairment reviews. A fair value test isapplied at the reporting level. This test requires various judgments andestimates. A goodwill impairment loss will be recorded for any goodwill that isdetermined to be impaired.  When the carryingvalue exceeds fair value, the impairment is the difference between the carryingvalue of goodwill and the fair value. The fair value of goodwill is defined asthe fair value as a whole less the value of individual assets and liabilitiesusing an estimated purchase price, as a whole.

Estimates:**Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements, aswell as the reported amounts of revenues and expenses during the reportingperiod. Actual results could differ from those estimates.

Revenue Recognition:**Our revenue is derived principally from the sale of ourvehicles and associated spare parts and training services. Revenue from productsales and spare part sales, net of an allowance for contractual adjustments, isrecognized when the products or spare parts are delivered to and “formally”accepted by the customer. We define “formal acceptance” as taking place when arepresentative of the United States Government signs the United States FormDD250 entitled “Material Inspection and Receiving Report” which under theFederal Acquisition Regulations signifies contractual inspection and acceptanceof the work performed by the contractor. It also acts as the contractual invoice creating payment liability onthe United States Government.  Inaccordance with standard industry practice, there is a representative from theUnited States Defense Contractor Manufacturing Agency (DCMA) acting as acontractual representative of the United States Government present at our facilities.  This DCMA representative inspects eachvehicle as it is delivered by the Company and upon confirmation of the vehicle’sconformity with the contractual specifications the inspector signs the FormDD250 and formally accepts delivery of the vehicle. We only recognize revenuesarising from its U.S. Government contracts upon execution of the Form DD250 bythe DCMA inspector. Under some of our U.S. Government contracts, we receiveperformance based payments based on completion of specific milestonesstipulated under the contract (for example, delivery of raw material to ourLadson facility). These payments are recorded as “deferred revenue” and carriedon our balance sheet as until the final delivery of the 

21

----

products and formal acceptance by the U.S. Governmentpursuant to the Form DD250. Upon acceptance of the products and the executionof the Form DD250, we recognize the full sale price of the product as revenue.

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

We negotiate contracts with our customers that mayinclude revenue arrangements with multiple deliverables, as outlined byEmerging Issues Task Force No. 00-21 (EITF 00-21).  Our accounting policies are defined such thateach deliverable under a contract is accounted for separately.  Historically, we have negotiated and signedcontracts with our customers which outline the contract amount and specificterms and conditions associated with each deliverable.

Concentration: Our future operationsand continued expansion are subject to a significant concentration risk. During the nine months ended September 30, 2006 and 2005, our revenues frommilitary units of the U.S. Government accounted for 89% and 91% of totalrevenues, respectively.  Our accounts receivable from military units ofthe U.S. Government at September 30, 2006 and December 31, 2005 amounted to 75%and 83%, of total accounts receivable, respectively.  However, wecurrently have a significant backlog and have signed contracts to provideadditional products of significant value to the U.S. Government and our firstinternational customer, the British Ministry of Defense.

Accounts Receivable and “Definitization”:A majority of our contracts are with the United States Government and as suchthey are “public sector” contracts subject to the Federal AcquisitionRegulations set out at Title 41 of the United States Code (the “FAR”), and mayresult either from competitive bidding or may be awarded as “sole source”contracts “subject to definitization” as provided under FAR Section252.217-7027. Following the award of a sole source contract, a centralcomponent of the definitization process is the negotiation and finalization ofthe contract price between the contractor and the United States contractingofficer.  As part of this process, theparties make a mutual determination of the direct material and labor costs forthe work based upon the bill of materials and other purchasing information andthen the parties mutually agree upon “rates” for the indirect labor costs andthe general and administrative costs and upon a “fee” (or profit).  While thedirect material costs and labor can be established through objective evidence,the “rates” and fee are more subjective and are based upon an analysis ofmultiple factors including historical performance data and projectedoperational factors.  The contractor hasthe right to submit proposed rates and fee, but these are subject to finalreview and approval by the contracting officer, who may insist on usingalternate rates and fee.  As provided insection 252.217-7027(c):

*(c) Ifagreement on a definitive contract action to supersede this undefinitizedcontract action is not reached by the target date in paragraph (b) of thisclause, or within any extension of it granted by the Contracting Officer, theContracting Officer may, with the approval of the head of the contractingactivity, determine a reasonable price or fee in accordance with subpart 15.4and part 31 of the FAR, subject to Contractor appeal as provided in theDisputes clause.*

Finally, although both parties make an effort todefinitize the contract as quickly as possible, the process is time consumingand can take months (or even years) to complete.  During the definitization process the contractoris required to perform the contract work and to make deliveries under thecontract before the final contract price has been established.  For this reason, as part of the originalletter award, the contractor provides a rough order of magnitude (“ROM”) priceto be used for invoicing and accounting purposes pending definitization.

As a result of the potential adjustments related tothe definitization process, we maintain an allowance for contractualadjustments account.  This account isreviewed on a regular basis to determine adequate adjustments, ifnecessary.  The allowance is evaluatedand deemed adequate based on the analysis of historical data and calculation ofpro-rata percentages of current contracts in place, which remain subject to thedefinitization process.

Dividend Policy:**Wehave never declared or paid a cash dividend on our common stock, and we do notanticipate paying any cash dividends on our common stock in the foreseeablefuture. Any future determination to pay cash 

22

----

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.Under the terms of the Certificate of Designation for our Series D ConvertiblePreferred stock, we are obligated to pay a 6% dividend in cash or shares ofcommon stock on the outstanding shares of Series D stock.  Such divided is due and payable on March 1and September 1 each year. As of September 30, 2006, there are no outstandingSeries D shares and we have no further obligation to make such dividendpayments.

**FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

Overview: As a result of ourcontinued vehicle production and increased operating efficiencies, we generatedan operating profit for the third consecutive quarter, and continue to show ayear-to-date net profit. For the three month period ended September 30, 2006,revenue from all sources was $42,160,858. Total costs of sales were $34,242,350 and we generated a gross profit of$7,918,508. We incurred general and administrative expenses of $6,780,641 andresearch and development expenses in the amount of $545,717.  Total operating income was $592,150. Weincurred interest expense of $110,493 and other income of $121,041 resulting innet income for the three months ended September 30, 2006 of $602,698.

For the nine month period ended September 30, 2006,revenues totaled $133,037,980.  Netincome for the nine month period ended September 30, 2006 was $1,171,080.

The following table sets forth our consolidatedstatements of operations for the three month period ended September 30, 2006and 2005, respectively. The discussion and analysis that follows should be readin conjunction with our consolidated financial statements and related notesincluded elsewhere in this report.

**ConsolidatedStatement of Operations**
| ** **              | ** ** | **Three Month Period  Ended September 30** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------|------------|--------------------------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **2006**                                   | ** ** | **2006**   | ** ** | **Difference** | ** ** | **% Change** | ** ** |
| Revenues                |       | $42,160,858                                |       | 9,303,526  |       | 32,857,332     |       | 353.2 | % |
| Cost of Sales           |       | 34,242,350                                 |       | 10,618,349 |       | 23,624,001     |       | 222.5 | % |
|                    |       |                                       |       |       |       |           |       |   |   |
| Gross Profit            |       | $7,918,508                                 |       | (1,314,823 | )          | 9,233,331      |       | 702.2 | % |
| G.P.%                   |       | 18.8%                                      |       | -14.1      | %          |           |       |   |   |
|                    |       |                                       |       |       |       |           |       |   |   |
| G&A Expense         |       | $6,780,641                                 |       | 3,741,220  |       | 3,039,421      |       | 81.2 | % |
| R&D Expense         |       | 545,717                                    |       | 203,730    |       | 341,987        |       | 167.9 | % |
| Total G&A           |       | $7,326,358                                 |       | 3,944,950  |       | 3,381,408      |       | 85.7 | % |
| G&A%                |       | 17.4                                       | %          | 42.4       | %          |           |       |   |   |
|                    |       |                                       |       |       |       |           |       |   |   |
| Operating Income/(Loss) |       | $592,150                                   | )          | (5,259,773 | )          | 5,851,923      |       | 111.3 | % |
|                    |       |                                       |       |       |       |           |       |   |   |
| Interest Expense        |       | (110,493                                   | )          | (364,235   | )          | 253,742        |       | 69.7 | % |
| Other Income/(Expense)  |       | 121,041                                    |       | 18,797     |       | 102,244        |       | 543.9 | % |
| Net Income (Loss)       |       | $602,698                                   |       | (5,605,211 | )          | 6,207,910      |       | 110.8 | % |

 

Revenue: Revenue for the three monthperiod ended September 30, 2006 was $42,160,858 representing an increase of  $32,857,332 (or 353.2%) compared to the sameperiod in 2005. During the three month period, we delivered a total of 58vehicles (3 Buffalo, 53 Cougar/JERRV and 2 ILAV) compared with 13 vehicles forthe same period in 2005. The increase in revenues was due to higher vehicleproduction volumes, primarily as a result of the follow on

23

----

 

JERRV contract awarded May 5, 2006. Our revenue isderived from the sale of our armored vehicles and the sale of spare parts,training, field services and other support services. During the three monthperiod ended September 30, 2006, we recorded revenues of $32,042,511 fromvehicle sales and $10,118,347 from the sale of spare parts and other supportservices. The revenue from the sale of spare parts continues to increase,driven by the increasing number of our vehicles delivered and deployed to areasof operations.

Cost of Sales: Cost of sales for thethree month period ended September 30, 2006 was $34,242,350 representing anincrease of $23,624,001 (or 222.5%) compared to the same period in 2005. Theincrease during this period was due to the increased level of vehicleproduction, and the corresponding increased cost of direct and indirect laborand material associated with our manufacturing activities. The cost of salesfor the three month period ended September 30, 2006 was 81.2% of gross revenuesfor this three month period representing a 18.8% gross profit for this period,compared with cost of sales of 114.1% and a gross profit of -14.1% for the sameperiod in 2005. As we continue to expand our production capacity, we areachieving increased cost efficiency from such factors as volume purchasing andimprovements in our manufacturing processes which will continue to improve ourgross margins.

General and Administrative Expenses:General and administrative expenses for the three month period ended September30, 2006 were $7,326,358 representing an increase of $3,381,408 (or 85.7%)compared to the same period in 2005. The general and administrative expensesfor the three month period ended September 30, 2006 included $545,717 inresearch and development expenses. We expect the absolute amount of our generaland administrative expenses to increase over time as we continue to expand ourproduction capacity to meet increasing sales demand, however we expect thepercentage of our general and administrative expenses in relation to grossrevenues to decrease as we are able to allocate such costs over an increasedrevenue base.  Thus, for example, duringthe three month period ended September 30, 2006, our general and administrativeexpenses were 17% of our gross revenue as compared with 42% for the same periodin 2005. We expect this trend to continue.

Net Income/(Loss): Net income forthe three month period ended September 30, 2006 was $602,698 (1.4% of sales)representing a significant improvement over the net loss of $(5,605,211)incurred during the same period in 2005. The improved performance is due toincreasing efficiencies and our higher production volumes.

Vehicle Orders and Backlog:

On May 17, 2004, we announced the award of acontract to deliver 21 Buffalo vehicles to the U.S. Army and inOctober 2004 we were awarded a separate contract by the U.S. Army for anadditional 15 Buffalo vehicles. Initial deliveries under these two Buffalocontracts began during 2004 and 2005, and as of September 30, 2006, we havedelivered all 36 Buffalo vehicles.  As ofSeptember 30, 2006, there is no backlog under these two contracts with the U.S.Army.

During the three month period ended December 31, 2005,we announced a new order from the U.S. Marine Corps. for the purchase of 4Buffalo vehicles, with associated spares, service and training, for a totalcontract price of $3,852,026. We delivered all 4 of these Buffalo vehicles in2005.

On February 3, 2006, we announced the award of aLetter Contract from the U.S. Army for the delivery of 19 Buffalo Vehicles withan option for an additional 27 vehicles. The Army subsequently ordered 22 ofthe total 27 vehicles available under the option, such that the total number ofvehicles on order is 41. The Letter Contract is subject to definitization ofterms.  As of September 30, 2006, we havedelivered 8 Buffalo vehicles, leaving a contract backlog of 33 Buffalo vehiclesto deliver under this contract.

On March 2, 2006, we announced the award of a contractwith the U. S. Army, whereby we agreed to provide the Army with authorizedstock list supplies to service its Buffalo route clearance vehicle for the sumof up to $5 million.  As of September 30,2006, we had delivered supplies totaling $4,189,190 under this contract.

On April 23, 2004, we announced a contract awardto deliver Cougar Hardened Engineer Vehicles (“HEV”) to the U. S. Marine Corps,of which 14 were initially funded under the contract. On March 8, 2005 theU.S. Marine Corps exercised its option to increase the number of HEV vehiclesby 14, for a total of 28 vehicles. As of September 30, 

24

----

2006, we delivered a total of 27 HEV vehicles, andhave a remaining backlog of 1 Cougar HEV vehicle to be delivered under thiscontract, with a value of approximately $400,000.

During the second quarter of 2005, we announced theaward of a new contract by the U.S. Marine Corps for delivery of 122 CougarJoint EOD Rapid Response Vehicles (“JERRV”) to be delivered during 2005 and2006, with a total value, with associated spares parts and training, of$90,000,000. As of September 30, 2006, we have delivered all 122 JERRV vehiclesleaving no backlog under the initial JERRV contract.

On May 5, 2006, we announced that the U.S. MarineCorps had awarded us a fixed price indefinite delivery, indefinite quantitycontract to provide not more than 79 additional Joint Explosive OrdnanceDisposal Rapid Response Vehicles (JERRV) and associated manuals, spare parts,field support and training for an amount not to exceed $51,031,110. As ofSeptember 30, 2006, we have delivered 59 of these additional JERRV vehicles,leaving a backlog of 20 vehicles with a total value, with associated sparesparts and training, of approximately $13,000,000.

On June 2, 2006, we announced that on May 31,2006 the U.S. Army Tank-Automotive and Armaments Command (“TACOM”) awarded BAESystems Land & Armaments L.P. of York, Pa (“BAE”) a delivery order inthe amount of $180,503,000 as part of a $445,439,000 firm-fixed-price contractfor the production and delivery of 378 Iraqi Light Armored Vehicles (“ILAV”) tobe delivered to the Iraqi National Army. We have an agreement with BAE pursuantto which we will license to BAE the use of FPI’s Cougar vehicle as the basisfor the ILAV design, and will act as BAE’s principal subcontractor to providethe manpower and other resources needed to produce 50% of the vehicles inLadson South Carolina. We will also provide 100% of the after sales service andsupport required under the TACOM agreement. As of September 30, 2006 we havedelivered 2 of the ILAV vehicles, leaving a backlog of 187 vehicles with atotal value, including associated spares and logistical support, ofapproximately $55,000,000 under the current delivery order from TACOM.

On August 11, 2006, we announced that we had beenawarded a contract by the British Ministry of Defense for more than 85 Cougarexplosive ordnance disposal vehicles, also known as Mastiff Protected PatrolVehicles (Mastiff PPV). The contract also includes associated spares, technicalmanuals, and field service support.  TheContract, administered through the U.S. Marine Corps System Command  is subject to price definitization. As ofSeptember 30, 2006 we had not delivered any of the Mastiff PPV vehicles,leaving a backlog of all 85 vehicles.

On November 10, 2006, weannounced that we had signed a U.S. Marine Corps contract for approximately 200Cougar Joint EOD Rapid Response vehicles, 80 Buffalo mine-protected clearancevehicles, parts and services. The contract, which will be administered by theMarine Corps Systems Command, is worth an estimated $214,124,450 subject tocontract definitization.

Vehicle Deliveries: Set out below isa table showing actual deliveries of our vehicles during 2004, 2005 and 2006.These deliveries are subject to parts and material availability, productionschedules, production efficiencies and other contingencies discussed in thisreport.

**ActualVehicle Deliveries 2004, 2005 & 2006**
| ** **   | ** ** | **2004** | ** ** | **Q1-2005** | ** ** | **Q2-2005** | ** ** | **Q3-2005** | ** ** | **Q4-2005** | ** ** | **2005** | ** ** | **Q1-2006** | ** ** | **Q2-2006** | ** ** | **Q3-2006** | ** ** |
|--------------|------------|----------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|----------|------------|-------------|------------|-------------|------------|-------------|------------|
| Buffalo      |       | 9        |       | 2           |       | 22          |       | 3           |       | 4           |       | 31       |       | 3           |       | 5           |       | 3           |       |
|         |       |     |       |        |       |        |       |        |       |        |       |     |       |        |       |        |       |        |       |
| Cougar HEV   |       | 5        |       | 8           |       | 2           |       | 8           |       | 4           |       | 22       |       | 0           |       | 0           |       | 1           |       |
|         |       |     |       |        |       |        |       |        |       |        |       |     |       |        |       |        |       |        |       |
| Cougar JERRV |       | 0        |       | 0           |       | 0           |       | 2           |       | 16          |       | 18       |       | 45          |       | 59          |       | 52          |       |
|         |       |     |       |        |       |        |       |        |       |        |       |     |       |        |       |        |       |        |       |
| Cougar ILAV  |       | 0        |       | 0           |       | 0           |       | 0           |       | 0           |       | 0        |       | 0           |       | 0           |       | 2           |       |
|         |       |     |       |        |       |        |       |        |       |        |       |     |       |        |       |        |       |        |       |
| British PPV  |       | 0        |       | 0           |       | 0           |       | 0           |       | 0           |       | 0        |       | 0           |       | 0           |       | 0           |       |
|         |       |     |       |        |       |        |       |        |       |        |       |     |       |        |       |        |       |        |       |
| Total        | ** ** | **14**   |       | 10          |       | 24          |       | 13          | ** ** | **24**      | ** ** | **71**   |       | 48          |       | 64          |       | 58          |       |

 

25

----

 

TRENDS, RISKS ANDUNCERTAINTIES

Trends: Our financial results forthe period ended September 30, 2006 do not necessarily reflect the direction ofour operations during this period. Although our revenue for the third quarterof 2006 is significantly greater than our revenue for the same period in 2005,our third quarter revenue has declined by more than 20% when compared with oursecond quarter 2006 results. We do not believe that this decrease in sales isindicative of a slow down in our overall growth but instead we believe it isthe result of a combination of temporary factors; including a diversion ofresources associated with our mobilization for new contracts (including the ILAVcontract and the Mastiff contract), short term interruption of our Buffaloproduction to make design modifications requested by the customer, productivityinefficiencies resulting from our continuing workforce expansion and end ofquarter delivery timing issues.  Thesefactors contributed to a dip in our vehicle production growth which hastranslated to a short term decrease in our revenue for the third quarter ascompared with the second quarter of 2006. 

During the three month period ending September 30,2006, we announced the award of a new contract from the British Ministry ofDefense for more than 85 Cougar explosive ordnance disposal vehicles, alsoknown as Mastiff Protected Patrol Vehicles (Mastiff PPV). The contract includesassociated spares, technical manuals, and field service support and representsthe continued expansion of our presence in the international market. During thethird quarter of 2006, we commenced mobilization for this contract andanticipate that production and delivery of vehicles under this contract willcommence during the fourth quarter of 2006. On November 10, 2006, we also announced a new contract award from theU.S. Marine Corps contract for approximately 200 Cougar JERRV and 80 Buffalovehicles with associated parts and services. These new contracts, together withthe ILAV and Buffalo contracts awarded earlier in the year, will provide apotential backlog of more than 500 vehicles for production in 2007.

Overall, as we commence delivery of the ILAV andMastiff vehicles, and continue production of our Buffalo and Cougar vehicles,we remain on track for our 2006 financial performance to substantially exceedour 2005 results, and we believe there is an opportunity for such growth tocontinue during 2007 and beyond, subject to the risks and uncertaintiesdiscussed below.

Risks: We continue to rely upon theU.S. Army and the U.S. Marine Corps for the vast majority of our sales, and weare expanding our infra-structure with the expectation that such sales willincrease over time.  If either of thesecustomers elected not to issue further orders to us it would have a dramaticimpact upon our financial performance. We have no reason to believe that suchadditional orders will not be forthcoming however there is a risk to our futureoperations resulting from such sales concentration. In the past, we have alsoencountered some delays in securing the necessary components for our vehicles,for example armor steel, truck chassis, axle sets and ballistic glass. Tomitigate this risk, we have identified multiple vendors for certain componentsto ensure we have alternate sources of supply, if necessary. Additionally, wehave implemented a program of advance purchasing and stockpiling criticalmaterials. For example, we currently have pre-purchased steel and truck partsto ensure availability of material needed for current and potential futureorders. While we do not currently expect the potential non-availability ofparts or raw materials to materially affect our operations, there is a possibilitythat delays or increased costs could negatively impact our financialperformance if circumstances change.

There is also growing competition in the marketplacefrom other manufacturers of armored vehicles similar to ours. In the past, wewere able to capture a large share of the market requirement for these vehiclesbased on our tested design and proven performance, and by virtue of being “firstto market” with the Buffalo and Cougars vehicles. The increasing number of U.S.Governmental contract solicitations for vehicles offering a high level of “survivability”has resulted in numerous companies seeking to enter the market for armoredvehicles and there is a risk that one or more competitors could encroach on ourcurrent market position. To maintain our competitive position we seek tocontinuously enhance our technology and know-how to improve our products. Ourvehicles have established a good 

26

----

reputation based on their performance in the field,and we believe that by improving their capabilities our vehicles will continueto be preferred over other vehicles currently being offered in the marketplace.

Uncertainties: The realization of amajor portion of the assets shown on our balance sheet is dependent upon thesuccess of our future operations, which in turn is primarily dependent on themarket demand for our products and our ability to capture a share of thatdemand.  While the market demand forarmored vehicles is driven by potentially unpredictable geo-political,technological and economic forces, we believe it is more likely than not thatthere will be a continued and growing demand for armored vehicles such as oursthat offer a high level of protection to occupants traveling in areas of urbanunrest and war. Recent contract solicitations by the U.S. Department of Defensedemonstrate that such protection has become a leading performance specificationfor military vehicles of all kinds and suggest that armored vehicles willbecome an integral part of the military vehicle fleet. The main uncertainty facingour company is whether we will be able to create and implement the operatingsystems needed to achieve sustainable high-volume vehicle production within thenear term time frame. The demand for armored vehicles is growing so quicklythat if we are not able to substantially improve our production capability, itis possible that our customers may seek alternate products or suppliers tosatisfy their requirements.  Ourmanagement is aware of this situation and is taking steps to mitigate this riskby striving to optimize our production capacity and by seeking strategicrelationships to support our operations.

LIQUIDITY AND CAPITALRESOURCES

Current Liquidity: For the ninemonth period ended September 30, 2006, we had a starting cash balance of$1,217,509 and an ending cash balance of $26,748,260 representing a netincrease in our cash position for such period of $25,530,751. During thisperiod we received $1,312,500 from the exercise of outstanding warrants. Inaddition, on July 24, 2006, we closed a private placement sale and issued8,250,000 shares of common stock to investors for gross proceeds of$41,250,000; net proceeds were $39,187,500. Approximately $15 million of theproceeds were used to bring our accounts payables to current status. The balanceof these cash proceeds, approximately $25 million, remains available to coveranticipated capital expenditures required for our continued facilities andinfrastructure expansion, and to provide short term working capital to minimizethe cyclic nature of our accounts receivable from the U.S. Government.

Future Liquidity: During the ninemonth period ended September 30, 2006, while we increased our net cash positionby $25,530,751, we experienced negative cash flows from operations of$8,293,412, and we are currently in the process of mobilizing the resourcesneeded to support our increased production build-up.  As part of such process we intend to developnew production lines for vehicle fabrication and final integration activities,add to our workforce, expand our paint and material handling facilities andpurchasing long lead materials to support increased levels of production duringthe coming fiscal year.  We also believethere is a growing market opportunity for our new Cheetah vehicle and we areaccelerating our development program for this vehicle in an effort to establisha production line during 2007. These activities will place demands on ourfuture liquidity which may exceed our currently available cash resources. Ifso, we may need to seek alternative sources of cash such as senior debtfacilities, lines of credit or additional sales of our securities. If we raisefunds through the sale of securities, the common stock currently outstandingcould be diluted. There is a risk that such additional financing may not beavailable, or may not be available on acceptable terms, and the inability toobtain additional financing or generate sufficient cash from operations couldrequire us to reduce or eliminate expenditures for capital equipment, researchand development, production, or marketing of our products, or otherwise curtailor discontinue our operations, which could have a material adverse effect onour business, financial condition and results of operations.

Inflation & Material Cost: We donot believe that inflation has had or is likely to have any significant impacton our revenues, and we currently are not facing any material shortages ofmaterial or parts. We currently have enough steel on hand or on order tomanufacture our existing contracts, and we continue to purchase steelanticipating future requirements. If the price of steel increasessignificantly, the cost of our products could increase, and we may not be ableto pass on this cost under our current contracts. As a result, if the cost ofour raw materials increases our profitability on such current contracts, ifany, could decrease.

27

----

 

**ITEM 3****— QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

**Commodity Prices:**Weare exposed to market risk from changes in commodity prices. If the price ofsteel increases significantly, the cost of our products could increase. It isunlikely we will be able to pass on this cost under our current contracts. As aresult, if the cost of our raw materials increases, our profitability, if any,could decrease.

**Foreign Currency:**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.

**Interest Rates:**As wedo not have a trading portfolio and our current financing is at a fixed rate,we are not currently directly at risk of interest rate fluctuations. As ourfinancing needs change in the future, interest rate risk may become a more significantissue for us.

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

**ITEM 4****— CONTROLSAND PROCEDURES**

**Disclosure Controls and Procedures**

Our management evaluated, with the participation ofour Chief Executive Officer and our Acting Chief Financial Officer, theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this Quarterly Report on Form 10-Q.  Based on thisevaluation, our Chief Executive Officer and our Acting Chief Financial Officerhave concluded that our disclosure controls and procedures are effective toensure that information we are required to disclose in reports that we file orsubmit under the Securities Exchange Act of 1934 (i) is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms, and (ii) isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and our Acting Chief Financial Officer, as appropriate to allow timelydecisions regarding required disclosure.  Our disclosure controls andprocedures are designed to provide reasonable assurance that such informationis accumulated and communicated to our management.  Our disclosurecontrols and procedures include components of our internal control overfinancial reporting.  Management’s assessment of the effectiveness of ourinternal control over financial reporting is expressed at the level ofreasonable assurance that the control system, no matter how well designed andoperated, can provide only reasonable, but not absolute, assurance that thecontrol system’s objectives will be met.

**Changes in Internal Controls overFinancial Reporting**

There were no changes in our internal control overfinancial reporting that occurred during our last fiscal quarter that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

**Code of Ethics**

We have adopted a Code of Ethics that applies to allexecutive officers and other employees. Our Code of Ethics is available forreview on our website at www.forceprotection.net

**PART II— OTHER INFORMATION**

**ITEM 1 —LEGAL PROCEEDINGS**

On August 8, 2006, we settled all claims brought byAtlantis Partners, Inc. against the Company in the Circuit Court for the15th Judicial Circuit, Palm Beach County Florida arising out of an allegedfinder’s fee agreement, for a one time payment of 30,000 shares of unregisteredcommon stock.

During the three month period ended June 30, 2006, we confirmed thattwo former employees had filed claims under 31 U.S.C. §3730 alleging *inter alia* that we had failed to comply with the terms ofthe JERRV contract in respect of the allocation and use of the initial contractmilestone payment for such “accelerated delivery costs.” On 

28

----

August 23, 2006, we agreed to settle with the UnitedStates Government and with these former employees all claims relating to orarising under the JERRV contract and the payment of such accelerated deliverycosts for a total of $1,905,000 plus interest of $23,000. As of September 30,2006, we have paid $705,000 under the terms of such settlement agreement and wehave established a provision of $1,223,000 against this liability.

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

During the three month period ended September 30, 2006,we issued the following unregistered securities:

On August 8, 2006, we issued 30,000 shares ofunregistered common stock to Atlantis Partners, Inc under a settlementagreement.  The shares were valued at$187,500.

On July 25, 2006, we issued 22,962 shares ofunregistered common stock as compensation to our Directors for their service.The shares were valued at $116,417.

Private Sale of Public Equity: OnJuly 24, 2006, we sold 8,250,000 shares of its unregistered common stock at$5.00 per share through a private placement for gross proceeds $41,250,000. Theproceeds net of commissions were $39,187,500. The shares were sold to 15 institutional investors in accordance with Rule 506of Regulation D under the Securities Act of 1933 (as amended) in that:

·                  the sales weremade to sophisticated or accredited investors, as defined in Rule 502;

·                  we gave eachpurchaser the opportunity to ask questions and receive answers concerning theterms and conditions of the offering and to obtain any additional informationwhich we possessed or could acquire without unreasonable effort or expense thatis necessary to verify the accuracy of information furnished;

·                  at a reasonabletime prior to the sale of securities, we advised each purchaser of thelimitations on resale in the manner contained in Rule 502(d)2;

·                  neither we norany person acting on its behalf sold the securities by any form of generalsolicitation or general advertising; and

·                  we exercisedreasonable care to assure that each purchaser of the securities is not anunderwriter within the meaning of Section 2(11) of the Securities Act of1933 in compliance with Rule 502(d).

The netproceeds from this financing were used to reduce our outstanding accountspayable, cover anticipated capital expenditures required for our continuingfacilities and infra-structure expansion, and to provide short term workingcapital to minimize the cyclic nature of the payment of our accounts receivablefrom the U.S. Government.

**STOCK OPTIONS**

We do not have a formalstock option plan, however we have issued the following options to purchaseshares of our unregistered common stock to certain employees, including:

·                  Optionsto purchase 1,000,000 shares at $0.72 per share.  These options were approved by the Board ofDirectors on November 18, 2005 to be granted on January 1, 2006 at 100% of thethen current market price for our shares. These options vest in full on January1, 2007.

·                  Optionsto purchase 464,791 at a purchase price of $1.50 per share. These options weregranted on April 15, 2005 at 100% of the current market price for our shares.These options vested in full on April 15, 2006.

29

----

 

**ITEM 3 —DEFAULTS UPON SENIOR SECURITIES**

Not applicable.

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

On September 18, 2006 at 10:00 a.m., we held ourgeneral Shareholder’s meeting at our offices in Ladson South Carolina.  The meeting was held pursuant to a printednotice mailed on or about September 5, 2006 to each stockholder of record as ofAugust 16, 2006, the record date for the meeting. The single issue to be votedon at such meeting was the election of Mr. Gordon McGilton as a Class Idirector, replacing Mr. Aguilar, and the election of Mr. Jack Davis as a ClassII director. As of the record date there were a total of 51,139,850 shares ofcommon stock outstanding and entitled to vote. A total of 24,931,965 shares were present either in person or by Proxyand the meeting.  Both Directors wereduly elected to the Board of Directors. The votes for each director are asfollows:
| ** **                 | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|----------------------------|------------|------------|------------|--------------|------------|
| Gordon McGilton  (Class I) |       | 22,833,789 |       | 2,098,176    |       |
| Jack Davis (Class II)      |       | 23,345,923 |       | 1,586,042    |       |

 

**ITEM 5 —OTHER INFORMATION**

NOTE REGARDING OUR AUDITORS

During 2004, the accounting firm of Jaspers and Hall, PC purchased the assets of Michael Johnson and Company, LLC - our former independent auditors.  To maintain continuity in the audit procedure, we chose to use the services of Jaspers and Hall after such purchase, as the preceding company was familiar with our financial records. Our Board of Directors has confirmed the withdrawal of Michael Johnson & Co., LLC as our principal accountants and ratified the appointment of Messrs Jaspers + Hall, PC to serve as our independent public accountants for the fiscal year ending December 31, 2005.

There have been no disagreements with Jaspers + Hall on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Jaspers + Hall’s satisfaction, would have caused them to make reference to the subject matter of such disagreements in connection with their report on our consolidated financial statements for such year. Jaspers + Hall’s report on our consolidated financial statements for the fiscal year ended December 31, 2005 did not contain an adverse opinion or disclaimer of opinion, or was modified as to uncertainty, audit scope or accounting principles, however, they were modified to include an explanatory paragraph wherein they expressed substantial doubt about our ability to continue as a going concern.

During the year ended December 31, 2005 and through the date hereof, we did not consult with Jaspers + Hall, PC with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements.

 

30

----

 

**ITEM 6 —EXHIBITS**

**EXHIBIT INDEX**
| Numbers | ** ** | **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, 2005 (included as Exhibit  4.1 to the Form 8-K filed January 27, 2005, and incorporated herein  by reference). |
|    |       |            |   |   |
|    | 4.2        |            |   | Form of Common Stock Purchase Warrant, dated  January 19, 2005, (included as Exhibit 4.2 to the Form 8-K  filed January 27, 2005, and incorporated herein by reference). |
|    |       |            |   |   |
|    | 4.3        |            |   | Securities Purchase Agreement, dated  January 19, 2005 (included as Exhibit 4.3 to the Form 8-K  filed January 27, 2005, and incorporated herein by reference). |
|    |       |            |   |   |
|    | 4.4        |            |   | Registration Rights Agreement, dated  January 19, 2005 (included as Exhibit 4.4 to the Form 8-K  filed January 27, 2005, 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, 2005, 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, 2005, and incorporated herein by  reference). |
|    |       |            |   |   |
|    | 4.7        |            |   | Bridge Facility between the Company and GC Financial  Services, Inc., dated June 29, 2005 (included as Exhibit 4.1  to the Form 8-K filed July 8, 2005, and incorporated herein by  reference). |
|    |       |            |   |   |
|    | 4.8        |            |   | Demand Note between the Company and GC Financial  Services, Inc., dated June 29, 2005 (included as Exhibit 4.2  to the Form 8-K filed July 8, 2005, and incorporated herein by  reference). |
|    |       |            |   |   |
|    | 10.1       |            |   | Sonic Jet Corporation 2000 Stock Option  Plan & Advisory and Consulting Agreement, dated May 1, 2000  (included as Appendix A to the Form 14C filed September 30, 2000, and  incorporated herein by reference). |
|    |       |            |   |   |
|    | 10.2       |            |   | Series B Convertible Preferred Stock Purchase  Agreement between the Company and Ashford Capital, LLC, dated  December 27, 2001 (included as Exhibit 10.1 to the Form 8-K filed  January 7, 2002, and incorporated herein by reference). |

 

31

----

 
| 10.3   |   | Series C Convertible Preferred Stock Purchase  Agreement between the Company and eFund Capital Partners, LLC, dated  December 27, 2001 (included as Exhibit 10.2 to the Form 8-K filed  on January 7, 2002, and incorporated herein by reference).                                                                                                                         |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.4   |   | Letter Agreement between the Company and Ashford  Capital, LLC, dated April 15, 2003 (included as Exhibit 4.9 to the  Form 10-QSB filed November 18, 2003, and incorporated herein by  reference).                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.5   |   | Industrial Lease between the Company and  Aerospace/Defense, Inc., dated September 2, 2003 (included as  Exhibit 10.12 to the Form 10-QSB filed August 13, 2004, and  incorporated herein by reference).                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6   |   | Modification of Business Asset Sale, License  Agreement & Assignment of Rights between the Company and Rockwell Power  Systems, Inc., dated September 15, 2003 (included as Exhibit 2.3 to  the Form 10-QSB filed November 18, 2003, and incorporated herein by  reference).                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7   |   | Non-Employee Directors and Consultants Retainer  Stock Plan, dated September 30, 2003 (included as Exhibit 4 to the  Form S-8 filed November 7, 2003, and incorporated herein by  reference).                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.8   |   | Investment Agreement between the Company and  Dutchess Private Equities Fund, L.P., dated January 26, 2004 (included  as Exhibit 10.8 to the SB-2 filed January 27, 2004, and incorporated  herein by reference).                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.9   |   | Registration Rights Agreement between the Company  and Dutchess Private Equities Fund, L.P., dated January 26, 2004  (included as Exhibit 10.9 to the SB-2 filed January 27, 2004, and  incorporated herein by reference).                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.10  |   | Placement Agent Agreement between the Company,  Charleston Capital, LLC, and Dutchess Private Equities Fund, L.P., dated  January 27, 2004 (included as Exhibit 10.10 to the SB-2 filed on  January 27, 2004, and incorporated herein by reference).                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.11  |   | Form of Subscription Agreement between the  Company and Gamma Opportunity Capital Partners, LP, Longview Fund, LP, Alpha  Capital Aktiengesellschaft, Domino International Ltd, Magellan International  Ltd, and Mountain Ridge Capital LLC, dated March 23, 2004 (included as  Exhibit 4 to the Form 8-K filed on March 26, 2004, and incorporated  herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.12  |   | Royalty Agreement between the Company and J.J. van  Eck, dated April 1, 2004 (included as Exhibit 10.13 to the  Form 10-QSB filed August 13, 2004, and incorporated herein by  reference).                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.13  |   | Contract between the Company and the U.S. Marines,  dated April 21, 2004 (included as Exhibit 10.14 to the 10-QSB filed  August 13, 2004, and incorporated herein by reference).                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.14  |   | Term Sheet between the Company and GC Financial  Services, Inc., dated September 16, 2004 (included as Exhibit 10.14  to the 10-QSB filed November 15, 2004, and incorporated herein by  reference).                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.15  |   | Employment Agreement between the Company and Thomas  Thebes (included as Exhibit 10.10 to the Form 10-QSB filed  August 13, 2004, and incorporated herein by reference).                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.16  |   | Letter re: Industrial Lease Agreement between the  Company and Aerospace/Defense, Inc., dated July 13, 2004 (included  as Exhibit 10.11 to the Form 10-QSB filed August 13, 2004, and  incorporated herein by reference).                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.17  |   | Employment Agreement between the Company and Frank  Kavanaugh, dated November 15, 2004 (included as Exhibit 10.15 to the  10-QSB filed November 15, 2004, and incorporated herein by reference).                                                                                                                                                                                     |

 

32

----

 
| 10.18  |   | Letter Contract awarded to the Company by the  Department of the Army dated November 18, 2004 (as described in the 8-K  filed November 24, 2004, and incorporated herein by reference).                                                                          |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                       |
| 10.19  |   | Promissory Note between the Company and Dutchess  Private Equity Fund, II, LP dated December 3, 2004 (included as  Exhibit 10.1 to the Form 8-K filed December 8, 2004, and  incorporated herein by reference).                                   |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.20  |   | Employment Agreement between the Company and Gordon  McGilton, dated January 27, 2005 (included as Exhibit 10.22 to the  Form 10-KSB/A filed April 22, 2005, and incorporated herein by  reference).                                                   |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.21  |   | Order for Supplies or Services between the Company  and U.S. Department of Defense, dated May 13, 2005 (included as  Exhibit 10.1 to the Form 8-K filed May 18, 2005, and  incorporated herein by reference).                                          |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.22  |   | Order for Supplies or Services between the Company  and U.S. Department of Defense, dated May 18, 2005 (included as  Exhibit 10.1 to the Form 8-K filed May 23, 2005, and  incorporated herein by reference).                                          |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.23  |   | Order for Supplies or Services and Delivery Order  between the Company and U.S. Department of Defense, dated September 23,  2005 (included as Exhibit 10.1 to the Form 8-K filed  September 27, 2005, and incorporated herein by reference).           |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.24  |   | Purchase and Sale Agreement the Company and GC  Financial Services, Inc., dated June 29, 2005 (included as  Exhibit 10.1 to the Form 8-K filed July 8, 2005, and  incorporated herein by reference).                                                   |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.25  |   | Security Agreement the Company and GC Financial  Services, Inc., dated June 29, 2005 (included as Exhibit 10.2 to  the Form 8-K filed July 8, 2005, and incorporated herein by  reference).                                                            |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.26  |   | Purchase Order between the Company and Ricardo  Engineering, dated June 29, 2005 (included as Exhibit 10.1 to the  Form 8-K filed July 19, 2005, and incorporated herein by  reference).                                                               |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.27  |   | Solicitation/Contract/Order for Commercial Items and  Delivery Order between the Company and the United States Marine Corps, dated  September 7, 2005 (included as Exhibit 10.1 to the Form 8-K filed  September 9, 2005, and incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.28  |   | Engineering Services Agreement between the Company  and TecStar, dated August 22, 2005 (included as Exhibit 10.31 to the Form  10-QSB filed November 11, 2005, and incorporated herein by reference).                                                                      |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.29  |   | Letter Contract between the Company and the United  States Army, dated February 3, 2006 (included as Exhibit 10.1 to the  Form 8-K filed February 9, 2006, and incorporated herein by reference).                                                                     |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.30  |   | Contract between the Company and the United States  Army (included as Exhibit 10.36 to the Form 10-K filed April 13, 2006, and  incorporated herein by reference).                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.31  |   | Form of Common Stock Purchase Agreement, dated July  24, 2006 (included as Exhibit 10.1 to the Form 8-K filed July 25, 2006, and  incorporated herein by reference).                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.32  |   | Production License Agreement between the Company and  BAE Systems Land & Armaments, LP, dated June 13, 2006 (included as  Exhibit 10.1 to the Form 10-Q filed August 14, 2006, and incorporated herein  by reference).                                                 |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.33  |   | Logistic Support Agreement between the Company and  BAE Systems Land & Armaments, LP, dated June 13, 2006 (included as  Exhibit 10.2 to the Form 10-Q filed August 14, 2006, and incorporated herein  by reference).                                                   |

 

33

----

 
|  10.34 |   | Contract between the Company and the British  Ministry of Defense, dated August 11, 2006 (included as Exhibit 10.1 to the  Form 8-K filed August 17, 2006, and incorporated herein by reference).                                                    |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                 |
| 10.35       |   | Memorandum of Agreement and Cooperation between the  Mechem, a division of Denel (PTY), Ltd., and the Company, dated September 28,  2006 (included as Exhibit 10.1 to the Form 8-K filed September 28, 2006, and  incorporated herein by reference). |
|        |   |                                                                                                                                                                                                                                                 |
| 31.1        |   | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                        |
|        |   |                                                                                                                                                                                                                                                 |
| 31.2        |   | Certification of the Acting 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.                                                                                                      |

 

34

----

 

**SIGNATURES**

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.
|                         | **FORCE PROTECTION, INC.** |
|-------------------------|----------------------------|
|                    |                       |   |
|                    |                       |   |
| Date: November 14, 2006 | By:                        | /s/ Gordon McGilton |
|                    |                       | Gordon McGilton |
|                    |                       | Chief Executive Officer |
|                    |                       |   |
| Date: November 14, 2006 | By:                        | /s/ R. Scott Ervin |
|                    |                       | R. Scott Ervin |
|                    |                       | Acting Chief Financial Officer |
|                    |                       | Principal Accounting Officer |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

Signatures
| Name                     | ** ** | **Title**                             | ** ** | **Date**           |
|--------------------------|------------|---------------------------------------|------------|--------------------|
|                     |       |                                  |       |               |
| /s/ Frank Kavanaugh |       | Chairman, Board of Directors          |       | November 14,  2006 |
| Frank Kavanaugh          |       |                                  |       |               |
|                     |       |                                  |       |               |
| /s/ Gordon McGilton |       | Director, and Chief Executive Officer |       | November 14,  2006 |
| Gordon McGilton          |       |                                  |       |               |
|                     |       |                                  |       |               |
| /s/ Jack Davis      |       | Director                              |       | November 14,  2006 |
| Jack Davis               |       |                                  |       |               |
|                     |       |                                  |       |               |
| /s/ Michael Moody   |       | Director                              |       | November 14,  2006 |
| Michael Moody            |       |                                  |       |               |

 

35

----