**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-Q**

**x****                             ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**FOR THE QUARTERLY PERIOD ENDED JUNE30, 2006**

**OR**

**o****                                ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 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)   |

 

**9801Highway 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):

Largeaccelerated filer o                                    Acceleratedfiler o                                              Non-acceleratedfiler 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 August 14, 2006 the Issuer had 51,089,229shares of common stock issued and outstanding.

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

 

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**Table of Contents**
| Part I : Financial  Information |                                                                                   |
|--------------------------------------|----------------------------------------------------------------------------------------|
|                                 |                                                                                   |   |
|                                 | Item 1 – Consolidated Financial Statements                                        |   |
|                                 | Report On Review By Registered Independent Public  Accounting Firm                     | 2 |
|                                 | Consolidated Balance  Sheet As Of June 30, 2006                                        | 3 |
|                                 | Consolidated  Statement Of Operations For The Three and Six Months Ended June 30, 2006 | 4 |
|                                 | Consolidated  Statement Of Cash Flows For The Six Months Ended June 30, 2006           | 5 |
|                                 | Notes To Consolidated Financial Statements                                             | 6 |
|                                 | Item 2 - Management’s Discussion And Analysis                                     | 14 |
|                                 | Item  3 -Controls and Procedures                                                       | 21 |
|                                 |                                                                                   |   |
| Part II  : Other Information    | 21                                                                                     |
|                                 |                                                                                   |   |
|                                 | Item 1 - Legal Proceedings                                                             | 21 |
|                                 | Item 2 - Unregistered Sales Of Equity Securities And  Use of Proceeds                  | 21 |
|                                 | Item 3 - Defaults Upon Senior Securities                                               | 22 |
|                                 | Item 4 – Submission Of Matters To A Vote Of Security  Holders                     | 22 |
|                                 | Item 5 - Other Information                                                             | 22 |
|                                 | Item 6 - Exhibits And Reports On Form 8-K                                         | 23 |

 

**PART I – FINANCIAL INFORMATION**

**ITEM 1  - FINANCIAL STATEMENTS**

**REPORT ON REVIEW BY INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

***JASPERS + HALL, PC***

*CERTIFIED PUBLIC ACCOUNTANTS*
|   |
|--------|

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

REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

Board of Directors

Force Protection, Inc.

Ladson, South Carolina

 

 

We have reviewed the accompanyingconsolidated balance sheet of Force Protection, Inc. and Subsidiaries as ofJune 30, 2006, and the related consolidated statements of income for the threeand six month periods ended June 30, 2006 and cash flows for the six monthsended June 30, 2006. These financial statements are the responsibility of thecompany’s management.

We conducted our review in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates). A review of interim financial information consists principally ofapplying analytical procedures and making inquiries of persons responsible forfinancial and accounting matters. It is substantially less in scope than anaudit conducted 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 review, we are not aware ofany material modifications that should be made to the accompanying interimfinancial statements for them to be in conformity with accounting principlesgenerally accepted in the United States of America.

We have previouslyaudited, in accordance with auditing standards of the Public Company AccountingOversight Board (United States), the balance sheet of Force Protection Inc. andSubsidiaries as of December 31, 2005, and the related statements of income,retained earnings 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. Our report contained an explanatory paragraph that described a goingconcern.  In our opinion, the informationset forth in the accompanying balance sheet as of December 31, 2005, is fairlystated, in all material respects, in relation to the balance sheet from whichit has been derived.

 

/s/ Jaspers + Hall, PC

 

August 7, 2006

Denver, Colorado

 

 

2

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**FORCE PROTECTION, INC.**

**CONSOLIDATED BALANCE SHEET**
| ** **                                                                                                                                                                                                                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                         | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                                                                                         | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                                         |       |              |       |                  |       |
| Current Assets:                                                                                                                                                                                                                    |       |              |       |                  |       |
| Cash                                                                                                                                                                                                                               |       | $                 | 3,469,394  |                  | $          | 1,217,509 |   |
| Accounts  receivable                                                                                                                                                                                                               |       | 8,101,608         |       | 4,033,581             |       |
| Inventories                                                                                                                                                                                                                        |       | 21,341,638        |       | 32,486,776            |       |
| Other current  assets                                                                                                                                                                                                              |       | 332,525           |       | 267,189               |       |
| Total current assets                                                                                                                                                                                                               |       | 33,245,165        |       | 38,005,055            |       |
| Property and equipment,  net                                                                                                                                                                                                       |       | 4,149,036         |       | 2,138,703             |       |
| **Total  Assets**                                                                                                                                                                                                                  |       | $                 | 37,394,201 |                  | $          | 40,143,758 |   |
| ** **                                                                                                                                                                                                                         |       |              |       |                  |       |
| **LIABILITIES & SHAREHOLDERS’  EQUITY LIABILITIES**                                                                                                                                                                       |       |              |       |                  |       |
| Current Liabilities:                                                                                                                                                                                                               |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                                                                   |       | $                 | 21,900,694 |                  | $          | 14,688,855 |   |
| Other accrued  liabilities                                                                                                                                                                                                         |       | 1,533,339         |       | 1,618,451             |       |
| Contract  liabilities                                                                                                                                                                                                              |       | 2,997,326         |       | 2,053,285             |       |
| Loans payable                                                                                                                                                                                                                      |       | 2,500,000         |       | 7,500,000             |       |
| Deferred revenue                                                                                                                                                                                                                   |       | 215,570           |       | 12,598,921            |       |
| Total Current  Liabilities                                                                                                                                                                                                         |       | 29,146,929        |       | 38,459,512            |       |
| **Total  Liabilities**                                                                                                                                                                                                             |       | $                 | 29,146,929 |                  | $          | 38,459,512 |   |
|                                                                                                                                                                                                                               |       |              |       |                  |       |
| **SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                      |       |              |       |                  |       |
| Preferred stock: no par  value, 10,000,000 shares authorized: Series D convertible preferred stock, $1,000  par value; 20,000 shares authorized 4,877 shares at 6.30.2006 and 13,004  shares at 12.31.2005 issued and outstanding, |       | 4,724,496         |       | 12,597,390            |       |
| Common stock, Par Value  $0.001, 300,000,000 shares authorized; in 2005 42,081,570 shares at 6.30.2006  and 36,114,217 shares at 12.31.2005 issued and outstanding                                                                 |       | 42,082            |       | 36,114                |       |
| Warrants – 1,387,916  outstanding                                                                                                                                                                                             |       | 1,500             |       | 1,500                 |       |
| Shares committed to be  issued ***                                                                                                                                                                                                 |       |              |       | 122,000               |       |
| Additional Paid-in  Capital                                                                                                                                                                                                        |       | 52,445,295        |       | 38,232,994            |       |
| Accumulated deficit                                                                                                                                                                                                                |       | (48,966,101       | )          | (49,305,752           | )          |
| **Total  Shareholders’ Equity**                                                                                                                                                                                               |       | 8,247,272         |       | 1,684,246             |       |
|                                                                                                                                                                                                                               |       |              |       |                  |       |
| **Total Liabilities and Shareholders’ Equity**                                                                                                                                                                                |       | $                 | 37,394,201 |                  | $          | 40,143,758 |   |

 

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*** Represents41,667 common shares and 1 Series C share accrued in 2005 and issued in 2006

Theaccompanying Notes are an integral part of these Financial Statements.

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**FORCEPROTECTION, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| ** **                                    | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | **(in dollars)**            | ** ** | **(in dollars)**          | ** ** |
|                                          | ** ** | ** **                       | ** ** | ** **                     |       | ** ** | ** ** | ** ** | ** ** |
| **Net Sales**                                 |       | $                                | 56,074,537 |                           | $          | 18,295,357 |   | $ | 90,877,122 |   | $ | 24,148,780 |   |
| Cost of sales                                 |       | 45,917,751                       |       | 14,261,165                     |       | 74,082,567 |   | 20,656,484 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Gross Profit                                  |       | 10,156,786                       |       | 4,034,192                      |       | 16,794,555 |   | 3,492,296 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| General and  administrative expense           |       | 7,483,444                        |       | 3,361,615                      |       | 13,342,981 |   | 6,353,059 |   |
| Research and  Development                     |       | 641,215                          |       | 367,925                        |       | 1,304,805 |   | 578,780 |   |
| **Operating  Profit (Loss)**                  |       | 2,032,127                        |       | 304,652                        |       | 2,146,769 |   | (3,439,543 | ) |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Other income                                  |       | 20,873                           |       | 29,483                         |       | 47,922 |   | 68,024 |   |
| Interest expense                              |       | (818,985                         | )          | (203,502                       | )          | (1,626,309 | ) | (480,758 | ) |
| ** **                                    |       |                             |       |                           |       |   |   |   |   |
| **Net  Profit/(Loss)**                        |       | $                                | 1,234,015  |                           | $          | 130,633 |   | $ | 568,382 |   | $ | (3,852,277 | ) |
|                                          |       |                             |       |                           |       |   |   |   |   |
| **Basic  Profit/(Loss) per common share**     |       | $                                | 0.03       |                           | $          | (0.00 | ) | $ | 0.01 |   | $ | (0.12 | ) |
|                                          |       |                             |       |                           |       |   |   |   |   |
| **Diluted  Profit/(Loss) per common share**   |       | $                                | 0.03       |                           | $          | (0.00 | ) | $ | 0.01 |   | $ | (0.12 | ) |
|                                          |       |                             |       |                           |       |   |   |   |   |
| **Weighted-average shares used to  compute:** |       |                             |       |                           |       |   |   |   |   |
| Basic profit/(loss) per  share                |       | 39,511,931                       |       | 34,403,512                     |       | 38,487,506 |   | 34,403,512 |   |
| Diluted profit/(loss) per share               |       | 44,851,658                       |       | 34,403,512                     |       | 38,487,506 |   | 34,403,512 |   |

 

Theaccompanying Notes are an integral part of these Financial Statements.

4

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**FORCEPROTECTION, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                                     | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                     | ** ** | **June 30**               | ** ** |
| ** **                                                                                     | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| ** **                                                                                     | ** ** | **(in dollars)**          | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES**                                                      |       |                           |       |   |   |
| Net loss from  continuing operations                                                           |       | 568,382                        |       | (3,852,277 | ) |
| **Adjustments to reconcile net  loss to net cash (used in) provided by operating activities:** |       |                           |       |   |   |
| Depreciation and  Amortization                                                                 |       | 338,160                        |       | 182,854 |   |
| Common Stock issued For  Services                                                              |       | 401,462                        |       |   |   |
| Warranty and Royalties                                                                         |       |                           |       | 257,000 |   |
| Change in assets and  liabilities:                                                             |       |                           |       |   |   |
| Decrease (increase)  in accounts receivable                                                    |       | (4,068,027                     | )          | (1,018,710 | ) |
| Decrease  (increase) in inventories                                                            |       | 11,145,138                     |       | (3,232,652 | ) |
| Decrease  (increase) in other current assets                                                   |       | (65,336                        | )          | (101,290 | ) |
| Increase  (decrease) in accounts payable                                                       |       | 7,211,839                      |       | 2,481,485 |   |
| Increase  (decrease) in other accrued liabilities                                              |       | (85,112                        | )          | (42,232 | ) |
| Increase  (decrease) in contract liabilities                                                   |       | 944,041                        |       | (517,092 | ) |
| Increase  (decrease) in deferred revenue                                                       |       | (12,383,351                    | )          | 1,038,368 |   |
|                                                                                           |       |                           |       |   |   |
| **Net cash Provided (used) in  operating activities**                                          |       | 4,007,196                      |       | (4,804,546 | ) |
|                                                                                           |       |                           |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES**                                                      |       |                           |       |   |   |
| Purchase of property  and equipment                                                            |       | (2,348,493                     | )          | (1,092,676 | ) |
| Proceeds from sale of  property and equipment                                                  |       | —                         |       | 155,442 |   |
| **Net cash used in investing  activities**                                                     |       | (2,348,493                     | )          | (937,234 | ) |
|                                                                                           |       |                           |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                     |       |                           |       |   |   |
| Proceeds from issuance  of Preferred Stock                                                     |       | —                         |       | 15,800,000 |   |
| Issuance of common  stock, net                                                                 |       | 5,970,735                      |       | 802,273 |   |
| Short Term Debts                                                                               |       |                           |       | (360,975 | ) |
| Payment on capitalized  lease obligations                                                      |       |                           |       | 48,420 |   |
| Preferred Stock  Dividends paid                                                                |       | (377,553                       | )          |   |   |
| Proceeds from (Payments  on) loans, net                                                        |       | (5,000,000                     | )          | (4,000,000 | ) |
|                                                                                           |       |                           |       |   |   |
| **Net cash provided by Financing  Activities**                                                 |       | 593,182                        |       | 12,289,718 |   |
|                                                                                           |       |                           |       |   |   |
| **Net increase (decrease) in cash**                                                            |       | 2,251,885                      |       | 6,547,938 |   |
|                                                                                           |       |                           |       |   |   |
| **CASH - beginning of period**                                                                 |       | 1,217,509                      |       | 2,264,406 |   |
|                                                                                           |       |                           |       |   |   |
| **CASH - end of period**                                                                       |       | 3,469,394                      |       | 8,812,344 |   |

 

Theaccompanying Notes are an integral part of these Financial Statements.

5

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**FORCEPROTECTION, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**June30, 2006**

(Unaudited)

**NOTE1 - PRESENTATION OF CONSOLIDATED INTERIM INFORMATION**

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 ofJune 30, 2006, and the results of operations and cash flows for the three monthperiod ended June 30, 2006. Interim results are not necessarily indicative ofresults for a full year.

The consolidatedfinancial statements and notes are presented as permitted by Form 10-Q, and donot contain certain information included in Force Protection Inc.’s auditedconsolidated financial statements and notes for the fiscal year ended December31, 2005.

The consolidatedfinancial statements include the accounts of Force Protection, Inc., andour two wholly owned subsidiaries, Force Protection Industries, Inc.(formerly Technical Solutions Group, Inc.) and Force ProtectionTechnologies, Inc (formerly TSG International, Inc.) for the three monthperiod ended June 30, 2006. All inter-company balances and transactions areeliminated in consolidation.

**NOTE 2 –INVENTORIES**

Inventory at June30, 2006 consisted of the following:
|                                                 | ** ** | **June 30, 2006** | ** ** | **Dec. 31, 2005** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                            | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Raw materials  and supplies                     |       | $                           | 13,626,039 |                        | $          | 15,222,503 |   |
| Work in process                                 |       | 9,721,539                   |       | 17,762,554                  |       |
| Less: Allowance  for obsolescence and shrinkage |       | (2,005,940                  | )          | (498,281                    | )          |
|                                            |       |                        |       |                        |       |
| Net Inventories                                 |       | $                           | 21,341,638 |                        | $          | 32,486,776 |   |

**NOTE 3 - PROPERTY AND EQUIPMENT**

Property, Plantand Equipment at June 30, 2006 consisted of the following:
|                                     | ** ** | **June 30, 2006** | ** ** | **Dec. 31, 2005** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Furniture and  fixtures             |       | $                           | 236,863    |                        | $          | 227,613 |   |
| Leasehold  improvements             |       | 308,557                     |       | 59,928                      |       |
| Machinery and  equipment            |       | 3,444,970                   |       | 2,024,436                   |       |
| Test Equipment                      |       | 16,790                      |       | 16,790                      |       |
| Manuals                             |       | 104,798                     |       | 104,798                     |       |
| Vehicles                            |       | 56,464                      |       | 56,464                      |       |
| Demo vehicles                       |       | 1,095,925                   |       | 425,845                     |       |
| Less  depreciation and amortization |       | (1,115,331                  | )          | (777,171                    | )          |
|                                |       |                        |       |                        |       |
| Net property and  equipment         |       | $                           | 4,149,036  |                        | $          | 2,138,703 |   |

 

6

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Depreciationexpense for the period ended June 30, 2006 was $338,160 compared with $182,854for the same period in 2005.

**NOTE 4 – COMMITMENTS AND CONTINGENCIES**

**Compensationof Executive Officers & Directors**

On May 1, 2006 theCompany entered into an employment agreement with Mr. Raymond Pollard to act asits Chief Operating Officer.  Under theterms of the agreement, Mr. Pollard is to receive compensation of $240,000 peryear, plus relocation expenses of $30,000. In addition Mr. Pollard is to receive an annual grant of 20,513 sharesof our unregistered common stock valued at $40,000 based on the closing shareprice for our stock on the date of Mr. Pollard’s acceptance of employment withthe Company. These share grants will vest on the first and second anniversaryof his employment.  Mr. Pollard alsoserved as a member of the Board of Directors and has received $6,000 in cashand 3,906 shares of common stock as compensation for his services as a directorin 2006. Mr. Pollard resigned from the Board of Directors effective August 4,2006.

Mr. Jack Davisjoined the Board of Directors on January 13, 2006 as a non-employee,independent Board member. Mr. Davis has received $6,000 in cash and 3,906shares of common stock as compensation for his services as a director in 2006.

On February 4,2005, the Company entered into an agreement with Mr. Ted McQuinn to act asPresident of its subsidiary Force Protection Industries, Inc. Under the termsof the agreement, Mr. McQuinn is to receive compensation of $180,000 per year,plus an annual grant (for a period of three years) of unregistered common stockvalued at $100,000 and a one time grant of unregistered common stock valued at$20,000.  Mr. McQuinn resigned effective March31, 2006.

On January 27,2005, the Company entered into an agreement with Mr. Gordon McGilton to act asits Chief Quality Officer. Under the terms of such agreement, Mr. McGilton isto receive a base salary of $180,000 plus an annual bonus of $180,000 andreimbursement for travel, lodging and other out of pocket expenses incurredduring employment. The Company also agreed to provide Mr. McGilton stockoptions once it adopts a stock option plan. Effective April 18, 2005, theCompany appointed Mr. McGilton as its Chief Executive Officer.  During 2005 Mr. McGilton received “in kind”compensation in the amount of $20,000 in the form of a Vortex jet boat whichthe Company gave Mr. McGilton title to. This “in kind” compensation was forwork performed for the Company by Mr. McGilton as an independent contractorduring 2001and 2002. Effective January 1, 2006 the Company modified Mr.McGilton’s compensation to include cash compensation of $35,000 per month,relocation expense of $30,000 upon separation for the Company, a one time grantof 300,000 shares of the Company’s unregistered common stock and options topurchase 1,000,000 shares of the Company’s stock at an exercise price of $0.72per share, such options to vest on January 1, 2007 (or earlier upon theoccurrence of specified events).  Mr.McGilton joined the board of directors on April 18, 2005. Mr. McGilton receivedno compensation for his services as a director during 2005. Mr. McGilton hasreceived $6,000 in cash and 3,906 shares of common stock as compensation forhis 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 and a memberof the board of directors. Mr. Ervin received no compensation for his servicesas a director during 2005. On November 14, 2005 the Board appointed Mr. Ervinto serve as the Acting Chief Financial Officer following the resignation of theformer Chief Financial Officer. Effective February 10, 2006, the Companyincreased Mr. Ervin’s compensation to $180,000 per annum. On May 21, 2006, theboard of directors agreed to compensate our independent directors $1,000 foreach month of service to the Company during 2004 and 2005. We paid Mr. Ervin$7,000 for his services as an independent director in 2004. Mr. Ervin hasreceived $6,000 in cash and 3,906 shares of common stock as compensation forhis services as a director in 2006.

7

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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, 2004 valuedat $40,000 and a grant of 20,833 shares of unregistered common stock plus oneshare of the Company’s Series C stock vesting on January 1, 2005 valued at$82,000. Mr. Aguilar’s employment agreement was terminated effective January27, 2005. On May 21, 2006 the board of directors agreed to compensate ourindependent directors $1,000 for each month of service to the Company during2004 and 2005. We paid Mr. Aguilar $10,000 for his services as an independentdirector in 2004 and $11,000 for his service as an independent director in2005. Mr. Aguilar has received $6,000 in cash and 3,906 shares of common stockas compensation for his services as a director in 2006.

On June 30, 2003the Company entered into an employment agreement with Mr. Frank Kavanaugh toact 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, 2005Mr. 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 our independent directors $1,000 for each month of service to theCompany during 2004 and 2005. We paid Mr. Kavanaugh $10,000 for his services asan independent director in 2004 and $7,000 for his service as an independentdirector in 2005. Mr. Kavanaugh has received $6,000 in cash and 3,906 shares ofcommon stock as compensation for his services as a director in 2006.

**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 FAR 52.216-25awards may be made subject to future “Contract Definitization” pursuant towhich the contractor agrees to negotiate with the Government followingcommencement of the contract work to finalize detailed conditions of thecontract, including pricing, scheduling and other applicable requirements.  As part of such negotiations, the contractoris subject to audit by the U.S. Defense Contract Audit Agency (“DCAA”) of itsdirect material and labor costs, manufacturing overhead and margin. Based onsuch audit and the negotiations with the Government, the final “definitized”contract price may be less than the amount originally stated.

During the threemonth period ended June 30, 2006 the Company reached agreement with the U.S.Marine Corps Contracting Officer on a final definitized price for the JERRVcontract (M67854-05-D-5091) in the total amount of $89,739,728 representing areduction of $3,364,405 in the originally stated total contract price. As ofJune 30, 2006 the Company has a provision of $326,999 for potential priceadjustments on revenue recognized.

**LegalProceedings**

On August 8, 2006,the Company settled all claims brought by Atlantis Partners, Inc. against theCompany in the Circuit Court for the 15th Judical Circuit, Palm Beach County,Florida, arising out of an alleged finder’s fee agreement, for a one timepayment of 30,000 shares of the Company’s unregistered common stock. 

The Companybelieves that there are no other claims or litigation pending against theCompany or its officers and directors in their roles as such, the outcome ofwhich could have a material adverse effect on the Company’s financial conditionor operation results.

**LiquidatedDamages**

During the secondquarter of 2005, the Company announced the award of contract M67854-05-D-5091by the U.S. Marine Corps for delivery of one hundred twenty-two Cougar JointEOD Rapid Response Vehicles (“JERRV”) to be delivered during 2005 and2006.  As part of such contract, theCompany received $6,699,996 in July 2005 as the initial contract milestonepayment for “accelerated delivery costs.” Under the terms of the JERRVcontract, the customer has the right to recover this milestone payment in theform of liquidated damages on each vehicle in the event any of the vehicles aredelivered after the contractually agreed delivery date.  The amount of liquidated damages is $54,918per vehicle for each vehicle delivered late (representing the total milestonepayment of $6,699,996 divided by the 122 JERRV Cougars to be delivered underthe contract). On April 17, 2006 by modification to the JERRV contract, theUnited States Marine Corps assessed contractual liquidated damages in theamount of $439,344 in respect of eight vehicles delivered late and reduced theamount of the total contract price accordingly.

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During the threemonth period ended June 30,2006, the Company also 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 of the allocation and use of the initial contract milestone payment forsuch “accelerated delivery costs.” The Company has agreed to settle with theUnited States Government and with these former employees all claims relating toor arising under the JERRV contract and the payment of such accelerateddelivery costs for a total of $1,905,000 plus interest of $23,000. As of June30, 2006, the Company had established a provision of $1,928,000 against thisliability.

**OtherAccrued Liabilities**

The Company’s accrued liabilities include the following:
|                               | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|-------------------------------|------------|-----------|------------|-----------|------------|
| Compensation and  benefits    |       | 1,393,339 |       | 1,341,101 |       |
| Dividends on  Preferred Stock |       | 140,000   |       | 260,080   |       |
| Other                         |       | —    |       | 17,270    |       |
|                          |       | $         | 1,533,339  |      | $          | 1,618,451 |   |
|                               |            |           |            |           |            |  |  |

**ContractLiabilities**

Accruals for contract related liabilities include the following:
|                                  | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|----------------------------------|------------|-----------|------------|-----------|------------|
| Non- Recurring  Warranty         |       | 0         |       | 1,306,018 |       |
| General Warranty                 |       | 742,327   |       | 380,044   |       |
| Contract Price  re-determination |       | 326,999   |       | 367,223   |       |
| Liquidated  Damage Settlement    |       | 1,928,000 |       | —    |       |
|                             |       | $         | 2,997,326  |      | $          | 2,053,285 |   |
|                                  |            |           |            |           |            |  |  |

**NOTE 5 -DEFERRED REVENUE**

The Company onlyrecognizes revenue from the sales of its vehicles upon formal acceptance by itsU.S. Government customer, however the Company receives performance basedpayments and long lead material payments in accordance with agreed milestonesunder some of its government contracts. The Company records such performancebased payments as deferred revenue and carries them on its balance sheet untilformal acceptance by the customer. As of June 30, 2006, the Company has booked$215,570 as deferred revenue resulting from its contracts with the U.S. Armyand the U.S. Marines.

**NOTE6 - DEBT**

OnNovember 18, 2005, the Company entered into a Subscription Agreement withLongview Fund, LP and Longview Equity Fund, LP pursuant to which the Companyissued secured promissory notes having a total face value of $7,500,000. TheNotes matured on February 18, 2006, and paid simple interest payable atthe annual rate of twenty-four percent. The Company also executed a SecurityAgreement that granted to Longview a first preferred UCC-1 security interest inall of the Company’s assets and property. On February 18, 2006, the Companyentered into a Modification and Assignment Agreement with Longview pursuant towhich the Company paid $1,250,000 of the face value of the Notes and extendedthe maturity date of the balance for an additional 60 days.  In addition, the Company consented to theassignment of $2,500,000 of the Notes to Fort Ashford Funds LLC. The Company’sDirector, Frank Kavanaugh, is the principal owner of Fort Ashford Funds and asubstantial shareholder of our common stock. 

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Mr. Kavanaugh’srelationship to Fort Ashford Funds was fully disclosed to the Company and Mr.Kavanaugh did not participate in the negotiations or decision process inrespect of the Modification and Assignment Agreement.

On April 20, 2006,the Company paid $1,000,000 of the face value of the Notes outstanding andextended the maturity date on the Notes held by Longview and by Fort Ashfordfor an additional 60 days, through June 20, 2006.

On June 20, 2006,the Company paid $2,750,000 of the face value of the Notes held by Longview andextended the maturity date of the Fort Ashford Note for an additional 30 days,though July 20, 2006. On June 30, 2006, the Company had $2,500,000 inshort-term debt, representing the face value of the Notes outstanding at thattime.

On August 9, 2006,the Company paid off the full amount of the $2,500,000 Fort Ashford Note andcurrently has no further obligation under the Notes, the Security Agreement orother associated documents.

**NOTE 7 -RECEIVABLES AND FACTORING**

The Companyentered into a Purchase and Sale Agreement (the “Factoring Agreement”) with GCFinancial Services, Inc. dated June 29, 2005 pursuant to which it agreed tosell the U.S. government receivables under our JERRV Contract(M67854-05-D-5091) in an amount not to exceed $63,000,000. Under the terms ofsuch agreement, the Company receives 98.1% of the value of receivables sold toGC Financial within 24-48 hours of delivery of the invoice. The total amount offactoring expense charged to interest expense during the three months endedJune 30, 2006 was $269,074. During June 2006, the Company exceeded the agreedmaximum value of receivable to be factored under the agreement and gave noticeof termination of the Factoring Agreement to GC Financial. On June 22, 2006 theFactoring Agreement was cancelled between the parties.

**NOTE 8 -STOCK BASED COMPENSATION**

The Company doesnot have a formal stock compensation plan however the Company has issued stockto employees and non-employees from time to time as compensation for servicesrendered.

During the threemonth period ended June 30, 2006, the Company confirmed the grant to Mr.Kavanaugh of 12,500 shares of its unregistered common stock valued at $40,500as compensation due under his 2003 employment contract and issued such shares.

On April 21, 2006,the board of directors adopted a resolution approving payment of compensationto each member of the Board in the amount of $6,000 per quarter in cash and$7,500 worth of unregistered common stock per quarter, such stock to be grantedat a price based on the average five day market price for the Company’s sharesfollowing the date of approval of such compensation plan. Board members arerequired to hold such compensation shares until their board service is over.

**NOTE9 – STOCK OPTIONS**

During 2005, theCompany issued options to purchase 647,833 shares of its unregistered commonstock to certain of its employees at an exercise price of $1.50 per share. Allsuch options vested in full effective April 15, 2006.

**NOTE10 - COMMON STOCK WARRANTS**

As of June 30,2006 the following warrants to purchase shares of the Company’s common stockwere outstanding:

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

·                  warrants topurchase 1,146,666 shares of common stock at $3.75/share expiringJanuary 19, 2007

·                  warrants topurchase 116,250 shares of common stock at $3.75/share expiring May 5, 2007

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

10

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All of the foregoingwarrants are immediately exercisable. The fair value of all these warrants wasinsignificant at the issuance date.

 

**NOTE11 - CONVERTIBLE PREFERRED STOCK**

The board ofdirectors has the authority to issue preferred stock in one or more series, andfix for each series, the designation of, and number of shares to be included ineach such series. The board of directors is also authorized to set the powers,privileges, preferences, and relative participating, optional or other rights,if any, of the shares of each such series and the qualifications, limitationsor restrictions of the shares of each such series.

**Series DConvertible Preferred Stock**

OnJanuary 20, 2005 the Company authorized twenty thousand shares ofSeries D 6% Convertible Preferred Stock. On January 21, 2005, theCompany issued 15,800 shares of Series D stock in a private placement. Asof June 30, 2006 there were 4,877 shares of Series D stock outstanding.Holders of the Series D stock are entitled to receive cumulative dividendsat the rate per share of 6% per annum**,**payable semi-annually on March 1 and September 1, beginning with thefirst such date after the original issue date. The Preferred Series D doesnot have voting rights. Upon any liquidation, dissolution or winding-up of theCorporation, whether voluntary or involuntary, the Holders of the Series Dshall be entitled to receive out of the assets of the Company, whether suchassets are capital or surplus, for each share of Preferred Stock an amountequal to the Stated Value per share plus any accrued and unpaid dividendsthereon and any other fees or liquidated damages owing thereon before anydistribution or payment shall be made to the holders of any Junior Securities.Each share of Series D Preferred Stock will convert into the number ofshares of the Company’s common stock equal to $1,000 divided by the conversionprice at the holder’s discretion. The current conversion price is $2.10.  During the three month period ended June 30,2006 a total of 3,601 shares of Convertible Preferred Series D stock wereconverted to common.

**NOTE12 - REVERSE STOCK SPLIT**

In January 2005,the board of directors approved a 1 (new)-for-12 (old) reverse stock split ofthe outstanding shares of the Company’s common stock. The reverse stock splitbecame effective February 4, 2005. Shareholders approved the action at theCompany’s annual meeting on December 30, 2004. All references in theCompany’s quarterly and annual reports to shares of its common stock representshares adjusted for the effect of the reverse stock split (i.e. they represent “post-reversesplit shares”).

**NOTE 13 -OTHER STOCK TRANSACTIONS**

Issuance of CommonStock: During the three month period ended June 30, 2006 theCompany issued the following securities (other than those referred to in Notes11 & 12 above relating to Stock Based Compensation):

·                  1,714,841 sharesof common stock pursuant to the conversion of 3,601 shares of our Series DConvertible Preferred stock during the three month period ended June 30, 2006.

·                  586 shares ofcommon stock as “dividend shares” under the Series D certificate ofdesignation.

·                  1,595,568 sharesof common stock as a result of the exercise of warrants.

·                  12,500 shares ofunregistered stock as compensation to one of our former executives.

·                  23,436 shares ofunregistered common stock as compensation to our Directors for their service tothe Company.

 

Convertible PreferredSeries D: On January 21, 2005, the Company issued 15,800shares of Series D 6% Convertible Preferred Stock (“Series D stock”) having parvalue of $1,000 per share, for gross proceeds of $15.8 million. Each share ofthe Series D stock may convert at any time, in the holder’s discretion, into476 shares of our common stock at a fixed conversion price of $2.10 per commonshare. Holders of the Series D stock are entitled to receive cumulativedividends at the rate per share of 6% per annum**,** payable semi-annually on March 1 and September 1,beginning with the first such date after the original issue date; suchdividends may be paid in cash or 

11

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shares of stockaccording to the terms of the Series D Certificate of Designation.  In connection with the sale of the Series Dstock, we issued warrants to the Series D shareholders to purchase 2,633,333shares of our common stock. The exercise price of the warrants is $3.75 pershare, and can be exercised at any time prior to their expiration on January19, 2008. Finally, in connection with the sale of the Series D stock, we issuedto the transaction placement agent warrants to purchase 65,833 shares of theCompany’s common stock at an exercise price of $3.75 per share.  The warrants expire on January 19, 2008. Asof June 30, 2006:

·                  Thereare 4,877 shares of the Series D stock outstanding, at a conversion price of$2.10 share.

·                  There are1,146,666 Series D warrant shares outstanding, at an exercise price of $3.75per share.

 

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

·                  thesales were made to a sophisticated or accredited investors, as defined inRule 502;

·                  theCompany gave each purchaser the opportunity to ask questions and receiveanswers concerning the terms and conditions of the offering and to obtain anyadditional information which we possessed or could acquire without unreasonableeffort or expense that is necessary to verify the accuracy of informationfurnished;

·                  ata reasonable time prior to the sale of securities, the Company advised eachpurchaser of the limitations on resale in the manner contained inRule 502(d)2;

·                  neitherthe Company nor any person acting on its behalf sold the securities by any formof general solicitation or general advertising; and

·                  theCompany exercised reasonable care to assure that each purchaser of thesecurities is not an underwriter within the meaning of Section 2(11) ofthe Securities Act of 1933 in compliance with Rule 502(d).

**NOTE14 – GAIN/LOSS PER SHARE**

The Companyutilizes SFAS No. 128, “Earnings per Share” to calculate gain/loss per share.Basic gain/loss per share is computed by dividing the gain/loss available tocommon stockholders (as the numerator) by the weighted-average number of commonshares outstanding (as the denominator). Diluted gain/loss per share iscomputed similar to basic gain/loss per share except that the denominator isincreased to include the number of additional common shares that would havebeen outstanding if all potential common stock (including common stockequivalents) had all been issued, and if such additional common shares weredilutive.  Under SFAS No. 128, wherethere is a loss, the inclusion of additional common shares is anti-dilutive(since the increased number of shares reduces the per share loss available tocommon stock holders), and if the additional common shares are anti-dilutive,they are not added to the denominator in the calculation.  For periods, where the additional commonshares are anti-dilutive, the following common stock equivalents have beenexcluded from the calculation of diluted loss per share:

**Common Stock Equivalents excluded from calculation**
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| ** **                           | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                 |       |                             |       |                           |       |   |   |   |   |
| Convertible Preferred Stock Series D |       | —                           |       | 6,192,381                      |       | 2,322,381 |   | 6,192,381 |   |
| Warrants                             |       | —                           |       | 3,266,877                      |       | 1,387,916 |   | 3,266,877 |   |
| Options                              |       | —                           |       | 647,833                        |       | 1,504,540 |   | 647,833 |   |
|                                 |       |                             |       |                           |       |   |   |   |   |
| Total                                |       | —                           |       | 10,107,091                     |       | 5,214,837 |   | 10,107,091 |   |

 

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**Basic Earning Per Share Computation:**

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| ** **                                      | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(in dollars)**            | ** ** | **(in dollars)**          | ** ** |
|                                            |       |                             |       |                           |       |   |   |   |   |
| Net  Profit/(Loss)                              |       | 1,234,015                        |       | $                              | 130,633    |   | 568,382 |   | (3,852,277 | ) |
|                                            |       |                             |       |                           |       |   |   |   |   |
| Preferred  Dividends                            |       | (97,610                          | )          | (213,897                       | )          | (257,474 | ) | (388,781 | ) |
|                                            |       |                             |       |                           |       |   |   |   |   |
| Profit/(Loss)  available to common shareholders |       | 1,136,405                        |       | (83,264                        | )          | 310,908 |   | (4,241,058 | ) |
|                                            |       |                             |       |                           |       |   |   |   |   |
| Basics  Profit/(Loss) per common share          |       | $                                | 0.03       |                           | $          | (0.00 | ) | $ | 0.01 |   | $ | (0.12 | ) |
|                                            |       |                             |       |                           |       |   |   |   |   |
| **Weighted-average  shares used to compute:**   |       |                             |       |                           |       |   |   |   |   |
| Basic profit/(loss) per  share                  |       | 39,511,931                       |       | 34,403,512                     |       | 38,487,506 |   | 34,403,512 |   |
|                                                 |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

** **

**Dilutive Earning Per Share Computation:**

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| ** **                                      | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                            |       |                             |       |                           |       |   |   |   |   |
| Net  Profit/(Loss)                              |       | 1,234,015                        |       | 130,633                        |       | 568,382 |   | (3,852,277 | ) |
|                                            |       |                             |       |                           |       |   |   |   |   |
| Preferred  Dividends                            |       | —                           |       | (213,897                       | )          | (257,474 | ) | (388,781 | ) |
|                                            |       |                             |       |                           |       |   |   |   |   |
| Profit/(Loss)  available to common shareholders |       | 1,234,015                        |       | (83,264                        | )          | 310,908 |   | (4,241,058 | ) |
|                                            |       |                             |       |                           |       |   |   |   |   |
| Diluted Profit/(Loss)  per common share         |       | $                                | 0.03       |                           | $          | (0.00 | ) | $ | 0.01 |   | $ | (0.12 | ) |
|                                            |       |                             |       |                           |       |   |   |   |   |
| **Weighted-average  shares used to compute:**   |       |                             |       |                           |       |   |   |   |   |
| Diluted profit/(loss)  per share                |       | 44,851,658                       |       | 34,403,512                     |       | 38,487,506 |   | 34,403,512 |   |
|                                                 |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

**NOTE 15- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

The Company’sChief Executive Officer, Mr. McGilton, is a principle of APT Leadership, aconsulting firm hired by the Company to provide business consulting services,training seminars and certain business software. During the three month periodended June 30, 2006, APT Leadership has billed the Company a total of $198,376for such services, training and software. In addition, the Company has entered into an agreement with APTLeadership pursuant to which APT has granted to the Company a non-exclusiveright and license (the “License”) to use the diagrams, methods, concepts andbusiness operating system functionality contained in APT Leadership’s “APT Tool”software and presented in APT Leadership’s training seminars, specificallyincluding the use of system diagrams, process flow diagrams and actively linkedinputs, outcomes and feedback loops to represent business “conversion processes”and to design and redesign “value added” versus “non-value added” process flowdiagrams.  Under the terms of theagreement, the Company paid a one time license fee of $60,000 and agreed to payan annual license fee thereafter of $50,000.

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OnNovember 18, 2005, the Company entered into a Subscription Agreement withLongview Fund, LP and Longview Equity Fund, LP pursuant to which the Companyissued secured promissory notes having a total face value of $7,500,000. TheNotes matured on February 18, 2006, and paid simple interest payable atthe annual rate of twenty-four percent. The Company also executed a SecurityAgreement that granted to Longview a first preferred UCC-1 security interest inall of the Company’s assets and property. On February 18, 2006, the Companyentered into a Modification and Assignment Agreement with the Longview pursuantto which the Company paid $1,250,000 of the face value of the Notes andextended the maturity date of the balance for an additional 60 days.  In addition, the Company consented to theassignment of $2,500,000 of the Notes to Fort Ashford Funds LLC. The Company’sDirector, Frank Kavanaugh, is the principal owner of Fort Ashford Funds and asubstantial shareholder of our common stock. Mr. Kavanaugh’s relationship to Fort Ashford Funds was fully disclosedto the Company and Mr. Kavanaugh did not participate in the negotiations ordecision process in respect of the Modification and Assignment Agreement.

On April 20, 2006the Company paid $1,000,000 of the face value of the Notes outstanding andextended the maturity date on the Notes held by Longview and by Fort Ashfordfor an additional 60 days, through June 20, 2006. On June 20, 2006 the Companypaid $2,750,000 of the face value of the Notes held by Longview and extendedthe maturity date of the Fort Ashford Note for an additional 30 days, thoughJuly 20, 2006. On June 30, 2006, the Company had $2,500,000 in short-term debt,representing the face value of the Notes outstanding at that time. On August 9,2006 the Company paid off the full amount of the $2,500,000 Fort Ashford Noteand currently has no further obligation to Fort Ashford under the Notes, theSecurity Agreement or other associated documents.

**NOTE 16 -INCOME TAXES**

There has been noprovision for U.S. federal, state, or foreign income taxes for any periodbecause the Company has cumulative losses for all jurisdictions.

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

CAUTIONARY STATEMENTCONCERNING FORWARD-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 similar expressions.Our actual results could differ materially from these anticipated in theforward-looking statements for many reasons including our ability to raisecapital when necessary; availability of parts and raw materials for ourproducts; continued customer acceptance of our products; on-going success ofour research and development efforts and other risks described elsewhere inthis report. 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 SIGNIFICANTACCOUNTING POLICIES

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.

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The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements, as well as the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from thoseestimates.

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 the following critical accounting policiesand procedures, among others, affect our more significant judgments andestimates used in the preparation of our consolidated financial statements:

·                  Revenuerecognition;

·                  Inventorycost and Associated Reserves; and

·                  Allocation ofdirect and indirect cost of sales.

In December 2004, FASB issued StatementNo. 123(R), Share-Based Payment, which establishes accounting standardsfor transactions 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 in the third quarterof 2005, SFAS 123(R) will require us to recognize the grant-date fair value ofstock options and equity based compensation issued to employees in thestatement of operations. The statement also requires that such transactions beaccounted for using the fair-value-based method, thereby eliminating use of theintrinsic method of accounting in APB No. 25, Accounting for Stock Issuedto Employees, which was permitted under Statement 123, as originally issued. Todate, we have expensed stock based compensation on the intrinsic method. We arecurrently evaluating the impact of Statement No. 123 (R) on our financialcondition and results of operations.

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 will become effective for usin fiscal year 2006. Statement No. 151 clarifies the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterials. The Statement requires that those items be recognized ascurrent-period charges. Additionally, Statement No. 151 requires thatallocation of fixed production overhead to the costs of conversion be based onnormal capacity of the production facility. We are currently followingStatement No. 151 and do not believe that Statement No. 151 will havea significant impact on our financial condition 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 month period ended June 30, 2006. All inter-company balances andtransactions are eliminated in consolidation.

Cash Equivalents: For purposes ofreporting cash flows, we consider all highly liquid debt instruments purchasedwith maturity of three months or less to be cash equivalents. Cash equivalentsconsist primarily of United States government securities.

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

Property, Plant and Equipment:****Property and equipment are stated at costor at the value of the operating agreement. We capitalize additions andimprovements which include all material, labor and engineering cost to design,install or

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improve the asset. Routine repairs and maintenance areexpensed as incurred. The capitalization threshold is $2,000 and a useful lifegreater than one year. Depreciation and amortization are computed using thestraight-line method over the following estimated useful lives:
| Leasehold and improvements |   | 20 years |   |
|----------------------------|--------|----------|--------|
| Furniture and  fixtures    |   | 3 years  |   |
| Machinery and  equipment   |   | 7 years  |   |
| Tooling and  molds         |   | 7 years  |   |
| Vehicles                   |   | 5 years  |   |

 

Goodwill:****UnderSFAS No. 142. Goodwill and other Intangible Assets, all goodwillamortization ceased effective January 1, 2002. Rather, goodwill is now subjectto only impairment reviews. A fair-value based test is applied at the reportinglevel. This test requires various judgments and estimates. A goodwillimpairment loss will be recorded for any goodwill that is determined to beimpaired. We follow SFAS 142, Goodwill and Intangible Assets, which requires usto test goodwill for potential impairment annually. When the carrying valueexceeds fair value, the impairment is the difference between the carrying valueof goodwill and the implied value. The implied value of goodwill is thedifference between the fair value for the unit as a whole and the value ofindividual assets and liabilities using an “as-if” purchase price.

Estimates: The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements, as well as thereported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates.

Revenue Recognition: Our revenue isderived principally from the sale of our vehicles and associated spare partsand training services. Revenue from products and services is only recognized atthe time goods are shipped or services are actually delivered to and acceptedby the customer, with an appropriate provision for returns and allowances. Wereceive performance based payments based on completion of specific milestones.These payments are recorded as deferred revenue and recognized on the profitand loss statement upon customer acceptance of the completed vehicle. It is ourpolicy to not recognize revenue until customer acceptance. All advance paymentsare carried on our balance sheet as “deferred revenue” until acceptance of thevehicle by the customer.

Dividend Policy: We have neverdeclared or paid a cash dividend on our common stock, and we do not anticipatepaying any cash dividends on our common stock in the foreseeable future. Anyfuture determination to pay cash dividends on our common stock will be at thediscretion of our board of directors and will depend upon our financialcondition, operating results, capital requirements, restrictions contained inour agreements and other factors which our board of directors deems relevant.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.

FINANCIAL CONDITION ANDRESULTS OF OPERATIONS

Overview: As a result of increasedvehicle production and increased operating efficiencies we generated anoperating profit for the second consecutive quarter. For the first time, wehave achieved a year-to-date net profit.

For the three month period ended June 30, 2006, grossrevenue from all sources was $56,074,537 against which we incurred total costof goods of $45,917,751 generating a gross profit of $10,156,786. We incurredgeneral and administrative expenses of $7,483,444 (which included a one timesettlement provision of $1,928,000) plus research and development expenses inthe amount of $641,215 resulting in an operating profit of $2,032,127.  We incurred interest expense of $818,985 andother income of $20,873, resulting in a net profit of $1,234,015.

For the six month period ended June 30, 2006, wegenerated positive cash flows from operations of $4,007,196 and realized a yearto date net profit of $568,382.

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The following table sets forth our consolidatedstatements of operations for the three month period ended June 30 for the years2005 and 2006. The discussion and analysis that follows should be read inconjunction with our consolidated financial statements and related notesincluded elsewhere in this report.

**ConsolidatedStatement of Operations**
|                         | ** ** | Three Month Period  Ended June 30 | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------|------------|-------------------------------------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **2006**                                              | ** ** | **2005**   | ** ** | **Difference** | ** ** | **% Change** | ** ** |
| Revenues                |       | $                                                     | 56,074,537 |       | 18,295,357 |           | $          | 37,779,180 |   | 206 | % |
| Cost of Sales           |       | 45,917,751                                            |       | 14,261,165 |       | 31,656,586     |       | 222 | % |
|                    |       |                                                  |       |       |       |           |       |   |   |
| Gross Profit            |       |                                                  | $          | 10,156,786 |       | 4,034,192      |       | $ | 6,122,594 |   | 152 | % |
| G.P.%                   |       |                                                  | 18.1       | %          | 22.1       | %              |       |   |   |   |
|                    |       |                                                  |       |       |       |           |       |   |   |
| G&A Expense         |       | $                                                     | 7,483,444  |       | 3,361,615  |           | $          | 4,121,829 |   | 123 | % |
| R&D Expense         |       | 641,215                                               |       | 367,925    |       | 273,290        |       | 74 | % |
| Total G&A           |       |                                                  | $          | 8,124,659  |       | 3,729,540      |       | $ | 4,395,119 |   | 118 | % |
| G&A%                |       |                                                  | 14.5       | %          | 20.4       | %              |       |   |   |   |
|                    |       |                                                  |       |       |       |           |       |   |   |
| Operating Profit        |       |                                                  | $          | 2,032,127  |       | 304,652        |       | $ | 1,727,475 |   | 567 | % |
|                    |       |                                                  |       |       |       |           |       |   |   |
| Interest Expense        |       | (818,985                                              | )          | (203,502   | )          | (615,483       | )          | 302 | % |
| Other  Income/(Expense) |       | 20,873                                                |       | 29,483     |       | (8,610         | )          | -29 | % |
| Net Profit  (Loss)      |       |                                                  | $          | 1,234,015  |       | 130,633        |       | $ | 1,103,382 |   | 845 | % |

 

Revenue: Revenue for the three monthperiod ended June 30, 2006 was $56,074,537 representing an increase of$37,779,180 (or 206%) compared to the same period in 2005. During the threemonth period, we delivered a total of 64 vehicles (5 Buffalo and 59 CougarJERRV). The increase in revenues was due to higher vehicle production volumescompared with last year, primarily as a result of the JERRV contract that wasawarded in May 2005. Our revenue is derived from the sale of our Buffalo andCougar vehicles and the sale of spare parts, training, field services and othersupport services. During the three month period ended June 30, 2006, wereceived $43,765,182 from vehicle sales and $12,309,355 from the sale of spareparts and other support services. The revenue from the sale of spare partscontinues to increase, driven by the increasing number of our vehiclesdelivered and deployed to areas of operations. We intend to continue to developthis spare parts business as an increasingly important part of our revenuebase.

Cost of Sales: Cost of sales for thethree month period ended June 30, 2006 was $45,917,751 representing an increaseof $31,656,586 (or 222%) compared to the same period in 2005. The increase duringthis period was due to the increased level of vehicle production, and thecorresponding increased cost of direct and indirect labor and materialassociated with our manufacturing activities. The cost of sales for the threemonth period ended June 30, 2006 was 82% of gross revenues for such three monthperiod representing an 18% gross profit for this period, compared with cost ofsales of 78% and a gross profit of 22% for the same period in 2005. The grossmargin for this three month period was negatively impacted by the contractdefinitization of our JERRV contract. As we continue to expand our productioncapacity, we expect to achieve increased cost efficiency from volumepurchasing, improvements in our manufacturing processes and the allocation of indirectcosts across a broader production base. We believe this will result in adecrease in our cost of sales as a percentage of gross revenue.

General and Administrative Expenses:General and administrative expenses for the three month period ended June 30,2006 were $8,124,659 representing an increase of $4,395,119 (or 118%) comparedto the same period in 2005. The general and administrative expenses for theperiod ended June 30, 2006 included $641,215 in research and

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development expense. We expect our general andadministrative 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 achieve greater efficiencies in our operations.  Thus, for example, during the three monthperiod ended June 30, 2006 our general and administrative expenses were 14.5%of our gross revenue as compared with 20.4% for the same period in 2005. Weexpect this trend to continue.  Ourgeneral and administrative expenses for the three months ended June 30, 2006include the one time provision of $1,928,000 in respect of the liabilitiesassociated with the “accelerated delivery fee” under the JERRV contract, and ifsuch one time contingency is excluded, our general and administrative expensesfor such period would be 11.1% of our gross revenue.

Net Profit/(Loss): Net profit forthe three month period ended June 30, 2006 was $1,234,015 representing an 844.6%increase over the net profit of $130,633 incurred during the same period in2005. The improved performance is due to increasing efficiencies and our higherproduction volumes. Net profit for the six month period ended June 30, 2006 was$568,382 representing our first year-to-date profitable performance.

Backlog:

On May 17, 2004, we announced the award of acontract to deliver twenty-one Buffalo vehicles to the U.S. Army and inOctober 2004 we were awarded a separate contract by the U.S. Army for anadditional fifteen Buffalo vehicles. Initial deliveries under these two Buffalocontracts began during 2004 and 2005, and as of June 30, 2006 we have deliveredall thirty-six Buffalo vehicles, leaving no backlog under these two contractswith 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 fourBuffalo vehicles (with associated spares, service and training) for a totalcontract price of $3,852,026. We delivered all four of these Buffalo vehiclesin 2005.

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 reduced thenumber of the additional vehicles from 27 to 22, for a total of 41. The LetterContract is subject to definitization of terms. As of June 30, 2006, we have delivered 8 Buffalo, leaving a contractbacklog, assuming all options are exercised, of 33 Buffalo vehicles to deliverunder this contract.

On March 2, 2006, we announced the award of a contractwith the U. S. Army, whereby we agree to provide the Army with authorized stocklist supplies to service its Buffalo route clearance vehicle for the sum of upto $5 million.  As of June 30, 2006 wehad delivered $4,189,190 of the supplies under such contract.

On April 23, 2004, we announced a contract awardto deliver Cougar Hardened Engineer Vehicles, or HEV, to the U. S. MarineCorps, of which fourteen were initially funded under the contract. OnMarch 8, 2005 the U.S. Marine Corps exercised its option to increase thenumber of HEV vehicles by fourteen, for a total of twenty-eight vehicles. As ofJune 30, 2006 we delivered a total of twenty-seven HEV vehicles, and have aremaining backlog of one 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 one hundredtwenty-two Cougar Joint Explosive Ordnance Disposal Rapid Response Vehicles, orJERRV, to be delivered during 2005 and 2006, with a total value, withassociated spares parts and training, of $90,000,000. As of June 30, 2006, wehave delivered all 122 JERRV vehicles leaving no backlog under the initialJERRV contract. However, on May 5, 2006 we announced that we were awarded on asole source basis a fixed price indefinite delivery/indefinite quantitycontract with the U. S. Marine Corps. to provide not more than 79 additional JERRVand associated manuals, spare parts, field support and training for an amountnot to exceed $51,031,110. As of June 30, 2006, we have not started delivery ofthese additional JERRV vehicles, leaving a backlog of 79 vehicles with a totalvalue, with associated spares parts and training of $51,000,000.

On June 2, 2006, we announced that on May 31,2006 the U.S. Army Tank-Automotive and Armaments Command, or TACOM, awarded BAESystems Land & Armaments L.P. of York, Pa a delivery order in theamount of $180,503,000 as part of a $445,439,000 firm-fixed-price contract forthe production and delivery of 378 Iraqi

18

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Light Armored Vehicles, or ILAV, to be delivered tothe Iraqi National Army. We have an agreement with BAE pursuant to which wewill license to BAE the use of FPI’s Cougar vehicle as the basis for the ILAVdesign, and will act as BAE’s principal subcontractor to provide the manpowerand other resources needed to produce 50% of the vehicles in Ladson SouthCarolina. We will also provide 100% of the after sales service and supportrequired under the TACOM agreement. As of June 30, 2006, we have not deliveredany of the ILAV vehicles, leaving a backlog of 100% of the contract value,which is approximately $55,000,000 under the current delivery order from TACOM.

We contract for the sale of our vehicles to the U.S.Government under fixed price sales contracts, subject to the provision of theU.S. Federal Acquisition Regulations (“FAR”). Under FAR 52.216-25 awards may bemade subject to future “Contract Definitization” pursuant to which thecontractor agrees to negotiate with the Government following commencement ofthe contract work to finalize detailed conditions of the contract, includingpricing scheduling and other applicable requirements.  As part of such negotiations, the contractoris subject to audit by the U.S. Defense Contract Audit Agency of its directmaterial and labor costs, manufacturing overhead and margin.  Based on the audit and the negotiations withthe Government, the final “definitized” contract price may be less than theamount originally stated.

During the three month period ended June 30, 2006, wereached agreement with the U.S. Marine Corps Contracting Officer on a finaldefinitized price for the JERRV contract (M67854-05-D-5091) in the total amountof $89,739,728 representing a reduction of $3,364,405 in the originally statedtotal contract price.  As of June 30,2006, we have a provision of $326,999 for potential price adjustments onrevenue recognized.

Future Deliveries: Set out below isa table showing actual and projected deliveries of our vehicles during 2004,2005 and 2006 based on our internal estimates although our actual results mayvary depending upon parts and material availability, actual productionschedules, production efficiencies and other contingencies discussed in thisreport.

**VehicleDeliveries 2004, 2005 & 2006**
|              | ** ** | **Actual** | ** ** | **Forecast** | ** ** |
|--------------|------------|------------|------------|--------------|------------|
| ** **   | ** ** | **2004**   | ** ** | **Q1-2005**  | ** ** | **Q2-2005** | ** ** | **Q3-2005** | ** ** | **Q4-2005** | ** ** | **Q1-2006** | ** ** | **Q2-2006** | ** ** | **Q3-2006** | ** ** | **Q4-2006** | ** ** |
| Buffalo      |       | 9          |       | 2            |       | 22 |   | 3 |   | 4 |   | 3 |   | 5 |   | 11 |   | 11 |   |
|         |       |       |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cougar HEV   |       | 5          |       | 8            |       | 2 |   | 8 |   | 4 |   | 0 |   | 0 |   | 1 |   | 0 |   |
|         |       |       |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cougar JERRV |       | 0          |       | 0            |       | 0 |   | 2 |   | 16 |   | 45 |   | 59 |   | 52 |   | 27 |   |
|         |       |       |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cougar ILAV  |       | 0          |       | 0            |       | 0 |   | 0 |   | 0 |   | 0 |   | 0 |   | 2 |   | 60 |   |
|         |       |       |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total        |       | 14         |       | 10           |       | 24 |   | 13 |   | 24 |   | 48 |   | 64 |   | 66 |   | 98 |   |

 

TRENDS, RISKS ANDUNCERTAINTIES

The results of our operations for the period endedJune 30, 2006 reflect our continuing growth and production capacity, as ourgross revenues for the second quarter of 2006 exceeded our total annualrevenues for all of 2005.  We believe we havecompleted the transition from our start-up period to operating profitability aswe evolve to become a manufacturing facility with stable production capability.During 2004 we were awarded contracts by the U.S. Army for a total of thirtysix Buffalos and by the U.S. Marines for twenty eight Cougars. We were able tobuild 14 vehicles during that year.  In2005, we produced a total of total of 71 vehicles, representing an increase of407% from the prior year, and during the six month period ended June 30, 2006,we produced a total of 110 vehicles, representing an annualized increase in2006 of 210%. During 2005, as we were working to complete our 2004 backlog. Wealso undertook the work necessary to increase our production capacity to meetthe demand for our vehicles under the JERRV contract for one hundred twenty-twoCougars awarded in May 2005. This included substantial vehicle and automotiveengineering work, manufacturing engineering development, hiring and training aworkforce and the expansion of our manufacturing and administrative facilities.While the JERRV contract reflects a broader, growing demand for our vehicles,we continued to face the challenge of expanding our manufacturing capacity tofully exploit this opportunity. During 2005, we moved aggressively to meet thischallenge by expanding our facilities, improving our operating systems and refiningour manufacturing processes. These activities required a significant commitmentof short term resources, but have positioned us to reap a long-termbenefit.  The results for the first andsecond quarter of 2006 demonstrate that we are beginning to reap such benefitsin the form of increased liquidity, operating profitability and net profit. Webelieve the May 31, 2006 ILAV contract offers us a new opportunity forexpansion and growth, as it represents a new product line and a new customerorientation.

We recognize there are risks associated with ouron-going expansion activities. We continue to rely upon the U.S. Army and theU.S. Marine Corps for 100% of our sales, and if either customer elected not toissue further orders to us it would have a dramatic impact upon our financialperformance. We have no reason to believe that such

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additional orders will not be forthcoming. During thethree month period ended June 30, 2006, we received follow on orders foradditional JERRV vehicles and secured a new contract for the production of ILAVvehicles.

In the past, we have encountered some delays insecuring the necessary components for our vehicles, for example armor steel,truck chassis, axle sets and ballistic glass. To mitigate this risk, we haveidentified multiple vendors for certain components to ensure we have alternatesources of supply, if necessary. Additionally, we have implemented a program ofadvance purchasing and stockpiling critical materials. For example, wecurrently have pre-purchased steel and truck parts to ensure availability ofmaterial needed for current and potential future orders. While we do notcurrently expect the potential non-availability of parts or raw materials tomaterially affect our operations, there is a possibility that delays orincreased costs could negatively impact our financial performance ifcircumstances change. Apart from the foregoing, the main uncertainty about ourfuture operations is whether we will continue to receive additional orders forour vehicles. It is impossible to predict with certainty whether such futureorders will be placed by existing or new customers. If we do not receive futureorders, it is unlikely that our business will continue. However, we believe ourvehicles provide proven blast and ballistic protection, and that for so long asthere is a risk of bodily harm to service personnel from explosive blasts,there will be a market for our products.

LIQUIDITY AND CAPITALRESOURCES

Current Liquidity: For the six monthperiod ended June 30, 2006, we had a starting cash balance of $1,217,509 and anending cash balance of $3,469,394 representing a net increase in our cashposition for such period of $2,251,885. During this period we incurred positivecash flows from operations of $4,007,196, we received $5,970,735 from theexercise of outstanding warrants and we paid down $5,000,000 of the principalamount due under our short term debt.

Future Liquidity: During the sixmonth period ended June 30, 2006 we experienced positive cash flows fromoperations of $4,007,196 and were able to retire the majority of our short termdebt.  During this period, we continuedto manage our accounts payable, and continued to factor our U.S. Governmentreceivables under the Purchase and Sale Agreement with GC Financial Services, Inc.which allows us to receive payment within 24-48 hours of vehicle deliveries,reducing the impact of the government contract payment cycle on our short termliquidity.  During the remainder of 2006we expect the infra-structure expenses we have incurred in connection with ourproduction ramp-up will begin to level off or decline and that we will continueto experience increased levels of positive cash flows from operations as weincrease the volume of vehicle production. We expect such positive cash flowswill allow us to pay down all or a portion of our short term debt and reducethe level of our accounts payable.  Inaddition, on July 24, 2006, we realized net proceeds of $39,187,500 through thesale of 8,250,000 shares of our common stock pursuant to a private placementwith institutional investors.

Uncertainties: The amount of workingcapital that we will require depends on several factors, including withoutlimitation, the extent and timing of sales of our products, future inventorycosts, the timing and costs associated with the expansion of our manufacturing,development, engineering and customer support capabilities, the timing and costof our product development and enhancement activities and our operatingresults. The realization of a major portion of the assets shown on our balancesheet is dependent upon the success of such future operations. During 2006 weanticipate we will generate cash flows from operations sufficient to satisfyour cash requirements, but if we are unable to do so, we may need to seekalternative sources of cash. Potential sources of such cash could includesenior debt facilities, new lines of credit, or additional sales of oursecurities. If we raise funds through the sale of securities, the common stockcurrently outstanding could be diluted. There is a risk that such additionalfinancing may not be available, or may not be available on acceptable terms,and the inability to obtain additional financing or generate sufficient cashfrom operations could require us to reduce or eliminate expenditures forcapital equipment, research and development, production, or marketing of ourproducts, or otherwise curtail or discontinue our operations, which could havea material adverse effect on our business, financial condition and results ofoperations.

Inflation & Material Cost

We do not believe that inflation has had or is likelyto have any significant impact on our revenues, and we currently are not facingany material shortages of material or parts. We currently have enough steel onhand or on order to manufacture our existing contracts, and we continue topurchase steel anticipating future requirements. If the price

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

**ITEM 3 -CONTROLS AND PROCEDURES**

**Disclosure Controls and Procedures**

Our management evaluated, with the participation ofour Chief Executive Officer and our Interim 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 Interim 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 of reasonableassurance that the control system, no matter how well designed and operated,can provide only reasonable, but not absolute, assurance that the controlsystem’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 broughtby Atlantis Partners, Inc. against us in the Circuit Court for the15th Judicial Circuit, Palm Beach County, Florida arising out of analleged finder’s fee agreement, for a one time payment of 30,000 shares ofour unregistered common stock.

We believe that there are no other claims orlitigation pending against the Company or its officers and directors in theirroles as such, the outcome of which could have a material adverse effect on theCompany’s financial condition or operation results.

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

On June 26, 2006we issued 586 shares of common stock to the holders of our Series D Preferredas “dividend shares” under the Series D certificate of designation.

On June 2, 2006 weissued 12,500 shares of unregistered stock to Mr. Frank Kavanaugh, one of ourformer executives as compensation due for services rendered to the Companyduring 2002 and 2003.

On May 22, 2006 weissued a total of 23,436 shares of unregistered common stock as compensation toour Directors for their service to the Company during the three month periodended March 31, 2006.

On July 24, 2006 we sold 8,250,000 shares of ourunregistered common stock at $5.00 per share through a private placement forgross proceeds $41,250,000. The proceeds net of commissions were $39,187,500. Theshares were sold to 15 institutional investors in accordance with Rule 506of Regulation D under the Securities Act of 1933 (as amended) in that:

21

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·                  thesales were made to a sophisticated or accredited investors, as defined inRule 502;

·                  wegave each purchaser the opportunity to ask questions and receive answersconcerning the terms and conditions of the offering and to obtain anyadditional information which we possessed or could acquire without unreasonableeffort or expense that is necessary to verify the accuracy of informationfurnished;

·                  ata reasonable time prior to the sale of securities, we advised each purchaser ofthe limitations on resale in the manner contained in Rule 502(d)2;

·                  neitherwe nor any person acting on our behalf sold the securities by any form ofgeneral solicitation or general advertising; and

·                  weexercised reasonable care to assure that each purchaser of the securities isnot an underwriter within the meaning of Section 2(11) of the SecuritiesAct of 1933 in compliance with Rule 502(d).

Weintend to use the net proceeds from the financing to reduce our outstandingaccounts payable, cover anticipated capita expenditures required for ourcontinuing facilities and infra-structure expansion, and to provide shortworking capital to minimize the cyclic nature of the payment of our accountsreceivable from the U.S. Government.

**STOCK OPTION PLAN**

We have issued the following options to purchaseshares of our unregistered common stock to certain employees, including:

·                  Options topurchase 1,000,000 shares at $0.72/share. These options were approved by the Board of Directors on November 18,2005 to be granted on January 1, 2006 at 100% of the then current market pricefor our shares. These options vest in full on January 1, 2007.

·                  Options topurchase 647,833 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.

**ITEM 3 -DEFAULTS UPON SENIOR SECURITIES**

Not applicable.

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

Not applicable.

**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

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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.

**ITEM 6 -EXHIBITS**

**EXHIBIT INDEX**
| NUMBER | ** ** | **DESCRIPTION**                                                                                                                                                                                                            |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                       |
| 2.1    |       | Agreement and Plan of Merger (included as Attachment  A to exhibit 99.2 to the Form DEF 14A filed November 19, 2004, and  incorporated herein by reference).                                                     |
|   |       |                                                                                                                                                                                                                       |
| 3.1    |       | Articles of Incorporation (included as Attachment B  to exhibit 99.2 to the Form DEF 14A filed November 19, 2004, and  incorporated herein by reference).                                                        |
|   |       |                                                                                                                                                                                                                       |
| 3.2    |       | By-Laws (included as Attachment C to Exhibit 99.2 to  the Form DEF 14A filed November 19, 2004, and incorporated herein  by reference).                                                                          |
|   |       |                                                                                                                                                                                                                       |
| 3.3    |       | Amended Articles of Incorporation (included as  Attachment D to Exhibit 99.2 to the Form DEF 14A filed November 19,  2004, and incorporated herein by reference).                                                |
|   |       |                                                                                                                                                                                                                       |
| 4.1    |       | Certificate of Designation for Series D  Convertible Preferred Stock, dated January 19, 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 June 30, 2000, and  incorporated herein by          |

 

23

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|        |   | 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).                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 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 June 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,                                                                                                                                                                                                                                                                               |

 

24

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|        |   | 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 Gale  Aguilar, dated November 8, 2004 (included as Exhibit 10.1 to the  Form 8-K/A filed November 10, 2004, and incorporated herein by  reference).                                                       |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.18  |   | 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).                                                                 |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.19  |   | 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).                                                                          |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.20  |   | 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).                                   |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.21  |   | 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).                                                   |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.22  |   | Employment Agreement between the Company and Ted McQuinn,  dated February 4, 2005 (included as Exhibit 10.23 to the  Form 10-KSB/A filed April 22, 2005, and incorporated herein by  reference).                                                       |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.23  |   | 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).                                          |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.24  |   | 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).                                          |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.25  |   | 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).           |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.26  |   | 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).                                                   |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.27  |   | 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).                                                            |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.28  |   | 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).                                                                |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.29  |   | 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). |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.30  |   | 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).                                                                      |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.31  |   | 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).                                                                     |

 

25

----

 
| 10.32  |   | 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).   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                 |
| 10.33  |   | 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). |
|   |   |                                                                                                                                                                 |
| 10.34  |   | Production License Agreement between the Company and  BAE Systems Land & Armaments, LP, dated June 13, 2006 (filed herewith).                                    |
|   |   |                                                                                                                                                                 |
| 10.35  |   | Logistic Support Agreement between the Company and  BAE Systems Land & Armaments, LP, dated June 13, 2006 (filed herewith).                                      |
|   |   |                                                                                                                                                                 |
| 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.                      |

 

26

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**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: August 14, 2006      | ** ** |
|                       |   |   |
| By:                        | /s/ Gordon McGilton |   |
| Gordon McGilton            |   |
| Chief Executive Officer    |
|                            |  |  |  |

 

 
| Date: August 14, 2006          |
|--------------------------------|
|                           |   |
| By:                            | /s/ R. Scott Ervin |   |
| R. Scott Ervin                 |
| Acting Chief Financial Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

Signatures
| Name                 | ** ** | **Title**                      | ** **                    | **Date** |
|----------------------|------------|--------------------------------|-------------------------------|----------|
|                 |       |                           |                          |     |
|                 |       |                           |                          |     |
| /s/ Frank  Kavanaugh |       |                           | Chairman, Board of Directors  |     | August 14, 2006 |
| Frank Kavanaugh      |       |                           |                          |     |
|                 |       |                           |                          |     |
| /s/ Gordon  McGilton |       |                           | Director, and                 |     | August 14, 2006 |
| Gordon McGilton      |       | Chief Executive Officer        |                          |     |
|                 |       |                           |                          |     |
| /s/ R. Scott  Ervin  |       |                           | Director, General Counsel and |     | August 14, 2006 |
| R. Scott Ervin       |       | Acting Chief Financial Officer |                          |     |
|                 |       |                           |                          |     |
| /s/ Jack Davis       |       |                           | Director                      |     | August 14, 2006 |
| Jack Davis           |       |                           |                          |     |
|                 |       |                           |                          |     |
| /s/ Gale Aguilar     |       |                           | Director                      |     | August 14, 2006 |
| Gale Aguilar         |       |                           |                          |     |
|                      |            |                                |                               |          |  |  |

 

27

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