**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION****Washington, D.C.20549**

**FORM 10-Q**

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

**FOR THE QUARTERLY PERIOD ENDED MARCH 31,2006**

**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)   |

 
| **9801  Highway 78, Bldg #2** |
|-------------------------------|
| **Ladson,  South Carolina**   |
| **29456**                     |

 

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

Securities registered pursuant to Section 12(b) ofthe Act:   ** None**

Securities registered pursuant to Section 12(g) ofthe Act:**Common Stock par value $0.001 pershare**

Check whetherthe issuer (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. **Yes****x**                               No o

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o                         **No ****x**

As of March 31, 2006, the Issuer had 38,734,639shares 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                   |   |
|                                 | Consolidated  Balance Sheet As Of March 31, 2006                                |   |
|                                 | Consolidated  Statement Of Operations For The Three Months Ended March 31, 2006 |   |
|                                 | Consolidated  Statement Of Cash Flows For The Three Months Ended March 31, 2006 |   |
|                                 | Notes To  Consolidated Financial Statements                                          |   |
|                                 | Item 2 –  Management’s Discussion And Analysis                             |   |
|                                 | Item 3 –  Quantitative and Qualitative Disclosures About Market Risk            |   |
|                                 | Item 4 – Controls And  Procedures                                               |   |
|                                 |                                                                                 |   |
| Part II : Other  Information    |                                                                                 |
|                                 |                                                                                 |   |
|                                 | Item 1 – Legal Proceedings                                                      |   |
|                                 | Item 1A –  Risk Factors                                                         |   |
|                                 | Item 2 –  Unregistered Sales Of Equity Securities And Use of Proceeds           |   |
|                                 | Item 3 –  Defaults Upon Senior Securities                                       |   |
|                                 | Item 4 –  Submission Of Matters To A Vote Of Security Holders                   |   |
|                                 | Item 5 – Other Information                                                      |   |
|                                 | Item 6 – Exhibits                                                          |   |

 

 

**PART I — FINANCIAL INFORMATION**

**ITEM 1  - FINANCIAL STATEMENTS**

**REPORT ON REVIEW BY INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

***JASPERS + HALL,PC****CERTIFIED PUBLIC ACCOUNTANTS****9175 E KenyonAvenueDenver, CO 80237303-796-0099***

2

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REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

Tothe Board of Directors

ForceProtection, Inc. and Subsidiary

We have reviewed the accompanying consolidated balancesheet of Force Protection, Inc., and Subsidiary as of March 31, 2006and the related consolidated statement of operations and consolidated statementof cash flows for the three month periodended March 31, 2006. These financial statementsare the responsibility of the company’s management.

We conducted our reviewin accordance with the standards of the Public Company Accounting OversightBoard (United States). A review of interim financial information consistsprincipally of applying analytical procedures and making inquiries of personsresponsible for financial and accounting matters. It is substantially less inscope than an audit conducted in accordance with standards of the PublicCompany Accounting Oversight Board (United States), the objective of which isthe expression of an opinion regarding the financial statements taken as awhole. Accordingly, we do not express such an opinion.

Based on our review, weare not aware of any material modifications that should be made to the accompanyinginterim financial statements referred to above for them to be in conformitywith accounting principles generally accepted in the United States of America.

The accompanyingfinancial statements have been prepared assuming that the Company will continueas a going concern. As discussed in Note 2, conditions exist which raisesubstantial doubt about the Company’s ability to continue as a going concern. Thefinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

We have previously audited,in accordance with the standards of the Public Company Accounting OversightBoard (United States), the balance sheet as of December 31, 2005, and therelated statements of operations, stockholders’ equity and cash flows for theyear then ended (not presented herein). In our report dated March 17,2006, we expressed an unqualified opinion on those financial statements. In ouropinion, the information set forth in the accompanying balance sheet as of March 31,2006 is fairly stated in all material respects in relation to the balance sheetfrom which it has been derived.
| /s/ Jaspers + Hall, PC |   |   |   |
|------------------------|--------|--------|--------|

**May 8, 2006**

3

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**FORCE PROTECTION,INC.CONSOLIDATED BALANCE SHEETMARCH 31, 2006**
| ** **                                                                                                                                                                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                                | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current Assets:                                                                                                                                                           |       |               |       |                  |       |
| Cash                                                                                                                                                                      |       | $                  | 6,146,738  |                  | $          | 1,217,509 |   |
| Accounts receivable                                                                                                                                                       |       | 1,416,729          |       | 4,033,582             |       |
| Inventories                                                                                                                                                               |       | 33,587,108         |       | 32,486,776            |       |
| Other current assets                                                                                                                                                      |       | 371,137            |       | 267,189               |       |
| Total current  assets                                                                                                                                                     |       | 41,521,712         |       | 38,005,056            |       |
| Property and  equipment, net                                                                                                                                              |       | 2,597,105          |       | 2,138,703             |       |
| **Total  Assets**                                                                                                                                                         |       | $                  | 44,118,817 |                  | $          | 40,143,759 |   |
| ** **                                                                                                                                                                | ** ** | ** **         | ** ** | ** **            | ** ** |
| **LIABILITIES &  SHAREHOLDERS’ EQUITY**                                                                                                                     | ** ** | ** **         | ** ** | ** **            | ** ** |
| **LIABILITIES**                                                                                                                                                           | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current  Liabilities:                                                                                                                                                     |       |               |       |                  |       |
| Accounts payable                                                                                                                                                          |       | $                  | 19,551,390 |                  | $          | 14,688,855 |   |
| Other accrued liabilities                                                                                                                                                 |       | 1,757,368          |       | 1,618,451             |       |
| Contract liabilities                                                                                                                                                      |       | 1,652,646          |       | 2,053,285             |       |
| Notes payable                                                                                                                                                             |       | 3,750,000          |       | 7,500,000             |       |
| Note payable – Related Party                                                                                                                                         |       | 2,500,000          |       | —                |       |
| Deferred revenue                                                                                                                                                          |       | 13,734,314         |       | 12,598,921            |       |
| Total Current  Liabilities                                                                                                                                                |       | 42,945,718         |       | 38,459,512            |       |
| **Total Liabilities**                                                                                                                                                     |       | $                  | 42,945,718 |                  | $          | 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 8,478  shares at 3.31.2006 and 13,004 shares at 12.31.2005 issued and outstanding, |       | 8,212,918          |       | 12,597,390            |       |
| Common stock,  Par Value $0.001, 300,000,000 shares authorized; in 2005 38,734,639 shares at  3.31.2006 and 36,114,217 shares at 12.31.2005 issued and outstanding        |       | 38,735             |       | 36,114                |       |
| Warrants - 3,057,050  outstanding                                                                                                                                         |       | 1,500              |       | 1,500                 |       |
| Shares committed  to be issued ***                                                                                                                                        |       | —             |       | 122,000               |       |
| Additional  Paid-in Capital                                                                                                                                               |       | 43,052,845         |       | 38,232,994            |       |
| Accumulated  deficit                                                                                                                                                      |       | (50,132,899        | )          | (49,305,752           | )          |
| **Total Shareholders’ Equity**                                                                                                                                       |       | 1,173,099          |       | 1,684,247             |       |
|                                                                                                                                                                      |       |               |       |                  |       |
| **Total Liabilities and  Shareholders’ Equity**                                                                                                                      |       | $                  | 44,118,817 |                  | $          | 40,143,759 |   |

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*** Represents sharesaccrued in 2005 and issued in 2006The accompanying Notes are an integral part of these Financial Statements.

SeeAccountant’s Review Report

4

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**FORCE PROTECTION,INC.CONSOLIDATED STATEMENTS OF OPERATIONSFor the Three Month Period ended March 31(Unaudited)**
| ** **                                    | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|
| **Net  Sales**                                |       | $          | 34,802,585 |       | $          | 5,853,423 |   |
| Cost of sales                                 |       | 28,164,816 |       | 6,395,319  |       |
| Gross Profit                                  |       | 6,637,769  |       | (541,896   | )          |
|                                          |       |       |       |       |       |
| General and  administrative expense           |       | 5,859,537  |       | 2,991,444  |       |
| Research and  Development                     |       | 663,590    |       | 210,855    |       |
| **Operating Profit (Loss)**                   |       | 114,642    |       | (3,744,195 | )          |
|                                          |       |       |       |       |       |
| Other income                                  |       | 27,049     |       | 38,541     |       |
| Interest expense                              |       | (807,324   | )          | (277,256   | )          |
| ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net Loss**                                  |       | $          | (665,633   | )          | $          | (3,982,910 | ) |
|                                          |       |       |       |       |       |
| **Basic loss per common share**               |       | $          | (0.02      | )          | $          | (0.13 | ) |
|                                          |       |       |       |       |       |
| **Diluted loss per common share**             |       | $          | (0.02      | )          | $          | (0.13 | ) |
|                                          |       |       |       |       |       |
| **Weighted-average  shares used to compute:** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic loss per  share                         |       | 37,451,698 |       | 30,728,806 |       |
| Diluted loss per share                        |       | 37,451,698 |       | 30,728,806 |       |

 

Theaccompanying Notes are an integral part of these Financial Statements.

SeeAccountants Review Report

5

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**FORCE PROTECTION,INC.CONSOLIDATED STATEMENTS OF CASH FLOWSFor the Three Month Period Ended March 31, 2006(Unaudited)**
| ** **                                                                                     | ** ** | **2006**         | ** ** | **2005**      | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------|------------|---------------|------------|
| ** **                                                                                     | ** ** | **(000’s)** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                                      | ** ** | ** **       | ** ** | ** **    | ** ** |
| Net loss from  operations                                                                      |       | $                | (665,633   | )             | $          | (3,982,910 | ) |
| **Adjustments  to reconcile net loss to net cash (used in) provided by operating activities:** | ** ** | ** **       | ** ** | ** **    | ** ** |
| Depreciation and  Amortization                                                                 |       | 183,558          |       | 73,837        |       |
| Common stock  issued for services                                                              |       | 316,000          |       | —        |       |
| Change in assets  and liabilities:                                                             |       |             |       |          |       |
| Increase (decrease) in accounts receivable                                                     |       | 2,616,853        |       | (452,310      | )          |
| Increase (decrease) in inventories                                                             |       | (1,100,332       | )          | (4,094,983    | )          |
| Increase (decrease) in other current assets                                                    |       | (103,948         | )          | (158,291      | )          |
| Increase (decrease) in accounts payable                                                        |       | 4,862,535        |       | 82,934        |       |
| Increase (decrease) in other accrued liabilities                                               |       | 354,955          |       | (774,763      | )          |
| Increase (decrease) in contract liabilities                                                    |       | (400,639         | )          | 211,223       |       |
| Increase (decrease) in Deferred Revenue                                                        |       | 1,135,393        |       | 3,703,737     |       |
|                                                                                           |       |             |       |          |       |
| **Net  cash provided (used) in operating activities**                                          |       | 7,198,742        |       | (5,391,526    | )          |
|                                                                                           |       |             |       |          |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                                      | ** ** | ** **       | ** ** | ** **    | ** ** |
| Purchase of  property and equipment                                                            |       | (641,960         | )          | (498,312      | )          |
| **Net  cash used in investing activities**                                                     |       | (641,960         | )          | (498,312      | )          |
|                                                                                           |       |             |       |          |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                     | ** ** | ** **       | ** ** | ** **    | ** ** |
| Issuance of  common stock, net                                                                 |       |             |       | 346,124       |       |
| Issuance of  Preferred Series D Stock                                                     |       | —           |       | 15,800,000    |       |
| Preferred Stock  Dividends paid                                                                |       | (377,553         | )          | —        |       |
| Proceeds from  (Payments on) loans, net                                                        |       | (1,250,000       | )          | (4,360,975    | )          |
| **Net  cash provided (used) by Financing Activities**                                          |       | (1,627,552       | )          | 11,785,149    |       |
| ** **                                                                                     | ** ** | ** **       | ** ** | ** **    | ** ** |
| **Net  increase (decrease) in cash**                                                           | ** ** | **4,929,229**    | ** ** | **5,895,311** | ** ** |
| ** **                                                                                     | ** ** | ** **       | ** ** | ** **    | ** ** |
| **CASH - beginning  of period**                                                                |       | 1,217,509        |       | 2,264,406     |       |
| ** **                                                                                     | ** ** | ** **       | ** ** | ** **    | ** ** |
| **CASH -  end of period**                                                                      |       | $                | 6,146,738  |          | $          | 8,159,717 |   |
| **Interest  Paid**                                                                             |       | 285,806          |       | 114,800       |       |
| ** **                                                                                     |       |             |       |          |       |
| **Taxes Paid**                                                                                 |       | —           |       | —        |       |

 

Theaccompanying Notes are an integral part of these Financial Statements.

SeeAccountant’s Review Report

6

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**FORCEPROTECTION, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**March 31,2006**

(Unaudited)

 

**NOTE 1 –PRESENTATION OF CONSOLIDATED INTERIM INFORMATION**

 

In the opinion of themanagement of Force Protection, Inc. and its wholly-owned subsidiaries,the accompanying unaudited consolidated financial statements include all normaladjustments considered necessary to present fairly the financial position as ofMarch 31, 2006, and the results of operations and cash flows for the threemonth period ended March 31, 2006. Interim results are not necessarilyindicative of results for a full year.

 

The consolidatedfinancial statements and notes are presented as permitted by Form 10-Q,and do not contain certain information included in Force Protection Inc.’saudited consolidated financial statements and notes for the fiscal year ended December 31,2005.

 

The consolidatedfinancial statements include the accounts of Force Protection, Inc., andthe Company’s two wholly-owned subsidiaries, Force Protection Industries, Inc.(formerly Technical Solutions Group, Inc.) and TSG International, Inc.for the three month period ended March 31, 2006. All inter-companybalances and transactions are eliminated in consolidation.

 

**NOTE 2 – GOING CONCERN**

 

The Company’s financialstatements have been prepared on a going concern basis, which contemplatescontinuity of operations, realization of assets and liquidation of liabilitiesin the normal course of business. The Company had cumulative recurring lossesof $50,132,899 as of March 31, 2006 and while the Company returned to operating profitability for the periodended March 31, 2006 its ability to operate as a going concern will dependupon the Company’s ability to generate positive cash flows from operationsand/or to obtain outside sources of working capital. Management is aware ofthese requirements and is undertaking specific measures to address theseliquidity concerns. Specifically, to increase revenues the Company has focusedon increasing its production capacity to maximize revenues from vehicles salesand has continued to expand its integrated logistics support function to meetthe increased demand for spare parts and other support services. The efforts bythe Company in these regards have been dramatic as the Company has been able toincrease its average monthly vehicle production from four vehicles in early2005 to an average of 15 vehicles per month during the three month period endedMarch 31, 2006. In addition the Company is undertaking to increase itsgross profitability by reducing the direct costs to manufacture its products byfocusing on continual improvement of manufacturing processes and reducingrework and waste resulting from internal inefficiencies. At the same time, theCompany is working to reduce the percentage of its G&A expenses throughworkforce balancing and cost planning initiatives. As a result of such efforts,the Company experienced net positive cash flows from operations for the threemonth period ended March 31, 2006 of $7,198,742 and the Company expectsthis trend to continue. Finally, to provide additional liquidity, the Companycontinues to explore various asset-based debt financing options, including longterm loans, revolving lines of credit and accounts receivable factoringarrangements. Notwithstanding the foregoing, there can be no assurance that theCompany will be successful in obtaining such financing, that it will havesufficient funds to execute its business plan or that it will generate positiveoperating results. The financial statements do not include any adjustmentsrelating to the recoverability and classification of asset carrying amounts orthe amount and classification of liabilities that might result should theCompany be unable to continue as a going concern.

 

**NOTE 3 – INVENTORIES**

 

Inventory at March 31,2006 consisted of the following:

 

|                                                 | ** ** | **March 31** | ** ** | **Dec. 31** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                      | ** ** | **2006**          | ** ** | **2005**         | ** ** |
| Raw materials  and supplies                     |       | 11,487,681        |       | 15,222,503       |       |
| Work in process                                 |       | 22,747,708        |       | 17,762,554       |       |
| Less: Allowance  for obsolescence and shrinkage |       | (648,281          | )          | (498,281         | )          |
|                                            |       |              |       |             |       |
| Net Inventories                                 |       | 33,587,108        |       | 32,486,776       |       |

 

 

7

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**NOTE 4 – PROPERTY AND EQUIPMENT**

 

Property, Plant andEquipment at March 31, 2006 consisted of the following:

 

|                                     | ** ** | **March 31** | ** ** | **Dec 31** | ** ** |
|-------------------------------------|------------|-------------------|------------|-----------------|------------|
| ** **                          | ** ** | **2006**          | ** ** | **2005**        | ** ** |
| Furniture and  fixtures             |       | 227,613           |       | 227,613         |       |
| Leasehold  improvements             |       | 308,557           |       | 59,928          |       |
| Machinery and  equipment            |       | 2,417,767         |       | 2,204,436       |       |
| Test Equipment                      |       | 16,790            |       | 16,790          |       |
| Manuals                             |       | 104,798           |       | 104,798         |       |
| Vehicles                            |       | 56,464            |       | 56,464          |       |
| Demo vehicles                       |       | 425,845           |       | 425,845         |       |
| Less depreciation  and amortization |       | (960,729          | )          | (771,171        | )          |
|                                |       |              |       |            |       |
| Net property and  equipment         |       | 2,597,105         |       | 2,138,703       |       |

 

Depreciation expense forthe period ended March 31, 2006 was $183,558 compared with $73,837 for thesame period in 2005.

 

**NOTE 5 – COMMITMENTS + CONTINGENCIES**

 

**Compensation of ExecutiveOfficers & Directors**

 

On January 27,2005, the Company entered into an agreement with Mr. Gordon McGilton toact as its Chief Quality Officer. Under the terms of such agreement, Mr. McGiltonis to 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 2005Mr. McGilton received “in kind” compensation in the amount of $20,000 inthe form of a Vortex jet boat which the Company gave Mr. McGilton titleto. This “in kind” compensation was for work performed for the Company by Mr. McGiltonas an independent contractor during 2001and 2002. Effective January 1,2006 the Company modified Mr. McGilton’s compensation to include cashcompensation of $35,000 per month, relocation expense of $30,000 uponseparation for the Company, a one time grant of 300,000 shares of the Company’sunregistered common stock and options to purchase 1,000,000 shares of theCompany’s stock at an exercise price of $0.72 per share, such options to vest onJanuary 1, 2007 (or earlier upon the occurrence of specified events).Mr. McGilton joined the board of directors on April 18, 2005. Mr. McGiltonreceived no compensation for his services as a director during 2005.

 

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 theterms of such agreement, Mr. McQuinn is to receive compensation of$180,000 per year, plus an annual grant (for a period of three years) ofunregistered common stock valued at $100,000 and a one time grant ofunregistered common stock valued at $20,000. Mr. McQuinn resignedeffective March 31, 2006.

 

8

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On November 15,2004, the Company entered into an employment agreement with Mr. R. ScottErvin to act as its General Counsel. Under the terms of such agreement, Mr. Ervinis to 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 appointedby the Board to act as Interim Chief Executive Officer during the Company’ssearch for a Chief Executive Officer. Upon the appointment of the new CompanyChief Executive Officer on April 18, 2005, Mr. Ervin ceased to serveas the Interim Chief Executive Officer but continues to serve as GeneralCounsel and a member of the board of directors. Mr. Ervin received nocompensation for his services as a director during 2005. On November 14,2005 the Board appointed Mr. Ervin to serve as the Acting Chief FinancialOfficer following the resignation of the former CFO. Effective February 10,2006, the Company increased Mr. Ervin’s compensation to $180,000 perannum.

 

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 is to receive compensation of $180,000 per year,plus a grant of unregistered stock valued at $82,000. Mr. Aguilar’semployment agreement was terminated effective January 27, 2005. Mr. Aguilarreceived no compensation for his services as a director during 2005.

 

On March 31,2003 the Company entered into an employment agreement with Mr. FrankKavanaugh to act as its Vice President of Business Development. Under the termsof such agreement, Mr. Kavanaugh is to receive compensation of $180,000per year. In addition, on December 31, 2004 Mr. Kavanaugh received aone time grant of 10 Series C shares and 41,667 common shares valued at$180,000. On May 14, 2005 Mr. Kavanaugh resigned from his employmentwith the Company, but continues to serve on the board of directors as Chairman.In connection with Mr. Kavanaugh’s resignation, the Company agreed to payfor 24 months of health coverage valued at $24,178. Mr. Kavanaugh receivedno compensation for his services as a director during 2005.

 

**Legal Proceedings**

 

On May 12, 2005,Atlantis Partners, Inc. filed a complaint against the Company in theCircuit Court for the 15th Judicial Circuit, Palm Beach County Florida foralleged breach of terms related to a finder’s fee agreement dated March 28,2003. The complaint alleges damages of at least $400,000 in fees, plus costsand interest. The Company has answered the complaint and intends to vigorouslydefend against Atlantis Partner’s claims.

 

**Liquidated Damages**

 

During the second quarterof 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 and 2006. Aspart of such contract, the Company received $6,699,996 as the initial contractmilestone payment for “accelerated delivery costs.” Under the terms of theJERRV contract, the customer has the right to recover this milestone payment inthe form of liquidated damages on each vehicle in the event any of the vehiclesare delivered after the contractually agreed delivery date. The amount ofliquidated damages is $54,918 per vehicle for each vehicle delivered late(representing the total milestone payment of $6,699,996 divided by the 122JERRV Cougars to be delivered under the contract). The Company has establisheda provision of $219,872 against this contingency.

 

**OtherAccrued Liabilities**

 

TheCompany’s other accrued liabilities include the following:

 

|                                       | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|---------------------------------------|------------|-----------|------------|-----------|------------|
| Compensation and  benefits            |       | 1,714,978 |       | 1,341,101 |       |
| Accrued  Dividends on Preferred Stock |       | 42,390    |       | 260,080   |       |
| Other                                 |       | —    |       | 17,270    |       |
|                                  |       | $         | 1,757,368  |      | $          | 1,618,451 |   |
|                                       |            |           |            |           |            |  |  |

 

 

9

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**Accrualsfor Warranty and Pricing**

 

Accrualsfor warranty and pricing contingencies include the following:

 

|                                  | ** ** | **2006** | ** ** | **2005**  | ** ** |
|----------------------------------|------------|----------|------------|-----------|------------|
| Non- Recurring  Warranty         |       | —   |       | 1,306,018 |       |
| General Warranty                 |       | 619,947  |       | 380,044   |       |
| Contract Price  re-determination |       | 812,827  |       | 367,223   |       |
| Other                            |       | 219,872  |       | —    |       |
|                             |       | $        | 1,652,646  |      | $          | 2,053,285 |   |
|                                  |            |          |            |           |            |  |  |

** **

**NOTE 6 –DEFERRED REVENUE**

 

The Company onlyrecognizes revenue from the sales of its vehicles upon formal acceptance by itsU.S. Government customer however the Company does receive performance basedpayments in accordance with agreed milestones under some of its governmentcontracts. The Company records such performance based payments as deferredrevenue and carries them on its balance sheet until formal acceptance by thecustomer. As of March 31, 2006 the Company has booked $13,734,314 asdeferred revenue resulting from its contracts with the U.S. Army and the U.S.Marines.

 

**NOTE 7 –CONTRACT DEFINITIZATION**

 

The Company contracts forthe sale of its vehicles to the U.S. Government under fixed price salescontracts, subject to the provisions of the U.S. Federal AcquisitionRegulations (“FAR”). Under FAR 52.216-25 awards may be made subject tofuture “Contract Definitization” pursuant to which the contractor agrees tonegotiate with the Government following commencement of the contract work tofinalize detailed conditions of the contract, including pricing, scheduling andother applicable requirements. As part of such negotiations, the contractor issubject 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 three monthperiod ended March 31, 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 a reduction of $3,364,405 in the originally statedcontract price.

 

**NOTE 8 –DEBT**

 

On November 18,2005, the Company entered into a Subscription Agreement with Longview Fund, LPand Longview Equity Fund, LP (the “Subscribers”) pursuant to which the Companyissued to the Subscribers secured promissory notes (the “Notes”) having a totalface value of $7,500,000. The Notes matured on February 18, 2006, and paidsimple interest at the annual rate of twenty-four percent if not paid in full atthat time. In connection with such purchase, the Company executed a SecurityAgreement pursuant to which the Subscribers were granted a first preferred UCC-1security interest in all of the Company’s assets and property. On February 18,2006 the Company entered into a Modification and Assignment Agreement with theholders of the Notes pursuant to which the Company paid $1,250,000 of the facevalue of the notes and extended the maturity date of the balance for anadditional 60 days. In addition, the Company consented to the assignment of$2,500,000 of the Notes to Fort Ashford Funds LLC, including the assignment ofall rights and responsibilities of the Subscribers. The Company’s Director,Frank Kavanaugh, is the principal owner of Fort Ashford Funds and a substantialshareholder of its common stock. Mr. Kavanaugh’s relationship to FortAshford Funds was fully disclosed to the Company and 

 

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Mr. Kavanaugh didnot participate in the negotiations or decision process in respect of theModification and Assignment Agreement.

 

As of March 31,2006, the Company had $6,250,000 in short-term debt, representing the facevalue of the Notes outstanding at that time.

 

**NOTE 9 – RECEIVABLES ANDFACTORING**

 

The Company entered intoa Purchase and Sale Agreement (the “Factoring Agreement”) with GC FinancialServices, Inc. dated June 29, 2005 pursuant to which it agreed tosell the U.S. government receivables under its JERRV Contract (M67854-05-D-5091)in an amount not to exceed $63,000,000. Under the terms of such agreement, theCompany receives 98.1% of the value of receivables sold to GC Financial within24-48 hours of delivery of the invoice. The total amount of factoringexpense changed to interest during the three month period ended March 31,2006 was $514,234.

 

**NOTE 10 – STOCK BASEDCOMPENSATION**

 

The Company does not havea formal stock compensation plan, however the Company has issued stock toemployees and non-employees from time to time as compensation for servicesrendered.

 

During the three monthperiod ended March 31, 2006 the Company granted 300,000 shares of itsunregistered stock valued at $216,000 and options to purchase 1,000,000 sharesof the Company’s common stock at an exercise price of $0.72 per share ascompensation to its Chief Executive Officer. The options vest on January 1,2007 (or earlier upon the occurrence of specified events).

 

On February 25,2006, the Company issued 47,619 shares of its unregistered common stock to Mr. McQuinnvalued at $100,000 in accordance with the terms of Mr. McQuinn’s employmentagreement.

 

During 2005, the Companygranted shares of its unregistered stock valued at $82,000 to the Company’sInterim Chief Executive Officer Mr. Aguilar. On February 28, 2006 theCompany issued certificates for a total of 117,583 shares of its unregisteredcommon stock representing such stock grants.

 

**NOTE 11 –STOCK OPTIONS**

 

During 2005, the Companyissued options to purchase 647,833 shares of its unregistered common stock tocertain of its employees at an exercise price of $1.50 per share. All suchoptions vest in full effective April 15, 2006. In January 2006 theCompany issued options to purchase 1,000,000 shares of common stock at anexercise price of $0.72 per share, such options to vest on January 1, 2007(or earlier upon the occurrence of specified events).

 

**NOTE 12 –COMMON STOCK WARRANTS**

 

As of March 31, 2006the following warrants to purchase shares of the Company’s common stock wereoutstanding:

 

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

·                  warrants topurchase 83,333 shares of unregistered common stock at $2.40/share expiring Jan. 17,2007

·                  warrants topurchase 2,699,167 shares of common stock at $3.75/share expiring January 19,2007

·                  warrants topurchase 150,000 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 expiring January 13,2007

 

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

 

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**NOTE 13 –CONVERTIBLE PREFERRED STOCK**

 

The board of directorshas the authority to issue preferred stock in one or more series, and fix foreach series, the designation of, and number of shares to be included in eachsuch 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**

 

On January 20, 2005,the Company authorized twenty thousand shares of Series D 6% ConvertiblePreferred Stock. On January 21, 2005, the Company issued 15,800 shares of Series Dstock in a private placement. As of March 31, 2006 there were 8,478 sharesof Series D stock outstanding. Holders of the Series D stock areentitled to receive cumulative dividends at the rate per share of 6% per annum**,** payable semi-annually on March 1 andSeptember 1, beginning with the first such date after the original issuedate. The Preferred Series D does not have voting rights. Upon anyliquidation, dissolution or winding-up of the Corporation, whether voluntary orinvoluntary, the Holders of the Series D shall be entitled to receive outof the assets of the Company, whether such assets are capital or surplus, foreach share of Preferred Stock an amount equal to the Stated Value per shareplus any accrued and unpaid dividends thereon and any other fees or liquidateddamages owing thereon before any distribution or payment shall be made to theholders of any Junior Securities. Each share of Series D Preferred Stockwill convert into the number of shares of the Company’s common stock equal to$1,000 divided by the conversion price at the holder’s discretion. The currentconversion price is $2.10. During the three month period ended March 31,2006 a total of 4,526 shares of Convertible Preferred Series D stock wereconverted to common.

 

**NOTE 14 –REVERSE STOCK SPLIT**

 

In January 2005, theBoard 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 15 – OTHER STOCKTRANSACTIONS**

 

During the three monthperiod ended March 31, 2006 the Company issued the following securities(other than those referred to in Notes 11 & 12 above relating to StockBased Compensation):

 

·                  2,155,220 sharesof common stock pursuant to the conversion of 4,526 shares of  Series D Convertible Preferred stockduring the three month period ended March 31, 2006.

 

On January 21, 2005, the Company issued 15,800shares of Series D 6% Convertible Preferred Stock (“Series D Stock”)having par value of $1,000 per share, for gross proceeds of $15.8 million. Eachshare of the Series D stock may convert at any time, in the holder’sdiscretion, into 476 shares of  commonstock at a fixed conversion price of $2.10 per common share. Holders of the Series Dstock are entitled to receive cumulative dividends at the rate per share of 6%per annum**,** payable semi-annuallyon March 1 and September 1, beginning with the first such date after theoriginal issue date; such dividends may be paid in cash or shares of stockaccording to the terms of the Series D Certificate of Designation.

 

In connection with the sale of the Series Dstock, the Company issued warrants to the Series D shareholders topurchase 2,633,333 shares of  commonstock. The exercise price of the warrants is $3.75 per share, and can beexercised at any time prior to their expiration on January 19, 2008.

 

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In connection with the sale of the Series Dstock, the Company issued to the transaction placement agent warrants topurchase 65,833 shares of the Company’s common stock at an exercise price of$3.75 per share. The warrants expire on January 19, 2008.

 

As of December 31, 2005 the Company had issuedthe following shares of common stock as a result of the Series Dconvertible preferred stock:

 

·                  1,331,429 sharesof common stock pursuant to the conversion by the Series D Holders of2,796 shares of Series D Convertible Preferred stock during 2005.

·                  224,511 sharesof common stock valued at $321,939 as payment of the semi-annual dividend dueto the Company’s Series D Convertible Preferred stockholders on September 1,2005.

·                  57,186restricted shares of common stock valued at $100,076 as payment of thesemi-annual dividend due to the Company’s Series D Convertible Preferredstockholders on March 1, 2005.

 

As of March 31,2006, none of the Warrants issued in connection with the Series Dtransaction have been exercised.

 

**NOTE 16 –GAIN/LOSS PER SHARE**

 

The Company utilizes SFASNo. 128, “Earnings per Share” to calculate gain/loss per share. Basicgain/loss per share is computed by dividing the gain/loss available to commonstockholders (as the numerator) by the weighted-average number of common sharesoutstanding (as the denominator). Diluted gain/loss per share is computedsimilar to basic gain/loss per share except that the denominator is increasedto include the number of additional common shares that would have beenoutstanding if all potential common stock (including common stock equivalents)had all been issued, and if such additional common shares were dilutive. UnderSFAS No. 128, if the additional common shares are dilutive, they are notadded to the denominator in the calculation. Where there is a loss, theinclusion of additional common shares is anti-dilutive (since the increasednumber of shares reduces the per share loss available to common stock holders).For all periods, the Company has experienced a net loss, and thus the followingcommon stock equivalents have been excluded from the calculation of dilutedloss per share:

 

|                                            | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|--------------------------------------------|------------|-----------|------------|-----------|------------|
| Convertible  Preferred Stock Series D |       | 4,037,143 |       | 6,192,381 |       |
| Warrants                                   |       | 3,057,500 |       | 2,994,167 |       |
| Options                                    |       | 1,456,666 |       | 456,666   |       |
| Total                                      |       | 8,551,305 |       | 9,643,214 |       |

 

 

 

Earning Per ShareComputation:

 

|                        | ** ** | **2006** | ** ** | **2005**   | ** ** |
|------------------------|------------|----------|------------|------------|------------|
|                   |       |     |       |       |       |
| Net Loss               |       | (665,633 | )          | (3,982,910 | )          |
|                   |       |     |       |       |       |
| Preferred  Dividends   |       | (159,864 | )          | (158,830   | )          |
|                   |       |     |       |       |       |
| Pro forma Net  Loss    |       | (825,497 | )          | (4,141,740 |       |
|                   |       |     |       |       |       |
| Basic Loss per  share  |       | $        | (0.02      | )          | $          | (0.13 | ) |
|                   |       |     |       |       |       |
| Diluted Loss per share |       | $        | (0.02      | )          | $          | (0.13 | ) |

 

 

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**NOTE 17 –CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

The Company’sChief Executive Officer, Mr. McGilton, is a principle of APT Leadership, aconsulting firm the Company hired to provide various business consultingservices, training seminars and certain business software. During the threemonth period ended March 31, 2006, APT Leadership has billed the Company atotal of $139,344 for such services, training and software.

 

On November 18,2005, the Company entered into a Subscription Agreement with Longview Fund, LPand Longview Equity Fund, LP (the “Subscribers”) pursuant to which the Companyissued to the Subscribers secured promissory notes (the “Notes”) having a totalface value of $7,500,000. The Notes matured on February 18, 2006, and paidsimple interest payable at the annual rate of twenty-four percent if not paidin full at that time. In connection with such purchase, the Company executed aSecurity Agreement pursuant to which the Subscribers were granted a firstpreferred UCC-1 security interest in all of the Company’s assets andproperty. On February 18, 2006 the Company entered into a Modification andAssignment Agreement with the holders of the Notes pursuant to which theCompany paid $1,250,000 of the face value of the notes and extended thematurity date of the balance for an additional 60 days. In addition, theCompany consented to the assignment of $2,500,000 of the Notes to Fort AshfordFunds LLC, including the assignment of all rights and responsibilities of theSubscribers. The Company’s Director, Frank Kavanaugh, is the principal owner ofFort Ashford and a substantial shareholder of its common stock. Mr. Kavanaugh’srelationship to Fort Ashford was fully disclosed to the Company and Mr. Kavanaughdid not participate in the negotiations or decision process in respect of theModification and Assignment Agreement. During the three month period ended March 31,2006 the Company paid a total of $150,000 in interest and fees in connectionwith such Notes to Fort Ashford Funds of which $99,152 was expensed and theremainder was recorded as prepaid.

 

**NOTE 18 – INCOME TAXES**

 

There has been noprovision for U.S. federal, state, or foreign income taxes for any periodbecause the Company has incurred losses or has loss carryforwards in allperiods and for all jurisdictions.

 

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

 

CAUTIONARYSTATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

This Report containsforward-looking statements, including, without limitation, statementsconcerning possible or assumed future results of operations and those precededby, followed by or that include the words “believes,” “could,” “expects,” “intends,”“anticipates,” or similar expressions. Our actual results could differmaterially from these anticipated in the forward-looking statements for manyreasons including our ability to raise capital when necessary; availability ofparts and raw materials for our products; continued customer acceptance of our products;on-going success of our research and development efforts and other risksdescribed elsewhere in this report. Although we believe the expectationsreflected in the forward-looking statements are reasonable, they relate only toevents as of the date on which the statements are made, and our future results,levels of activity, performance or achievements may not meet theseexpectations. We do not intend to update any of the forward-looking statementsafter the date of this document to conform these statements to actual resultsor to changes in our expectations, except as required by law.

 

SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

 

The Securities andExchange Commission, or SEC, issued Financial Reporting release No. 60, “CautionaryAdvice Regarding Disclosure About Critical Accounting Policies,” or FRR 60,suggesting companies provide additional disclosure and commentary on their mostcritical accounting policies. In FRR 60, the SEC defined the most criticalaccounting policies as the ones that are most important to the portrayal of acompany’s financial condition and operating results, and require management tomake its most difficult and subjective judgments, often as a result of the needto make estimates of matters that are inherently uncertain. The methods,estimates and judgments we use in applying these most critical accountingpolicies have a significant impact on the results we report in our financialstatements.

 

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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.

 

As a general rule,financial information is accounted for and based on cost, not current marketvalue. Revenues and gains should be matched using the accrual method with theexpenses giving rise to the revenues and gains to determine earnings for theperiod. Expenses are necessarily incurred to produce revenue. Expenses are then“matched” in the same accounting period against the revenue generated. Revenuesare recognized when they are earned and expenses are recognized in the sameperiod as the related revenue (matching or using a systematic and rationalallocation or expensing in the period in which they expire), not necessarily inthe period in which we receive or expend cash.

 

We believe the followingcritical accounting policies and procedures, among others, affect our moresignificant judgments and estimates used in the preparation of our consolidatedfinancial statements:

 

·                  Revenue recognition;

·                  Inventory cost and AssociatedReserves; and

·                  Allocation of direct andindirect cost of sales.

 

We recognize revenue uponformal acceptance of vehicles by customers. We receive performance basedpayments from the U.S. Army and U.S. Marines and record such payments asdeferred revenue, carrying them on our balance sheet as such until acceptanceby the customer.

 

In December 2004,FASB issued Statement No. 123(R), Share-Based Payment, which establishesaccounting standards for transactions in which an entity receives employeeservices in exchange for (a) equity instruments of the entity or (b) liabilitiesthat are based on the fair value of the entity’s equity instruments or that maybe settled by the issuance of equity instruments. Effective in the third quarterof 2005, SFAS 123(R) will require us to recognize the grant-date fairvalue of stock 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 ourfinancial condition and results of operations.

 

In November 2004,the FASB issued Statement No. 151, Inventory Costs, to amend the guidancein Chapter 4, Inventory Pricing, of the FASB Accounting Research Bulletin No. 43,Restatement and Revision of Accounting Research Bulletins, which will becomeeffective for us in fiscal year 2006. Statement No. 151 clarifies theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted materials. The Statement requires that those items berecognized as current-period charges. Additionally, Statement No. 151requires that allocation of fixed production overhead to the costs ofconversion be based on normal capacity of the production facility. We arecurrently following Statement No. 151 and do not believe that Statement No. 151will have a significant impact on our financial condition and results ofoperations.

 

Principles ofConsolidation: The consolidated financial statements includethe accounts of Force Protection, Inc., and our two wholly ownedsubsidiaries, Force Protection Industries, Inc. (formerly TechnicalSolutions Group, Inc.) and TSG International, Inc. for the threemonth period ended March 31, 2006. All inter-company balances andtransactions are eliminated in consolidation.

 

Cash Equivalents: Forpurposes of reporting cash flows, we consider all highly liquid debtinstruments purchased with maturity of three months or less to be cashequivalents. Cash equivalents consist primarily of United States governmentsecurities.

 

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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 andEquipment:****Propertyand equipment are stated at cost or at the value of the operating agreement. Wecapitalize additions and improvements which include all material, labor andengineering cost to design, install or improve the asset. Routine repairs andmaintenance are expensed as incurred. The capitalization threshold is $2,000and a useful life greater than one year. Depreciation and amortization arecomputed using the straight-line method over the following estimated usefullives:

 

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

 

Goodwill:****Under SFAS No. 142.Goodwill and other Intangible Assets, all goodwill amortization ceasedeffective January 1, 2002. Rather, goodwill is now subject to onlyimpairment reviews. A fair-value based test is applied at the reporting level.This test requires various judgments and estimates. A goodwill impairment losswill be recorded for any goodwill that is determined to be impaired. We followSFAS 142, Goodwill and Intangible Assets, which requires us to test goodwillfor potential impairment annually. When the carrying value exceeds fair value,the impairment is the difference between the carrying value of goodwill and theimplied value. The implied value of goodwill is the difference between the fairvalue for the unit as a whole and the value of individual assets andliabilities using an “as-if” purchase price.

 

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

 

Revenue Recognition: Ourrevenue is derived principally from the sale of our vehicles and associatedspare parts and training services. Revenue from products and services isrecognized at the time goods are shipped or services are provided to thecustomer, with an appropriate provision for returns and allowances. We receiveperformance based payments based on completion of specific milestones. Thesepayments are recorded as Deferred Revenue and recognized on the profit and lossstatement upon customer acceptance of the completed vehicle. It is our policyto not recognize revenue until customer acceptance. All advance payments aretreated as “deferred revenue”.

 

Dividend Policy: Wehave never declared or paid a cash dividend on our common stock, and we do notanticipate paying any cash dividends on our common stock in the foreseeablefuture. Any future determination to pay cash dividends on our common stock willbe at the discretion of our board of directors and will depend upon ourfinancial condition, operating results, capital requirements, restrictionscontained in our agreements and other factors which our board of directorsdeems relevant. Under the terms of the Certificate of Designation for our Series DConvertible Preferred stock, we are obligated to pay a 6% dividend in cash orshares of common stock on the outstanding shares of Series D stock.

 

FINANCIALCONDITION AND RESULTS OF OPERATIONS

 

Overview: TheCompany returned to operating profitability for the three month period ended March 31,2006, due to the increased production of our vehicles and the increasedefficiency of our operations. Sales for this period from all sources generatedgross revenue of $34,802,585 against which we incurred total cost of goods of$28,164,816 generating a gross profit of $6,637,769. We incurred G&Aexpenses of $5,859,538 plus R&D expenses in the amount of $663,590resulting in an operating profit of $114,641. During this three month period,we delivered a total of 44 vehicles (1 Buffalo and 43 Cougar JERRV), and on February 3,2006 we announced the award of a Letter Contract from the U.S. Army for thedelivery of 19 Buffalo Vehicles with an option for an additional 22 vehicles,

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having a total estimatedvalue of $35,000,000. In addition to operating profitability, we experiencedpositive cash flows from operations of $7,118,898 during the three month periodended March 31, 2006.

 

The following table setsforth our consolidated statements of operations for the three month periodended March 31 for the years 2005 and 2006. The discussion and analysisthat follows should be read in conjunction with our consolidated financialstatements and related notes included elsewhere in this report.

 

**Consolidated Statement of Operations**

** **

|                          | ** ** | **Three Month Period Ended** | ** ** | ** **                   | ** ** | ** **     | ** ** |
|--------------------------|------------|---------------------------------------------|------------|------------------------------|------------|----------------|------------|
| ** **               | ** ** | **March 31, 2006**                | ** ** | **March 31, 2005** | ** ** | **Difference** | ** ** | **% Change** | ** ** |
| Revenues                 |       | $                                           | 34,802,585 |                         | 5,853,423  |           | 28,949,162 |   | 495 | % |
| Cost of Sales            |       | 28,164,816                                  |       | 6,395,319                    |       | 21,769,497     |       | 340 | % |
|                     |       |                                        |       |                         |       |           |       |   |   |
| Gross Profit             |       | 6,637,769                                   |       | (541,896                     | )          | 7,179,665      |       | 1325 | % |
| G.P. %              | * *   | *19*                                        | *%*        | *(10*                        | *)%*       |           |       |   |   |
|                     |       |                                        |       |                         |       |           |       |   |   |
| G&A Expense          |       | $                                           | 5,859,538  |                         | 2,991,444  |           | 2,868,094  |   | 96 | % |
| R&D Expense          |       | 663,590                                     |       | 210,855                      |       | 452,735        |       | 215 | % |
| Total G&A            |       | 6,523,128                                   |       | 3,202,299                    |       | 3,320,829      |       |   |   |
|                     |       |                                        |       |                         |       |           |       |   |   |
| Operating Profit  (Loss) |       | $                                           | 114,641    |                         | (3,744,195 | )              | 3,858,836  |   |   |   |
|                     |       |                                        |       |                         |       |           |       |   |   |
| Interest Expense         |       | $                                           | (807,324   | )                            | (277,256   | )              | (530,068   | ) |   |   |
| Other Income/(Expense)   |       | 27,049                                      |       | 38,541                       |       | (11,492        | )          |   |   |
|                     |       |                                        |       |                         |       |           |       |   |   |
| Net Income (Loss)        |       | $                                           | (665,634   | )                            | (3,982,910 | )              | 3,317,276  |   |   |   |

 

Revenue: Revenuefor the three month period ended March 31, 2006 was $34,802,585representing an increase of 495% compared to the same period in 2005. Theincrease during this period was due to the increased level of vehicleproduction we have achieved compared with last year, which is primarily theresult of the JERRV contract, awarded in May 2005. Our revenue is derivedfrom the sale of our Buffalo and Cougar vehicles and the sale of spare partsand other support services, however we do not record any income until ourproducts are formally accepted by our customers The revenue reported duringthis three month period thus includes amounts we carried on our balance sheetduring prior reporting periods as deferred revenue pending acceptance of thefinal products by the U.S. Army and the U.S. Marines. During the three monthperiod ended March 31, 2006, we received approximately $33,000,000 fromvehicle sales and $1,800,000 from the sale of spare parts and other supportservices. The revenue from the sale of spare parts has continuedd to increaseover past quarters, driven by the increasing number of our vehicles deliveredand deployed to areas of operations. We intend to continue to develop thisspare parts business as an increasingly important part of our revenue base.

 

Cost of Sales:Cost of sales for the three month period ended March 31, 2006 was$28,164,816 representing an increase of $21,769,497 compared to the same periodin 2005. The increase during this period was due to the increased level ofvehicle production, and the corresponding increased cost of direct and indirectlabor and material associated with our manufacturing activities. The cost ofsales for the three month period ended March 31, 2006 was 81% of grossrevenues for such three month period representing a 19% gross profit for thisperiod, compared with cost of sales of 110% of gross revenues for the sameperiod in 2005. This improvement in our gross profit is the result in part ofincreasing efficiency of our manufacturing operations. As we continue to expandour production capacity, we expect to achieve increased cost efficiency fromvolume purchasing, improvements in our 

 

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manufacturing processesand the allocation of indirect costs across a broader production base, resultingin a projected decrease in the cost of sales as a percentage of gross revenue.

 

General andAdministrative Expenses: General and Administrative expensesfor the three month period ended March 31, 2006 were $6,523,128representing an increase of $3,320,829 compared to the same period in 2005. TheG&A expenses for the period ended March 31, 2006 included $663,590 inresearch and development expense. We expect our General and Administrativeexpenses to increase over time as we continue to expand our production capacityto meet increasing sales demand, however we expect the percentage of ourG&A expenses in relation to gross revenues to decrease as we achievegreater efficiencies in our operations. Thus, for example, during the threemonth period ended March 31, 2006, our General and Administrative expensewas 19% of our gross revenue as compared with 54% for the same period in 2005.

 

Net Gain/(Loss): NetLoss for the three month period ended March 31, 2006 was $665,633representing an improvement over the net loss of $3,982,910 incurred during thesame period in 2005. The improved performance is due primarily to higherproduction volumes and improved operating cost efficiencies.

 

Backlog:On April 23, 2004 we announced a contract award to deliver Cougar HardenedEngineer Vehicles, or HEV, to the U. S. Marine Corps, of which fourteen wereinitially funded under the contract. On March 8, 2005 the U.S. MarineCorps exercised its option to increase the number of HEV vehicles by fourteen,for a total of twenty-eight vehicles. As of March 31, 2006 we delivered atotal of twenty-seven HEV vehicles, and have a remaining backlog of one CougarHEV vehicle to be delivered under this contract, with a value of approximately$400,000. On May 17, 2004 we announced the award of a contract to delivertwenty-one Buffalo vehicles to the U.S. Army and in October 2004 we wereawarded a separate contract by the U.S. Army for an additional fifteen Buffalovehicles. Initial deliveries under these two Buffalo contracts began during2004 and 2005, and as of March 31, 2006 we have delivered all thirty-sixBuffalo vehicles, leaving no backlog under these two contracts with the U.S.Army. During the second quarter of 2005 we announced the award of a newcontract by the U.S. Marine Corps for delivery of one hundred twenty-two CougarJoint EOD Rapid Response Vehicles (“JERRV”) to be delivered during 2005 and2006, with a total value (with associated spares parts and training) of$90,000,000. As of March 31, 2006, we have delivered 61 JERRV vehicles andhave a remaining backlog of 61 vehicles under the JERRV contract with anapproximate value of $45,000,000, including associated spares and support.During the three month period ended December 31, 2005, we also announced anew order from the U.S. Marine Corps. for the purchase of four Buffalo vehicles(with associated spares, service and training) for a total contract price of$3,852,026.00. We delivered all four of these Buffalo vehicles under suchcontract during 2005.

 

On February 3, 2006we announced the award of a Letter Contract from the U.S. Army for the deliveryof 19 Buffalo Vehicles with an option for an additional 27 vehicles. The Armysubsequently reduced the number of the additional vehicles from 27 to 22, for atotal of 41. The Letter Contract is subject to definitization of terms. Additionally,on March 2, 2006 we announced the award of a contract with the U. S. Army,whereby we agree to provide the Army with authorized stock list supplies toservice its Buffalo route clearance vehicle for the sum of up to $5 million.

 

Future Results:During the remainder of calendar year 2006 we expect to have incurred themajority of our presently anticipated infra-structure expansion costs and toachieve a substantially increased level of vehicle production capacity,resulting in increased revenues and profitability for such upcoming period. Setout below is a table showing actual and projected deliveries of our vehiclesduring 2004, 2005 and 2006 based on our internal estimates although our actualresults may vary depending upon parts and material availability, actualproduction schedules, production efficiencies and other contingencies discussedin this report.

 

**VehicleDeliveries 2004, 2005 & 2006**

 
| ** **   | ** ** | **Actual** | ** ** | **Projected** | ** ** |
|--------------|------------|------------|------------|---------------|------------|
| ** **   | ** ** | **2004**   | ** ** | **Q1-2005**   | ** ** | **Q2-2005** | ** ** | **Q3-2005** | ** ** | **Q4-2005** | ** ** | **Q1-2006** | ** ** | **Q2-2006** | ** ** | **Q3-2006** | ** ** | **Q4-2006** | ** ** |
| Buffalo      |       | 9          |       | 2             |       | 22 |   | 3 |   | 4 |   | 1 |   | 12 |   | 12 |   | 12 |   |
| Cougar HEV   |       | 5          |       | 8             |       | 2 |   | 8 |   | 4 |   | 0 |   | 0 |   | 0 |   | 0 |   |
| Cougar JERRV |       | 0          |       | 0             |       | 0 |   | 2 |   | 16 |   | 43 |   | 62 |   | 60 |   | 60 |   |
| Total        |       | 14         |       | 10            |       | 24 |   | 13 |   | 24 |   | 44 |   | 74 |   | 72 |   | 72 |   |

 

 

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TRENDS,RISKS AND UNCERTAINTIES

 

The results of ouroperations for the period ended March 31, 2006 reflect the continuedtransition from net losses associated with our start up period to profitabilityas we evolve to become a manufacturing facility with stable productioncapability. During 2004 we were awarded contracts by the U.S. Army for a totalof thirty six Buffalos and by the U.S. Marines for twenty eight Cougars, andwere able to build 14 vehicles during that year. In 2005 we produced a total oftotal of 71 vehicles, representing an increase of 407%. During the three monthperiod ended March 31, 2006, we produced a total of 44 vehicles,representing an annualized increase of 248%, and we are on track to achieve aminimum production capacity of 24 vehicles per month. During 2005, as we wereworking to complete our 2004 backlog, we also undertook the work necessary toincrease our production capacity to meet the demand for our vehicles under theJERRV contract for one hundred twenty-two Cougars awarded in May 2005.This included substantial vehicle and automotive engineering work,manufacturing engineering development, hiring and training workers and theexpansion of our manufacturing and administrative facilities. While the JERRVcontract reflects a broader, growing demand for our vehicles, we continued toface the challenge of expanding our manufacturing capacity to fully exploitthis opportunity. During 2005 we moved aggressively to meet this challenge byexpanding our facilities, improving our operating systems and refining ourmanufacturing processes. These activities required a significant commitment ofshort term resources, but have positioned us to reap a long-term benefit. Theresults for the first quarter of 2006 demonstrate that we are beginning to bein a position to reap such benefits, in the form of increased liquidity andoperating profitability.

 

We recognize there arerisks associated with our on-going expansion activities. We continue to relyupon the U.S. Army and the U.S. Marine Corps for 100% of our sales, and ifeither customer elected not to issue further orders to us it would have adramatic negative impact upon our financial performance. In addition, if we aredelayed in meeting the delivery schedule under the JERRV contract, we maybe obligated to pay liquidated damages for any delayed vehicle, and in theevent of any substantial failure to perform, the customer could cancel thecontract and/or claim additional damages. Payment of liquidated damages couldnegatively impact our future liquidity, and since we are incurring significantcosts associated with our expansion program based on the expectation of futurecontract revenues, loss of the JERRV contract would have a dramatic impact onboth our liquidity and our financial performance. We currently do not have anyreason to expect that our customers will choose to stop buying our vehicles orthat the JERRV contract would be cancelled.

 

In the past, we haveencountered some difficulties in securing the necessary components for ourvehicles, for example armor steel, truck chassis, axle sets and ballisticglass. To mitigate this risk, we have identified multiple vendors for certaincomponents to ensure we have alternate sources of supply if necessary.Additionally, we have implemented a program of advance purchasing andstockpiling critical materials. For example, we currently have pre-purchasedsteel and truck parts to ensure availability of material needed for current andpotential future orders. While we do not currently expect the potential non-availabilityof parts or raw materials to materially affect our operations, there is apossibility that delays or increased costs could negatively impact ourfinancial performance if circumstances change. Apart from the foregoing, themain uncertainty about our future operations is whether we will continue toreceive additional orders for our vehicles. It is impossible to predict withcertainty whether such future orders will be placed by existing or newcustomers. If we do not receive future orders, it is unlikely that our businesswill continue. However, we believe our vehicles provide proven blast andballistic protection, and that for so long as there is a risk of bodily harm toservice personnel from explosive blasts, there will be a market for our products.

 

LIQUIDITYAND CAPITAL RESOURCES

 

Current Liquidity:For the three month period ended March 31, 2006, we had a starting cashbalance of $1,217,509 and an ending cash balance of $6,146,738 representing anet increase in our cash position for such period of $4,929,229. During thisperiod we incurred positive cash flows from operations of $7,198,742 and used$1,627,553 

 

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in connection with ourfinancing activities, including paying $1,250,000 of the principal amount dueunder our short term debt.

 

Future Liquidity:During the three month period ended March 31, 2006 we experienced positivecash flows from operations of $7,118,898 and were able to retire a portion ofour short term debt. During this period, we continued to manage our accountspayable, and continued to factor our U.S. Government receivables under thePurchase and Sale Agreement with GC Financial Services, Inc. which allowsus to receive payment within 24-48 hours of vehicle deliveries andreduces the impact of the government contract payment cycle on our short termliquidity. During the remainder of 2006 we expect the infra-structure expenseswe have incurred in connection with our production ramp-up will begin to leveloff or decline and that we will continue to experience increased levels of positivecash flows from operations as we increase the volume of vehicle production.Such positive cash flows will allow us to pay down all or a portion of ourshort term debt and reduce the level of our accounts payable. In addition, weare also undertaking to secure long-term, asset-based debt financing to provideliquidity to support our continued development and growth.

 

Uncertainties:The amount of working capital that we will require depends on several factors,including without limitation, the extent and timing of sales of our products,future inventory costs, the timing and costs associated with the expansion ofour manufacturing, development, engineering and customer support capabilities,the timing and cost of our product development and enhancement activities andour operating results. The realization of a major portion of the assets shownon our balance sheet is dependent upon the success of such future operations.During 2006 we expect to be able to generate cash flows from operationssufficient to satisfy our cash requirements, but if we are unable to do so, wemay need to seek alternative sources of cash. Potential sources of such cashcould include senior debt facilities, new lines of credit, or additional salesof our securities. If we raise funds through the sale of securities, the commonstock currently outstanding could be diluted. There is a risk that suchadditional financing may not be available, or may not be available onacceptable terms, and the inability to obtain additional financing or generatesufficient cash from operations could require us to reduce or eliminateexpenditures for capital equipment, research and development, production, ormarketing of our products, or otherwise curtail or discontinue our operations,which could have a material adverse effect on our business, financial conditionand results of operations.

 

Inflation &Material Cost

 

We do not believe thatinflation has had or is likely to have any significant impact on our revenues,and we currently are not facing any material shortages of material or parts. Wecurrently have enough steel on hand or on order to manufacture our existingcontracts, and we continue to purchase steel anticipating future requirements.If the price of steel increases significantly, the cost of our products couldincrease, and we may not be able to pass on this cost under our currentcontracts. As a result, if the cost of our raw materials increases ourprofitability on such current contracts, if any, could decrease.

 

ITEM 3 –   QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

*COMMODITYPRICES*

 

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

 

*FOREIGNCURRENCY*

 

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

 

*INTERESTRATES*

 

As we do not have atrading portfolio and our current financing is at a fixed rate, we are notcurrently directly at risk of interest rate fluctuations. As our financing needschange in the future, interest rate risk may become a more significant issuefor us.

 

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

 

**ITEM 4 – CONTROLS AND PROCEDURES**

 

**DisclosureControls and Procedures**

 

Our management evaluated,with the participation of our Chief Executive Officer and our Interim ChiefFinancial Officer, the effectiveness of our disclosure controls and proceduresas of the end of the period covered by this Quarterly Report on Form 10-Q.Based on this evaluation, our Chief Executive Officer and our Interim ChiefFinancial Officer have concluded that our disclosure controls and proceduresare effective to ensure that information we are required to disclose in reportsthat we file or submit under the Securities Exchange Act of 1934 (i) isrecorded, processed, summarized and reported within the time periods specifiedin Securities 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 and proceduresare designed to provide reasonable assurance that such information isaccumulated and communicated to our management. Our disclosure controls andprocedures include components of our internal control over financial reporting.Management’s assessment of the effectiveness of our internal control overfinancial reporting is expressed at the level of reasonable assurance that thecontrol system, no matter how well designed and operated, can provide onlyreasonable, but not absolute, assurance that the control system’s objectiveswill be met.

 

**Changesin Internal Controls over Financial Reporting**

 

There were no changes inour internal control over financial reporting that occurred during our lastfiscal quarter that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

**Codeof Ethics**

 

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

 

**PART II – OTHER INFORMATION**

 

**ITEM 1 – LEGAL PROCEEDINGS**

 

On May 12, 2005,Atlantis Partners, Inc. filed a complaint against us in the Circuit Courtfor the 15th Judicial Circuit, Palm Beach County Florida for alleged breach ofterms related to a finder’s fee agreement dated March 28, 2003. Thecomplaint alleges damages of at least $400,000 in fees, plus costs and interest.We have answered the complaint and intend to vigorously defend against AtlantisPartner’s claims.

 

**ITEM 1A –RISK FACTORS**

 

An investment in ourcommon stock involves a high degree of risk. You should carefully consider thefollowing risk factors, other information included in this Form 10-Q.If any of the following risks actually occur, our business, financial conditionor results of operations could be materially and adversely affected, and youmay lose some or all of your investment.

 

*RISKSRELATED TO OUR BUSINESS*

 

*We hadlosses since our inception and expect losses to continue in the future. We maynever become profitable.*

 

We have historicallygenerated substantial losses, which, if continued, could make it difficult tofund our operations or successfully execute our business plan, and couldadversely affect our stock price. We experienced net losses of $5,321,624 forthe year ended December 31, 2003, $10,245,833 for the year ended December 31,2004 and 

 

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$16,565,668 for the year ended December 31, 2005.We have generated significant net losses in recent periods, and experiencednegative cash flows from operations in the amount of $4,069,735 for the yearended December 31, 2003, $13,763,396 for the year ended December 31,2004 and $18,296,127 for the year ended 2005. In recent years, some of thelosses were incurred as a result of investments in new product development,inefficiencies while we built up our operations and marketing costs. While wehave increased our investments, most notably in inventory, we anticipate thatwe will continue to generate net losses and we may not be able to achieve orsustain profitability on a quarterly or annual basis in the future. Inaddition, because large portions of our expenses are fixed, we generally areunable to reduce expenses significantly in the short-term to compensate for anyunexpected delay or decrease in anticipated revenues. As a result, we maycontinue to experience net losses, which will make it difficult to fund ouroperations and achieve our business plan, and could cause the market price ofour common stock to decline.

 

*We havea limited operating history and may never achieve or sustain profitableoperations.*

 

We are an early stageproduction company. We acquired our subsidiary, Force Protection Industries, Inc.(formerly Technical Solutions Group, Inc.) in July 2002 and have onlyrecently begun generating significant revenues. We generated revenues from ourcurrent products of $6,247,285 for the year ended December 31, 2003,$10,272,757 for the year ended December 31, 2004 and $49,712,829 for theyear ended December 31, 2005. The sale of our mine protected vehicles andassociated spare parts provided 100% of the sales, 100% of the cost of goodssold and 100% of the loss in 2004 and 2005. Our ability to successfullycommercialize our products will depend on, among other things, successfulcompletion of our ongoing development activities, geo-political events, abilityto cost effectively manufacture and distribute our products, and the relativecost to the customer of our system as compared to alternative competitiveproducts. Because we focus on emerging markets, market reaction can bedifficult to predict. Many of our planned products incorporate technologies orapproaches that have not yet achieved broad market acceptance. In addition, wehave a limited history of competing in the intensely competitive defenseindustry. Our technology may not be successfully commercialized or marketed. Asa result, we may never achieve or sustain profitable operations.

 

*Ourindependent accountants have issued a Going Concern Opinion and, if we do notgenerate enough cash from operations to sustain our business, we may have toliquidate assets or curtail our operations.*

 

The financial statementsin our annual report on Form 10-K for the year ended December 31,2005, have been prepared assuming we will continue as a going concern. Duringthe year ended December 31, 2003, we incurred a net loss of $5,321,624,during the year ended December 31, 2004 we incurred a net loss of$10,245,833 and during the year ended December 31, 2005 we incurred a netloss of $16,565,668. Conditions exist which raise substantial doubt about ourability to continue unless we are able to generate sufficient cash flows tomeet our obligations and sustain our operations. The financial statements donot include any adjustment that might result from the outcome of thisuncertainty.

 

*If wecan not access sufficient funds when needed, we may not be able to meet ourcontractual obligations to deliver our products and our business may fail.*

 

We believe we havesufficient cash resources to continue operations at our current capacity,however in the event of an unanticipated change of circumstances, or if wesecure additional orders, we could face liquidity constraints and we couldrequire external financing to fund operations. Until we generate cash flow fromoperations that will be sufficient to satisfy our cash requirements, we willcontinue to seek alternative means for financing our operations and capitalexpenditures and/or postpone or eliminate certain investments or expenditures.Potential alternative means for financing may include leasing capitalequipment, lines of credit, or obtaining additional debt or equity financing.When needed, additional financing may not be available, or available onacceptable terms. The inability to obtain additional financing or generatesufficient cash from operations could require us to reduce or eliminateexpenditures for capital equipment, research and development, production ormarketing of our products, or otherwise curtail or discontinue its operations,which could have a material adverse effect on our business, financial conditionand results of operations. Furthermore, if we raise funds through the sale ofadditional equity securities, the common stock currently outstanding will befurther diluted.

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*Wedepend on our suppliers and if we can not obtain certain components for ourproducts, we might have to develop alternative designs that could increase ourcosts.*

 

We depend upon a numberof suppliers for components of our products. There is an inherent risk thatcertain components of our products will be unavailable for prompt delivery or,in some cases, discontinued. We have only limited control over any third-partymanufacturer as to quality controls, timeliness of production, deliveries andvarious other factors. Should the availability of certain components becompromised, it could force us to develop alternative designs using othercomponents, which could add to the cost of goods sold and compromise deliverycommitments. If we are unable to obtain components in a timely manner, at anacceptable cost, or at all, we may need to select new suppliers, redesign orreconstruct process we use to build the hulls and/or the vehicles, whichmanagement believes would take a minimum of one-year. We may not be able tomanufacture any vehicles for a period of time, which could materially adverselyaffect our business, results from operations, and financial condition.

 

*Wemarket our products to a limited customer base and if we do not find acceptanceof our products within that customer base, our business may fail.*

 

Our government businessdepends on a limited number of customers, and if any of these customers terminateor reduce their contracts, or if we cannot obtain additional governmentcontracts in the future, our revenues will decline and our results ofoperations will decrease. Because most of our consolidated revenues werederived directly or indirectly from government contractors, this risk cansignificantly affect our business, results of operations and financialcondition. For the twelve-months ended December 31, 2005 100% of ourrevenues were derived directly or indirectly from two governmental agencies, theU.S. Army and the U.S. Marine Corps.

 

We expect to continue tobe dependent upon contracts with governmental agencies and their contractorsfor a substantial portion of revenue for the foreseeable future. Because wecurrently depend on government contracts and subcontracts, we face certainrisks, including budget restraints and fixed price contracts. General politicaland economic conditions, which are difficult to accurately predict, directlyand indirectly affect the quantity and allocation of expenditures by governmentagencies. Even the timing of incremental funding commitments to existing, butpartially funded, contracts can be affected by these factors. Therefore,cutbacks or re-allocations in the U.S. or other government budget could have amaterial adverse impact on our results of operations as long as research anddevelopment contracts remain an important element of the business.

 

Obtaining governmentcontracts may also involve long purchase and payment cycles, competitivebidding, qualification requirements, delays or changes in funding, budgetaryconstraints, political agendas, extensive specification development, pricenegotiations and milestone requirements. Each government agency also maintainsits own rules and regulations with which we must comply and which can varysignificantly among agencies. Governmental agencies also often retain someportion of fees payable upon completion of a project and collection of thesefees may be delayed for several months or even years, in some instances. In addition,an increasing number of government contracts are fixed price contracts whichmay prevent us from recovering costs incurred in excess of its budgeted costs.Fixed price contracts require us to estimate the total project cost based onpreliminary projections of the project’s requirements.

 

The financial viabilityof any given project depends in large part on our ability to estimate suchcosts accurately and complete the project on a timely basis. In the eventactual costs exceed the fixed contractual cost, we may not be able to recoverthe excess costs. Some government contracts are also subject to termination orrenegotiation at the convenience of the government, which could result in alarge decline in revenue in any given quarter. Although government contractshave provisions providing for the reimbursement of costs associated withtermination, the termination of a material contract at a time when our fundedbacklog does not permit redeployment of staff could result in reductions ofemployees. In addition, the timing of payments from government contracts isalso subject to significant fluctuation and potential delay, depending on thegovernment agency involved. Any such delay could result in a temporary shortagein working capital.

 

*Some ofour product components are manufactured in South Africa or other foreigncountries and if they become unstable or changes government regulations ourcosts may increase or we may become unable to source certain parts.*

 

Some of our productcomponents are manufactured in South Africa and supplied from other foreigncountries. If import tariffs or taxes increase for any reason, our cost ofgoods would increase. Our financial performance may be affected by changes inpolitical, social and economic environment. The role of the central and localgovernments in the economy is significant. Policies toward economicliberalization, and laws and policies affecting foreign 

 

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companies, foreign investment, currency exchange ratesand other matters could change, resulting in greater restrictions on ourability to do business with suppliers based in other countries. The governmentcould impose surcharges, increase tax rates, or revoke, terminate or suspendoperating licenses without compensating us. Also, South Africa and other countries,from time to time, experience instances of civil unrest and hostilities.Confrontations have occurred between the military, insurgent forces, andcivilians. If for these or any other reason, we lose our ability tosub-contract or manufacture the components to its products, or the cost ofdoing business increases, our business, financial condition, and results ofoperations would be materially and adversely affected.

 

*We maybe subject to personal liability claims for our products and if our insurance isnot sufficient to cover such claims, our expenses may increase substantially.*

 

We may be subject topersonal liability claims and our insurance may not be adequate to cover suchclaims. As a result, a significant lawsuit could adversely affect our business.We may be exposed to liability for personal injury or property damage claimsrelating to the use of the products. Any future claim against us for personalinjury or property damage could materially adversely affect the business,financial condition, and results of operations and result in negativepublicity. Even if we are not found liable, the costs of defending a lawsuitcan be high. We do not currently maintain insurance for this type of liability.Additionally, even if we do purchase insurance, we may experience legal claimsoutside of our insurance coverage, or in excess of our insurance coverage, orthat insurance will not cover.

 

*We aresubject to substantial competition and we must continue research anddevelopment to remain competitive.*

 

We are subject tosignificant competition that could harm our ability to win business andincrease the price pressure on our products. We face strong competition from awide variety of firms, including large, multinational vehicle, defense andaerospace firms. Most of our competitors have considerably greater financial,marketing and technological resources than we do which may make it difficult towin new contracts and we may not be able to compete successfully. Certaincompetitors operate fabrication facilities and have longer operating historiesand presence in key markets, greater name recognition, larger customer basesand significantly greater financial, sales and marketing, manufacturing,distribution, technical and other resources, as a result, these competitors maybe able to adapt more quickly to new or emerging technologies and changes incustomer requirements. They may also be able to devote greater resources to thepromotion and sale of their products. Moreover, we may not have sufficientresources to undertake the continuing research and development necessary toremain competitive.

 

Competitors may attemptto independently develop similar designs or duplicate our products or designs.We or our competitors may intentionally or unintentionally infringe upon ormisappropriate products or proprietary information. In the future, litigationmay be necessary to enforce intellectual property rights or to determine thevalidity and scope of the proprietary rights of others. Any such litigationcould be time consuming and costly. Currently we have no patents. Any patent orpatents sub-licensed to us relating to current or future products may bechallenged, invalidated, or circumvented or the rights granted there-under willmay not be held valid if subsequently challenged. Our products are based ontechnological innovation. Consequently, the life cycles of our products can berelatively short. Our success depends significantly on our ability to establishand maintain a competitive position in this field. Our products may not remaincompetitive in light of technological developments by others. Our competitorsmay succeed in discovering and developing technology before we do that wouldrender our technology, and hence our products, obsolete and noncompetitive.

 

*We mustcomply with environmental regulations or we may have to pay expensive penaltiesor clean up costs.*

 

We are subject tofederal, state, local and foreign laws, and regulations regarding protection ofthe environment, including air, water, and soil. Our manufacturing businessinvolves the use, handling, storage, and contracting for recycling or disposalof, hazardous or toxic substances or wastes, including environmentallysensitive materials, such as batteries, solvents, lubricants, degreasingagents, gasoline and resin. We must comply with certain requirements for theuse, management, handling, and disposal of these materials. We do not maintaininsurance for pollutant cleanup and removal. If we are found responsible forany hazardous contamination, we may have to pay expensive fines or penalties orperform costly clean-up. Even if we are charged, and later found notresponsible, for such contamination or clean up, the cost of defending thecharges could be high. If we do not comply with government regulations, we maybe unable to ship our products or have to pay expensive fines or penalties. Weare subject to regulation by county, state and federal governments,governmental agencies, and regulatory authorities from several differentcountries. If we fail to obtain regulatory approvals or suffer delays in 

 

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obtaining regulatory approvals, we may not be able tomarketing our products and services, and generate product and service revenues.Further, we may not be able to obtain necessary regulatory approvals. Althoughwe do not anticipate problems satisfying any of the regulations involved, wecannot foresee the possibility of new regulations, which could adversely affectour business. Further our products are subject to export limitations and we maybe prevented from shipping our products to certain nations or buyers.

 

*We relyon proprietary designs and rights and if we have to litigate those rights, ourexpenses could substantially increase.*

 

Our success and abilityto compete depend, in part, on the protection of our designs and technology. Inaddition, our technology could infringe on patents or proprietary rights ofothers. We have not undertaken or conducted any comprehensive patentinfringement searches or studies. If any third parties hold any conflicting rights,we may be required to stop making, using or selling our products or to obtainlicenses from and pay royalties to others. Further, in such event, we may notbe able to obtain or maintain any such licenses on acceptable terms, if at all.We may need to engage in future litigation to enforce intellectual propertyrights or the rights of customers, to protect trade secrets or to determine thevalidity and scope of proprietary rights of others, including customers. Thislitigation could result in substantial costs and diversion of resources andcould materially and adversely affect our results of operations.

 

*Insiderscan exert significant control over our policies and affairs and they may assertcontrol in a manner that does not favor minority shareholders.*

 

As of December 31,2005 our Directors and Executive Officers in the aggregate, beneficially ownedshares equal to 17.6% of our outstanding common stock. These shareholders, ifacting together, would be able to exert substantial influence over all mattersrequiring shareholder approval, including amendments to our Articles ofIncorporation, fundamental corporate transactions such as mergers,acquisitions, the sale of the company, and other matters involving thedirection of our business and affairs. As a result, although other shareholdersmay vote their shares, they may have only limited influence on our business andmanagement.

 

*Wedepend on management and other key personnel and we may not be able to executeour business plan without their services.*

 

Our success and ourbusiness strategy depend in large part on our ability to attract and retain keymanagement and operating personnel. Such individuals are in high demand and areoften subject to competing employment offers. We depend to a large extent on theabilities and continued participation of our executive officers and other keyemployees. We do not presently maintain “key man” insurance on any employees.We believe that, as our activities increase and change in character,additional, experienced personnel will be required to implement our businessplan. Competition for such personnel is intense and we may not be able to hirethem when required, or have the ability to attract and retain them.

 

*RISKSRELATED TO OUR STOCK*

 

*“PennyStock” rules may make buying or selling our securities difficult.*

 

Trading in our securitiesis subject to the Securities and Exchange Commission’s “penny stock” rules andit is anticipated that trading in our securities will continue to be subject tothe penny stock rules for the foreseeable future. The Securities andExchange Commission has adopted regulations that generally define a penny stockto be any equity security that has a market price of less than $5.00 per share,subject to certain exceptions. These rules require that any broker-dealerwho recommends our securities to persons other than prior customers andaccredited investors must, prior to the sale, make a special writtensuitability determination for the purchaser and receive the purchaser’s writtenagreement to execute the transaction. Unless an exception is available, theregulations require the delivery, prior to any transaction involving a pennystock, of a disclosure schedule explaining the penny stock market and the risksassociated with trading in the penny stock market. In addition, broker-dealersmust disclose commissions payable to both the broker-dealer and the registeredrepresentative and current quotations for the securities they offer. Theadditional burdens imposed upon broker-dealers by such requirements maydiscourage broker-dealers from recommending transactions in our securities,which could severely limit the liquidity of our securities and consequentlyadversely affect the market price for our securities.

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*Our securities have been thinly traded on theover-the-counter bulletin board, which may not provide liquidity for ourinvestors.*

Our securities are quoted on the Over-the-CounterBulletin Board. The Over-the-Counter Bulletin Board is an inter-dealer, over-the-countermarket that provides significantly less liquidity than the NASDAQ Stock Marketor national or regional exchanges. Securities traded on the Over-the-CounterBulletin Board are usually thinly traded, highly volatile, have fewer marketmakers and are not followed by analysts. The Securities and Exchange Commission’sorder handling rules, which apply to NASDAQ-listed securities, do not apply tosecurities quoted on the Over-the-Counter Bulletin Board. Quotes for stocksincluded on the Over-the-Counter Bulletin Board are not listed in newspapers.Therefore, prices for securities traded solely on the Over-the-Counter BulletinBoard may be difficult to obtain and holders of our securities may be unable toresell their securities at or near their original acquisition price, or at anyprice.

*Investors must contact a broker-dealer to tradeover-the-counter bulletin board securities. As a result, you may not be able tobuy or sell our securities at the times that you may wish.*

Even though our securities are quoted on theOver-the-Counter Bulletin Board, the Over-the-Counter Bulletin Board may notpermit our investors to sell securities when and in the manner that they wish.Because there are no automated systems for negotiating trades on theOver-the-Counter Bulletin Board, they are conducted via telephone. In times ofheavy market volume, the limitations of this process may result in asignificant increase in the time it takes to execute investor orders.Therefore, when investors place market orders an order to buy or sell aspecific number of shares at the current market price it is possible for theprice of a stock to go up or down significantly during the lapse of timebetween placing a market order and its execution.

*We do not intend to pay dividends in the foreseeable future;therefore, you may never see a return on your investment.*

We do not anticipate the payment of cash dividends onour common stock in the foreseeable future. We anticipate that any profits fromour operations will be devoted to our future operations. Any decision to paydividends will depend upon our profitability at the time, cash available andother factors. Therefore, you may never see a return on your investment.Investors who anticipate a need for immediate income from their investmentshould not purchase the company’s securities.

*Our stock price is volatile and you may not be able to sellyour shares for more than what you paid.*

Our stock price has been subject to significantvolatility, and you may not be able to sell shares of common stock at or abovethe price you paid for them. The trading price of our common stock has beensubject to wide fluctuations in the past. From January 2005 to December 2005,our common stock has traded at prices as low as $0.69 per share and as high as $3.60per share (using post-reverse-split share prices) The market price of thecommon stock could continue to fluctuate in the future in response to variousfactors, including, but not limited to: quarterly variations in operatingresults; our ability to control costs and improve cash flow; announcements oftechnological innovations or new products by us or our competitors; changes ininvestor perceptions; and new products or product enhancements by us or ourcompetitors. The stock market in general has continued to experience volatilitywhich may further affect our stock price. As such, you may not be able toresell your shares of common stock at or above the price you paid for them.

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

We do not have a formal stock compensation plan,however we have issued stock to employees and non-employees from time to timeas compensation for services rendered.

During the three month period ended March 31, 2006, we granted300,000 shares of unregistered stock valued at $216,000 and options to purchase1,000,000 shares of common stock at an exercise price of $0.72 per share ascompensation to our Chief Executive Officer. The options vest on January 1,2007 or earlier upon the occurrence of specified events.

26

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On February 25, 2006, we issued 47,619 shares of our unregisteredcommon stock to Mr. McQuinn valued at $100,000 in accordance with theterms of Mr. McQuinn’s employment agreement.

**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 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, 2006 (included as exhibit  4.1 to the Form 8-K filed January 27, 2006, and incorporated  herein by reference). |

 

27

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| 4.2    | Form of Common Stock Purchase Warrant, dated  January 19, 2006, (included as Exhibit 4.2 to the Form 8-K  filed January 27, 2006, and incorporated herein by reference).                                                                                                         |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                      |
| 4.3    | Securities Purchase Agreement, dated  January 19, 2006 (included as Exhibit 4.3 to the Form 8-K  filed January 27, 2006, and incorporated herein by reference).                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                      |
| 4.4    | Registration Rights Agreement, dated  January 19, 2006 (included as Exhibit 4.4 to the Form 8-K  filed January 27, 2006, and incorporated herein by reference).                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                      |
| 4.5    | Amended and Restated Certificate of Designation for  Series B Convertible Preferred Stock (included as exhibit 4.1 of the  Form 8-K filed February 15, 2006, and incorporated herein by  reference).                                                                                       |
|   |                                                                                                                                                                                                                                                                                                      |
| 4.6    | Amended and Restated Certificate of Designation for  Series C Convertible Preferred Stock (included as exhibit 4.2 of the  Form 8-K filed February 15, 2006, and incorporated herein by  reference).                                                                                       |
|   |                                                                                                                                                                                                                                                                                                      |
| 4.7    | Bridge Facility between the Company and GC Financial  Services, Inc., dated September 29, 2006 (included as  Exhibit 4.1 to the Form 8-K filed July 8, 2006, and  incorporated herein by reference).                                                                             |
|   |                                                                                                                                                                                                                                                                                                      |
| 4.8    | Demand Note between the Company and GC Financial  Services, Inc., dated September 29, 2006 (included as  Exhibit 4.2 to the Form 8-K filed July 8, 2006, and  incorporated herein by reference).                                                                                 |
|   |                                                                                                                                                                                                                                                                                                      |
| 10.1   | Sonic Jet Corporation 2000 Stock Option  Plan & Advisory and Consulting Agreement, dated May 1, 2000  (included as Appendix A to the Form 14C filed March 31, 2000, and  incorporated herein by reference).                                                                       |
|   |                                                                                                                                                                                                                                                                                                      |
| 10.2   | Series B Convertible Preferred Stock Purchase  Agreement between the Company and Ashford Capital, LLC, dated  December 27, 2001 (included as exhibit 10.1 to the Form 8-K  filed January 7, 2002, and incorporated herein by reference).                                              |
|   |                                                                                                                                                                                                                                                                                                      |
| 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 March 31, 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,                                                                                         |

28

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|        | 2004, and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                   |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.11  | Form of Subscription Agreement between the  Company and Gamma Opportunity Capital Partners, LP, Longview Fund, LP, Alpha  Capital Aktiengesellschaft, Domino International Ltd, Magellan International  Ltd, and Mountain Ridge Capital LLC, dated March 23, 2004 (included as  exhibit 4 to the Form 8-K filed on March 26, 2004, and  incorporated herein by reference). |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.12  | Royalty Agreement between the Company and J.J. van  Eck, dated April 1, 2004 (included as exhibit 10.13 to the Form 10-QSB  filed August 13, 2004, and incorporated herein by reference).                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.13  | Contract between the Company and the U.S. Marines,  dated April 21, 2004 (included as exhibit 10.14 to the 10-QSB  filed August 13, 2004, and incorporated herein by reference).                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.14  | Term Sheet between the Company and GC Financial  Services, Inc., dated September 16, 2004 (included as exhibit 10.14  to the 10-QSB filed November 15, 2004, and incorporated herein by  reference).                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.15  | Employment Agreement between the Company and Thomas  Thebes (included as Exhibit 10.10 to the Form 10-QSB filed  August 13, 2004, and incorporated herein by reference).                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.16  | Letter re: Industrial Lease Agreement between the  Company and Aerospace/Defense, Inc., dated July 13, 2004 (included  as Exhibit 10.11 to the Form 10-QSB filed August 13,  2004, and incorporated herein by reference).                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.17  | Employment Agreement between the Company and Garth  Barrett, dated August 12, 2004 (included as exhibit 10.16 to the 10-QSB  filed November 15, 2004, and incorporated herein by reference).                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.18  | 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).                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.19  | 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).                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.20  | 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).                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.21  | 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).                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.22  | 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).                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.23  | 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).                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.24  | 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).                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.25  | 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).                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.26  | 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).                                                                                                                               |

29

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| 10.27  | Purchase and Sale Agreement the Company and GC  Financial Services, Inc., dated September 29, 2005 (included as  Exhibit 10.1 to the Form 8-K filed July 8, 2005, and  incorporated herein by reference).                                                   |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                 |
| 10.28  | Security Agreement the Company and GC Financial  Services, Inc., dated September 29, 2005 (included as  Exhibit 10.2 to the Form 8-K filed July 8, 2005, and  incorporated herein by reference).                                                            |
|   |                                                                                                                                                                                                                                                                                 |
| 10.29  | Purchase Order between the Company and Ricardo  Engineering, dated September 29, 2005 (included as Exhibit 10.1 to  the Form 8-K filed July 19, 2005, and incorporated herein by  reference).                                                                    |
|   |                                                                                                                                                                                                                                                                                 |
| 10.30  | 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). |
|   |                                                                                                                                                                                                                                                                                 |
| 10.31  | Engineering Services Agreement between the Company  and TecStar, dated August 22, 2005 (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 Interim 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.                                                                                                                                      |

 

30

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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: May 15, 2006

 
| By:                     | /s/ Gordon McGilton |   |
|-------------------------|---------------------|--------|
| Gordon McGilton         |
| Chief Executive Officer |

 

Date: May 15, 2006

 
| By:                                                            | /s/ R. Scott Ervin |   |
|----------------------------------------------------------------|--------------------|--------|
| R. Scott Ervin                                                 |
| Interim Chief Financial  Officer  Principal Accounting Officer |

 

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

 

Signatures
| ** **

**Name** |   | **Title**                        |                               | **Date** |
|----------------------|--------|----------------------------------|------------------------------------|----------|
|                 |   |                             |                               |     |
|                 |   |                             |                               |     |
| /s/ Frank Kavanaugh  |   |                             | Chairman, Board of  Directors      |     | May 15, 2006 |
| Frank Kavanaugh      |   |                             |                               |     |
|                 |   |                             |                               |     |
| /s/ Gordon McGilton  |   |                             | Director, and                      |     | May 15, 2006 |
| Gordon McGilton      |   | Chief Executive Officer          |                               |     |
|                 |   |                             |                               |     |
| /s/ R. Scott Ervin   |   |                             | Director, General  Counsel and     |     | May 15, 2006 |
| R. Scott Ervin       |   | Interim Chief Financial  Officer |                               |     |
|                 |   |                             |                               |     |
| /s/ Raymond Pollard  |   |                             | Director, Chief  Operating Officer |     | May 15, 2006 |
| Raymond Pollard      |   |                             |                               |     |
|                 |   |                             |                               |     |
| /s/ Jack Davis       |   |                             | Director                           |     | May 15, 2006 |
| Jack Davis           |   |                             |                               |     |
|                 |   |                             |                               |     |
| /s/ Gale Aguilar     |   |                             | Director                           |     | May 15, 2006 |
| Gale Aguilar         |   |                             |                               |     |

 

31

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