**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-K/A**

**(Mark One)**
| x          | **ANNUAL  REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**     |
|------------|----------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                         |
| ** ** | **FOR THE FISCAL  YEAR ENDED DECEMBER 31, 2005**                                                   | ** ** |
| ** ** | ** **                                                                                         | ** ** |
| **o**      | **TRANSITION  REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

 

**FORTHE TRANSITION PERIOD FROM        TO**

**Commission File No. 001-33253**

**FORCE PROTECTION, INC.**

(Exact name of issuer asspecified in its charter)

| **Nevada**                                            |   | **84-1383888**       |
|-------------------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of                      |   | (I.R.S. Employer     |
| incorporation or  organization)                       |   | Identification  No.) |
|                                                  |   |                 |
| **9801  Highway 78, Building No. 1, Ladson, SC** |   | **29456**            |
| (Address of  principal executive offices)             |   | (Zip Code)           |

 

Registrant’s telephonenumber, including area code: **(843) 740-7015**

Securities registered under Section 12(b) ofthe Exchange Act:

**None.**

Securities registered under Section 12(g) ofthe Exchange Act:

**Common stock, par value$0.001 per share.**

(Title of class)

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act. o

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or 15(d) of the Act. Yes o   No x

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act during the pasttwelve months (or such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x   No o

Indicateby check mark if disclosure of delinquent filers in response to Item 405 ofRegulation S-K (§229.405 of this chapter) is not contained in this form, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference inPart III of this Form 10-K or any amendment to thisForm 10-K. o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. (Check one).

Large accelerated filer o         Accelerated filer o         Non-acceleratedfiler x

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

The aggregate market value of the voting andnon-voting common equity held by non-affiliates as of December 31, 2005was $22,353,816 based on a total of 28,658,739 shares of our common stock heldby non-affiliates on December 31, 2005 at the closing price of $0.78 pershare. 

We had36,114,217 shares of common stock outstanding as of December 31, 2005.

Documentsincorporated by reference: None.

 

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**FORCE PROTECTION, INC. FORM 10-K/A**

**TABLE OF CONTENTS**

 
| **Explanatory Note** | ** **                                                                            |
|----------------------|---------------------------------------------------------------------------------------|
| ** **           | ** **                                                                            |
| Part I          |                                                                                  |   |
|                 |                                                                                  |   |
| Item 1.              | Business                                                                              | 3 |
| Item1A.              | Risk  Factors                                                                         | 7 |
| Item 2.              | Properties                                                                            | 11 |
| Item 3.              | Legal Proceedings                                                                     | 11 |
| Item 4.              | Submission of  Matters to a Vote of Security Holders                                  | 11 |
|                 |                                                                                  |   |
| Part II         |                                                                                  |   |
|                 |                                                                                  |   |
| Item 5.              | Market for  Common Equity and Related Stockholder Matters                             | 12 |
| Item 6.              | Selected Financial Data                                                               | 13 |
| Item 7.              | Management’s  Discussion and Analysis or Plan of Operation                       | 13 |
| Item 7A.             | Quantitative  and Qualitative Disclosures About Market Risk                           | 20 |
| Item 8.              | Financial Statements                                                                  | 21 |
| Item 9.              | Changes In and  Disagreements With Accountants on Accounting and Financial Disclosure | 51 |
| Item 9A.             | Controls  and Procedures                                                              | 51 |
| Item 9B.             | Other  Information                                                                    | 51 |
|                 |                                                                                  |   |
| Part III        |                                                                                  |   |
|                 |                                                                                  |   |
| Item 10.             | Directors &  Executive Officers of the Registrant                            | 51 |
| Item 11.             | Executive  Compensation                                                               | 53 |
| Item 12.             | Security  Ownership of Certain Beneficial Owners and Management                       | 54 |
| Item 13.             | Certain  Relationships and Related Transactions                                       | 54 |
| Item 14.             | Principal  Accountant Fees and Services                                               | 55 |
|                 |                                                                                  |   |
| Part IV         |                                                                                  |   |
|                 |                                                                                  |   |
| Item  15.            | Exhibits                                                                              | 56 |
|                 | Signatures                                                                            | 59 |

 

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**EXPLANATORYNOTE**

*OVERVIEW*

We are filing this amendment to our Annual Report onForm 10-K for the year ended December 31, 2005 to amend and restate financialstatements and other information for the years 2005, 2004 and 2003.  The restatement adjusts our accounting forpreferred stock and warrants issued to investors, accounting for stock-basedcompensation to employees and non-employees and accounting for rent expense ona straight-line basis.  Following is ageneral summary of each accounting restatement followed by a summary of thecumulative change in our net loss for the years ended December 31, 2005, 2004and 2003.

*RESTATEMENTOF ACCOUNTING FOR PREFERRED STOCK AND WARRANTS ISSUED TO INVESTORS*

We have reviewed our accounting for Preferred Stockand Warrants Issued to Investors taking into account, where applicable,Financial Accounting Standards Board Statements No. 150 (SFAS 150), and No. 133(SFAS 133), EITF 98-5, EITF 00-19, EITF 00-27, EITF Topic No. D-98 andAccounting Series Release No. 268 (ASR 268): 

·   Series Band Series C Convertible Preferred Stock are recorded as equity at fair valueusing the Black-Scholes Method at the time of issuance using a one year holdingperiod.

·   A Beneficial Conversion Feature (BCF) treatedas equity is created when the value received for each issuance is less than thefair value from the Black-Scholes calculation. Changes in conversion rates of Preferred Stock into Common Stock alsocan create a Beneficial Conversion Feature if the Preferred Stock can beconverted into more common shares than at issuance or last amendment. 

·   The SeriesD Preferred Stock falls outside the scope of SFAS No. 150 but the guidancein Rule 5-02.28 of Regulation S-X, Accounting Release No. 268and EITF Topic D-98: Classification and Measurement of Redeemable Securitiesare applicable. As such, we have recorded the Series D Preferred asmezzanine equity on the accompanying balance sheet.

·         SeriesD 6% Convertible Preferred Stock is recorded at fair value equaling the netcash proceeds from issuance minus the fair value of Warrants issued inconjunction with the Series D 6% Convertible Preferred Stock.  Dividends for Series D 6% ConvertiblePreferred Stock were distributed either in common stock shares or cash. 

·         TheWarrants issued in conjunction with the Series D 6% Convertible Preferred Stockwere initially recorded at fair value as a liability, as liquidating damageswere paid due to a late SEC registration of the underlying Common Stock.  The Black-Scholes Method was used todetermine the fair value at issuance using a three year holding period.  These Warrants were adjusted each reportingperiod to the new fair value using the Black-Scholes Method until theregistration statement was declared effective by the SEC.  At that point, the fair value using theBlack-Scholes Method was reclassified into Equity.  A realized gain on derivative liability inthe amount of $2,830,791 was recorded in 2005 as a result of the change in fairvalue from issuance to reclassification to equity for these Warrants. 

·         Other warrants arerecorded at fair value using the Black-Scholes Method. 

*RESTATEMENTOF ACCOUNTING FOR STOCK-BASED COMPENSATION*

We have reviewed our accounting for stock basedcompensation issued for services and compensation during 2005, 2004 and 2003taking into account, where applicable, Financial Accounting Standards Board’sStatement of Financial Accounting Standard No. (SFAS) 123. Stock basedcompensation issued for services and compensation were valued at the marketprice at the time of issuance.  As aresult of valuation, we recorded additional expense of $565,055, $1,627,985 and$2,721,657 in 2005, 2004 and 2003, respectively.

We have reviewed the Financial Accounting StandardsBoard’s Statement of Financial Accounting Standard No.123 (Revised) and weadopted SFAS 123(R) as of July 1, 2005.  Werecorded stock option expense of $92,671 for 2005. 

*RESTATEMENT OFACCOUNTING FOR OPERATING LEASE COMMITMENTS*

We have reviewed the Financial Accounting StandardsBoard’s Statement of Financial Accounting Standard No. 13 and has determinedthat in 2005, 2004 and 2003 our accounting for rent expense was not recorded ona straight-line basis over the term of our operating lease commitments.  Several of our operating leases in effectduring 2005, 2004 and 2003 included certain terms that provided for severalmonths at the beginning of the lease term whereby rents were not due.  Additionally, we identified certain rentescalation clauses included within certain operating leases that, previous tothis filing, had deferred rent expense improperly over the course of theleases.  We calculated the necessaryadjustments for 2005, 2004 and 2003 in order to restate our financialstatements and record rent expense associated with operating lease commitmentsfor 2005, 2004 and 2003.  We recorded additionalrent expense for 2005, 2004 and 2003 in the amount of $12,039, $79,985 and$44,588, respectively.

RESTATEMENT OF EARNINGSPER SHARE

We have reviewed theFinancial Accounting Standards Board’s Statement of Financial AccountingStandard No. 128—Earnings Per Share (EPS) and determined that incomeavailable to common shareholders did not include the accretion related topreferred stock and the weighted average number of common shares outstandingused to calculate diluted earnings per share did not give effect to commonshares issued upon conversion for the entire year. The impact to 2005 EPS was adecrease of $0.06 per share.

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**AMENDMENTTO FORM 10-K**

The followingsections of this Form 10-K/A have been revised to reflect restatement: Part 1:Item 1, Business; Part II: Item 6, Selected Financial Data; Item 7,Management’s Discussion and Analysis of Financial Condition and Results ofOperations; Item 8, Financial Statements; and Item 9A, Controls and Procedures.Except to the extent relating to the restatement of our financial statementsand other financial information described above, the financial statements andother disclosures in this Form 10-K/A do not reflect events that occurred afterthe Form 10-K was initially filed on April 13, 2006. 

In light of therestatement, readers should not rely on previously filed financial statementsand other financial information for the years and for each of the quarters inthe years 2005, 2004 and 2003. 

**EFFECTS OF RESTATEMENT**

 
| **Effects on Income Statement**                     | ** ** | **2005**   | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|-----------|------------|-----------|------------|
|                                                               |       |       |       |      |       |      |       |
| Increase in cost  of sales                                         |       | 2,012,989  |       | —    |       | —    |       |
|                                                               |       |       |       |      |       |      |       |
| Decrease in  gross profit                                          |       | (2,012,989 | )          | —    |       | —    |       |
|                                                               |       |       |       |      |       |      |       |
| Increase in  general and administrative expense                    |       | 669,745    |       | 1,707,970 |       | 2,766,245 |       |
|                                                               |       |       |       |      |       |      |       |
| Increase in  operating loss                                        |       | 669,745    |       | 1,707,970 |       | 2,766,245 |       |
|                                                               |       |       |       |      |       |      |       |
| Decrease in non  recurring warranty expense                        |       | (2,012,989 | )          | —    |       | —    |       |
|                                                               |       |       |       |      |       |      |       |
| Increase in  realized gain                                         |       | 2,830,791  |       | —    |       | —    |       |
|                                                               |       |       |       |      |       |      |       |
| Increase  (decrease) in loss from continuing operations before tax |       | (2,161,046 | )          | 1,707,970 |       | 2,766,245 |       |
|                                                               |       |       |       |      |       |      |       |
| Increase/(decrease)  in net loss                                   |       | (2,161,046 | )          | 1,707,970 |       | 2,766,245 |       |
|                                                               |       |       |       |      |       |      |       |
| Increase  (decrease) in earning per share                          |       |       |       |      |       |      |       |
| basic                                                              |       | (0.02      | )          | (0.09     | )          | (0.34     | )          |
| diluted                                                            |       | (0.02      | )          | (0.09     | )          | (0.34     | )          |
|                                                               |       |       |       |      |       |      |       |

 
| **Effects on Balance Sheet**                       | ** ** | **2005**    | ** ** | **2004**    | ** ** | **2003**   | ** ** |
|-------------------------------------------------------------------|------------|-------------|------------|-------------|------------|------------|------------|
|                                                              |       |        |       |        |       |       |       |
| Decrease in  accounts receivables                                 |       | (367,223    | )          | —      |       | —     |       |
|                                                              |       |        |       |        |       |       |       |
| Decrease in  total assets                                         |       | (367,223    | )          | —      |       | —     |       |
|                                                              |       |        |       |        |       |       |       |
| Increase  in other accrued liability                              |       | 279,569     |       | 124,575     |       | 44,589     |       |
|                                                              |       |        |       |        |       |       |       |
| Decrease  in contract liabilities                                 |       | (367,223    | )          | —      |       | —     |       |
|                                                              |       |        |       |        |       |       |       |
| Increase  (decrease) in total liabilities                         |       | (87,654     | )          | 124,575     |       | 44,589     |       |
|                                                              |       |        |       |        |       |       |       |
| Increase in  mezzanine equity—Series D preferred stock       |       | 7,901,438   |       | —      |       | —     |       |
|                                                              |       |        |       |        |       |       |       |
| Decrease  in Series D preferred stock                             |       | (12,597,390 | )          | —      |       | —     |       |
|                                                              |       |        |       |        |       |       |       |
| Increase  in warrants                                             |       | 5,780,952   |       | 2,602,800   |       | 4,862,765  |       |
|                                                              |       |        |       |        |       |       |       |
| Increase in  beneficial conversion feature                        |       | —      |       | 19,102,306  |       | 282,890    |       |
|                                                              |       |        |       |        |       |       |       |
| Decrease  in accumulated deficit                                  |       | (1,722,968  | )          | (23,078,732 | )          | (2,563,321 | )          |
|                                                              |       |        |       |        |       |       |       |
| Decrease  in shareholders equity                                  |       | (8,181,007  | )          | (124,573    | )          | (44,589    | )          |
|                                                              |       |        |       |        |       |       |       |
| Increase/(decrease) in  total liabilities and shareholders equity |       | (367,223    | )          | —      |       | —     |       |

 

 

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**PART I**

**ITEM1.**                   DESCRIPTIONOF BUSINESS

*HISTORY*

We organized under thelaws of the State of Colorado in November 1996 as Boulder CapitalOpportunities III. Effective June 30, 1998, we acquired all assets andassumed all liabilities of Sonic Jet Performance, LLC, a California limitedliability company in the business of producing and marketing recreationalboats, jet boats, trailers, and related accessories. On November 4, 1998,we changed our name to Sonic Jet Performance, Inc. In 2000 and 2001, weemphasized building recreational boats and generated gross revenues ofapproximately one million dollars while sustaining operating losses. In 2002,we relocated our corporate headquarters, assembly, and prototyping facility toStanton, California and shifted focus to design and production of fire andrescue boats.

In June 2002, weacquired the shares of Technical Solutions Group, Inc., a developmentstage manufacturer of ballistic and blast protected vehicles based inCharleston, South Carolina. Technical Solutions Group was originally formed in1997 as a  Nevada corporation to supplyspecialty vehicles to military and law enforcement agencies worldwide. Thevehicles are used to transport personnel in hostile areas that may includelandmines, and to locate and remove landmines.

In July 2003, weshifted our principal focus to the production of armored vehicles and moved ourcorporate headquarters to South Carolina. In August 2003, we changed ourname to Force Protection, Inc. to reflect our focus on protected vehicles.In October 2003, we negotiated and finalized an agreement with investorsto divest all assets related to our Fire Rescue Boat Business, focusing ourprimary business operations on the manufacture of armored vehicles. EffectiveJanuary 1, 2005, we reincorporated from Colorado to Nevada, and we changedthe name of our wholly owned subsidiary “Technical Solutions Group, Inc.”to “Force Protection Industries, Inc.”

*BUSINESSOVERVIEW*

We design and manufactureballistic and blast-protected military vehicles using proprietary technologyderived from South African vehicle development programs carried out from 1972through 1994. We incorporated further design developments with information fromU.N. and other humanitarian mine clearance operations after 1994 into ourvehicles, improving their protection and functionality. At December 31,2005, we had more than 325 employees and we occupy three buildings with acombined floor area of more than 240,000 square feet in a secure manufacturingfacility in Ladson, South Carolina.

Our common stock ispublicly traded on the NASD “Over the Counter Bulletin Board” under the tickersymbol “FRPT.OB.”

*HOWTO CONTACT US*

Our address is 9801Highway 78, Building No. 1, Ladson, SC 29456. Our phone number is(843) 740-7015. Our website address is www.forceprotection.net.Information contained on our website does not constitute part of this reportand our address should not be used as a hyperlink to our website.

*INDUSTRYOVERVIEW*

Mine Protected Vehicleswere initially developed in Rhodesia and South Africa in response to thelandmine problems arising from the wars in Southern Africa. The vehicles weredesigned to protect personnel during transport, removal of unexploded ordnance,route clearance, humanitarian de-mining, and other missions that requireprotection from landmines and hostile fire. The technology has been developedand used in several parts of the world, principally Africa, over the last 20years in response to the intense use of landmines in that region. We believethe world market for mine-protected vehicles is growing rapidly. Landmines andImprovised Explosive Devices, or IEDs, are weapons of choice for terrorists andinsurgent groups because they are highly effective yet relatively low cost.Rising populations in heavily mined regions and the need to utilize and developsuch areas means the problem can no longer be ignored. With increasing worldtensions, we believe there is a need for vehicles that can provide a level ofprotection against these threats during a variety of missions. Such missionsinclude troop transport in and around unexploded ordnance or mine threat areasas well as route clearance and humanitarian de-mining—which require entranceinto known mine fields or areas of known terrorist activities.

Mine protected vehicleshave been purchased worldwide, principally in Africa, with additional purchasesby several NATO allied countries. Troop movements in overseas operations face acontinuous threat because of the use of land mines or the possibility of ambushand enemy fire. Vehicles that move troops or ordnance economically and providesignificant protection against ballistic, incendiary, landmine hazards, andIEDs are useful in these situations. This is a pressing issue for the U.S. andits allies throughout the world.

We believe the worldmarket for blast and ballistic protective vehicles is growing rapidly asregional instability becomes an increasing issue. Typical missions for ourvehicles include troop transport in and around unexploded ordnance, areas ofrisk for IEDs, mine threat areas, humanitarian de-mining and route clearance.Most of these missions require operating in areas of known terrorist activitiesand have traditionally been accomplished using light weight wheeled utilityvehicles, including for example the High Mobility Multi Wheeled Vehicle(“HMMWV” or “Humvee”). However, Humvees were never designed to sustain high 

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powered explosive blastsand these un-armored utility vehicles are vulnerable to enemy fire and offer aprime target for attack. In response to the increasing number of casualtiesfrom IEDs and other explosive during Operation Iraqi Freedom, the U.S. hassought to rapidly increase the armor and blast protection of many of itsvehicle fleet, including the Humvee, by retrofitting heavy armor to the hullsof these normally lightly armored vehicles. The results have not beensatisfactory due in part to the high costs of retrofitting armor into the bodyof the vehicles and the increased mechanical wear caused by the added weight.

One alternative to usingup-armored Humvees was heavy weight troop transport and offensive armor such asthe Bradley Fighting Vehicle or the M1A1 Abrams Tank. Conventional armoredvehicles such as the Bradley and the Abrams tank do offer some protection fromballistic and blast threats. However, even these are too often no match for thelatest batch of powerful IEDs. Further, these vehicles are expensive, andrequire substantial resources to maintain. They are large and difficult tomaneuver in crowded urban environments. Their intimidating offensive weaponsystems are not well suited to peacekeeping missions.

Our armored vehiclesoffer protection against mines and IED blasts. As the U.S. military increasesits focus on providing the best equipment available to its troops, weanticipate an increasing market demand for our products.

*PRODUCTS*

We currently produce twoblast-protected vehicles with different mission capabilities: (1) theBuffalo and (2) a lighter vehicle, the Cougar. We are also moving a thirdvehicle, the Mine-protected Utility Vehicle/Rapid Deployable, or MUV-R,  through the proto-type and development phase.This vehicle was previously referred to as the Lion.

*The Buffalo*

The Buffalo is ourheaviest vehicle—weighing 22 tons—and is designed principally for routeclearing activities. It integrates a blast resistant capsule with anAmerican-made truck engine and drive train. We believe that a key aspect ofmine protected-vehicle design is the management of hot gasses and concussiveenergy released by a mine or IED blast. The Buffalo is designed to deflect anddissipate the explosive blast away from the passenger compartment, thusprotecting the occupants from harm. Utilizing our advanced technology, theBuffalo is able to withstand even a major explosion. Competing vehicles withoutbenefit of such an advanced V-hull design—such as up-armored Humvees—relysolely on retrofitting heavy armor plates to absorb blast energy as just oneaspect of its use. The Buffalo design emphasizes blast and ballistic protectionas the vehicle’s primary mission.

We believe that thegeometric, V-hull design, along with the materials used, the componentsselected, our relationship with critical component suppliers and the overallmanufacturing process makes our vehicles a desirable solution for blast andballistic protected vehicles.

The U.S. Army tested theBuffalo at the Aberdeen Proving Grounds to determine its measure of“survivability”—i.e. the  ability of theBuffalo’s blast capsule to effectively protect the occupants and the criticalautomotive components from the effects of explosive blasts. Following suchtests, the U.S. Army has ordered and deployed more than fifty Buffalos forservice in Afghanistan and Iraq, and has announced its desire to use theBuffalo in the newly established “Route Clearance Companies” being developed aspart of the IED Defeat Task Force. This real-world experience has demonstratedthe Buffalo’s ability to withstand blasts without injury to the occupants. Webelieve that the Buffalo fills a niche in the U.S. Army’s route clearancesystems and that used in this capacity, the Buffalo currently has no direct competition.We are currently developing our infra-structure and manufacturing capacity toproduce four Buffalo vehicles per month to meet anticipated near term demand.

*The Cougar*

The Cougar first launchedin 2004. We designed the Cougar to serve a broader market and mission rangethan the Buffalo. Its missions include urban patrol, route clearance support,utility transport and special unit activities. Like the Buffalo, the Cougaremploys the geometric V-Hull design to deflect blast energy along with an armoredsteel capsule affording ballistic protection, and while the Cougar, at 14 tons,is lighter than the Buffalo, it offers a similar level of blast protection.Like the Buffalo, the Cougar uses a standard American automotive drive trainand control components which allow service and maintenance similar to that of acommercial truck, making servicing the Cougar less expensive and easier toservice. We have produced approximately fifty Cougars to date, all of whichhave been deployed in active service in Iraq. We are currently developing ourinfra-structure and manufacturing capacity to produce twenty or more Cougarvehicles per month to meet anticipated near term demand.

*Mine-protectedUtility Vehicle/Rapid Deployable (MUV-R)*

We are currently wellinto the development of a third vehicle, the MUV-R (pronounced “Mover”). TheMUV-R will be the smallest of our vehicles—weighing seven tons or less.Management positioned the MUV-R for use by security services and other agenciesrequiring blast and ballistic protection for personnel transport in high threatand insurgent-hostile regions. We did not specifically position the vehicle asa replacement for the two-decade old armored Humvee, however Department ofDefense efforts to “up-armor” Humvees already deployed to the Army and Marineshave proven less than effective. The added weight of the armor strains thevehicle’s engine and drive-train and the method of armor plating is vulnerableto blast energy. The MUV-R’s geometric V-hull design conducts this energy outthe sides, protecting the occupants. Being specifically designed for blast andballistic protection, the MUV-R protects vital engine components to allowcontinuing vehicle operations even after surviving a blast from a landmine, anIED or a roadside bomb. The U.S. military has recently undertaken marketstudies to develop a fleet of new “Joint Light 

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Tactical Vehicles”specifically intended to replace the Humvees and we believe that the MUV-R caneffectively compete for a share of this newly evolving opportunity. The vehicleis still in its developmental stage and will require further work before it isready for production.

*CUSTOMERACTIVITY*

During 2005, we dependedon two principal customers, the United States Army and the United States MarineCorps. In the twelve months ended December 31, 2005, approximately 40% ofour revenues were derived directly or indirectly from the U.S. Army andapproximately 60% from the U.S. Marine Corps. We expect to continue to dependupon contracts with governmental agencies for a substantial portion of ourrevenue for the foreseeable future.

Government contracts andsubcontracts typically involve long purchase and payment cycles, competitivebidding, qualification requirements, delays or changes in funding, extensivespecification development, price negotiations and milestone requirements. Eachgovernment agency also maintains its own rules and regulations with whichwe must comply and which can vary significantly among agencies. Governmentalagencies also often retain some portion of fees payable upon completion of aproject and collection of these fees may be delayed for several months or evenyears, in some instances.

In addition, anincreasing number of government contracts are fixed price contracts which mayprevent us from recovering costs incurred in excess of our 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 contractsare also subject to termination or renegotiation at the convenience of thegovernment, which could result in a large decline in revenue in any givenquarter. Although government contracts have provisions providing for thereimbursement of costs associated with termination, the termination of amaterial contract at a time when our funded backlog does not permitredeployment of staff could result in reductions of employees. In addition, thetiming of payments from government contracts is also subject to significantfluctuation and potential delay, depending on the government agency involved.Any such delay could result in a temporary shortage in working capital.

The following chartillustrates our product deliveries in the last two calendar years and ourcurrent backlog:
| Vehicle      | ** ** | **2004** | ** ** | **2005** | ** ** | **Backlog** | ** ** |
|--------------|------------|----------|------------|----------|------------|-------------|------------|
| Buffalo      |       | 9        |       | 31       |       | 41          |       |
| Cougar HEV   |       | 5        |       | 22       |       | 1           |       |
| Cougar JERRV |       | 0        |       | 18       |       | 104         |       |
| Total        |       | 14       |       | 71       |       | 146         |       |

 

*COMPETITIVEPOSITIONING*

We are subject tosignificant competition from companies that market products that performsimilar functions to our products. This competition could harm our ability towin business and increase the price pressure on our products. The firms wecompete against include large, multinational vehicle, defense and aerospacefirms such as BAE Land Systems, Textron, Stewart & Stevens, AustralianDefense Industries and General Dynamics. Most of our competitors haveconsiderably greater financial, marketing and technological resources than wedo which may make it difficult to win new contracts and we may not be able tocompete successfully. Certain competitors operate fabrication facilities andhave longer operating histories and presence in key markets, greater namerecognition, larger customer bases and significantly greater financial, salesand marketing, manufacturing, distribution, technical and other resources. As aresult, these competitors may be able to adapt more quickly to new or emergingtechnologies and changes in customer requirements. They may also be able todevote greater resources to the promotion and sale of their products.

We believe ourcompetitive advantages include:

·       Thelevel of blast and ballistic protection incorporated into our vehicles;

·       Ourvehicles are currently deployed in Iraq and Afghanistan and are creating atrack record of performance;

·       Ourability to innovate;

·       Thehigh level of supportability of our vehicles;

·       Our“Made in America” status;

·       Ourexcellent manufacturing facilities; and

·       Theprior testing and acceptance of our designs by the U.S. Military.

We believe our products aresuperior to other vehicles currently in use by the U.S. military for mine andblast protection. Existing military vehicles include Humvees and othernon-armored utility support vehicles, or heavy-weight troop transport andoffensive armor such as the Bradley Fighting Vehicle or the M1A1 Abrams Tank.The un-armored utility vehicles offer a prime target for 

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attack and efforts to“up-armor” these vehicles have not been totally successful due to the highcosts associated with retrofitting armor onto the body of the vehicle and theincreased mechanical wear caused by the weight of the armor. Conventionalarmored vehicles such as the Bradley and the Abrams offer protection fromballistic and blast threats, but are expensive, require substantial resourcesto maintain, are large and difficult to maneuver in crowded urban environmentsand are not well-suited to peace keeping missions due to their intimidatingoffensive weapon systems.

As recent events haveshown, there is also an increasing concern over death or injury of U.S.military personnel during operations such as Operation Iraqi Freedom andOperation Enduring Freedom, particularly to reservists and or civiliancontractors who are not expected to face front line combat, but whoincreasingly have become the target of insurgents and terrorists. Theseconcerns have led the U.S. military to adopt armor protection as a baserequirement for many of its transport vehicles and to look for ways to defeatthe threat of IEDs and other booby trap devices, including developing “routeclearance” and other explosive detection and removal teams.

*PRODUCTION*

Our manufacturing processincludes production and/or assembly of all critical components of our vehiclesas follows:

·       We utilize proprietarytechnology and skilled welders to create ballistic and blast protected vehiclecapsules which we believe are capable of withstanding the explosive effect oflandmines, IEDs and other blast threats encountered in wars, insurgency andurban conflicts.

·       We integrate commercialAmerican-made automotive drive-trains and other components onto the capsules toproduce vehicles that have a high level of commonality with the existing U.S.military fleet and can be repaired and maintained by traditional truckmechanics.

Our Ladson facility has sufficientfloor space, ample electrical and other utilities and an abundance of existingcrane capacity. We have also secured sufficient tools and equipment, and haveaccess to a local pool of labor, including many skilled welders and skilledautomotive mechanics. We maintain a dedicated staff of engineers to providein-house engineering support and utilize various manufacturing approaches toincrease efficiency and product quality. We source steel and other rawmaterials from various key vendors in the United States and overseas, andsecure our automotive components from a variety of U.S. suppliers including:

·       Caterpillar;

·       Mack Trucks, a member ofthe Volvo Group; and

·       Allison Transmission.

*SALESAND MARKETING*

Our employees, includingsenior management and the Vice President of Sales, conduct our primary salesand marketing efforts. Currently our primary sales staff resides in SouthCarolina and Connecticut, but we also have an agreement for an exclusivemarketing agent in Israel.

We actively participatein shows involving countermine operations and technology, military vehicle, lawenforcement technology and military force protection including the Associationof the U.S. Army Annual Conference and Winter Symposium, Marine Expo, andTactical Wheeled Vehicle conferences. Additionally, our marketing effortsinclude our web site, some advertising focused on the military community andbrochures. We do not use independent referral sources to assist in identifyingopportunities for our products and services and we do not pay any referral feesor sales commissions.

*RESEARCHAND DEVELOPMENT*

In 2005, 2004, and2003 we spent $1,657,918, $1,230,290 and $102,439, respectively, on researchand development. 

*INTELLECTUALPROPERTY*

We are party totwo long term intellectual property agreements covering technology used in theproduction of our ballistic and blast protected vehicles. One agreement is withthe CSIR Defencetek, a division of the Council for Scientific and IndustrialResearch, a statutory council established in accordance with the Laws of theRepublic of South Africa. The other is with Mechem, a division of Denel PtyLtd, a company established in accordance with the Laws of the Republic of SouthAfrica. We pay a specific “vehicle fee” upon the sale of certain vehiclesutilizing the technology and specific intellectual property covered under theseparticular agreements. 

*PERSONNEL*

As of December 31,2005, we had 327 employees in the U.S. and 2 consultants, 1 located in SouthAfrica and 1 located in Israel. Employees can be broken down into 198 hourlyemployees and 129 salaried employees. We are not a party to any collectivebargaining agreement. We believe our relations with employees are good.

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*ENVIRONMENTALMATTERS*

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 environmentally sensitivematerials, such as batteries, solvents, lubricants, degreasing agents, gasolineand resin. We must comply with certain requirements for the use, management,handling, and disposal of these materials. We, however, do not maintain insurancefor pollutant cleanup and removal. If we are found responsible for anyhazardous contamination, any fines or penalties we may be required to pay, orany clean up we are required to perform, could be very costly. Even if we arecharged, and later found not responsible, for such contamination or clean up,the cost of defending the charges could be high. If either of the foregoingoccurs, our business, results from operations and financial condition could bematerially adversely affected. We do not believe we have any materialenvironmental liabilities or that compliance with environmental laws,ordinances, and regulations will, individually or in the aggregate, have amaterial adverse effect on our business, financial condition, or results ofoperations.

*OTHERREGULATORY MATTERS*

Our operations andproducts are subject to extensive government regulation, supervision, andlicensing under various federal, state, local and foreign statutes, ordinancesand regulations. Certain governmental agencies such as the EnvironmentalProtection Agency, or EPA, and the Occupational Safety and HealthAdministration, or OSHA, monitor our compliance with their regulations, requireus to file periodic reports, inspect our facilities and products, and mayimpose substantial penalties for violations of the regulations.

While we believe that wemaintain all requisite licenses and permits and are in compliance with allapplicable federal, state, local and foreign regulations, there can be noassurance that we will be able to maintain all requisite licenses and permits.The failure to satisfy those and other regulatory requirements could have amaterial adverse effect on our business, financial condition, and results ofoperations.

**ITEM1A.**          RISK FACTORS

An investment in our commonstock involves a high degree of risk. You should carefully consider thefollowing risk factors, other information included in this Form 10-K.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 $8,087,869 forthe year ended December 31, 2003, $11,953,803 for the year endedDecember 31, 2004, and $14,404,622 for the year ended December 31,2005. We have generated significant net losses in recent periods, andexperienced negative cash flows from operations in the amount of $3,403,504 forthe year ended December 31, 2003, $12,053,361 for 2004, and $18,495,319for 2005. In recent years, some of the losses were incurred as a result ofinvestments in new product development, inefficiencies while we built up ouroperations and marketing costs. While we have increased our investments, mostnotably in inventory, we anticipate that we will continue to generate netlosses and we may not be able to achieve or sustain profitability on aquarterly or annual basis in the future. In addition, because large portions ofour expenses are fixed, we generally are unable to reduce expensessignificantly in the short-term to compensate for any unexpected delay ordecrease in anticipated revenues. As a result, we may continue to experiencenet losses, which will make it difficult to fund our operations and achieve ourbusiness plan, and could cause the market price of our common stock to decline.

***We have alimited operating history and may never achieve or sustain profitableoperations.***

We are an earlystage production company. We acquired our subsidiary, Force ProtectionIndustries Inc. (formerly Technical Solutions Group, Inc.) inJuly 2002 and have only recently begun generating significant revenues. Wegenerated revenues from our current products of $6,247,285 for the year endedDecember 31, 2003, $10,272,757 for 2004, and $49,712,829 for 2005. Thesale of our mine protected vehicles and associated spare parts accounted for100% of the sales, 100% of the cost of goods sold and 100% of the loss in 2004 and2005. The loss for 2003 included a loss of $2,932,179 from discontinuedoperations. Our ability to successfully commercialize our products will dependon, among other things, successful completion of our ongoing developmentactivities, geo-political events, ability to cost effectively manufacture anddistribute our products, and the relative cost to the customer of our system ascompared to alternative competitive products. Because we focus on emergingmarkets, market reaction can be difficult to predict. Many of our plannedproducts incorporate technologies or approaches that have not yet achievedbroad market acceptance. In addition, we have a limited history of competing inthe intensely competitive defense industry. Our technology may not besuccessfully commercialized or marketed. As a result, we may never achieve orsustain profitable operations. 

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

The accompanyingfinancial statements have been prepared assuming we will continue as a goingconcern. During the year ended December 31, 2003, we incurred a net lossof $8,087,869, during the year ended December 31, 2004 we incurred a netloss of $11,953,803 and during the year ended December 31, 2005 weincurred a net loss of $14,404,622. Conditions exist which raise substantialdoubt about our ability to continue unless we are able to generate sufficientcash flows to meet our obligations and sustain our operations. The financialstatements do not include any adjustment that might result from the outcome ofthis uncertainty, except that an allowance has been recorded for 100% ofdeferred tax assets. 

***If we cannot 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.

***We dependon our suppliers and if we can not obtain certain components for our products,we might have to develop alternative designs that could increase our costs.***

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.

***We marketour products to a limited customer base and if we do not find acceptance of ourproducts within that customer base, our business may fail.***

Our governmentbusiness depends on a limited number of customers, and if any of thesecustomers terminate or reduce their contracts, or if we cannot obtainadditional government contracts in the future, our revenues will decline andour results of operations will decrease. Because most of our consolidatedrevenues were derived directly or indirectly from government contractors, thisrisk can significantly 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,the U.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 government contractsmay also involve long purchase and payment cycles, competitive bidding,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. Inaddition, an increasing number of government contracts are fixed pricecontracts which may prevent us from recovering costs incurred in excess of itsbudgeted costs. Fixed price contracts require us to estimate the total projectcost based on preliminary projections of the project’s requirements.

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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 companies, foreigninvestment, currency exchange rates and other matters could change, resultingin greater restrictions on our ability to do business with suppliers based inother countries. The government could impose surcharges, increase tax rates, orrevoke, terminate or suspend operating licenses without compensating us. Also,South Africa and other countries, from time to time, experience instances ofcivil unrest and hostilities. Confrontations have occurred between themilitary, insurgent forces, and civilians. If for these or any other reason, welose our ability to sub-contract or manufacture the components to its products,or the cost of doing business increases, our business, financial condition, andresults of operations would be materially and adversely affected.

***We may besubject 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.

***Competitorsmay attempt to independently develop similar designs or duplicate our productsor designs.***

We or our competitors mayintentionally or unintentionally infringe upon or misappropriate products orproprietary information. In the future, litigation may be necessary to enforceintellectual property rights or to determine the validity and scope of theproprietary rights of others. Any such litigation could be time consuming andcostly. Currently we have no patents. Any patent or patents sub-licensed to usrelating to current or future products may be challenged, invalidated, or circumventedor the rights granted there-under will may not be held valid if subsequentlychallenged. Our products are based on technological innovation. Consequently,the life cycles of our products can be relatively short. Our success dependssignificantly on our ability to establish and maintain a competitive positionin this field. Our products may not remain competitive in light oftechnological developments by others. Our competitors may succeed indiscovering and developing technology before we do that would render ourtechnology, 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 environmentally sensitivematerials, such as batteries, solvents, lubricants, degreasing agents, gasolineand resin. We must comply with certain requirements for the use, management,handling, and disposal of these materials. We do not maintain insurance forpollutant cleanup and removal. If we are found responsible for any hazardouscontamination, we may have to pay expensive fines or penalties or performcostly clean-up. Even if we are charged, and later 

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found not responsible,for such contamination or clean up, the cost of defending the charges could behigh. If we do not comply with government regulations, we may be unable to shipour products or have to pay expensive fines or penalties. We are subject toregulation by county, state and federal governments, governmental agencies, andregulatory authorities from several different countries. If we fail to obtainregulatory approvals or suffer delays in obtaining regulatory approvals, we maynot be able to marketing our products and services, and generate product andservice revenues. Further, we may not be able to obtain necessary regulatoryapprovals. Although we do not anticipate problems satisfying any of theregulations involved, we cannot foresee the possibility of new regulations,which could adversely affect our business. Further our products are subject toexport limitations and we may be prevented from shipping our products tocertain 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 conflictingrights, we may be required to stop making, using or selling our products or toobtain licenses from and pay royalties to others. Further, in such event, wemay not be able to obtain or maintain any such licenses on acceptable terms, ifat all. We may need to engage in future litigation to enforce intellectualproperty rights or the rights of customers, to protect trade secrets or todetermine the validity and scope of proprietary rights of others, includingcustomers. This litigation could result in substantial costs and diversion ofresources and could materially and adversely affect our results of operations.

***Insiders can exert significant control over ourpolicies and affairs and they may assert control in a manner that does notfavor 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.

***We dependon management and other key personnel and we may not be able to execute ourbusiness 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 onthe abilities and continued participation of our executive officers and otherkey employees. We do not presently maintain “key man” insurance on anyemployees. 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 and it is anticipated that trading in our securities will continueto be subject to the penny stock rules for the foreseeable future. TheSecurities and Exchange Commission has adopted regulations that generallydefine a penny stock to be any equity security that has a market price of lessthan $5.00 per share, subject to certain exceptions. These rules requirethat any broker-dealer who recommends our securities to persons other thanprior customers and accredited investors must, prior to the sale, make aspecial written suitability determination for the purchaser and receive thepurchaser’s written agreement to execute the transaction. Unless an exceptionis available, the regulations require the delivery, prior to any transactioninvolving a penny stock, of a disclosure schedule explaining the penny stockmarket and the risks associated with trading in the penny stock market. Inaddition, broker-dealers must disclose commissions payable to both thebroker-dealer and the registered representative and current quotations for thesecurities they offer. The additional burdens imposed upon broker-dealers bysuch requirements may discourage broker-dealers from recommending transactionsin our securities, which could severely limit the liquidity of our securitiesand consequently adversely affect the market price for our securities.

***Oursecurities have been thinly traded on the over-the-counter bulletin board,which may not provide liquidity for our investors.***

Our securities are quotedon the Over-the-Counter Bulletin Board. The Over-the-Counter Bulletin Board isan inter-dealer, over-the-counter market that provides significantly lessliquidity than the NASDAQ Stock Market or national or regional exchanges.Securities traded on the Over-the-Counter Bulletin Board are usually thinlytraded, highly volatile, have fewer market makers and are not followed byanalysts. The Securities and Exchange Commission’s order handling rules, whichapply to NASDAQ-listed securities, do not apply to securities quoted on theOver-the-Counter Bulletin Board. Quotes for stocks included on theOver-the-Counter Bulletin Board are not listed in newspapers. Therefore, pricesfor securities traded solely on the Over-the-Counter Bulletin Board may bedifficult to obtain and holders of our securities may be unable to resell theirsecurities at or near their original acquisition price, or at any price.

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***Investorsmust contact a broker-dealer to trade over-the-counter bulletin boardsecurities. As a result, you may not be able to buy or sell our securities atthe times that you may wish.***

Even though oursecurities are quoted on the Over-the-Counter Bulletin Board, theOver-the-Counter Bulletin Board may not permit our investors to sell securitieswhen and in the manner that they wish. Because there are no automated systemsfor negotiating trades on the Over-the-Counter Bulletin Board, they areconducted via telephone. In times of heavy market volume, the limitations ofthis process may result in a significant increase in the time it takes toexecute investor orders. Therefore, when investors place market orders an orderto buy or sell a specific number of shares at the current market price it ispossible for the price of a stock to go up or down significantly during thelapse of time between placing a market order and its execution.

***We do notintend to pay dividends in the foreseeable future; therefore, you may never seea return on your investment.***

We do not anticipate thepayment of cash dividends on our common stock in the foreseeable future. Weanticipate that any profits from our operations will be devoted to our futureoperations. Any decision to pay dividends will depend upon our profitability atthe time, cash available and other factors. Therefore, you may never see areturn on your investment. Investors who anticipate a need for immediate incomefrom their investment should not purchase the company’s securities.

***Our stockprice is volatile and you may not be able to sell your shares for more thanwhat you paid.***

Our stock price has beensubject to significant volatility, and you may not be able to sell shares ofcommon stock at or above the price you paid for them. The trading price of ourcommon stock has been subject to wide fluctuations in the past. FromJanuary 2005 to December 2005, our common stock has traded at pricesas low as $0.69 per share and as high as $3.60 per share (usingpost-reverse-split share prices) The market price of the common stock couldcontinue to fluctuate in the future in response to various factors, including,but not limited to: quarterly variations in operating results; our ability tocontrol costs and improve cash flow; announcements of technological innovationsor new products by us or our competitors; changes in investor perceptions; andnew products or product enhancements by us or our competitors. The stock marketin general has continued to experience volatility which may further affect ourstock price. As such, you may not be able to resell your shares of common stockat or above the price you paid for them.

**ITEM2.**                   PROPERTIES

We lease space in threebuildings located on a single campus in Ladson, South Carolina for ourexecutive offices and manufacturing facilities, designated Building #1,Building #2 and Building #3.

We lease a portion ofBuilding #1 for use as our executive offices. The term of the lease is threeyears starting September 1, 2005, with an option to renew for anadditional five years. Annual rent is $119,880 plus utilities, taxes andmaintenance. The base rent is subject to an annual escalation at the rate of 3%per year. We have 7,190 square feet of office space and 9,139 square feet ofwarehouse space in Building #1.

We lease all of Building#2. The term of the lease is five years starting July 15, 2004, with anoption to renew for another five years. Annual rent is $439,500 for the firstyear plus utilities, taxes and maintenance, and $439,500 base rental for thenext four years, which may be adjusted by increases to the Consumer PriceFactor by three to seven percent.

We lease all of Building#3. The term of the lease is five years starting October 15, 2003. Annualrent is $215,000 for the first year plus utilities, taxes and maintenance, and$258,000 base rental for the next four years. We have 84,800 square feet ofspace in Building #3.

**ITEM 3.**                   LEGALPROCEEDINGS 

On May 12, 2005,Atlantis Partners, Inc. filed a complaint against us in the Circuit Courtfor the 15th Judicial Circuit, Palm Beach County Floridafor alleged breach of terms related to a finder’s fee agreement datedMarch 28, 2003. The complaint alleged damages of at least $400,000 infees, plus costs and interest. 

We may be involved fromtime to time in ordinary litigation that will not have a material effect on ouroperations or finances. Other than the litigation described above, we are notaware of any pending or threatened litigation against the company or ourofficers and directors in their capacity as such that could have a materialimpact on our operations or finances.

**ITEM4.**                   SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

 

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**PART II**

**ITEM5.**                   MARKET FORCOMMON EQUITY AND RELATED STOCKHOLDER MATTERS

*MARKETFOR OUR COMMON STOCK*

Our common stockbegan trading on the OTC Bulletin Board on December 29, 1998 under thesymbol “SJET.OB”. Our common stock currently trades on the OTC Bulletin Boardunder the symbol “FRPT.OB”. Before our listing on the OTC Bulletin Board noneof our securities were traded in the public market. Bid and ask quotations forour common shares are routinely submitted by registered broker dealers who aremembers of the National Association of Securities Dealers on the NASDOver-the-Counter Electronic Bulletin Board. These quotations reflectinner-dealer prices, without retail mark-up, markdown or commission and may notrepresent actual transactions. The following table shows, for the periodsindicated, the high and low closing sales prices per share of our common stock.Effective February 4, 2005, we affected a reverse split of our commonstock in the ratio of 12 pre-split shares for every 1 post-split share (12:1). 
|                | ** ** | **High**                              | ** ** | **Low**                                   | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|---------------------------------------|------------|-------------------------------------------|------------|----------|------------|---------|------------|
| ** **     | ** ** | **Prior to  Reverse Split** | ** ** | **Restated for  Reverse Split** | ** ** |
| 2004           |       |                                  |       |                                      |       |     |       |    |       |
| First Quarter  |       | $                                     | 0.71       |                                      | $          | 0.07     |       | $       | 8.52       |   | $ | 0.84 |   |
| Second Quarter |       | $                                     | 0.43       |                                      | $          | 0.13     |       | $       | 5.16       |   | $ | 1.56 |   |
| Third Quarter  |       | $                                     | 0.25       |                                      | $          | 0.13     |       | $       | 3.00       |   | $ | 1.56 |   |
| Fourth Quarter |       | $                                     | 0.40       |                                      | $          | 0.14     |       | $       | 4.80       |   | $ | 1.68 |   |
| 2005           |       |                                  |       |                                      |       |     |       |    |       |
| First Quarter  |       |                                  |       |                                      |       | $        | 3.60       |    | $          | 1.75 |   |
| Second Quarter |       |                                  |       |                                      |       | $        | 2.30       |    | $          | 1.28 |   |
| Third Quarter  |       |                                  |       |                                      |       | $        | 1.80       |    | $          | 1.28 |   |
| Fourth Quarter |       |                                  |       |                                      |       | $        | 1.39       |    | $          | 0.69 |   |

 

*SHAREHOLDERS*

As of December 31,2005, there were 330 shareholders of record of our common stock.

DIVIDEND POLICY

We have never declared or paid a cash dividend on ourcommon stock. We currently intend to retain all of our future earnings, if any,for use in our business and therefore we do not anticipate paying any cashdividends on our common stock in the foreseeable future. Any futuredetermination to pay cash dividends will be at the discretion of our board ofdirectors and will depend upon our financial condition, operating results,capital requirements, restrictions contained in our agreements and otherfactors which our board of directors deems relevant.

On January 19, 2005we issued 15,800 shares of Series D 6% convertible preferred stock. TheSeries D Certificate of Designation provides for the payment of a dividendat the rate of 6% simple interest per annum for so long as the Series Dshares are outstanding. Dividend payments are semi-annual due March 1 andSeptember 1 and are payable in cash or shares of common stock. OnMarch 3, 2005 we issued 57,186 shares of common stock valued at $100,075as a dividend payment to the holders of the Series D 6% ConvertiblePreferred Stock. On September 1, 2005 we paid $318,355 and issued  224,511 shares of common stock valued at$330,143 as a dividend payment to the holders of the Series D stock. 

*RECENT SALES OF UNREGISTERED SECURITIES*

We did not sell unregistered (restricted) securitiesduring the three months ended December 31, 2005.

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**ITEM 6.**                   SELECTED FINANCIAL DATA
| ** **                          | ** ** | **2005**     | ** ** | **2004**     | ** ** | **2003**     | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **Restated** | ** ** | **Restated** | ** ** | **Restated** | ** ** | **2002**   | ** ** | **2001**   | ** ** |
| **Results of Operations**           | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Sales                           |       | $            | 49,712,829 |         | $          | 10,272,757   |       | $          | 6,247,285  |       | $          | 2,606,634 |   | $ | 1,199,047 |   |
| Loss from continuing  operations    |       | (14,404,622  | )          | (11,953,803  | )          | (5,155,690   | )          | (5,373,377 | )          | (1,437,818 | )          |
| Net Loss                            |       | (14,404,622  | )          | (11,953,803  | )          | (8,087,869   | )          | (5,373,377 | )          | (1,437,818 | )          |
|                                |       |         |       |         |       |         |       |       |       |       |       |
| **Per  Common Share**               | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loss from continuing  operations    |       |         |       |         |       |         |       |       |       |       |       |
| Basic                               |       | (0.51        | )          | (0.62        | )          | (0.63        | )          | (1.58      | )          | (0.08      | )          |
| Assuming dilution                   |       | (0.51        | )          | (0.62        | )          | (0.63        | )          | (1.58      | )          | (0.08      | )          |
| Common Stock Dividends              |       | 0.00         |       | 0.00         |       | 0.00         |       | 0.00       |       | 0.00       |       |
|                                |       |         |       |         |       |         |       |       |       |       |       |
| **Financial  Position at Year-End** | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Property plant and  equipment, net  |       | 2,138,703    |       | 1,036,994    |       | 309,068      |       | 336,523    |       | 1,221,313  |       |
| Total assets                        |       | 39,776,535   |       | 13,627,196   |       | 1,620,114    |       | 2,615,451  |       | 2,113,779  |       |
| Total debt                          |       | 7,500,000    |       | 4,360,975    |       | 713,123      |       | 549,486    |       | —     |       |
| Shareholders’ Equity           |       | (6,496,761   | )          | 2,558,483    |       | (305,595     | )          | 803,450    |       | 1,174,915  |       |
|                                     |            |              |            |              |            |              |            |            |            |            |            |  |  |  |  |  |

 

**ITEM 7.**                   MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 

*2005, 2004 AND 2003 RESTATEMENT*

As discussed inthe explanatory note to this Form 10-K/A and in Note 1 to our financialstatements included herein, we are restating our financial statements and otherfinancial information for the years ended 2005, 2004 and 2003, and financialinformation for each of the quarters in those years.  The restatement adjusts our accounting forpreferred stock and warrants issued to investors, accounting for stock-basedcompensation to employees and non-employees and accounting for rent expense ona straight-line basis. 

The following tables set forth the effects of theerror in accounting for the valuation of preferred stock and warrants issued toinvestors, accounting for stock-based compensation to employees and accountingfor rent expense on a straight-line basis.

 
|                                                     | ** ** | **(Increase)/Decrease in Net Loss** | ** **  |
|-----------------------------------------------------|------------|----------------------------------------------------|-------------|
| ** **                                          | ** ** | **2005**                                           | ** **  | **2004** | ** ** | **2003** | ** ** |
| Total adjustment                                    |       | $                                                  | 2,161,046   |   | $ | (1,707,970 | ) | $ | (2,766,245 | ) |
| Previously reported net loss                        |       | $                                                  | (16,565,668 | ) | $ | (10,245,833 | ) | $ | (5,321,624 | ) |
| Percent variation from previously reported net loss |       | 13.0                                               | %           | -16.7 | % | -52.0 | % |

 
|                                                     | ** ** | **(Increase)/Decrease in net loss** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **2005**                                           | ** ** |
| **Quarter**                                         | ** ** | **4th Qtr.**                                  | ** ** | **3rd Qtr.** | ** ** | **2nd Qtr.** | ** ** | **1st Qtr.** | ** ** |
| Total adjustment                                    |       | $                                                  | (46,309    | ) | $ | (61,272 | ) | $ | (777,977 | ) | $ | 3,046,604 |   |
| Previously reported net loss                        |       | $                                                  | (7,108,180 | ) | $ | (5,605,211 | ) | $ | 130,633 |   | $ | (3,982,910 | ) |
| Percent variation from previously reported net loss |       | 0.7                                                | %          | 1.1 | % | -595.5 | % | -76.5 | % |

 
|                                                      | ** ** | **(Increase)/Decrease in net loss** | ** ** |
|------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **2004**                            | ** ** |
| **Quarter**                                          | ** ** | **4th Qtr.**                        | ** ** | **3rd Qtr.** | ** ** | **2nd Qtr.** | ** ** | **1st Qtr.** | ** ** |
| Total adjustment                                     |       | $                                   | (375,754   | ) | $ | (649,028 | ) | $ | 34,159 |   | $ | (717,347 | ) |
| Previously  reported net loss                        |       | $                                   | (3,854,612 | ) | $ | (3,236,792 | ) | $ | (1,957,990 | ) | $ | (1,196,439 | ) |
| Percent  variation from previously reported net loss |       | 9.7                                 | %          | 20.1 | % | -1.7 | % | 60.0 | % |

 
|                                                     | ** ** | **(Increase)/Decrease in net loss** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                          | ** ** | **2003**                            | ** ** |
| **Quarter**                                         | ** ** | **4th Qtr.**                        | ** ** | **3rd Qtr.** | ** ** | **2nd Qtr.** | ** ** | **1st Qtr.** | ** ** |
| Total adjustment                                    |       | $                                   | (720,718   | ) | $ | (254,946 | ) | $ | (420,309 | ) | $ | (1,370,272 | ) |
| Previously reported net loss                        |       | $                                   | (1,748,243 | ) | $ | 183,246 |   | $ | (1,972,958 | ) | $ | (1,783,669 | ) |
| Percent variation from previously reported net loss |       | 41.2                                | %          | -139.1 | % | 21.3 | % | 76.8 | % |

 

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CAUTIONARY STATEMENTCONCERNING 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 coulddiffer materially from these anticipated in the forward-looking statements formany reasons including our ability to raise capital when necessary;availability of parts and raw materials for our products; continued customeracceptance of our products; on-going success of our research and developmentefforts and other risks described elsewhere in this report. Although we believethe expectations reflected in the forward-looking statements are reasonable,they relate only to events as of the date on which the statements are made, andour future results, levels of activity, performance or achievements may notmeet these expectations. We do not intend to update any of the forward-lookingstatements after the date of this document to conform these statements toactual results or to changes in our expectations, except as required by law.

*SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES*

The Securities andExchange Commission, or SEC, issued Financial Reporting release No. 60,“Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” orFRR 60, suggesting companies provide additional disclosure and commentary ontheir most critical accounting policies. In FRR 60, the SEC defined the mostcritical accounting policies as the ones that are most important to theportrayal of a company’s financial condition and operating results, and requiremanagement to make its most difficult and subjective judgments, often as aresult of the need to make estimates of matters that are inherently uncertain. Themethods, estimates and judgments we use in applying these most criticalaccounting policies have a significant impact on the results we report in ourfinancial statements.

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 andAssociated Reserves; and

·       Allocationof direct and indirect cost of sales.

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

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

The Company negotiates contracts with its customerswhich may include revenue arrangements with multiple deliverables, as outlinedby Emerging Issues Task Force No. 00-21 (EITF 00-21).  The Company’s accounting policies are definedsuch that each deliverable under a contract is accounted for separately.  Historically, the Company has negotiated andsigned contracts with its customers which outline the contract amount andspecific terms and conditions associated with each deliverable. Allowance forcontractual adjustments is recorded as a reduction to revenue.

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*Stock-BasedCompensation:  *In December 2004, the FASB issuedSFAS No. 123 (revised 2004) (SFAS No. 123(R)),*  Share-BasedPayment* , which replaced SFAS No. 123,*  Accountingfor Stock-Based Compensation* , and superseded Accounting PrinciplesBoard Opinion No. 25,*  Accounting for Stock Issued to Employees*.SFAS No. 123(R) requires all share-based payments to employees,including grants of employee stock options, to be recognized in the financialstatements based on their fair values. The pro forma disclosures previouslypermitted under SFAS No. 123 will no longer be an alternative tofinancial statement recognition. Under SFAS No. 123(R), we mustdetermine the appropriate fair value method to be used for valuing share-basedpayments, the amortization method of compensation cost and the transitionmethod to be used at the date of adoption. In April 2005, the Securities Exchange Commission (SEC) amendedRule 401(a) of Regulation S-X to delay the effective date forcompliance with SFAS No. 123(R). Based on the amended rule, we arerequired to adopt SFAS No. 123(R) as of July 1, 2005. We haveevaluated the requirements of SFAS No. 123(R) and will adoptSFAS No. 123(R) on July 1, 2005.

*Principles ofConsolidation:  *The consolidated financialstatements include the accounts of Force Protection, Inc., and our twowholly owned subsidiaries, Force Protection Industries, Inc. (formerlyTechnical Solutions Group, Inc.) and TSG International, Inc. for theyears ended December 31, 2005, 2004 and 2003, respectively. Allinter-company balances and transactions 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. 

*Inventories:  *Inventoriesare stated at the lower of cost or market. The cost is determined under thefirst-in, first-out, or FIFO, base valuation method. The Company maintains an allowance for obsolete or excess inventory. TheCompany determines an appropriate balance in this account based on historicaldata and specific identification of certain inventory items.

In November 2004,the FASB issued Statement No. 151, Inventory Costs, to amend the guidancein Chapter 4, Inventory Pricing, of the FASB Accounting Research BulletinNo. 43, Restatement and Revision of Accounting Research Bulletins, whichwill become effective for us in fiscal year 2006. Statement No. 151clarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted materials. The Statement requires thatthose items be recognized as current-period charges. Additionally, StatementNo. 151 requires that allocation of fixed production overhead to the costsof conversion be based on normal capacity of the production facility. We arecurrently following Statement No. 151 and do not believe that StatementNo. 151 will have a significant impact on our financial condition andresults of operations.

*Property, Plant andEquipment:  *Property and equipment arestated at cost or at the value of the operating agreement. We capitalizeadditions and improvements which include all material, labor and engineeringcost to design, install or improve the asset. Routine repairs and maintenanceare expensed as incurred. Depreciation and amortization are computed using the straight-linemethod over the following estimated useful lives:
| Building and improvements |   | 20 years       |
|---------------------------|--------|----------------|
| Furniture and fixtures    |   |   3 years |
| Machinery and equipment   |   |   7 years |
| Tooling and molds         |   |   7 years |
| Vehicles                  |   |   5 years |

 

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

*Gain/Loss per Share:  *Weutilize SFAS No. 128, “Earnings per Share.” Basic gain/loss per share iscomputed by dividing  gain/loss availableto common stockholders by the weighted-average number of common sharesoutstanding. Diluted gain/loss per share is computed similar to basic gain/lossper share except that the denominator is increased to include the number ofadditional common shares that would have been outstanding if the potentialcommon shares had been issued and if the additional common shares weredilutive. Since we have had a loss from continued operations for the periodsending December 31, 2003, 2004 and 2005, in accordance with SFAS No 128 wetreat our earnings per share on a “fully diluted basis” as equal to theearnings per share for our outstanding common stock (the reasoning providedunder SFAS No 128 for such treatm-ent is that the inclusion of additionalpotential common shares is anti-dilutive). 

*Estimates:  *Thepreparation of financial statements in conformity with  accounting principles generally accepted inthe United States of America requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements, as well as the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

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*Dividend Policy:*   We have never declared or paid a cashdividend on our common stock, and we do not anticipate paying any cashdividends on our common stock in the foreseeable future. Any futuredetermination to pay cash dividends on our common stock will be at thediscretion of our board of directors and will depend upon our financialcondition, operating results, capital requirements, restrictions contained inour agreements and other factors which our board of directors deems relevant.Under the terms of the Certificate of Designation for our Series D 6%Convertible Preferred stock, we are obligated to pay a 6% dividend in cash orshares of common stock on the outstanding shares of Series D stock. 

*RESTATEDFINANCIAL CONDITION AND RESULTS OF OPERATIONS*

*Overview:**  *Thetwelve month period ending December 31, 2005 has been a period ofextraordinary growth for us, as we increased our production capacity by morethan 407% from the same period ending December 31, 2004 and increased oursales 384%. During this period we completed our vehicle production backlog from2004 and secured a major new contract for the production of the new Cougar“Joint EOD Rapid Response” vehicles (“JERRV”) under Contract M67854-05-D-5091for the United States Marine Corps. During the twelve month period endingDecember 31, 2005 we also announced a new order received 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. We deliveredall four of these Buffalo vehicles under such contract during 2005. Sales forthis period from all sources generated gross revenue of $49,712,829, againstwhich we incurred total cost of goods of $46,828,615 generating a gross profitof $3,284,214. We incurred general and administrative expenses, includingresearch and development, in the total amount of $18,914,277 resulting in anoperating loss of $14,404,622. In 2005 we delivered a total of 71 vehicles (31Buffalos, 22 Cougar HEV and 18 Cougar JERRV), and made substantial progress inour infrastructure build-up toward our current targeted steady productioncapacity of twenty Cougars per month and 4 Buffalos per month. 

The following table setsforth our consolidated statements of operations for the twelve monthperiod  ended December 31, 2005 and2004, respectively. The discussion and analysis that follows should be read inconjunction with our consolidated financial statements and related notesincluded elsewhere in this report.

**Consolidated Statement of Operations**
| ** **                             | ** ** | **2005**     | ** ** | **2004**     | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|----------------------------------------|------------|--------------|------------|--------------|------------|-------------------|------------|-------------------|------------|
| ** **                             | ** ** | **Restated** | ** ** | **Restated** | ** ** | **Restated**      | ** ** | **Restated**      | ** ** |
| Revenues                               |       | 49,712,829   |       | 10,272,757   |       | 39,440,072        |       | 383.93            | %          |
| Cost of Sales                          |       | 46,428,615   |       | 11,266,998   |       | 35,161,617        |       | 312.08            | %          |
| Gross Profit                           |       | 3,284,214    |       | (994,241     | )          | 4,278,455         |       | 430.32            | %          |
| G.P.%                                  |       | 7            | %          | -10%         |       |              |       |              |       |
|                                   |       |         |       |         |       |              |       |              |       |
| G&A Expense                        |       | 17,256,359   |       | 9,614,052    |       | 7,642,307         |       | 79.49             | %          |
| R&D Expense                        |       | 1,657,918    |       | 1,230,290    |       | 427,628           |       | 34.76             | %          |
| Total G&A                          |       | 18,914,277   |       | 10,844,342   |       | 8,069,935         |       |              |       |
| Operating Loss                         |       | (15,630,063  | )          | (11,838,583  | )          | (3,791,480        | )          | 32.03             | %          |
|                                   |       |         |       |         |       |              |       |              |       |
| Interest Expense                       |       | (1,708,291   | )          | (684,980     | )          | (1,023,311        | )          | 149.39            | %          |
| Other  Income/(Expense)                |       | 102,941      |       | 569,760      |       | (466,819          | )          | -81.93            | %          |
| Realized gain on  derivative liability |       | 2,830,791    |       | —       |       | 2,830,791         |       |              |       |
| Total                                  |       | 1,225,441    |       | (115,220     | )          | 1,340,661         |       | -1163.57          | %          |
|                                   |       |         |       |         |       |              |       |              |       |
| Net Loss                               |       | (14,404,622  | )          | (11,953,803  | )          | (2,450,819        | )          | 20.50             | %          |

* *

*Revenue:**  *Revenuefor the twelve month period ended December 31, 2005 was $49,712,829representing an increase of $39,440,072 compared to the same period in 2004.The increase during this period was due to the increased level of vehicleproduction we have achieved compared with last year. 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 we received duringthis twelve month period thus includes amounts we previously carried on our balancesheet as deferred revenue pending acceptance of the final products by the U.S.Army and the U.S. Marines. During the twelve month period endedDecember 31, 2005, we received approximately $44,844,704 from vehiclesales and $4,868,125 from the sale of spare parts and other support services.The revenue from the sale of spare parts continues to increase, driven by theincreasing number of our vehicles delivered and deployed to areas ofoperations. We intend to continue to develop this spare parts business as anincreasingly important part of our revenue base. 

*Cost of Sales:*   Cost of sales for the twelve monthperiod ended December 31, 2005 was $46,428,615, representing an increaseof $35,161,617 compared to the same period in 2004. The increase during thisperiod was due to the increased level of vehicle production, and thecorresponding increased cost of direct and indirect labor and materialassociated with our manufacturing activities. The cost of sales for the twelvemonth period ended December 31, 2005 was 93% of gross revenues for suchtwelve month period representing an 7% gross profit for this period, comparedwith cost of sales of 110% of gross revenues for the same period in 2004,representing a 10% negative gross profit for 2004. This improvement in ourgross profit is the result in part of increasing efficiency of ourmanufacturing operations. As we continue to expand our production capacity, weexpect to achieve increased cost efficiency from volume purchasing,improvements in our manufacturing processes and the allocation of indirectcosts across a broader production base, resulting in a projected decrease inthe cost of sales as a percentage of gross revenue.

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*General andAdministrative Expenses:*   Generaland Administrative expenses for the twelve month period ended December 31,2005 were $18,914,277 representing an increase of $8,069,935 compared to thesame period in 2004. This increase included $427,628 in research and developmentexpense, $551,322 attributable to relocation and recruiting costs for newemployees, $4,703,460 for salaries and employee benefits, $1,107,972 forcommission and settlement related expenses, $256,994 for employee training and$922,559 for consulting services. 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 ourGeneral and Administrative expenses in relation to gross revenues to decreaseas we achieve greater efficiencies in our operations. Thus for example, duringthe twelve month period ending December 31, 2005 our General andAdministrative**expense was 38% of our grossrevenue as compared with 106% for the same period in 2004. 

*Net Loss:**  *NetLoss for the twelve month period ended December 31, 2005 was $14,404,622representing an increased loss of $2,450,819 as compared to the net loss of$11,953,803 incurred during the same period in 2004. This increase reflects thecosts associated with the intensive infra-structure development program wecarried out during 2005, coupled with an expected temporary decline in vehicleproduction and delivery levels during the third and fourth quarters followingthe completion of our contract backlog and the commencement of our productionunder the JERRV contract. This increased loss also includes the non-recurringexpense reserve of $2,012,989 for the cost of configuration upgrades to certainCougar HEV vehicles discussed above. During this twelve month period, weincurred substantial expenses associated with our infrastructure expansion buthave not been in a position to fully realize revenue from our increasedcapacity. As such, we do not believe that the financial results for this twelvemonth period are fully representative of our projected future results.

*Backlog:*   On April 23, 2004 we announced acontract award to deliver Cougar Hardened Engineer Vehicles (“HEV”) to theUnited States Marine Corps, of which fourteen were initially funded under thecontract. On March 8, 2005 the U.S. Marine Corps exercised its option toincrease the number of HEV vehicles by fourteen, for a total of twenty-eightvehicles. As of December 31, 2005 we delivered a total of twenty-seven HEVvehicles, and have a remaining backlog of one Cougar HEV vehicle to bedelivered under this contract, with a value of approximately $400,000. OnMay 17, 2004 we announced the award of a contract to deliver twenty-oneBuffalo vehicles to the U.S. Army and in October 2004 we were awarded aseparate contract by the U.S. Army for an additional fifteen Buffalo vehicles.Initial deliveries under these two Buffalo contracts began during 2004 and2005, and as of December 31, 2005 we have delivered all thirty-six Buffalovehicles, 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) ofapproximately $93,000,000. As of December 31, 2005 we delivered eighteenJERRV vehicles and have a remaining backlog of one hundred four vehicles underthe JERRV contract with an approximate value of $75,000,000 (including associatedspares and support). During the twelve month period ended December 31,2005 we also announced a new order from the U.S. Marine Corps. for the purchaseof four Buffalo vehicles (with associated spares, service and training) for atotal contract price of $3,852,026. We delivered all four of these Buffalovehicles under such contract 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.

*Future Results:*   During the upcoming calendar year 2006we expect to have incurred the majority of our presently anticipatedinfrastructure expansion costs and to achieve a substantially increased levelof vehicle production capacity, resulting in increased revenues and profitabilityfor such upcoming period. Set out below is a table showing actual and projecteddeliveries of our vehicles during 2004 and 2005.

***VehicleDeliveries 2004 & 2005 ***
|              | ** ** | **Actual** | ** ** |
|--------------|------------|------------|------------|
| ** **   | ** ** | **2004**   | ** ** | **Q1-2005** | ** ** | **Q2-2005** | ** ** | **Q3-2005** | ** ** | **Q4-2005** | ** ** |
| Buffalo      |       | 9          |       | 2 |   | 22 |   | 3 |   | 4 |   |
| Cougar HEV   |       | 5          |       | 8 |   | 2 |   | 8 |   | 4 |   |
| Cougar JERRV |       | 0          |       | 0 |   | 0 |   | 2 |   | 16 |   |
| Total        |       | 14         |       | 10 |   | 24 |   | 13 |   | 24 |   |

 

*TRENDS,RISKS AND UNCERTAINTIES*

The results of ouroperations for the period ended December 31, 2005 reflect the costsassociated with our  extraordinarygrowth, as we evolve from a start up enterprise to become a full scalemanufacturing facility. During 2004 we were awarded contracts by the U.S. Armyfor a total of thirty six Buffalos and by the U.S. Marines for twenty eightCougars. We were able to build only 14 vehicles during 2004, but during thetwelve month period ending December 31, 2005, we increased our totalcapacity to 71 vehicles, an increase of 407%, including all the 2004 backlogvehicles (apart from one HEV Cougar). At the same time we were working tocomplete the 2004 backlog, we also undertook the work necessary to increase ourproduction capacity to meet the expected demand for our vehicles under theJERRV contract for one hundred twenty-two Cougars and potential follow-on orders.This included substantial vehicle and automotive engineering work,manufacturing engineering development, hiring and training 

17

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workforce and theexpansion of our manufacturing and administrative facilities. While the JERRVcontract reflects a broader, growing demand for our vehicles, we continue toface the challenge of expanding our manufacturing capacity to fully exploitthis opportunity. During 2005 we have moved aggressively to meet this challengeby expanding our facilities, improving our operating systems and refining ourmanufacturing processes. These activities have required a significantcommitment of short term resources, but we expect the long term benefits willbe substantial.

We recognize there arerisks associated with our on-going expansion activities. We continue to relyupon the U.S. Army and the U.S. Marine Corps for 100% of our sales, and ifeither customer elected not to issue further orders to us it would have adramatic impact upon our financial performance. In addition, if we are delayedin meeting the delivery schedule under the JERRV contract, we may beobligated to pay liquidated damages for any delayed vehicle, and in the eventof any substantial failure to perform, the customer could cancel the contractand/or claim additional damages. Payment of liquidated damages could negativelyimpact our future liquidity, and since we are incurring significant costsassociated 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 potentialnon-availability of parts or raw materials to materially affect our operations,there is a possibility that delays or increased costs could negatively impactour financial performance if circumstances change. Apart from the foregoing,the main uncertainty about our future operations is whether we will continue toreceive additional orders for our vehicles. It is impossible to predict withcertainty whether such future orders will be placed by existing or newcustomers. If we do not receive future orders, it is unlikely that our businesswill continue. However, we believe our vehicles provide proven blast andballistic protection, and that for so long as there is a risk of bodily harm toservice personnel from explosive blasts, there will be a market for ourproducts. A number of recent market surveys and requests for information issuedby the U.S. military, for armored vehicles with characteristics substantiallysimilar to ours, support this view.

*LIQUIDITYAND CAPITAL RESOURCES*

*Current Liquidity:*   For the twelve month period endingDecember 31, 2005, we had a starting cash balance of $2,264,406 and anending cash balance of $1,217,509 representing a net decrease in our cashposition for such period of $1,046,897. During this period we incurred negativecash flows from operations of $18,495,319 due to the increased spendingassociated with our substantial infra-structure expansion needed to support ourincreased production capacity. As part of this expansion, we also invested$1,511,337 in software, machinery and equipment. To meet our cash needs duringthis period, we raised a net total of $18,896,988 through various financingactivities, including $15,305,965 from the sale of 15,800 shares of ourSeries D Convertible Preferred Stock, $513,991 from the sale of our commonstock and $7,500,000 from the sale of a secured Note pursuant to a SubscriptionAgreement dated November 18, 2005 with Longview Fund, LP and LongviewEquity Fund, LP. During this period we paid $4,000,000 to settle the principalamount outstanding under our July 2004 Bridge Facility with GC FinancialServices, and incurred commissions and other fees associated with the foregoingfinancing transactions.

*Future Liquidity:*   During the twelve month period endingDecember 31, 2005 we experienced negative cash flows from operations of $18,495,319and needed to rely on outside sources of working capital to meet our cash flowrequirements. Our ability to factor our U.S. Government receivables under thePurchase and Sale Agreement with GC Financial Services, Inc. allowed us toreceive payment within 24-48 hours of vehicle deliveries and reduced theimpact of the government contract payment cycle on our short term liquidityhowever we needed to regularly manage our accounts payable to maintainliquidity during 2005. During the upcoming period ending December 31, 2006we expect the infra-structure expenses we have incurred in connection with ourproduction ramp-up will begin to level off or decline and that we will begin toexperience positive cash flow from operations as we increase the volume ofvehicle production. As our expenses level out and our revenues increase, weexpect to achieve positive cash flow from operations during the first half of2006. Nonetheless, given our limited available cash, we may need to consideroutside sources of financing to support our continued development and growth.

*Contract Liabilities:*Oursales contracts generally include a warranty such that our products are freefrom defects in design, material, and workmanship for a period of 1 year fromthe acceptance date.  The warranty doesnot apply to any damage or failure to perform caused by the misuse or abuse of thevehicle, combat damage, fair wear and tear items (brake shoes, track pads,wiper blades, etc.), or by the customer’s failure to perform proper maintenanceor service on the supplies.

We routinely review our exposure for warranty costsand determines warranty and pricing reserves based on historical data and knownevents.  Below is a table detailing ouraccruals for warranty-related costs as of December 31, 2005 and 2004:

18

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Accruals for contractliabilities include the following:

| ** **       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------|------------|----------|------------|----------|------------|----------|------------|
| General warranty |       | $        | 1,686,062  |     | $          | 167,950  |       | $ | 180,384 |   |
| Loss contingency |       | —   |       | 501,331  |       | —   |       |
| Other            |       | —   |       | 60,180   |       | —   |       |
|             |       | $        | 1,686,062  |     | $          | 729,461  |       | $ | 180,384 |   |

 

*Vehicle Fees:*Weare party to a Memorandum of Understanding with Mechem, a division of DenelPTY, a South African company pursuant to which Mechem agreed for a period offive years to work exclusively with us and not to cede, dispose or transfer toany third party other than us any of our technology, IPR or other proprietaryinformation relating to our armored vehicles systems including, but not limitedto, designs, drawings, full technical specifications, test data, hardware andsoftware designs and technologies, supplier’s list, know-how and all and everypiece of information and data relevant to such systems. In exchange for suchexclusivity, we agreed to pay Mechem a “vehicle fee,” for every Buffalo andTempest we manufacture and sell. We are not obligated to pay a vehicle fee inrespect of other vehicles we manufacture and sell. On September 13, 2006, weexecuted a new Memorandum of Agreement with Mechem, extending the period ofexclusivity for an additional five years, and adding a provisions that Mechemwould upon request by us provide expertise and know-how on a “work for hire”basis to advise, assist and support us in our marketing activities. We alsoagreed to make a one time payment of $394,500 to Mechem, representing vehiclefees in respect of Cougar vehicles previously delivered and sold by us during2005 and 2006. The agreement with Mechem expires in September 2011.

We are also party to anagreement with CSIR Defencetek (a division of the Council for Scientific andIndustrial Research) a statutory council established in accordance with theLaws of the Republic of South Africa, pursuant to which we are obligated to paythe CSIR a similar vehicle fee. The agreement with the CSIR expires in March2007.

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

 

***Tableof Contractual Obligations:***

The following is a table outlining our actual andprojected significant contractual obligations as of December 31, 2005:.
| ** **                               | ** ** | **For the Years Ended** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2006**                               | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Total** | ** ** |
| Operating Lease Commitments              |       | $                                      | 777,092    |   | $ | 831,426 |   | $ | 492,844 |   | $ | 18,305 |   | $ | — |   | $ | 2,119,667 |   |
| Notes Payable – Longview, principal |       | $                                      | 7,500,000  |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 7,500,000 |   |
| Notes Payable – Longview, interest  |       | $                                      | 843,288    |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 843,288 |   |
| Raw Material Purchase Commitments        |       | $                                      | 8,289,132  |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 8,289,132 |   |
| Mechem - Vehicle Fees (1)                |       | Variable                               |       | Variable |   | Variable |   | Variable |   | Variable |   |   |   |
| CSIR – Vehicle Fees (2)             |       | Variable                               |       | Variable |   | $ | — |   | $ | — |   | $ | — |   |   |   |
| Total                                    |       | $                                      | 17,409,512 |   | $ | 831,426 |   | $ | 492,844 |   | $ | 18,305 |   | $ | — |   | $ | 18,752,087 |   |

 

----

(1)          Refer to the Mechemvehicle fee agreement detailed above in Footnote 8, Commitments andContingencies, “Vehicle Fees.”

(2)          Refer to the CSIRvehicle fee agreement detailed above in Footnote 8, Commitments andContingencies, “Vehicle Fees.”

*Uncertainties:*   The amount of working capital that wewill require depends on several factors, including without limitation, theextent and timing of sales of our products, future inventory costs, the timingand costs associated with the expansion of our manufacturing, development,engineering and customer support capabilities, the timing and cost of ourproduct development and enhancement activities and our operating results. Therealization of a major portion of the assets shown on our balance sheet isdependent upon the success of such future operations. During 2006 we expect tobe able to generate cash flows from operations sufficient to satisfy our cashrequirements, but if we are unable to do so, we may need to seek alternativesources of cash. Potential sources of such cash could include senior debtfacilities, new lines of credit, or additional sales of our securities. If weraise funds through the sale of securities, the common stock currentlyoutstanding could be diluted. There is a risk that such additional financingmay not be available, or may not be available on acceptable terms, and theinability to obtain additional financing or generate sufficient cash fromoperations could require us to reduce or eliminate expenditures for capitalequipment, research and development, production, or marketing of our products,or otherwise curtail or discontinue our operations, which could have a materialadverse effect on our business, financial condition and results of operations.

On October 18, 2005our Chief Financial Officer resigned. The resignation of our Chief FinancialOfficer has not had a material negative impact upon on our operations.  On November 15, 2005, R. Scott Ervin, amember of the Company’s board of directors, 

19

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accepted the position ofInterim Chief Financial Officer.  TheCompany is in the process of identifying candidates to become the Company’snext Chief Financial Officer.

*INFLATION ANDMATERIAL 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 raw materials orparts. We currently have enough steel on hand or on order to meet our  existing contractual requirements, and wecontinue to purchase steel anticipating future requirements. If the price ofsteel increases significantly, the cost of our products could increase, and wemay not be able to pass on this cost under our current contracts. As a result,if the cost of our raw materials increases our profitability on such currentcontracts, if any, could decrease.

**ITEM7A.**          QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT 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 financingneeds change in the future, interest rate risk may become a more significantissue for us.

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.

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**ITEM8. FINANCIAL STATEMENTS**

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

**To the Board of Directors andStockholders of Force Protection, Inc.**

We have auditedthe accompanying consolidated balance sheets of Force Protection, Inc. andsubsidiary as of December 31, 2005 and 2004, and the related consolidatedstatements of income, stockholders’ equity and comprehensive income, and cashflows for each of the years in the two-year period ended December 31, 2005.These financial statements are the responsibility of the company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.  The December 31, 2003financial statements of Force Protection, Inc. and subsidiary were audited byanother auditor who has ceased operations. That auditor expressed an unqualified opinion on those financial statementsin his report dated March 2, 2004.

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. The company is not required tohave, nor were we engaged to perform, an audit of its internal control overfinancial reporting. Our audit included consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the financial position of Force Protection Inc., and subsidiary as ofDecember 31, 2005 and 2004, and the results of its operations and its cashflows for each of the years in the two-year period ended December 31, 2005 inconformity with accounting principles generally accepted in the United Statesof America.

As discussed inNote 1 to the financial statements, certain errors resulting in adjustments tothe Company’s accounting for preferred stock and warrants issued to investors,accounting for stock-based compensation to employees and non-employees andaccounting for rent expense on a straight-line basis as of December 31, 2005and 2004, were discovered by management of the Company during the current year.Accordingly, the 2005 and 2004 financial statements have been restated tocorrect these errors.

As discussedabove, the financial statements of Force Protection Inc., and subsidiary as ofDecember 31, 2003, and for the year then ended were audited by other auditorswho have ceased operations. As described in Note 1, these financial statementshave been restated. We audited the adjustments described in Note 1 that were appliedto restate the 2003 financial statements. In our opinion, such adjustments areappropriate and have been properly applied. However, we were not engaged toaudit, review, or apply any procedures to the 2003 financial statements of theCompany other than with respect to such adjustments and, accordingly, we do notexpress an opinion or any other form of assurance on the 2003 financialstatements taken as a whole.

The accompanyingfinancial statements have been prepared assuming the Company will continue as agoing concern.  As discussed in Note 2,conditions exist which raise substantial doubt about the Company’s ability to continueas a going concern.  Management’s plansin regard to these matters are also discussed in Note 2.  The financial statements do not include anyadjustments that might result from this uncertainty.

/s/ Jaspers +Hall, PCDenver, ColoradoMarch 17, 2006 (except as to the restatement discussed in Note 1 to theconsolidated financial statements as to which the date is as of April 16, 2007)

21

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INDEPENDENT AUDITOR’S REPORT

To the Board of Directors and Stockholders of Force Protection, Inc. and subsidiary

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Force Protection, Inc., and subsidiary (formerly known as Sonic Jet Performance, Inc.) as  of  December  31,  2003 and 2002, and the related consolidated statements of operations,  stockholders’  equity  (deficit)  and  cash flow for the years then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit  also  includes  assessing  the accounting principles used and significant estimates  made  by  management,  as  well  as evaluating the overall financial statement  presentation.  We believe that our audits provide a reasonable basis for our opinion.

In  our  opinion,  the financial statements referred to above present fairly, in all  material  respects,  the financial  position of Force Protection, Inc, and subsidiary,  at  December 31, 2003 and 2002, and the results of their operations and  their  cash  flows  for the years then ended, in conformity with accounting principles  generally  accepted  in  the  United  States.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial  statements,  the  Company’s  recurring losses from operations and its difficulties  in  generating  sufficient  cash  flow  to meet its obligation and sustain  its operations raise substantial doubt about its ability to continue as a  going concern. Management’s plans concerning these matters are also described in Note 1.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| /s/ Michael Johnson &  Co., LLC |   |
|-------------------------------------|--------|
| Michael Johnson  & Co., LLC     |
| Denver, Colorado                    |
| March 2, 2004                       |

 

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**FORCEPROTECTION, INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETSDECEMBER 31, 2005, 2004 and 2003**
| ** **                                                                                                                                                          | ** ** | **2005**     | ** ** | **2004**     | ** ** | **2003**     | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
| ** **                                                                                                                                                          | ** ** | **Restated** | ** ** | **Restated** | ** ** | **Restated** | ** ** |
| **ASSETS**                                                                                                                                                          |       |         |       |         |       |         |       |
| Current Assets:                                                                                                                                                     |       |         |       |         |       |         |       |
| Cash                                                                                                                                                                |       | $            | 1,217,509  |         | $          | 2,264,406    |       | $ | 278,777 |   |
| Accounts receivable,  net of allowance for contractual adjustments of $1,018,051 for 2005, $0 for  2004 and 2003                                                    |       | 3,666,358    |       | 1,053,973    |       | 144,932      |       |
| Inventories                                                                                                                                                         |       | 32,486,776   |       | 9,029,913    |       | 827,337      |       |
| Other current assets                                                                                                                                                |       | 267,189      |       | 241,910      |       | 60,000       |       |
| Total current assets                                                                                                                                                |       | 37,637,832   |       | 12,590,202   |       | 1,311,046    |       |
| Investment in Xtreme Companies, Inc., net of  valuation allowance                                                                                                   |       | —       |       | —       |       | —       |       |
| Property and equipment, net                                                                                                                                         |       | 2,138,703    |       | 1,036,994    |       | 309,068      |       |
| **Total Assets**                                                                                                                                                    |       | $            | 39,776,535 |         | $          | 13,627,196   |       | $ | 1,620,114 |   |
| ** **                                                                                                                                                          |       |         |       |         |       |         |       |
| **LIABILITIES &  SHAREHOLDERS’ EQUITY**                                                                                                               | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** |
| LIABILITIES                                                                                                                                                         |       |         |       |         |       |         |       |
| Current Liabilities:                                                                                                                                                |       |         |       |         |       |         |       |
| Accounts payable                                                                                                                                                    |       | $            | 14,688,855 |         | $          | 1,867,363    |       | $ | 715,066 |   |
| Other accrued  liabilities                                                                                                                                          |       | 1,898,020    |       | 1,354,466    |       | 75,500       |       |
| Contract liabilities                                                                                                                                                |       | 1,686,062    |       | 729,461      |       | 180,384      |       |
| Loans payable                                                                                                                                                       |       | 7,500,000    |       | 360,975      |       | 536,162      |       |
| Line of Credit                                                                                                                                                      |       | —       |       | 4,000,000    |       | 176,961      |       |
| Deferred revenue                                                                                                                                                    |       | 12,598,921   |       | 2,645,716    |       | 209,175      |       |
| Total Current Liabilities                                                                                                                                           |       | 38,371,858   |       | 10,957,981   |       | 1,893,248    |       |
|                                                                                                                                                                |       |         |       |         |       |         |       |
| Long-term debt:                                                                                                                                                     |       |         |       |         |       |         |       |
| Other long term  liabilities                                                                                                                                        |       | —       |       | 110,732      |       | 32,461       |       |
| **Total Liabilities**                                                                                                                                               |       | 38,371,858   |       | 11,068,713   |       | 1,925,709    |       |
| ** **                                                                                                                                                          | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** |
| Preferred stock  series D, $0.001 par value, authorized: 20,000 shares, issued and  outstanding: 2005, 13,004 shares; 2004, 0 shares; 2003, 0 shares           |       | 7,901,438    |       | —       |       | —       |       |
| ** **                                                                                                                                                          | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** |
| **SHAREHOLDERS’  EQUITY**                                                                                                                                      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** |
| Preferred stock: $0.001 par value, authorized: 10,000,000  shares                                                                                                   |       |         |       |         |       |         |       |
| Preferred stock Series A, $0.001 par value,  authorized: 1,600 shares issued and outstanding: 2005, 0 shares; 2004, 0  shares; 2003, 0 shares                  |       |         |       |         |       |         |       |
| Preferred stock series B, $0.001 par value,  authorized: 25 shares, issued and outstanding: 2005, 0 shares;2004, 19.5  shares; 2003, 10 shares                      |       | —       |       | —       |       | —       |       |
| Preferred stock series C, $0.001 par value,  authorized: 150 shares, issued and outstanding: 2005, 0 shares; 2004, 0  shares; 2003, 130 shares                 |       | —       |       | —       |       | —       |       |
| Common stock, $0.001 par value $0.001, authorized:  300,000,000, issued and outstanding: 2005, 36,144,216 shares; 2004,  19,357,938 shares; 2003, 10,190,021 shares |       | 36,114       |       | 19,358       |       | 10,190       |       |
| Warrants                                                                                                                                                            |       | 5,780,952    |       | 2,602,800    |       | 4,862,765    |       |
| Beneficial Conversion Feature                                                                                                                                       |       | 0            |       | 19,102,306   |       | 282,890      |       |
| Additional Paid-in Capital                                                                                                                                          |       | 38,714,893   |       | 35,874,565   |       | 18,805,887   |       |
| Accumulated deficit                                                                                                                                                 |       | (51,028,720  | )          | (55,040,546  | )          | (24,267,327  | )          |
| **Total Shareholders’ Equity**                                                                                                                                 |       | (6,496,761   | )          | 2,558,483    |       | (305,595     | )          |
| **Total Liabilities and Shareholders’ Equity**                                                                                                                 |       | $            | 39,776,535 |         | $          | 13,627,196   |       | $ | 1,620,114 |   |

 

The accompanyingNotes are an integral part of these financial statements. 

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**FORCEPROTECTION, INC. AND SUBSIDIARYCONSOLIDATED INCOME STATEMENTFor the Years Ended December 31, 2005, 2004 and 2003**
| ** **                                                    | ** ** | **2005**     | ** **  | **2004**     | ** ** | **2003**     | ** ** |
|---------------------------------------------------------------|------------|--------------|-------------|--------------|------------|--------------|------------|
| ** **                                                    | ** ** | **Restated** | ** **  | **Restated** | ** ** | **Restated** | ** ** |
| **Net sales**                                                 |       | $            | 49,712,829  |         | $          | 10,272,757   |       | $ | 6,247,285 |   |
| ** **                                                    |       |         |        |         |       |         |       |
| Cost of sales                                                 |       | 46,428,615   |        | 11,266,998   |       | 4,442,418    |       |
| Gross profit                                                  |       | 3,284,214    |        | (994,241     | )          | 1,804,867    |       |
|                                                          |       |         |        |         |       |         |       |
| General and  administrative expense                           |       | 18,914,277   |        | 10,844,342   |       | 4,861,584    |       |
|                                                          |       |         |        |         |       |         |       |
| **Operating loss**                                            |       | (15,630,063  | )           | (11,838,583  | )          | (3,056,717   | )          |
|                                                          |       |         |        |         |       |         |       |
| Other income                                                  |       | 102,941      |        | 569,760      |       | 41,668       |       |
| Interest expense                                              |       | (1,708,291   | )           | (684,980     | )          | (222,894     | )          |
| Realized gain on derivative liability                         |       | 2,830,791    |        | —       |       | —       |       |
| Impairment losses – goodwill                             |       | —       |        | —       |       | (1,917,747   | )          |
| **Loss from continuing operations before taxes**              |       | (14,404,622  | )           | (11,953,803  | )          | (5,155,690   | )          |
|                                                          |       |         |        |         |       |         |       |
| Loss from discontinued  operations                            |       | —       |        | —       |       | (2,932,179   | )          |
|                                                          |       |         |        |         |       |         |       |
| **Net  loss**                                                 |       | $            | (14,404,622 | )            | $          | (11,953,803  | )          | $ | (8,087,869 | ) |
|                                                          |       |         |        |         |       |         |       |
| Net loss                                                      |       | $            | (14,404,622 | )            | $          | (11,953,803  | )          | $ | (8,087,869 | ) |
| Accretion of Series D 6% convertible preferred stock          |       | (2,041,697   | )           | —       |       | —       |       |
| Preferred stock dividends                                     |       | (778,530     | )           | —       |       | —       |       |
|                                                          |       |         |        |         |       |         |       |
| **Net loss  available to common shareholders**                |       | $            | (17,224,849 | )            | $          | (11,953,803  | )          | $ | (8,087,869 | ) |
|                                                          |       |         |        |         |       |         |       |
| Basic loss per common  share before discontinued operations   |       | $            | (0.51       | )            | $          | (0.62        | )          | $ | (0.63 | ) |
| Basic loss per common share from discontinued  operations     |       | —       |        | —       |       | (0.36        | )          |
|                                                          |       |         |        |         |       |         |       |
| **Basic  loss per common share**                              |       | $            | (0.51       | )            | $          | (0.62        | )          | $ | (0.99 | ) |
|                                                          |       |         |        |         |       |         |       |
| Diluted loss per common  share before discontinued operations |       | $            | (0.51       | )            | $          | (0.62        | )          | $ | (0.63 | ) |
| Diluted loss per common share from discontinued  operations   |       | —       |        | —       |       | (0.36        | )          |
|                                                          |       |         |        |         |       |         |       |
| **Diluted  loss per common share**                            |       | $            | (0.51       | )            | $          | (0.62        | )          | $ | (0.99 | ) |
| ** **                                                    |       |         |        |         |       |         |       |
| **Weighted-average  shares used to compute:**                 | ** ** | ** **   | ** **  | ** **   | ** ** | ** **   | ** ** |
| Basic loss per share                                          |       | 33,926,573   |        | 19,357,939   |       | 8,185,153    |       |
| Diluted loss per share                                        |       | 33,926,573   |        | 19,357,939   |       | 8,185,153    |       |

 

The accompanying Notes are an integral part of thesefinancial statements. 

24

----

FORCE PROTECTION, INC. AND SUBSIDIARYCONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY For the Years Ended December 31, 2005, 2004 and 2003

|                                                     | ** ** | **Series B  Preferred Stock** | ** ** | **Series C  Preferred Stock** | ** ** | **Common Stock** | ** ** | ** **                             | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------|------------|----------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|------------|------------|
| ** **                                          | ** ** | **Shares**                              | ** ** | **Par    $.001  **  | ** ** | **Shares**            | ** ** | **Par    $.001  ** | ** ** | **Shares** | ** ** | **Par  $.001** | ** ** | **Warrants** | ** ** | **BCF**    | ** ** | **Additional  Paid-in Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Total** | ** ** |
| **Balance,  December 31, 2002**                     |       | 10                                      |       | $                                       | —     |                  | 32         |                                   | $          | —     |       | 5,963,202      |       | $            | 5,963      |       | $          | 2,210,577 |   | $ | 199,598 |   | $ | 14,483,478 |   | $ | (16,096,166 | ) | $ | 803,450 |   |
| ** **                                          |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Issuance of  common stock for cash                  |       |                                    |       |                                    |       |                  |       |                                   |       | 2,429,272  |       | 2,429          |       | 2,652,188    |       |       |       | 312,083 |   | — |   | 2,966,700 |   |
|                                                |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Issuance of  common stock for conversion of debt    |       |                                    |       |                                    |       |                  |       |                                   |       | 264,804    |       | 265            |       | —       |       |       |       | 377,185 |   | — |   | 377,450 |   |
|                                                |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Issuance of  common stock for services              |       |                                    |       |                                    |       |                  |       |                                   |       | 738,791    |       | 740            |       |         |       |       |       | 1,232,169 |   |   |   | 1,232,909 |   |
|                                                |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Issuance of  common stock for settlement            |       |                                    |       |                                    |       |                  |       |                                   |       | 139,441    |       | 139            |       | —       |       |       |       | 133,724 |   | — |   | 133,863 |   |
|                                                |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Issuance of  common stock for compensation          |       |                                    |       |                                    |       |                  |       |                                   |       | 166,065    |       | 166            |       |         |       |       |       | 272,856 |   |   |   | 273,022 |   |
|                                                |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Issuance of  common stock for director compensation |       |                                    |       |                                    |       |                  |       |                                   |       | 75,000     |       | 75             |       |         |       |       |       | 130,425 |   |   |   | 130,500 |   |
|                                                |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Issuance of  common stock for financing placement   |       |                                    |       |                                    |       |                  |       |                                   |       | 109,279    |       | 109            |       |         |       |       |       | (109 | ) |   |   | — |   |
|                                                |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Revaluation of  TSG acquisition                     |       |                                    |       |                                    |       |                  |       |                                   |       | —     |       | —         |       |         |       |       |       | 720,000 |   |   |   | 720,000 |   |
|                                                |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Issuance of  preferred stock for cash               |       | —                                  |       | —                                  |       | 14                    |       | —                                 |       |       |       |           |       |         |       |       |       | 140,000 |   |   |   | 140,000 |   |
|                                                |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Issuance of  preferred stock for conversion of debt |       | —                                  |       | —                                  |       | 28                    |       | —                                 |       | —     |       | —         |       | —       |       |       |       | 280,000 |   | — |   | 280,000 |   |
|                                                |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Issuance of  preferred stock for interest           |       | —                                  |       | —                                  |       | 1                     |       | —                                 |       | —     |       | —         |       | —       |       |       |       | 9,064 |   | — |   | 9,064 |   |
|                                                |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Issuance of  preferred stock for services           |       | —                                  |       | —                                  |       | 50                    |       | —                                 |       | —     |       | —         |       | —       |       |       |       | 661,720 |   | — |   | 661,720 |   |
|                                                |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Issuance of  preferred stock for compensation       |       | —                                  |       | —                                  |       | 12                    |       | —                                 |       |       |       |           |       |         |       |       |       | 103,596 |   |   |   | 103,596 |   |
|                                                |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Redemption of  preferred stock                      |       | —                                  |       | —                                  |       | (5                    | )          | —                                 |       | —     |       | —         |       | —       |       |       |       | (50,000 | ) | — |   | (50,000 | ) |
|                                                |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Change in  Beneficial Conversion Feature            |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       | 83,292     |       |   |   | (83,292 | ) | — |   |
|                                                |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Common shares to  be cancelled                      |       |                                    |       |                                    |       |                  |       |                                   |       | 304,167    |       | 304            |       |         |       |       |       | (304 | ) |   |   | — |   |
|                                                |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Net loss                                            |       |                                    |       |                                    |       |                  |       |                                   |       | —     |       | —         |       |         |       |       |       |   |   | (8,087,869 | ) | (8,087,869 | ) |
|                                                |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| **Balance, December 31, 2003**                      |       | 10                                      |       | $                                       | —     |                  | 132        |                                   | $          | —     |       | 10,190,021     |       | $            | 10,190     |       | $          | 4,862,765 |   | $ | 282,890 |   | $ | 18,805,887 |   | $ | (24,267,327 | ) | $ | (305,595 | ) |

 

 

25

----

 

|                                                                        | ** ** | **Series B  Preferred Stock** | ** ** | **Series C  Preferred Stock** | ** ** | **Common Stock** | ** ** | ** **                             | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------|------------|----------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|------------|------------|
| ** **                                                             | ** ** | **Shares**                              | ** ** | **Par    $.001  **  | ** ** | **Shares**            | ** ** | **Par    $.001  ** | ** ** | **Shares** | ** ** | **Par  $.001** | ** ** | **Warrants** | ** ** | **BCF**    | ** ** | **Additional  Paid-in Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Total** | ** ** |
| **Balance,  December 31, 2003**                                        |       | 10                                      |       | $                                       | —     |                  | 132        |                                   | $          | —     |       | 10,190,021     |       | $            | 10,190     |       | $          | 4,862,765 |   | $ | 282,890 |   | $ | 18,805,887 |   | $ | (24,267,327 | ) | $ | (305,595 | ) |
| ** **                                                             |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Issuance of  common stock for cash                                     |       |                                    |       |                                    |       |                  |       |                                   |       | 2,982,717  |       | 2,983          |       |         |       |       |       | 7,200,234 |   | — |   | 7,203,217 |   |
|                                                                   |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Issuance of  common stock for third party services                     |       |                                    |       |                                    |       |                  |       |                                   |       | 163,501    |       | 163            |       |         |       |       |       | 496,793 |   | — |   | 496,956 |   |
|                                                                   |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Issuance of  common stock for compensation - directors & employees |       |                                    |       |                                    |       |                  |       |                                   |       | 616,682    |       | 617            |       |         |       |       |       | 1,431,187 |   |   |   | 1,431,804 |   |
|                                                                   |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Issuance of  common stock for cash (Warrant net change)                |       |                                    |       |                                    |       |                  |       |                                   |       | 2,757,618  |       | 2,758          |       | (2,259,965   | )          |       |       | 6,352,054 |   |   |   | 4,094,847 |   |
|                                                                   |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Cancellation of  common shares                                         |       |                                    |       |                                    |       |                  |       |                                   |       | (304,167   | )          | (304           | )          |         |       |       |       | 304 |   |   |   | — |   |
|                                                                   |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Issuance of  common shares for debt                                    |       |                                    |       |                                    |       |                  |       |                                   |       | 20,421     |       | 20             |       |         |       |       |       | 124,956 |   |   |   | 124,976 |   |
|                                                                   |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Conversion of  preferred stock to common stock                         |       | (1                                      | )          |                                    |       | (80                   | )          |                                   |       | 2,931,145  |       | 2,931          |       |         |       |       |       | (2,931 | ) | — |   | — |   |
|                                                                   |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Conversion  between preferred Series B and Series C                    |       | 11                                      |       |                                    |       | (105                  | )          |                                   |       | —     |       | —         |       |         |       |       |       | — |   | — |   | — |   |
|                                                                   |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Change in  Beneficial Conversion Feature                               |       | —                                  |       |                                    |       | —                |       |                                   |       |       |       |           |       |         |       | 18,819,416 |       |   |   | (18,819,416 | ) | — |   |
|                                                                   |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Issuance of  preferred stock for cash                                  |       | —                                  |       |                                    |       | 1                     |       | —                                 |       | —     |       | —         |       |         |       |       |       | 10,000 |   | — |   | 10,000 |   |
|                                                                   |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Issuance of  preferred stock for compensation                          |       | —                                  |       |                                    |       | 38                    |       |                                   |       | —     |       | —         |       |         |       |       |       | 1,316,081 |   | — |   | 1,316,081 |   |
|                                                                   |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Issuance of preferred  stock for conversion of debt                    |       | —                                  |       |                                    |       | 20                    |       |                                   |       | —     |       | —         |       |         |       |       |       | 200,000 |   | — |   | 200,000 |   |
|                                                                   |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Rescission and  redemption of preferred stock                          |       | —                                  |       |                                    |       | (6                    | )          |                                   |       | —     |       | —         |       | —       |       |       |       | (60,000 | ) | — |   | (60,000 | ) |
|                                                                   |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| Net loss                                                               |       | —                                  |       |                                    |       | —                |       |                                   |       | —     |       | —         |       |         |       |       |       |   |   | (11,953,803 | ) | (11,953,803 | ) |
|                                                                   |       |                                    |       |                                    |       |                  |       |                                   |       |       |       |           |       |         |       |       |       |   |   |   |   |   |   |
| **Balance, December 31, 2004**                                         |       | 20                                      |       | $                                       | —     |                  | —     |                                   | $          | —     |       | 19,357,938     |       | $            | 19,358     |       | $          | 2,602,800 |   | $ | 19,102,306 |   | $ | 35,874,565 |   | $ | (55,040,546 | ) | $ | 2,558,483 |   |

 

 

26

----

 
| ** **                                                  | ** ** | **Series B  Preferred Stock** | ** ** | **Series C  Preferred Stock** | ** ** | **Common Stock** | ** ** | ** **     | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **  | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------|------------|----------------|------------|------------|------------|----------------|------------|--------------|------------|-------------|------------|
| ** **                                                  | ** ** | **Shares**                              | ** ** | **Par  $.001**                          | ** ** | **Shares**            | ** ** | **Par  $.001** | ** ** | **Shares** | ** ** | **Par  $.001** | ** ** | **Warrants** | ** ** | **BCF**     | ** ** | **Additional  Paid-in Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Total** | ** ** |
| **Balance, December 31, 2004**                              |       | 20                                      |       | $                                       | —     |                  | —     |           | $          | —     |       | 19,357,938     |       | $            | 19,358     |        | $          | 2,602,800 |   | $ | 19,102,306 |   | $ | 35,874,565 |   | $ | (55,040,546 | ) | $ | 2,558,483 |   |
| Issuance of common stock  for cash                          |       |                                    |       |                                    |       |                  |       |           |       | 185,321    |       | 185            |       | —       |       |        |       | 513,806 |   | — |   | 513,991 |   |
| Issuance of common stock  for compensation                  |       |                                    |       |                                    |       |                  |       |           |       | 51,616     |       | 52             |       |         |       |        |       | 125,357 |   | — |   | 125,409 |   |
| Issuance of common stock  for settlement agreements         |       |                                    |       |                                    |       |                  |       |           |       | 53,467     |       | 53             |       |         |       |        |       | 144,842 |   | — |   | 144,895 |   |
| Issuance of common stock  for interest                      |       |                                    |       |                                    |       |                  |       |           |       | 14,876     |       | 15             |       |         |       |        |       | 20,626 |   | — |   | 20,641 |   |
| Issuance of common stock  for Series D dividends            |       |                                    |       |                                    |       |                  |       |           |       | 281,697    |       | 282            |       |         |       |        |       | 418,148 |   | (418,430 | ) | — |   |
| Issuance of common stock  to round up post split shares     |       |                                    |       |                                    |       |                  |       |           |       | 3,079      |       | 3              |       |         |       |        |       | 6,075 |   | — |   | 6,078 |   |
| Issuance of common stock  for cash-warrants                 |       |                                    |       |                                    |       |                  |       |           |       | 114,376    |       | 114            |       | (122,903     | )          |        |       | 334,418 |   | — |   | 211,629 |   |
| Warrant issued for  Series D placement                      |       | —                                  |       | —                                  |       | —                |       | —         |       |       |       |           |       | 200,071      |       |        |       | (200,071 | ) |   |   | — |   |
| Conversion of Series D  preferred stock to common stock     |       | —                                  |       | —                                  |       | —                |       | —         |       | 1,331,429  |       | 1,331          |       |         |       |        |       | 1,440,694 |   |   |   | 1,442,025 |   |
| Accretion of Series D  preferred stock                      |       | —                                  |       | —                                  |       | —                |       | —         |       |       |       |           |       |         |       |        |       | (2,041,697 | ) |   |   | (2,041,697 | ) |
| Reclassification of  Series D warrants from liability       |       | —                                  |       | —                                  |       | —                |       | —         |       |       |       |           |       | 5,173,409    |       |        |       |   |   |   |   | 5,173,409 |   |
| Cash dividends for  Series D                                |       | —                                  |       | —                                  |       | —                |       | —         |       |       |       |           |       |         |       |        |       |   |   | (100,020 | ) | (100,020 | ) |
| Dividends for  Series D—accrued                   |       |                                    |       |                                    |       |                  |       |           |       |       |       |           |       |         |       |        |       |   |   | (260,080 | ) | (260,080 | ) |
| Conversion of Series B  preferred stock to common stock     |       | (20                                     | )          | —                                  |       | —                |       | —         |       | 14,803,750 |       | 14,804         |       | —       |       |        |       | (14,804 | ) | — |   | — |   |
| Change in Beneficial  Conversion Feature                    |       | —                                  |       | —                                  |       | —                |       | —         |       |       |       |           |       |         |       | (19,102,306 | )          |   |   | 19,102,306 |   | — |   |
| Common share grants  cancelled                              |       | —                                  |       | —                                  |       | —                |       | —         |       | (83,333    | )          | (83            | )          |         |       |        |       | (209,916 | ) |   |   | (209,999 | ) |
| Stock based compensation  (SFAS 123)                        |       |                                    |       |                                    |       |                  |       |           |       |       |       |           |       |         |       |        |       |   |   | 92,671 |   | 92,671 |   |
| Warrants-net (expired  & issued) not including Series D |       | —                                  |       | —                                  |       | —                |       | —         |       |       |       |           |       | (2,072,425   | )          |        |       | 2,302,850 |   |   |   | 230,425 |   |
| Net loss                                                    |       | —                                  |       | —                                  |       | —                |       | —         |       | —     |       | —         |       |         |       |        |       | — |   | (14,404,621 | ) | (14,404,621 | ) |
| **Balance, December 31, 2005**                              |       | —                                  |       | $                                       | —     |                  | —     |           | $          | —     |       | 36,114,216     |       | $            | 36,114     |        | $          | 5,780,952 |   | $ | — |   | $ | 38,714,893 |   | $ | (51,028,720 | ) | $ | (6,496,761 | ) |

 

27

----

**FORCE PROTECTION, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2005,2004 AND 2003**
| ** **                                                                                     | ** ** | **2005**     | ** ** | **2004**     | ** ** | **2003**     | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
| ** **                                                                                     | ** ** | **Restated** | ** ** | **Restated** | ** ** | **Restated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                                      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** |
| Net loss                                                                                       |       | (14,404,622  | )          | (11,953,803  | )          | (8,087,869   | )          |
| Loss from  discontinued operations                                                             |       | —       |       | —       |       | 2,932,179    |       |
| Loss from  continuing operations                                                               |       | (14,404,622  | )          | (11,953,803  | )          | (5,155,690   | )          |
| **Adjustments  to reconcile net loss to net cash (used in) provided by operating activities:** | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** |
| Depreciation and amortization                                                                  |       | 386,152      |       | 207,271      |       | 104,334      |       |
| Realized gain on derivative liability                                                          |       | (2,830,791   | )          | —       |       | —       |       |
| Impairment loss – goodwill                                                                |       | —       |       | —       |       | 1,634,873    |       |
| Stock issued for services and compensation                                                     |       | (84,590      | )          | 3,244,841    |       | 1,636,931    |       |
| Stock issued for settlement                                                                    |       | 144,895      |       | —       |       | 133,863      |       |
| Stock based compensation                                                                       |       | 92,671       |       | —       |       | —       |       |
| Stock issued for interest                                                                      |       | 20,641       |       | —       |       | —       |       |
| Change in assets and liabilities:                                                              |       |         |       |         |       |         |       |
| Decrease (increase) in accounts receivable                                                     |       | (2,612,385   | )          | (909,041     | )          | 21,310       |       |
| Decrease (increase) in inventories                                                             |       | (23,456,863  | )          | (8,202,576   | )          | (640,874     | )          |
| Decrease (increase) in other current assets                                                    |       | (25,279      | )          | (181,910     | )          | 86,874       |       |
| Increase (decrease) in accounts payable                                                        |       | 12,821,492   |       | 1,152,297    |       | (197,168     | )          |
| Increase (decrease) in other accrued liabilities                                               |       | 543,554      |       | 1,603,942    |       | (47,367      | )          |
| Increase (decrease) in contract liabilities                                                    |       | 956,601      |       | 549,077      |       | (244,563     | )          |
| Deferred Revenue                                                                               |       | 9,953,205    |       | 2,436,541    |       | 209,175      |       |
| **Net  cash used in operating activities**                                                     |       | (18,495,319  | )          | (12,053,361  | )          | (2,458,802   | )          |
| ** **                                                                                     |       |         |       |         |       |         |       |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                                       | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** |
| Purchase of  property and equipment                                                            |       | (1,511,337   | )          | (935,197     | )          | (76,878      | )          |
| Proceeds from  sale of assets                                                                  |       | 62,721       |       | —       |       | —       |       |
| **Net  cash used in investing activities**                                                     |       | (1,448,566   | )          | (935,197     | )          | (76,878      | )          |
| ** **                                                                                     |       |         |       |         |       |         |       |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** |
| Proceeds from  convertible debt—                                                          |       | —       |       | —       |       | —       |       |
| Issuance of  common stock, net                                                                 |       | 513,991      |       | 11,298,064   |       | 2,186,350    |       |
| Issuance of  Series D preferred stock, net                                                |       | 15,305,965   |       | —       |       | —       |       |
| Issuance of  Series C preferred stock, net                                                |       | —       |       | —       |       | 140,000      |       |
| Redemption of  preferred stock                                                                 |       | —       |       | (50,000      | )          | (50,000      | )          |
| Preferred Stock  Dividends paid                                                                |       | (100,020     | )          | —       |       | —       |       |
| Issuance of  common stock for cash - warrants                                                  |       | 211,629      |       | —       |       | —       |       |
| Proceeds from  (Payments on) loans, net                                                        |       | 7,139,025    |       | (175,187     | )          | 479,355      |       |
| Proceeds from  (Payments on) Line of Credit, net                                               |       | (4,000,000   | )          | 3,823,039    |       | (50,453      | )          |
| Proceeds from  (Payments on) long term liabilities                                             |       | (110,732     | )          | 78,271       |       | (35,271      | )          |
| Payments on  Capitalized lease                                                                 |       | (62,870      | )          | —       |       | —       |       |
| **Net  cash provided by Financing Activities**                                                 |       | 18,896,988   |       | 14,974,187   |       | 2,669,981    |       |
| **Net  increase (decrease) in cash**                                                           |       | (1,046,897   | )          | 1,985,629    |       | 134,301      |       |
| ** **                                                                                     |       |         |       |         |       |         |       |
| **CASH—beginning of period**                                                              |       | $            | 2,264,406  |         | $          | 278,777      |       | $ | 144,476 |   |
| **CASH—end  of period**                                                                   |       | $            | 1,217,509  |         | $          | 2,264,406    |       | $ | 278,777 |   |
|                                                                                           |       |         |       |         |       |         |       |
| Supplemental cashflow information                                                              |       |         |       |         |       |         |       |
| Interest Paid                                                                                  |       | $            | 1,010,160  |         | $          | 454,512      |       | $ | 38,726 |   |
| Taxes Paid                                                                                     |       | —       |       | —       |       | —       |       |

 

The accompanyingNotes are an integral part of these financial statements. 

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**FORCEPROTECTION, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

These notes are anintegral part of the Company’s financial statements set forth above.

**NOTE1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (RESTATED)**

**2005,2004 AND 2003 RESTATEMENT**

As discussed inthe explanatory note to this Form 10-K/A and in Note 1 to the Company’sfinancial statements included herein, the Company is restating its financialstatements and other financial information for the years ended 2005, 2004 and2003, and financial information for each of the quarters in the years 2005,2004 and 2003.  The restatement adjuststhe Company’s accounting for preferred stock and warrants issued to investors,accounting for stock-based compensation to employees and non-employees andaccounting for rent expense on a straight-line basis. 

The following tables set forth the effects of theerror in accounting for the valuation of preferred stock and warrants issued toinvestors, accounting for stock-based compensation to employees and accountingfor rent expense on a straight-line basis.** **
|                                                      | ** ** | **(Increase)/Decrease in net loss** | ** **  |
|------------------------------------------------------|------------|----------------------------------------------------|-------------|
| ** **                                           | ** ** | **2005**                                           | ** **  | **2004** | ** ** | **2003** | ** ** |
|                                                 |       |                                               |        |   |   |   |   |
| Total adjustment                                     |       | $                                                  | 2,161,046   |   | $ | (1,707,970 | ) | $ | (2,766,245 | ) |
|                                                 |       |                                               |        |   |   |   |   |
| Previously reported net  loss                        |       | $                                                  | (16,565,668 | ) | $ | (10,245,833 | ) | $ | (5,321,624 | ) |
|                                                 |       |                                               |        |   |   |   |   |
| Percent variation from previously  reported net loss |       | 13.0                                               | %           | -16.7 | % | -52.0 | % |

 
|                                                     | ** ** | **(Increase)/decrease in net loss** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **2005**                                           | ** ** |
| **Quarter**                                         | ** ** | **4th Qtr.**                                  | ** ** | **3rd Qtr.** | ** ** | **2nd Qtr.** | ** ** | **1st Qtr.** | ** ** |
|                                                |       |                                               |       |   |   |   |   |   |   |
| Total adjustment                                    |       | $                                                  | (46,309    | ) | $ | (61,272 | ) | $ | (777,977 | ) | $ | 3,046,604 |   |
| Previously reported net income (loss)               |       | $                                                  | (7,108,180 | ) | $ | (5,605,211 | ) | $ | 130,633 |   | $ | (3,982,910 | ) |
| Percent variation from previously reported net loss |       | 0.7                                                | %          | 1.1 | % | -595.5 | % | -76.5 | % |

 
|                                                     | ** ** | **(Increase)/decrease in net loss** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **2004**                                           | ** ** |
| **Quarter**                                         | ** ** | **4th Qtr.**                                  | ** ** | **3rd Qtr.** | ** ** | **2nd Qtr.** | ** ** | **1st Qtr.** | ** ** |
|                                                |       |                                               |       |   |   |   |   |   |   |
| Total adjustment                                    |       | $                                                  | (375,754   | ) | $ | (649,028 | ) | $ | 34,159 |   | $ | (717,347 | ) |
| Previously reported net loss                        |       | $                                                  | (3,854,612 | ) | $ | (3,236,792 | ) | $ | (1,957,990 | ) | $ | (1,196,439 | ) |
| Percent variation from previously reported net loss |       | 9.7                                                | %          | 20.1 | % | -1.7 | % | 60.0 | % |

 
|                                                     | ** ** | **(Increase)/decrease in net loss** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **2003**                                           | ** ** |
| **Quarter**                                         | ** ** | **4th Qtr.**                                  | ** ** | **3rd Qtr.** | ** ** | **2nd Qtr.** | ** ** | **1st Qtr.** | ** ** |
|                                                |       |                                               |       |   |   |   |   |   |   |
| Total adjustment                                    |       | $                                                  | (720,718   | ) | $ | (254,946 | ) | $ | (420,309 | ) | $ | (1,370,272 | ) |
| Previously reported net loss                        |       | $                                                  | (1,748,243 | ) | $ | 183,246 |   | $ | (1,972,958 | ) | $ | (1,783,669 | ) |
| Percent variation from previously reported net loss |       | 41.2                                               | %          | -139.1 | % | 21.3 | % | 76.8 | % |

 

**Nature of the Business**

ForceProtection, Inc. and subsidiaries (the “Company”) designs, manufacturesand markets blast and ballastics armored vehicles for saleto military customers.

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**Principles of Consolidation**

The consolidatedfinancial statements include the accounts of Force Protection, Inc., andits two wholly owned subsidiaries, Force ProtectionIndustries, Inc. (formerly Technical Solutions Group, Inc.) and TSGInternational, Inc. All inter-company balances and transactions areeliminated in consolidation.

**General Statement**

The Securities andExchange Commission has issued Financial Reporting release No. 60,“Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” orFRR 60, suggesting companies provide additional disclosure and commentary ontheir most critical accounting policies. In FRR 60, the SEC defined the mostcritical accounting policies as the ones that are mostimportant to the portrayal of a company’s financial condition and operatingresults, and require management to make its most difficult andsubjective judgments, often as a result of the need to make estimates of mattersthat are inherently uncertain. The methods, estimates and judgments the Companyuses in applying these most critical accounting policies have a significantimpact on the results the Company reports in its financial statements.

We believe thefollowing critical accounting policies and procedures, among others, affect ourmore significant judgments and estimates used in thepreparation of our consolidated financial statements:

·       Revenue recognition;

·       Inventory cost andAssociated Reserves; and

·       Allocation ofdirect and indirect cost of sales.

·       Valuation of derivativeinstruments

·       Valuation of preferredstock and common stock issuances in lieu of cash compensation

**RevenueRecognition**

The Company’s revenue isderived principally from the sale of its vehicles and associated spare partsand training services. Revenue from product sales and spare part sales, net ofan allowance for contractual adjustments, is recognized when the products orspare parts are delivered to and “formally” accepted by the customer. TheCompany defines “formal acceptance” as taking place when a representative ofthe United States government signs the United States Form DD250 entitled“Material Inspection and Receiving Report” which under the Federal AcquisitionRegulations signifies contractual inspection and acceptance of the workperformed by the contractor.  It alsoacts as the contractual invoice creating payment liability on the United StatesGovernment.  In accordance with standardindustry practice, there is a representative from the United States DefenseContractor Manufacturing Agency (“DCMA”) acting as a contractual representativeof the United States Government present at the Company’s facilities.  This DCMA representative inspects eachvehicle as it is delivered by the Company and upon confirmation of thevehicle’s conformity with the contractual specifications the inspector signsthe Form DD250 and formally accepts delivery of the vehicle.  The Company only recognizes revenues arising fromits U.S. Government contracts upon execution of the Form DD250 by the DCMAinspector. Under some of the Company’s U.S. Government contracts, it receivesperformance based payments based on completion of specific milestonesstipulated under the contract (for example, delivery of raw material to ourLadson facility). These payments are recorded as “deferred revenue” and carriedon the Company’s balance sheet as until the final delivery of the products andformal acceptance by the U.S. Government pursuant to the Form DD250. Uponacceptance of the products and the execution of the Form DD250, the Companyrecognizes the full sale price of the product as revenue.

Revenues from servicesprovided are recorded in accordance with specific contractual terms.  Services have historically consisted of the Companyproviding on-site personnel on an as-needed basis in a timely manner, and havegenerally been provided in foreign locations.

The Companynegotiates contracts with its customers which may include revenue arrangementswith multiple deliverables, as outlined by Emerging Issues Task Force No. 00-21(EITF 00-21).  The Company’s accountingpolicies are defined such that each deliverable under a contract is accountedfor separately.  Historically, the Companyhas negotiated and signed contracts with its customers which outline thecontract amount and specific terms and conditions associated with eachdeliverable. Allowance for contractual adjustments is recorded as a reductionto revenue. 

**Allowance forContractual Adjustments**

The Company’scontracts with the U.S. Government are negotiated as a “sole source” or “opencompetition” bid process.  A sole sourceprocess is one in which the Company is the sole bidder for the contract.  An open competition could involve variousbidders.  Once a bid is accepted, theU.S. Government expects work to commence immediately.  An open competition results in a finalagreed-upon contract price which the U.S. Government has agreed to.  A sole source process results in anagreed-upon contract with the U.S. Government, subject to an adjustment processat a later date, termed the “definitization process.”  The definitization process commences upondelivery of a product, whereby the U.S. Government completes a detailed reviewof the Company’s costs involved in the manufacturing and delivery process.  The U.S. Government and the Company then workto  

30

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determine anadequate and fair final contract price. As a result of the potential adjustments related to the definizationprocess, the Company maintains an allowance for contractual adjustmentsaccount.  This account is reviewed on amonthly basis to determine adequate adjustments, if necessary.  The allowance is maintained and deemedadequate based on the analysis of historical data and calculation of pro-ratapercentages of current contracts in place, which remain subject to thedefinitization process. 

The Company does notmaintain an allowance for doubtful accounts. The Company’s significant sales for 2005, 2004, and 2003 involvedcontracts signed with the U.S. Government. The Company does not believe an allowance for doubtful accounts isnecessary due to the credit-worthiness of the U.S. Government.

Historically, the Companyhas not encountered sales returns.  TheCompany does not anticipate sales returns in the future.

**Research andDevelopment**

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

**Cash Equivalents**

For purposes of reportingcash flows, the Company considers all highlyliquid debt instruments purchased with maturity of three months or less to becash equivalents.

**Inventories**

Inventories arestated at the lower of cost or market. The cost is determined under thefirst-in-first-out method base (FIFO) valuation method.  An allowance for excess or obsolete inventoryis maintained by the Company.  TheCompany determines an appropriate balance in this account based on historicaldata and specific identification of certain inventory items. 

**Property, Plantand Equipment**

Property and equipmentare stated at cost or at the value of the operating agreement. The Companycapitalizes additions and improvements which include all material, labor andengineering cost to design, install or improve the asset. Routine repairs andmaintenance are expensed as incurred. Depreciation and amortization arecomputed using the straight-line method over the following estimated usefullives:
| Building and improvements |   | 20 years |   |
|---------------------------|--------|----------|--------|
| Furniture and  fixtures   |   | 3 years  |   |
| Machinery and  equipment  |   | 7 years  |   |
| Tooling and molds         |   | 7 years  |   |
| Vehicles                  |   | 5 years  |   |

 

**Impairment ofLong-Lived Assets**

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

**Goodwill**

UnderSFAS No. 142, Goodwill and other Intangible Assets, all goodwillamortization ceased effective January 1, 2002. Rather, goodwill is nowsubject to only impairment reviews. A fair-value based test is applied at thereporting level. This test requires various judgments and estimates. A goodwillimpairment loss will be recorded for any goodwill that is determined to beimpaired. Goodwill is tested for impairment at least annually.

The Company acquiredGoodwill, which represents the excess of purchase price over fair value netassets, in the acquisition of Technical Solutions Group, Inc. inJune 2002. The Company follows SFAS 142, Goodwill and Intangible Assets,which requires the Company to test for potential impairment annually. When thecarrying value exceeds fair value, the impairment is the difference between thecarrying value of goodwill and the implied value. The implied value of goodwillis the difference between the fair value for the unit as a whole and the valueof individual assets and liabilities using an “as-if” purchase price.

**Income Taxes**

The Company usesthe asset and liability method of accounting for income taxes. The asset andliability method accounts for deferred income taxes by applying enactedstatutory rates in effect for periods in which the difference between the bookvalue and the tax bases of assets and liabilities are scheduled to reverse. Theresulting deferred tax asset or liability is adjusted to reflect changes in taxlaws or rates. Because the Company has incurred losses from operations, nobenefit is realized for the tax effect of the net operating loss carry-forwarddue to the uncertainty of its realization. 

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**Stock-Based Compensation**

The Company applied therecognition and measurement principles of Accounting Principles Board OpinionNo. 25,* Accounting for Stock Issued to Employees* , and relatedInterpretations in accounting for those plans through June 30, 2005.

In December 2004,FASB issued Statement No. 123(R), *Share-BasedPayment,* which establishes accounting standards for transactions inwhich an entity receives employee services in exchange for (a) equityinstruments of the entity or (b) liabilities that are based on the fairvalue of the entity’s equity instruments or that may be settled by the issuanceof equity instruments. Effective on July 1, 2005,  the Company adopted SFAS 123(R), whichrequires the Company to recognize the grant-date fair value of stock optionsand equity based compensation issued to employees in the statement of operations.The statement also requires that such transactions be accounted for using thefair-value-based method, thereby eliminating use of the intrinsic method ofaccounting in APB No. 25, *Accountingfor Stock Issued to Employees,*which was permitted under SFAS 123,as originally issued.

***Loss per Share***

The Company utilizes SFASNo. 128, “Earnings per Share” to calculate gain/loss per share. Basic gain/lossper 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 not addedto the denominator in the calculation. Where there is a loss, the inclusion ofadditional common shares is anti-dilutive (since the increased number of sharesreduces the per share loss available to common stock holders). For all periods,the Company has experienced a net loss, and thus common stock equivalents havebeen excluded from the calculation of diluted loss per share.

**Estimates**

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

**Reclassifications**

Certain reclassificationsto the Company’s balance sheet and income statement have been made in 2005, inorder for the 2004 and 2003 financial statements to conform to the presentationof these financial statements.  Thesereclassifications did not impact the Company’s net loss for the years endedDecember 31, 2005, 2004 and 2003, respectively.

**Recent AccountingPronouncements**

In November 2004,the FASB issued Statement No. 151, *InventoryCosts*, to amend the guidance in Chapter 4, *Inventory Pricing*, of the FASB AccountingResearch Bulletin No. 43, *Restatementand Revision of Accounting Research Bulletins*, which will becomeeffective for the Company in fiscal year 2006. Statement No. 151 clarifiesthe accounting 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. The Companyis currently following Statement No. 151 and does not believe thatStatement No. 151 will have a significant impact on its financialcondition and results of operations.

In March 2005, the FASBissued FASB Interpretation No. 47, “Accounting for Conditional AssetRetirement Obligations” (“FIN 47”). FIN 47 provides guidance relatingto the identification of and financial reporting for legal obligations toperform an asset retirement activity. The Interpretation requires recognitionof a liability for the fair value of a conditional asset retirement obligationwhen incurred if the liability’s fair value can be reasonably estimated.FIN 47 also defines when an entity would have sufficient information toreasonably estimate the fair value of an asset retirement obligation. Theprovision is effective no later than the end of fiscal years ending afterDecember 15, 2005. The Company will adopt FIN 47 beginning the firstquarter of fiscal year 2006 and does not believe the adoption will have amaterial impact on its consolidated financial position or results of operationsor cash flows.

In May 2005, theFASB issued SFAS No. 154, “Accounting Changes and Error Corrections”(“SFAS 154”) which replaces Accounting Principles Board OpinionsNo. 20 “Accounting Changes” and SFAS No. 3, “Reporting AccountingChanges in Interim Financial Statements—An Amendment of APB OpinionNo. 28.” SFAS 154 provides guidance on the accounting for andreporting of accounting changes and error corrections. It establishesretrospective application, or the latest practicable date, as the requiredmethod for reporting a change in accounting principle and the reporting of acorrection of an error. SFAS 154 is effective for accounting changes and acorrection of errors made in fiscal years beginning after December 15,2005 and is required to be  

32

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adopted by theCompany in the first quarter of 2006. The Company is currently evaluating theeffect that the adoption of SFAS 154 will have on its results of operationsand financial condition but does not expect it to have a material impact. 

In June 2005, theEmerging Issues Task Force, or EITF, reached a consensus on Issue 05-6, *Determining the Amortization Period for Leasehold Improvements,*which requires that leasehold improvements acquired in a business combinationor purchased subsequent to the inception of a lease be amortized over thelesser of the useful life of the assets or a term that includes renewals thatare reasonably assured at the date of the business combination or purchase.EITF 05-6 is effective for periods beginning after July 1, 2005. Wedo not expect the provisions of this consensus to have a material impact on thefinancial position, results of operations or cash flows.

**NOTE2—GOING CONCERN**

The Company’s financial statements have been preparedon a going concern basis, which contemplates continuity of operations,realization of assets and liquidation of liabilities in the normal course ofbusiness. The Company had cumulative recurring losses of $50,668,620 as ofDecember 31, 2005 and negative cash flows from operations during the yearending December 31, 2005 of $18,495,319. The ability of the Company to operateas a going concern depends upon its ability to obtain outside sources ofworking capital and/or generate positive cash flow from operations. Managementis aware of these requirements and is undertaking specific measures to addressthese liquidity concerns. Specifically, to increase revenues the Company hasfocused on increasing its production capacity to maximize revenues fromvehicles sales and has continued to expand its integrated logistics supportfunction to meet the increased demand for spare parts and other supportservices. The efforts by the Company in these regards have been dramatic, asthe Company has been able to increase its average monthly vehicle productionfrom four vehicles per month to the current average of 15 vehicles per month,resulting in an annual production increase of 407% from 2004. The Company isalso undertaking to increase its gross profitability by reducing the directcosts to manufacture its products, by focusing on continual improvement ofmanufacturing processes and reducing rework and waste resulting from internalinefficiencies. At the same time, the Company is working to reduce thepercentage of its G&A expenses with respect to revenues through workforcebalancing and cost planning initiatives. The Company anticipates that theseefforts will lead to positive cash flows and profitability during 2006.Finally, to provide additional liquidity, the Company continues to explorevarious asset-based debt financing options, including long term loans,revolving lines of credit and accounts receivable factoring arrangements.Notwithstanding the foregoing, there can be no assurance that the Company willbe successful in obtaining such financing, that it will have sufficient fundsto execute its business plan or that it will generate positive operatingresults. The financial statements do not include any adjustments relating tothe recoverability and classification of asset carrying amounts or the amountand classification of liabilities that might result should the Company beunable to continue as a going concern.

**NOTE3 — CONCENTRATIONS**

The Company’s futureoperations and continued expansion is subject to a significant concentrationrisk.  During the years ended December 31, 2005, 2004 and 2003, theCompany’s revenues from military units of the U.S. Government accounted for100% of total revenues, respectively.  The Company’s accounts receivablefrom military units of the U.S. Government at December 31, 2005, 2004 and 2003amounted to 100% of total accounts receivable, respectively.  However, theCompany currently has a significant backlog and has signed contracts to provideadditional products of significant value to the U.S. Government and its firstinternational customer, the British Ministry of Defense.

**NOTE4 — ACCOUNTS RECEIVABLES “DEFINITIZATION”**

The majority of theCompany’s contracts are with the United States Government and as such they are“public sector” contracts subject to the Federal Acquisition Regulations setout at Title 41 of the United States Code (the “FAR”), and may result eitherfrom competitive bidding or may be awarded as “sole source” contracts “subjectto definitization” as provided under FAR Section 252.217-7027.

Following the award of asole source contract, a central component of the definitization process is thenegotiation and finalization of the contract price between the contractor andthe United States contracting officer. As part of this process, the parties make a mutual determination of thedirect material and labor costs for the work based upon the bill of materialsand other purchasing information and then the parties mutually agree upon“rates” for the indirect labor costs and the General and Administrative costsand upon  a “fee” (or profit).  While the direct material costs and labor canbe established through objective evidence, the “rates” and fee are more subjectiveand are based upon an analysis of multiple factors including historicalperformance data and projected operational factors.  The contractor has the right to submitproposed rates and fee, but these are subject to final review and approval bythe contracting officer, who may insist on using alternate rates and fee.  As provided in section 252.217-7027(c):

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

Finally, althoughboth parties make an effort to definitize the contract as quickly as possible,the process is time consuming and can take months (or even years) tocomplete.  During the definitizationprocess the contractor is required to perform the contract  

33

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

As a result of thepotential adjustments related to the definitization process, the Companymaintains an allowance for contractual adjustments account.  This account is reviewed on a regular basisto determine adequate adjustments, if necessary.  The allowance is evaluated and deemedadequate based on the analysis of historical data and calculation of pro-ratapercentages of current contracts in place, which remain subject to thedefinitization process.

Below is a tabledetailing activity within the allowance for contractual adjustments account forthe years ended December 31, 2005, 2004, and 2003 respectively.
|                         | ** ** | **Year Ended**         | ** ** | **Year Ended**         | ** ** | **Year Ended**         | ** ** |
|-------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **Dec. 31, 2005** | ** ** | **Dec. 31, 2004** | ** ** | **Dec. 31, 2003** | ** ** |
| Beginning  balance      |       | $                           | —     |                        | $          | —                      |       | $ | — |   |
| Additions to  allowance |       | 1,018,051                   |       | —                      |       | —                      |       |
| Reduction to  allowance |       | —                      |       | —                      |       | —                      |       |
| Ending balance          |       | $                           | 1,018,051  |                        | $          | —                      |       | $ | — |   |

 

The Company does notmaintain an allowance for doubtful accounts. The Company’s significant sales for the years ended December 31, 2005,2004 and 2003 involved contracts signed with the U.S. Government.  The Company does not believe an allowance fordoubtful accounts is necessary due to the credit-worthiness of the U.S.Government.

Historically, the Companyhas not encountered sales returns.  TheCompany does not anticipate sales returns in the future.

**NOTE5 — INVESTMENT IN XTREME COMPANIES, INC.**

On June 1, 2003, andmodified on September 15, 2003, the Company sold the asset associated with itsboat business to Rockwell Power Systems, Inc., which subsequently merged withXtreme Companies, Inc, now called Challenger Powerboats, Inc., a public companytraded on the Over the Counter Bulletin Board. As consideration for the sale,the Company received 1/3 of Challenger Powerboats’ outstanding common stock,which was distributed directly to the Company’s common stockshareholders.  Additionally, the Company was to receive 500 shares of ChallengerPowerboats Series A preferred stock.  The Company has been incommunications with Challenger Powerboats but has yet to receive theseshares.  The Company has elected to account for the investment inChallenger Powerboats’ Series A preferred stock under the cost method and hasprovided for a full valuation allowance against the fair market value of theseshares as of December 31, 2005, 2004 and 2003, respectively.
|                                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Challenger Powerboat Inc. Series A preferred stock |       | $        | —     |     | $          | —   |       | $ | — |   |
| Valuation Allowance                                |       | (—  | )          | (—  | )          | (—  | )          |
| Net Investment in Challenger Powerboat Inc.        |       | $        | —     |     | $          | —   |       | $ | — |   |

 

**NOTE6—INVENTORIES**

Property, Plant andEquipment at December 31, 2005, 2004 and 2003 consisted of the following:
|                                          | ** ** | **2005**   | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|------------------------------------------|------------|------------|------------|-----------|------------|-----------|------------|
| Raw materials and supplies               |       | $          | 15,222,503 |      | $          | 5,268,798 |       | $ | — |   |
| Work in process                          |       | 17,762,554 |       | 3,756,921 |       | 827,337   |       |
| Finished Goods                           |       | —     |       | 4,194     |       | —    |       |
| Less: Allowance for surplus and obsolete |       | (498,281   | )          | —    |       | —    |       |
| Inventories, net                         |       | $          | 32,486,776 |      | $          | 9,029,913 |       | $ | 827,337 |   |

 

**NOTE7—PROPERTY AND EQUIPMENT**

Property, Plant andEquipment at December 31, 2005 ,2004 and 2003 consisted of the following:
|                                    | ** ** | **2005**  | ** ** | **2004** | ** ** | **2003**  | ** ** |
|------------------------------------|------------|-----------|------------|----------|------------|-----------|------------|
| Furniture and fixtures             |       | $         | 227,613    |     | $          | 252,608   |       | $ | 61,479 |   |
| Leasehold improvements             |       | 59,928    |       | —   |       | —    |       |
| Machinery and equipment            |       | 2,024,436 |       | 983,955  |       | 307,490   |       |
| Test Equipment                     |       | 16,790    |       | 16,790   |       | —    |       |
| Manuals                            |       | 104,798   |       | 104,798  |       | 64,095    |       |
| Vehicles                           |       | 56,464    |       | 10,110   |       | —    |       |
| Demo vehicles                      |       | 425,845   |       | 192,530  |       | 192,530   |       |
| Less depreciation and amortization |       | (777,171  | )          | (523,797 | )          | (316,526  | )          |
| Net property and equipment         |       | $         | 2,138,703  |     | $          | 1,036,994 |       | $ | 309,068 |   |

 

Depreciationexpense for the years ended December 31, 2005, 2004 and 2003 was $386,152,$207,271 and $104,334 respectively.  

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**NOTE8—COMMITMENTS AND CONTINGENCIES**

**OtherAccrued Liabilities**

The Company’s otheraccrued liabilities include the following:
|                               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003**  | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Compensation and benefits     |       | $        | 1,396,024  |     | $          | 1,195,705 |       | $ | 30,911 |   |
| Dividends on preferred stock  |       | 260,080  |       | —   |       | —    |       |
| Rents liability               |       | 12,039   |       | 124,575  |       | 44,589    |       |
| Shares committed to be issued |       | 212,606  |       | —   |       | —    |       |
| Other                         |       | 17,271   |       | 34,186   |       | —    |       |
|                          |       | $        | 1,898,020  |     | $          | 1,354,466 |       | $ | 75,500 |   |

 

**ContractLiabilities**

The Company’s salescontracts generally include a warranty such that the Company’s products arefree from defects in design, material, and workmanship for a period of 1 yearfrom the acceptance date.  The warrantydoes not apply to any damage or failure to perform caused by the misuse orabuse of the vehicle, combat damage, fair wear and tear items (brake shoes,track pads, wiper blades, etc.), or by the customer’s failure to perform propermaintenance or service on the supplies.

The Company routinelyreviews its exposure for warranty costs and determines warranty and pricingreserves based on historical data and known events.  Below is a table detailing the Company’saccruals for warranty-related costs as of December 31, 2005 and 2004:

Accruals for contractliabilities include the following:
| ** **       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------|------------|----------|------------|----------|------------|----------|------------|
|             |       |     |       |     |       |     |       |
| General warranty |       | $        | 1,686,062  |     | 167,950    |     | 180,384    |   |
| Loss contingency |       | —   |       | 501,331  |       | —   |       |
| Other            |       | —   |       | 60,180   |       | —   |       |
|             |       | $        | 1,686,062  |     | $          | 729,461  |       | $ | 180,384 |   |
|                  |            |          |            |          |            |          |            |  |  |  |

 

**VehicleFees**

The Company isparty to a Memorandum of Understanding with Mechem, a division of Denel PTY, aSouth African company pursuant to which Mechem agreed for a period of fiveyears to work exclusively with the Company and not to cede, dispose or transferto any third party other than the Company any of its technology, IPR or otherproprietary information relating to its armored vehicles systems including, butnot limited to, designs, drawings, full technical specifications, test data,hardware and software designs and technologies, supplier’s list, know-how andall and every piece of information and data relevant to such systems. Inexchange for such exclusivity the Company agreed to pay Mechem a “vehicle fee,”for every Buffalo and Tempest the Company manufactures and sells. The Companyis not obligated to pay a vehicle fee in respect of other vehicles itmanufactures and sells.

The Company is also partyto an agreement with CSIR Defencetek (a division of the Council for Scientificand Industrial Research) a statutory council established in accordance with theLaws of the Republic of South Africa, pursuant to which the Company isobligated to pay the CSIR a similar vehicle fee. The agreement with the CSIRexpires in March 2007.

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

 

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**Table ofContractual Obligations**

The following is a table outlining the Company’sactual and projected significant contractual obligations as of December 31,2005:
|                                          | ** ** | **For the Years Ended** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2006**                               | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Total** | ** ** |
| Operating Lease Commitments              |       | $                                      | 777,092    |   | $ | 831,426 |   | $ | 492,844 |   | $ | 18,305 |   | $ | — |   | $ | 2,119,667 |   |
| Notes Payable – Longview, principal |       | $                                      | 7,500,000  |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 7,500,000 |   |
| Notes Payable – Longview, interest  |       | $                                      | 843,288    |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 843,288 |   |
| Raw Material Purchase Commitments        |       | $                                      | 8,289,132  |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 8,289,132 |   |
| Mechem - Vehicle Fees (1)                |       | Variable                               |       | Variable |   | Variable |   | Variable |   | Variable |   |   |   |
| CSIR – Vehicle Fees (2)             |       | Variable                               |       | Variable |   | $ | — |   | $ | — |   | $ | — |   |   |   |
|                                     |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Total                                    |       | $                                      | 17,409,512 |   | $ | 831,426 |   | $ | 492,844 |   | $ | 18,305 |   | $ | — |   | $ | 18,752,087 |   |

 

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(1) Refer to theMechem vehicle fee agreement detailed above in Footnote 8, Commitments andContingencies, “Vehicle Fees.” 

(2) Refer to theCSIR vehicle fee agreement detailed above in Footnote 8, Commitments andContingencies, “Vehicle Fees.” 

On April 23, 2004 the Company was awarded acontract to deliver 14 Cougar Hardened Engineer Vehicles (“HEV”) to the U.S.Marine Corps under contract M6785404-D-5099. As of December 31, 2004 we had deliveredonly 5 of the Cougar HEV vehicles. On March 8, 2005 the U.S. Marine Corpsexercised its contractual option to purchase an additional 14 HEV vehicles, fora total of twenty-eight vehicles to be delivered by the Company. As of December31, 2005, we had delivered a total of twenty seven HEV vehicles, leaving abacklog for 2006 of one HEV vehicle to be delivered under this contract. TheCougar HEV was a new product when the original contract was signed in 2004 andthe Company did not have experience with the cost of performance for suchvehicle. During 2005, as the Company continued to perform on the HEV contract,the Company experienced certain costs overruns resulting from design changes,material rework and other production inefficiencies inherent in the developmentof a new product. As of December 31, 2005, based on such operating experienceand having completed 96.4% of the vehicles required under the contract theCompany made a determination that it would experience a net loss on the HEVcontract in the approximate amount of $501,331 as a result of suchinefficiencies. This amount was based upon actual costs incurred for themanufacture of the previous vehicles and an estimation of the costs associatedwith the manufacture of the then existing backlog.

 

**Compensationof Executive Officers & Directors**

 

On January 27, 2005,the Company entered into an agreement with Mr. Gordon McGilton to act asits Chief Quality Officer. Under the terms of such agreement, Mr. 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. Mr. McGilton joined the board of directors on April 18, 2005.Mr. McGilton received no compensation for his services as a directorduring 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 of unregisteredcommon stock valued at $12,910.

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. Ervin is to receive compensation of $118,000 per year, plus relocationexpenses of $15,000, plus a grant of unregistered common stock valued at$75,001. Effective January 1, 2005, the annual compensation under suchagreement was increased to $140,000. On January 27, 2005, Mr. Ervinwas appointed by the Board to act as Interim Chief Executive Officer during theCompany’s search for a Chief Executive Officer. Upon the appointment of the newCompany Chief Executive Officer on April 18, 2005, Mr. Ervin ceasedto serve as the Interim Chief Executive Officer but continues to serve asGeneral Counsel and a member of the board of directors. Mr. Ervin receivedno compensation for his services as a director during 2005. OnNovember 14, 2005, the Board appointed Mr. Ervin to serve as theActing Chief Financial Officer following the resignation of the former CFO.

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 15,099 shares of unregistered common stock vesting onNovember 18, 2004 valued at $72,650. Mr. Aguilar’s employment agreement was terminated effectiveJanuary 27, 2005. Mr. Aguilar received no compensation for hisservices as a director during 2005.

On March 31, 2003,the Company entered into an employment agreement with Mr. Frank Kavanaughto act as its Vice President of Business Development. Under the terms of suchagreement, Mr. Kavanaugh is to receive compensation of $180,000 per year.In 

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addition, onDecember 31, 2004, Mr. Kavanaugh received a one time grant of 10Series C shares and 41,667 common shares valued at $460,890.  On May 14, 2005, Mr. Kavanaughresigned from his employment with the Company, but continues to serve on theboard of directors as Chairman. In connection with Mr. Kavanaugh’sresignation, the Company agreed to pay for 24 months of health coverage valuedat $24,178. Mr. Kavanaugh received no compensation for his services as adirector during 2005.

**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 FAR52.216-25, contract awards may be made subject to future “ContractDefinitization” pursuant to which the contractor agrees to negotiate with theGovernment following commencement of the contract work to finalize detailedconditions of the contract, including pricing, scheduling and other applicablerequirements.  As part of suchnegotiations, the contractor is subject to audit by the U.S. Defense ContractAudit Agency (“DCAA”) of its direct material and labor costs, manufacturingoverhead and margin. Based on such audit and the negotiations with theGovernment, the final “definitized” contract price may be less than the amountoriginally established (see additional discussions within Footnote 1 andFootnote 4).

**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 datedMarch 28, 2003. The complaint alleges damages of at least $400,000 infees, plus costs and interest.

**NOTE9—DEFERRED REVENUE**

The Company onlyrecognizes revenue from the sales of its vehicles upon formal acceptance by itscustomers. However, the Company does receive performance based payments inaccordance with agreed milestones under some of its government contracts. TheCompany records such performance based payments as deferred revenue and carriesthem on its balance sheet until formal acceptance by the customer. As ofDecember 31, 2005, 2004 and 2003 the Company had $12,598,921, $2,645,716and $209,175 respectively as deferred revenue resulting from its contracts withthe U.S. Army and the U.S. Marines.

**NOTE10—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 mature on February 18, 2006, and paysimple interest payable at the annual rate of 24%  if not paid in full at that time. Inconnection with such purchase, the Company executed a Security Agreementpursuant to which the Subscribers were granted a security interest in certainof the Company’s property. As of December 31, 2005, the Company had$7,500,000 in short-term debt, representing the face value of these Notes. OnFebruary 18, 2006 the Company entered into an extension agreement with theholders of the Notes pursuant to which the Company paid $1,250,000 of theprincipal amount of the Notes and extended the maturity date of the balance foran additional 60 days.

In June 2005 theCompany entered into an agreement with GC Financial Services, Inc. for a BridgeFacility and associated Demand Note with a stated principal amount of$5,000,000. The Company can draw on such Facility up to the face value of theNote and is obligated to pay interest on any amounts outstanding under suchFacility at an annualized interest rate of 48%. Additionally, the Company entered into a Security Agreement covering itsaccounts, inventory, equipment, general intangibles, and certain other assetsas collateral to secure payment of the Demand Note. This Bridge Facility andassociated Demand Note was paid off in full on November 18, 2005 from aportion of the proceeds of the Notes issued to Longview Fund and LongviewEquity Fund.

As of December 31,2004, the Company had a Bridge Facility and associated Demand Note with astated principle amount of $4,000,000 This debt represented the balanceoutstanding under the GC Financial Bridge Facility, which carried an annualizedinterest rate of 48%. The full amount of such outstanding balance was paid offon January 19, 2005.

**NOTE11 — FACTORING OF ACCOUNTS RECEIVABLE**

The Company entered intoan agreement (the “Factoring Agreement”) with GC Financial Services, Inc. (the “Factor”)on June 29, 2005, pursuant to which the Company agreed to sell accountsreceivables under our JERRV Contract (M67854-05-D-5091) in an 

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amount not to exceed$63,000,000. Under the terms of such agreement, the Company receives 98.1% ofthe value of receivables sold to the Factor within 24-48 hours of delivery ofthe invoice. The Factor was granted a security interest in the Company’s assetsand retained the right of full recourse against the Company.  During June 2006, the Company exceeded theagreed maximum value of receivable to be factored under the FactoringAgreement. On June 22, 2006, the Factoring Agreement was terminated and nofurther obligation remained between the Company and GC Financial Services, Inc.

The Company entered intoan agreement (the “Factoring Agreement”) with GC Financial Services, Inc. (the “Factor”)on June 28, 2004, pursuant to which the Company agreed to sell accountsreceivables under our Buffalo contracts with the U.S. Army. Under the terms ofsuch agreement, the Company receives approximately 98% of the value ofreceivables sold to the Factor within 24-48 hours of delivery of the invoice.The Factor was granted a security interest in the Company’s assets and retainedthe right of full recourse against the Company. The Company terminated such agreement in January 2005.

There were no factoringagreements in place during 2003.

The Company’s factoringtransactions in 2005 and 2004 are summarized below:
| ** **                    | ** ** | **Year Ended**             | ** **  | **Year Ended**             | ** ** |
|-------------------------------|------------|---------------------------------|-------------|---------------------------------|------------|
| ** **                    | ** ** | **December 31, 2005** | ** **  | **December 31, 2004** | ** ** |
| Sale of receivables to Factor |       | $                               | 17,170,086  |                            | $          | 11,895,363 |   |
| Payments to Factor            |       | $                               | (16,380,214 | )                               | $          | (11,294,319 | ) |
| Balance at end of period      |       | $                               | 789,872     |                            | $          | 601,044- |   |
| Charges by Factor             |       | $                               | 311,443     |                            | $          | 237,907 |   |

 

**NOTE12 — STOCKHOLDERS’ EQUITY**

The Company wasoriginally incorporated on November 27, 1996 as a Colorado corporation. TheCompany incorporated Force Protection, Inc, a Nevada corporation on December13, 2004 and effected a merger with Force Protection, Inc., a Coloradocorporation, on January 1, 2005. The Colorado Corporation was dissolved uponthe merger. The Company has continued its operations as the Nevada Corporationfrom January 1, 2005 forward. The Company has the authority to issue is310,000,000 shares, in aggregate, consisting of 300,000,000 shares of commonstock and 10,000,000 shares of preferred stock, of which 1,600 have beendesignated “Series A,” 25 of which have been designated as “Series B,” 150 ofwhich have been designated as “Series C” and 20,000 of which have beendesignated as “Series D.” At all times through December 31, 2004, the Companystock was all issued at “no par value.” By shareholder’s resolution effectiveJanuary 1, 2005, all classes of stock were declared to have a par value of$0.001 per share.  For furtherinformation regarding Series D 6% Convertible Preferred Stock, please refer tothe separate footnote disclosure in Note 13. 

The preferred stock hasthe following characteristics:

Dividends — Eachholder of preferred stock shall be entitled to receive dividends in cash, stockor otherwise, if, when and as declared by the Company’s board of directors,with the exception of the preferred stock designated as Series A, which shallnot be entitled to receive dividends. However, the Company will not declare orpay a dividend to common stockholders without first declaring and paying adividend to the preferred shareholders. Each share of Series D Preferred Stockis specifically entitled to 6% cumulative dividends, payable semi-annually incash or common stock. See Note 13 for further details regarding Series D 6%Convertible Preferred Stock. 

Liquidation — In theevent of any voluntary or involuntary liquidation, dissolution or winding-up ofthe Company, the assets of the Company available for distribution to itsstockholders shall be distributed as follows:

(a)          Series APreferred Stock shall rank senior to Series B Preferred Stock, Series CPreferred Stock, Series D 6% Convertible Preferred Stock and common stock; 

(b)         Series BPreferred Stock shall rank junior to Series A Preferred Stock, senior to SeriesC Preferred Stock, Series D 6% Convertible Preferred Stock and common stock 

(c)          Series CPreferred Stock shall rank junior to Series A Preferred Stock, Series B PreferredStock and senior to Series D 6% Convertible Preferred Stock and common stock; 

(d)         Series D 6%Convertible Preferred stock shall rank junior to Series A Preferred StockSeries B Preferred Stock, Series C Preferred Stock and senior to common stock;and 

(e)          Commonstock shall rank junior to Series A, B, C and D 6% Convertible Preferred Stock 

Additionally, upon aliquidation event, holders of Series A Preferred Stock will receive $1,000 pershare of Series A Preferred Stock. Holders of Series B Preferred Stock willreceive the greater of $2,500 or the pro-rata share of the Company’s remainingnet assets to be distributed, after rank considerations. Holders of Series CPreferred Stock will receive a 150% return on the face value of the share ofSeries C Preferred Stock, or $1,500, after rank considerations. In any eventwhereby the preceding distributions are unable to be met, the rankconsiderations outlined above shall be considered and the distribution of theCompany’s net assets shall be determined according to rank and on a pro-ratabasis.

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Conversion —Series A Preferred Stock shall convert into common stock at a rate of $4.00 pershare, as adjusted accordingly. Each share of Series B Preferred Stock shallconvert into 759,167 shares of common stock. Each share of Series C PreferredStock shall convert into 75,917 shares of common stock. Each share of Series D6% Convertible Preferred Stock shall convert into common stock at $2.10 pershare. 

In connection with the private placement sale of theCompany’s common stock on January 19, 2005, the Company and the holders ofSeries B and Series C Preferred Stock agreed to convert all shares of theSeries B and Series C Preferred Stock outstanding to shares of the Company’scommon stock. As a result, all shares of Series B and Series C Preferred Stockwere converted into common effective January 19, 2005. The Series D 6%Convertible Preferred Stock issued in connection with the January 19, 2005private placement remained outstanding following the conversion of the Series Band Series C Preferred Stock. All outstanding shares of the Series D 6%Convertible Preferred Stock were converted in full in 2006, and no shares ofthe Series D 6% Convertible Preferred Stock remain outstanding as of September30, 2006.  Series D 6% ConvertiblePreferred Stock has been classified as Mezzanine Equity by the Company.  Please refer to Note 13 for further detailsregarding Series D 6% Convertible Preferred Stock. 

 

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

The following disclosuresreference accounting guidelines and certain accounting treatments which theCompany has used throughout 2005, 2004 and 2003.  The Company considers the following terms anddefinition significant in ensuring the reader of these financial statementsunderstands the accounting treatments applied by the Company:

·         TheEmerging Issues Task Force (“EITF”) provides accounting guidance and interpretationson emerging issues in business and accounting

·         Statementson Financial Accounting Standards (“SFAS”) are a primary source of accountingguidance under which many of the Company’s accounting policies are based

·         Beneficialconversion feature is a topic addressed in EITF 98-5, *Accountingfor Convertible Securities with Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios*, EITF 00-19 *Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’ s Own Stock*and EITF 00-27 *Applicationof Issue No. 98-5 to Certain Convertible Instruments*, is an**accounting term defined in EITF 98-5 that represents asituation in which a convertible security (debt or equity) is convertible intothe Company’s common stock at a price which is at a discount to the market, atthe time the convertible security is issued.

·         TheBlack-Scholes option pricing model (Black-Scholes) is an analytical model usedto value an option to purchase a security based on certain market fundamentalssuch as the volatility of a security, the market for effective interest ratesover a period of time and constraints placed on the option to purchase thesecurity such as time horizons or the expiration of the option to purchase thesecurity.  The Company utilizesBlack-Scholes to value stock options issued to employees, preferred stockissued to employees and service providers, preferred stock purchased byinvestors and warrants issued to investors.

**During the year endedDecember 31, 2005, the Company recorded the following transactions withinits stockholders’ equity accounts:**

*COMMONSTOCK TRANSACTIONS*

In January 2005,the Company issued a total 188,400 shares of the Company’s common stock at anaverage price of $2.76 per share, generating $520,069 in net proceeds pursuantto the Investment Agreement between the Company and Dutchess Private EquitiesFund, L.P., dated January 26, 2004. 

The followingissuances of the Company’s common stock during 2005 were valued by the Companyusing the Company’s closing bid price of its common stock as quoted on the OTCBulletin Board market as of the date of the associated contract or the issuancedate if no contract existed. 

·         41,666shares of the Company’s common stock valued at $112,499 were issued to a director,a member of the board of directors, for services rendered to the Company. An expense of $112,499 was classified as compensation of directors and wasrecorded in 2005. 

·         9,950shares of the Company’s common stock valued at $12,910, to the Company’s formerPresident, for services rendered to the Company.  An expense of $12,910was classified as officer compensation and was recorded in 2005. 

·         TheCompany issued 53,467 shares of the Company’s common stock pursuant to theterms of the Company’s agreement with certain third parties and were valued at$144,895.  An expense of $144,895 was classified as settlement expense andwas recorded in 2005. 

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·         TheCompany issued 14,876 shares of the Company’s common stock pursuant to theterms of the Company’s agreement with GC Financial Services, Inc. were valuedat $20,641.  An expense of $20,641 was classified as interest expense andwas recorded in 2005. 

·         TheCompany’s former Chief Executive Office, agreed to rescind 83,333 shares ofcommon stock issued in 2004 valued at $209,999. 

A total of 114,376shares of common stock were issued by the Company for net proceeds of $211,629in connection with the exercise of warrants issued through a PIPE offeringcompleted on April 10, 2002. 

The Company issueda warrant to purchase 65,833 shares of the Company’s common stock on January19, 2005 to HPC Company.  The warrant was valued at $200,071 usingBlack-Scholes.  The Company recorded a reduction of stockholders’ equityassociated with services provided as a placement agent for the Company’s SeriesD 6% Convertible Preferred Stock offering, which closed on January 19,2005.  The inputs for this warrant inBlack-Scholes are consistent with the inputs for the warrants issued with theSeries D 6% Convertible Preferred Stock. 

The Company issuedwarrants to purchase 75,000 shares of the Company’s common stock that can beexercised for $3.75 per share in a settlement agreement with H.C. Wainwright& Co.  The value as determined by Black-Scholes was expensed assettlement expense in the amount of $158,071. The Company also issued a warrantto purchase 41,667 shares of the Company’s common stock that can be exercisedfor $3.96 per share in a settlement agreement with Westor Online.  Thevalue as determined by Black-Scholes was expensed as settlement expense in theamount of $72,354. The warrants were exercised in 2006. Below is a tabledepicting the valuation attributes used in Black-Scholes calculations relatedto these warrants issued in 2005: 

**WarrantValuation Information**
| Valuation Assumptions                           |   | —  |       |
|-------------------------------------------------|--------|---------|------------|
| Stock price on grant date                       |   | $       | 2.05-$3.00 |   |
| Number of shares of common stock convertible to |   | 116,667 |       |
| Conversion price                                |   | $       | 3.75-$3.96 |   |
| Expected option term (in years)                 |   | 1       |       |
| Vesting term (in years)                         |   | N/A     |       |
| Expected volatility                             |   | 177.06% |       |
| Risk-free interest rate                         |   | 4.26%   |       |
| Expected forfeiture rate                        |   | 0%      |       |
| Estimated corporate tax rate                    |   | 0%      |       |
| Expected  dividend yield                        |   | 0%      |       |

 

Outstandingwarrants to purchase 2,143,085 common stock shares expired or were cancelledduring 2005. The warrant valuation of $2,302,850 was added to Additional Paidin Capital accordingly in 2005. 

The Company issued14,803,750 shares of unregistered common stock resulting for the mandatoryconversion on February 8, 2005 of all the outstanding shares of theCompany’s Series B Convertible Preferred Stock.  At the time ofconversion, the conversion rate for the Series B Convertible Preferred Stockwas 2% of fully diluted common stock.  The beneficial conversion featurerelated to the Series B Convertible Preferred Stock in the amount of$19,102,306 was relieved in full on February 8, 2005. 

*PREFERREDSTOCK TRANSACTIONS*

*Series D 6% Convertible Preferred Stock:*

On January 19,2005, the Company issued 15,800 shares of the Company’s Series D 6% ConvertiblePreferred Stock for net cash of $15,305,965.  The issuance of the Company’sSeries D 6% Convertible Preferred Stock was recorded at $7,301,766 which is thenet value of the cash received of $15,305,965 less the fair value of theassociated warrants of $8,004,200.  TheCompany classified the Series D 6% Convertible Preferred Stock as MezzanineEquity.  Refer to Note 13 for furtherinformation regarding Series D 6% Convertible Stock. 

On May 23, 2005,2,796 shares of the Series D Preferred Stock were voluntarily converted into1,331,429 shares of Common Stock.  The conversion value of these shares ofcommon stock based on the conversion price of $2.10 per share was $2,796,001. 

During the yearended December 31, 2004, the Company recorded the following transactionswithin its stockholders’ equity accounts: 

*COMMON STOCKTRANSACTIONS*

The Company closedon a private investment in public equity (“PIPE”) offering on March 23, 2004.The PIPE, sold to numerous accredited investors, consisted of the following: 

·         Commonstock issuances, 1,771,874 shares of common stock were issued for $4,245,000 innet proceeds. 

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·         Issuanceof “A” warrants, 1,771,874 warrants to purchase common stock were issued in2004, with an original exercise price of $1.44 per warrant.  A total of219,792 shares of common stock were issued by the Company for net proceeds of$316,497, in connection with the exercise of “A” warrants in 2004.  Theremaining “A” warrants expired on December 31, 2004. 

·         Issuanceof “Green Shoe” warrants, 1,771,874 warrants to purchase common stock wereissued in 2004, with an original exercise price of $2.40 per warrant. A totalof 674,058 shares of common stock were issued by the Company for net proceedsof $1,677,713, in connection with the exercise of “Green Shoe” warrants in2004.  The remaining ”Green Shoe” warrants expired on December 31,2004. 

In November andDecember 2004, the Company issued a total 1,210,843 common shares generating$2,958,217 in net proceeds pursuant to the Dutchess Equity agreement. 

A total of1,863,768 shares of common stock were issued by the Company for net proceeds of$2,100,637 in connection with the exercise of warrants issued through a privateinvestment in public equity (“PIPE”) offering dated April 10, 2002 forRegulation D Section 506 Private Placement Memorandum issued in 2003 tonumerous accredited investors. 

The followingissuances of the Company’s common stock during 2004 were valued by the Companyusing the Company’s closing bid price of its common stock as quoted on the OTCBulletin Board market as of the date of the associated contract or the issuancedate if no contract existed. 

·         163,501shares of the Company’s common stock valued at $496,956 were issued to a thirdparty for services rendered to the Company.  An expense associated withthis issuance of $496,956 was recorded in 2004. 

·         70,833shares of the Company’s common stock valued at $127,500 were issued to a memberof the board of directors, for services rendered to the Company.  Anexpense of $127,500 was classified as compensation of directors and wasrecorded in 2004. 

·         91,667shares of the Company’s common stock valued at $231,000 were issued to a memberof the board of directors, for services rendered to the Company.  Anexpense of $231,000 was classified as compensation of directors and wasrecorded in 2004. 

·         208,333shares of the Company’s common stock valued at $495,000 to the Company’s formerChief Executive Officer, for services rendered to the Company.  An expenseof $495,000 was classified as officer compensation and was recorded in 2004. 

·         125,000shares of the Company’s common stock valued at $255,000 to the Company’s formerChief Financial Officer, for services rendered to the Company. An expense of$255,000 was classified as officer compensation and was recorded in 2004. 

·         41,682shares of the Company’s common stock valued at $145,054 to an employee, forservices rendered to the Company.  An expense of $145,054 was classifiedas stock-based compensation and was recorded in 2004. 

·         79,167shares of the Company’s common stock valued at $178,250, to various employeesfor services rendered to the Company.  An expense of $178,250 wasclassified as stock-based compensation and was recorded in 2004. 

·         304,167shares of common stock issued in error in December 2003 were cancelled in thefirst week of January 2004. 

·         TheCompany issued 20,421 shares of common stock to third parties upon theconversion of existing debts in the amount of $124,976. 

*PREFERRED STOCKTRANSACTIONS*

For informationregarding Series D 6% Convertible Preferred Stock, please refer to the separatefootnote disclosure in Note 13. 

Series B andSeries C Convertible Preferred Stock are in the form of shares, and have noconditional or unconditional mandatory redemption provisions obligating theCompany in the future other than liquidation or company wind-up provisions.Under SFAS150-*Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity*,the issuances of Series B and Series C Preferred stock have been classified asequity.  The conversion options are not considered derivative liabilitieswhich must be valued at fair value under SFAS 133 or EITF 00-19.  Theconversion options are indexed to the Company’s own stock and the hostinstrument is classified as equity thus meeting the paragraph 11a scopeexception under SFAS No. 133 — Accounting for Derivative instruments andhedging activities. The Company determined that there is no intrinsic value ofthe conversion options for the Series B and Series C Preferred Stock under EITF00-27. 

In accordance withEITF 98-5, “Accounting for Convertible Securities with Beneficial ConversionFeatures or Contingently Adjustable Conversion Rates,” the Company records “beneficialconversion feature expense” when and if the Company issues debt or equityinstruments which are convertible into shares of the Company’s common stock, ata conversion price which is favorable to the holder of the debt or equityinstrument. Valuation of this favorable conversion feature is based on thecircumstances of each debt or equity issuance but is generally based on theactual or estimated difference between the fair market  

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value of theunderlying common stock less the cost of acquiring the common stock or abeneficial increase in conversion rates of preferred shares into common stock. 

The Company issuedpreferred stock shares for services provided as follows: 

·         4shares of the Company’s Series C Convertible Preferred Stock were issuedto a member of the board of directors, for services rendered.  The Companyused Black-Scholes to determine the value of the shares as $137,583. 

·         20shares of the Company’s Series C Convertible Preferred Stock were issuedto the Company’s former Chief Executive Office, for services rendered. The Company used Black-Scholes to determine the value of the shares as$692,996. 

·         4shares of the Company’s Series C Convertible Preferred Stock were issuedto the Company’s former Chief Financial Officer, for services rendered. The Company used Black-Scholes to determine the value of the shares as$138,976. 

·         10shares of the Company’s Series C Convertible Preferred Stock were issued to amember of the board of directors, for services rendered.  The Company usedBlack-Scholes to determine the value of the shares as $346,526. 

The Company issued20 shares of Series C Convertible Preferred Stock in exchange for existing debtin the amount of $200,000.  The Company used Black-Scholes and calculatedthe value of shares at issuance. A beneficial conversion feature was generatedas the value of the issuance using Black-Scholes was greater than the value ofthe debt converted in the amount of $385,530. 

The Company issued1 share of the Company’s Series C Convertible Preferred Stock for proceeds of$10,000.  The value of this issuance was calculated using Black-Scholesand was greater than the value of the proceeds in the amount of $22,612.  The Company recorded a Beneficial ConversionFeature for this difference. 

Below is a tabledepicting the valuation attributes used in Black-Scholes calculations relatedto the Series C Preferred Stock issued in 2004: 

**SeriesC Preferred Stock Valuation Information for the Year Ended December 31, 2004**
| Valuation Assumptions                           |   | —         |   |
|-------------------------------------------------|--------|----------------|--------|
| Stock price on grant date                       |   | $1.80-$4.08    |   |
| Number of shares of common stock convertible to |   | 2,198,276      |   |
| Conversion price                                |   | $1.80-$4.08    |   |
| Expected option term (in years)                 |   | 1              |   |
| Vesting term (in years)                         |   | N/A            |   |
| Expected volatility                             |   | 90.29%-177.06% |   |
| Risk-free interest rate                         |   | 4.00%-4.296%   |   |
| Expected forfeiture rate                        |   | 0%             |   |
| Estimated corporate tax rate                    |   | 0%             |   |
| Expected  dividend yield                        |   | 0%             |   |

 

The followingtransactions of the Company’s preferred stock during 2004 were recorded: 

·         TheCompany had 5 Shares of Series C Convertible Preferred Stock voluntarilyredeemed for $60,000.  A loss on redemption of $10,000 was recorded. Additionally, the Company recorded a gain on debt extinguishment related to therecapture of beneficial conversion feature expensed in connection with theissuance of the preferred stock in 2002 of $7,272. 

·         1,330,865shares of the Company’s common stock were issued upon the voluntary conversionof 51 shares of Series C Convertible Preferred Stock. The conversion rateat the time of conversion was 0.2% of outstanding common stock. The Companyrecorded a gain on debt extinguishment related to the recapture of beneficialconversion feature expensed in connection with the issuance of the preferredstock in the amount of $389,810. 

·         1share of the Company’s Series C Convertible Preferred Stock wasvoluntarily rescinded.  A gain was recognized in the amount of $83,577 asa result.  The gain was calculated using the Company’s closing bid priceof its common stock as quoted on the OTC Bulletin Board market as of the datethe shares were rescinded and the number of shares of common stock for whichthe preferred stock was convertible into. Additionally, the Company recorded again on debt extinguishment related to the recapture of beneficial conversionfeature expensed in connection with the issuance of the preferred stock in theamount of $3,234. 

·         1share of the Company’s Series B Convertible Preferred Stock wasvoluntarily converted to 10 Series C Convertible Preferred Stock. TheCompany used Black Scholes and calculated a beneficial conversion feature of$269,044, associated as a result of differences between conversion ratesbetween the two preferred stock classes. 

·         416,667shares of the Company’s common stock were issued upon the conversion of 1 shareof Series B Convertible Preferred Stock. The conversion rate at the timeof conversion was 2% of fully diluted common stock. The Company recorded a gainon debt extinguishment related to the recapture of beneficial conversionfeature expensed in connection with the issuance of the preferred stock in of$16,324. 

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The conversionrate for Series C Convertible Preferred Stock changed to 0.2% of fully dilutedstock on September 14, 2004. At that time, there were 144 Series C PreferredStock shares outstanding. The Company used Black-Scholes to calculate the valueof this change as $18,558,870, which represents the beneficial conversionfeature for this conversion rate increase for all outstanding Series CPreferred Stock Shares on September 14, 2004. After which, 14,263 shares of the Company’s common stock were issuedupon the voluntary conversion of 1 share of Series C Convertible PreferredStock.  During October 2004, alloutstanding shares of the Company’s Series C Preferred Convertible stockwere either mandatory converted to Series B Convertible Preferred stock orinto shares of common stock. The conversion rate was 10 shares of Series CConvertible Preferred stock for 1 share of Series B Convertible Preferred Stockor 0.2% of fully diluted common stock.  In total, 115 shares of Series CConvertible Preferred stock were redeemed for 11.5 shares of Series BConvertible Preferred Stock.  1,169,350 shares of common stock were issuedfor the conversion of the remaining 28 Series C Convertible Preferred Stock.These transactions resulted in the Company recorded a gain on debtextinguishment related to the recapture of beneficial conversion featureexpensed in connection with the issuance of the preferred stock in the amountof $146,120. 

**Duringthe year ended December 31, 2003, the Company recorded the followingtransactions within its stockholders’ deficit accounts:**

*COMMON STOCKTRANSACTIONS*

A privateinvestment in public equity (“PIPE”) offering dated April 10, 2002 forRegulation D Section 506 Private Placement Memorandum issued in 2003 to numerousaccredited investors, consisted of the following: 

·         Commonstock issuances, 2,429,272 shares of common stock were issued for $2,966,700 innet proceeds. 

·         Issuanceof warrants, each common share included 2,429,272 warrant units valued at$2,610,372, to purchase common stock were issued in 2003. Each common stockunit consisted of (a) fifty shares of common stock of the Company, (b) onewarrant to purchase twenty-five shares of common stock of the Company at anexercise price of $2.40 per share, and (c) one warrant to purchase twenty-fiveshares of common stock, at an exercise price of $3.60 per share which has beenreduced to $0.12 per share by the Company’s board of directors on July 15,2002. No warrants were exercised in 2003. The Company used Black-Scholes to calculate the value of thewarrants.  The valuation attributes usedin the Black-Scholes calculation are as follows: 
| Valuation Assumptions           |   |        |   |
|---------------------------------|--------|-------------|--------|
| Stock price on grant date       |   | $1.80       |   |
| Number of warrants              |   | 2,429,272   |   |
| Exercise price                  |   | $1.20-$2.40 |   |
| Expected option term (in years) |   | 1           |   |
| Vesting term (in years)         |   | N/A         |   |
| Expected volatility             |   | 128.07%     |   |
| Risk-free interest rate         |   | 3.87%       |   |
| Expected forfeiture rate        |   | 0%          |   |
| Estimated corporate tax rate    |   | 40%         |   |
| Expected  dividend yield        |   | 0%          |   |

 

The Company issueda warrant to purchase 83,333 shares of the Company’s common stock to theCompany’s former Chief Financial Officer. The warrant has an exercise price of $1.44 per share of commonstock.  The warrant was valued at $41,816using Black-Scholes and was expensed in full in 2003 as officer compensationexpense.  The valuation attributes usedin the Black-Scholes calculation are as follows: 

**WarrantValuation Information for the Year Ended December 31, 2003**
| Valuation Assumptions           |   | —  |   |
|---------------------------------|--------|---------|--------|
| Stock price on grant date       |   | $       | 2.16   |   |
| Number of warrants              |   | 83,333  |   |
| Exercise price                  |   | $       | 1.44   |   |
| Expected option term (in years) |   | 1       |   |
| Vesting term (in years)         |   | N/A     |   |
| Expected volatility             |   | 128.07% |   |
| Risk-free interest rate         |   | 3.87%   |   |
| Expected forfeiture rate        |   | 0%      |   |
| Estimated corporate tax rate    |   | 40%     |   |
| Expected  dividend yield        |   | 0%      |   |

 

The Company issued264,804 shares of restricted common stock to third parties upon the conversionof existing debts in the amount of $377,450. 

The Company issuedcommon stock shares for services provided as follows: 

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·         738,791shares of the Company’s common stock to consultants for services rendered tothe Company. The Company valued the services rendered at $1,232,909, using theCompany’s closing bid price of its common stock as quoted on the OTC BulletinBoard market on at the date of issuance. The consultants were not hired under specific contracts and compensationwas determined on a case by case basis by management at the time the serviceswere rendered. 

·         166,065shares of the Company’s common stock were issued to employees and were valuedat $273,022 using the Company’s closing bid price of its common stock as quotedon the OTC Bulletin Board market on at the date of issuance.  The stock-based compensation to employees wasdetermined on a case by case basis by management at various times during theyear. 

·         75,000shares of the Company’s common stock were issued to the board of directors andwere valued at $130,500 using the Company’s closing bid price of its commonstock as quoted on the OTC Bulletin Board market on at the date ofissuance.  The stock-based compensationto the board of directors was determined on a case by case basis by the boardof directors at various times during the year. 

The Company issued139,441 shares of the Company’s common stock pursuant to the terms of theCompany’s agreement with Atlantis Aggressive Growth Co. and was valued at$133,863 using the Company’s closing bid price of its common stock as quoted onthe OTC Bulletin Board market on the date of the settlement December 8, 2003. 

The Company issued109,279 shares of the Company’s common stock to third parties for servicesrendered in connection with the aforementioned private placements.  No value was recorded in accordance with thisissuance as the issuance was deemed a financing cost associated with theCompany’s efforts to raise capital. Therefore, any value allocated to the share issuance would be anoffsetting accounting entry to both increase and decrease stockholders’ equityin the same value. 

The Companyincreased the TSG acquisition price by $720,000 as a result of the finalresolution with all parties concerned. The original transaction in 2002 was recorded at a value of $1,200,000with various matters pending. 

*PREFERRED STOCK TRANSACTIONS*

The Company’sSeries B and Series C Convertible Preferred Stock are in the form of shares,and have no conditional or unconditional mandatory redemption provisionsobligating the Company in the future other than liquidation or company wind-up provisions.The Company has reviewed SFAS150-*Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity*,and has classified the issuances of Series B and Series C Preferred stock asequity instruments.  The conversion optionsare not considered derivative liabilities which must be valued at fair valueunder SFAS 133 or EITF 00-19.  Theconversion options are indexed to the Company’s own stock and the hostinstrument is classified as equity thus meeting the paragraph 11a scopeexception under *SFAS No. 133 – Accounting for DerivativeInstruments and Hedging Activities*. The Company also determined thatthere is no intrinsic value of the conversion options for the Series B andSeries C Preferred Stock under EITF 00-27. 

In accordance withEITF 98-5, “Accounting for Convertible Securities with Beneficial ConversionFeatures or Contingently Adjustable Conversion Rates,” the Company records “beneficialconversion feature expense” when and if the Company issues debt or equity instrumentswhich are convertible into shares of the Company’s common stock, at aconversion price which is favorable to the holder of the debt or equityinstrument. Valuation of this favorable conversion feature is based on thecircumstances of each debt or equity issuance but is generally based on theactual or estimated difference between the fair market value of the underlyingcommon stock less the cost of acquiring the common stock or a beneficialincrease in conversion rates of preferred shares into common stock. 

The Company issued14 shares of the Company’s Series C Convertible Preferred Stock for cashproceeds of $140,000.  No beneficialconversion feature existed upon the issuance of these shares as the Companyused Black-Scholes and calculated the value of the shares issued to be lessthan the value of the cash proceeds of $140,000. 

The Company issued28 shares of Series C Convertible Preferred Stock in exchange for existing debtin the amount of $280,000.  A beneficialconversion feature existed as of the date of issuance.  The Company used Black-Scholes and calculatedthe value of the issuance was greater than the value of the debtconverted.  Accordingly, the Company recordeda beneficial conversion feature in the amount of $90,564. 

The Company issued1 share of Series C Convertible Preferred Stock to a member of the board ofdirectors in lieu of interest payments on an outstanding $50,000 loan.  The Company valued the issuance of the shareat $9,064 using Black-Scholes and recorded interest expense on the loan for$9,064 during 2003. 

The Company issued50 shares of the Company’s Series C Convertible Preferred Stock to the Company’sformer Chief Executive Office as compensation for consummating the TSGacquisition.  The Company usedBlack-Scholes and calculated a value of the share issuance at $661,720. 

The Company issued12 shares of the Company’s Series C Convertible Preferred Stock to employeesfor services rendered.  The Companyvalued the share issuance at $103,596, using Black-Scholes and recordedcompensation expense associated with these issuances of $103,596 during 2003. 

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The Companyrecorded a loss on redemption of preferred stock of $10,000 associated with thevoluntary redemption of 5 Shares of the Company’s Series C ConvertiblePreferred Stock (original payment for preferred was $50,000).  Additionally, the Company recorded a gain ondebt extinguishment related to the recapture of beneficial conversion featureexpensed in connection with the issuance of the preferred stock in 2002 of$7,272. 

Below is a tabledepicting the valuation attributes used in Black-Scholes calculations relatedto the Series C Preferred Stock issued in 2003: 

**SeriesC Preferred Stock Valuation Information for the Year Ended December 31, 2003**
| Valuation Assumptions                           |   | —          |   |
|-------------------------------------------------|--------|-----------------|--------|
| Stock price on grant date                       |   | $0.96-$1.44     |   |
| Number of shares of common stock convertible to |   | 1,448,757       |   |
| Conversion price                                |   | $0.96-$1.44     |   |
| Expected option term (in years)                 |   | 1               |   |
| Vesting term (in years)                         |   | N/A             |   |
| Expected volatility                             |   | 128.07%-236.46% |   |
| Risk-free interest rate                         |   | 3.87%-4.53%     |   |
| Expected forfeiture rate                        |   | 0%              |   |
| Estimated corporate tax rate                    |   | 0%              |   |
| Expected  dividend yield                        |   | 0%              |   |

 

304,167 shares ofcommon stock issued in error in December 2003 were cancelled in the first weekof January 2004. 

**NOTE13 –** SERIES D 6%CONVERTIBLE PREFERRED STOCK 

On January 19,2005, the Company issued 15,800 shares of Series D 6% Convertible PreferredStock (“Series D Preferred) at $1,000 per share pursuant to a purchaseagreement (the “Purchase Agreement”) for gross proceeds of $15,800,000.Issuance costs of $494,034 were incurred and treated as a discount to thecarrying value which netted to $15,305,966. The Series D Preferred may convert at any time, at the holder’sdiscretion, into shares of Common Stock. The conversion price is $2.10 per share. Each share of the Series D Preferred converts into the number of sharesof Common Stock equal to $1,000 divided by the conversion price which isapproximately 467.19 shares. Additionally, the Company pays 6% dividends on the Series D Preferred incash or Common Stock.  The Series D PreferredStock, if not converted to Common Stock, is redeemable for $1,000 per Series DPreferred share on January 19, 2008. 

In the sameprivate placement, the Company issued Warrants to purchase 2,633,333 shares ofCommon Stock at an exercise price of $3.75 per share.  The Warrants expire on January 19, 2008.  These warrants are further disclosed below. 

The Series DPreferred falls outside the scope of SFAS No. 150 but the guidance in Rule5-02.28 of Regulation S-X, Accounting Series Release No. 268 (ASR 268) and EITFTopic D-98: “Classification and Measurement of Redeemable Securities” areapplicable.  As such, the Company hasrecorded the Series D Preferred as mezzanine equity on the accompanying balancesheet. 

The differencebetween the initial recorded amount and redemption value is accreted toretained earnings or, in the absence of retained earnings, additional paid-incapital, over the period from the date of issuance to the earliest redemptiondate of the security using the interest method thus reducing net incomeattributable to common shareholders.  Theaccretion from the initial value to the redemption amount has been determinedusing T-Value based on the following inputs: 

1.               Rate – 8.00%(reasonable rate of interest) 

2.               Number of paymentperiods – 36 (three years) 

The followingtable summarizes the transactions of the Series D Preferred: 
| Series D 6% Convertible  Preferred stock at issuance                                        |                                                                      | $      | 15,800,000 |   |
|---------------------------------------------------------------------------------------------|---------------------------------------------------------------------------|--------|------------|--------|
| Less:                                                                                       | Issuance costs                                                            |   | 494,034    |   |
|                                                                                        | Fair value of  warrants at issuance (see “Warrants”)            |   | 8,004,200  |   |
| Subtotal  Carrying Value at issuance                                                        |                                                                      | $      | 7,301,766  |   |
| Plus:                                                                                       | Cumulative accretion of  discount to redemption value first quarter 2005  |   | 420,695    |   |
|                                                                                        | Cumulative  accretion of discount to redemption value second quarter 2005 |   | 593,609    |   |
|                                                                                        | Cumulative  accretion of discount to redemption value third quarter 2005  |   | 508,577    |   |
|                                                                                        | Cumulative  accretion of discount to redemption value fourth quarter 2005 |   | 518,816    |   |
| Carrying Value  of 2,796 Series D Preferred converted into Common Stock second quarter 2005 |                                                                      | $      | 1,442,025  |   |
| Carrying Value at  December 31, 2005                                                        |                                                                      | $      | 7,901,438  |   |

 

The Series BPreferred has the following rights, preferences and privileges: 

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***Registration Rights***

The Company andthe holders of Series D Preferred entered into a “Registration RightsAgreement” on January 19, 2005. Among other things, the Company was obligatedto file a registration statement on Form SB-2 within 75 days of theagreement and use its commercially reasonable efforts to cause suchregistration statement to become effective. The Securities & ExchangeCommission declared the Registration Statement effective on May 11, 2005,pursuant to which the shares of Common Stock issuable upon conversion of theSeries D Preferred, as well as the shares of Common Stock issuable uponthe exercise of warrants, were registered for resale. The agreement providesfor any liquidated damages by the Company to the Series D Preferredholders if the Company is unable to complete the registration, not filing intimely manner or maintain such effectiveness. 

***Voting Rights***

Each holder ofshares of Series D Preferred shall have no voting rights so long as theCompany shall not, without the affirmative vote of the holders of Series DPreferred then outstanding, alter or change the powers, preferences or rightsof the holders of Series D Preferred, authorize or create any class of stockranking as to dividends, redemption, or distribution of assets upon liquidationsenior to Series D Preferred, amend corporate documents so as to affectadversely any rights of holders or increase the authorized number of shares ofPreferred Stock. 

***Dividends***

CumulativeDividends are payable to all holders of Series D Preferred on March 1 andSeptember 1 beginning with the first such date after the original issue dateand on any conversion date.  Dividendscan be paid in cash unless certain criteria are met (mainly no cash availablefro payment) which allows the Company to issue shares of Common stockequivalent to the amount due at 85% of the average stock price of the preceding10 trading days to the dividend payment date. Series D Preferred dividends are recorded as a reduction(increase) to retained earnings (accumulated deficit) and net income(loss) available to common shareholders. Dividends, whether declared or not,are payable at a rate of six percent (6%) of the Stated Value per annum. 

In the eventdividends are paid on any shares of other Preferred stock or Common Stock, theCompany shall pay any amounts due to Series D Preferred holders before suchdividend can be paid.  
| Dividend Transactions (per equity table) | ** ** | **Amount** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|
| Dividend Payment  March 1, 2005                              |       |       |       |
| 57,186 common  shares issued                                 |       | $          | 100,075    |   |
| Dividend Payment  September 1, 2005                          |       |       |       |
| 224,511 common  shares issued                                |       | 318,355    |       |
| Cash payment                                                 |       | 100,020    |       |
| Total Dividend  for September 1, 2005                        |       | 418,375    |       |
| Dividend Accrued as of  December 31, 2005                    |       | $          | 260,080    |   |

 

***Conversion***

The Series DPreferred may convert at any time, at the holder’s discretion, into shares ofCommon Stock.  The conversion price is$2.10 per share.  Each share of theSeries D Preferred converts into the number of shares of Common Stock equal to$1,000 divided by the conversion price which is approximately 467.19shares.  The Company shall not effect anyconversion of the Series D Preferred and the Holder shall not have the right toconvert any portion of Series D Preferred to the extent that after givingeffect to such conversion, the Holder (including it’s affiliates) would beneficiallyown in excess of 4.99% of the number of shares of common stock outstandingimmediately after giving effect to such conversion.  The Company must reserve and keep availableout of its authorized and unissued shares of common stock for the purpose ofissuance upon conversion of the Series D Preferred and payments of dividends onthe Series D Preferred.  The Company mayforce a conversion of Series D Preferred if the market value of the commonstock for 20 consecutive trading days exceeds 180% of the conversion priceeffective at that time. 

***Redemptions***

On the thirdanniversary of the original issue date, the corporation shall redeem allremaining outstanding Series D Preferred which are not yet converted intocommon stock at a price equal to the Stated Value.  Each holder of Series D Preferred to beso redeemed may, in lieu of redemption, convert such holder’s shares ofSeries D Preferred Stock in whole or in part into shares of Common Stock. 

The Company may beobligated to redeem the outstanding shares of Series D Preferredimmediately prior to a change of control, failure to file the registrationstatement on or prior to 210 days after the original issue date, lapsing of theRegistration Statement for more than 60 calendar days in aggregate or failureto have available the sufficient number of authorized and unreserved shares ofcommon stock to issue upon conversion of a holder. 

***Warrants***

The Warrantsrepresent a liability under EITF 00-19 in that the registration rightsagreement contains a liquidated damages clause requiring the Company to paycash to the holder of the instrument if the Company fails to obtain aneffective registration statement timely, an event that is out of the Company’scontrol.  (Note:  On April 11, 2005, the Company paid $237,000in liquidated damages for not filing its registration statement timely).  The Warrants would not be classified asequity until the effective registration statement was obtained.  As such, in accordance with EITF 00-19, theWarrant Liability is measure at its fair value at 

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the reportingdate, with the change in its fair value from issuance date reporting in thestatement of operations.  The fair valueof the warrants has been determined using the Black-Scholes model using thefollowing inputs: 

1.               Number of Warrantshares – 2,633,333 

2.               Stock price atissuance date – $3.12 per share 

3.               Exercise price –$3.75 per share 

4.               Term – 3 years 

5.               Discount rate –3.42%, representing the three year Treasury at the date of issuance 

6.               Volatility – 259%,based on the stock prices during three years prior to issuance 

These inputs yielda fair value of $8,004,200. 

The warrants aremeasured at fair value both initially and in subsequent periods until theregistration statement has been accepted by the Security and ExchangeCommission. Subsequent changes in the fair value of the warrants until thattime are recognized in current earnings under “other income (expense)” in theconsolidated statements of operations. The decrease in fair value for the threemonth period ended March 31, 2005 is $3,431,206. The fair value of the warrantsat March 31, 2005 has been determined using the Black-Scholes model using thefollowing inputs: 

1.               Number of Warrantshares – 2,633,333 

2.               Stock price atreporting date – $1.84 per share 

3.               Exercise price –$3.75 per share 

4.               Term – 2.75 years 

5.               Discount rate –3.96%, representing the three year Treasury at the reporting date 

6.               Volatility – 245%,based on the stock prices during three years prior to the reporting date 

These inputs yielda fair value of $4,572,984 at March 31, 2005. 

On May 11, 2005, the Company received Form 424B3 fromthe SEC confirming the registration of 17,008,655 common shares.  As a result, the warrant liability isreclassified to equity on this date. The fair value of the warrants has beendetermined using the Black-Scholes model using the following inputs: 

1.               Number of Warrantshares – 2,633,333 

2.               Stock price atreporting date – $2.08 per share 

3.               Exercise price –$3.75 per share 

4.               Term – 2.70 years 

5.               Discount rate –3.96%, representing the three year Treasury at the reporting date 

6.               Volatility – 245%,based on the stock prices during three years prior to the reporting date 

These inputs yielda fair value of $5,173,409.  TheUnrealized Gain on Financial Instrument and Warrant Liability were reduced by$600,425 accordingly. 

**NOTE 14 — STOCK OPTIONS**

 

The Company does not havea formal stock option plan. However, the Company has offered its employeesstock options. During 2005, the Company issued options to purchase  652,833 shares of its unregistered commonstock to certain of its employees at an exercise price of $1.50 per share. Allsuch options vested in full effective April 15, 2006.

 

The Company adoptedStatement of Financial Accounting Standards No. 123(R) (“SFAS 123(R)) as ofJuly 1, 2005.  SFAS 123(R) provides formandatory expensing of the estimated value of stock options granted to theCompany’s employees over the period of time the stock options vest.  The Company measures the total cost of eachstock option grant at the date of grant using the Black Schole option tradingmodel.  We recognize the cost of eachstock option on a straight line basis over the applicable vesting period.

All stock optionsissued in 2005 do not carry a designated expiration date and vest over a oneyear period. Stock option expense recorded for 2005, 2004 and 2003 amounted to$92,671, $0 and $0, respectively. The following table summarizes stock optionsactivity for the year ended December 31, 2005: 

**Stock Option Activity**
|                               | ** ** | **Average per share** | ** ** |
|-------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **Shares subject**         | ** ** | **Exercise** | ** ** | **Market** | ** ** |
| ** **                    | ** ** | **to options**             | ** ** | **price** | ** ** | **price** | ** ** |
| Balance at December 31,  2004 |       | —                          |       | $ | — |   | $ | — |   |
| Options granted               |       | 652,833                         |       | 1.50 |   | 1.50 |   |
| Options  exercised            |       | —                          |       | — |   | N/A |   |
| Options terminated            |       | (196,167                        | )          | 1.50 |   | N/A |   |
| Balance at December 31, 2005  |       | 456,666                         |       | $ | 1.50 |   | $ | 1.50 |   |

 

The followingtable summarizes the attributes used in the Company’s valuation of stock optiongrants during 2005: 

47

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**Option Valuation Information**
|                                                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Fair value per option  (a)                                  |       | —   |       | —   |       | —   |       |
| Valuation Assumptions                                       |       | —   |       | —   |       | —   |       |
| Expected option  term (in years)                            |       | 2        |       | —   |       | —   |       |
| Expected  duration from grant to expiration date (in years) |       | 5        |       |     |       |     |       |
| Option vesting  term (in years)                             |       | 1        |       |     |       |     |       |
| Expected  volatility                                        |       | 48.61    | %          | —   |       | —   |       |
| Risk-free  interest rate                                    |       | 3.42     | %          | —   |       | —   |       |
| Expected  forfeiture rate                                   |       | 5.00     | %          | —   |       | —   |       |
| Estimated  corporate tax rate                               |       | 40.00    | %          | —   |       | —   |       |
| Expected dividend yield                                     |       | 0.00     | %          | —   |       | —   |       |

 

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(a) Estimatedusing Black Scholes option pricing model

(b) Not applicable

**NOTE15—ACQUISITION AND SALE OF ASSETS**

On October 15, 2003an officer of the Company exchanged an interest in TSG International for 50shares of the Company’s Series C preferred stock. In September 2004,the Directors of TSGI agreed to exchange all shares held by it of TechnicalSolutions Group Inc for the TSGI shares held by the Company, as a result ofwhich the Company reacquired 100% of the shares of Technical Solutions Group asa wholly owned subsidiary.

Under an agreement datedJuly 1, 2003, modified on September 15, 2003, the Company sold itsright, title and interest in and to the tangible and intangible assets of itsFire & Rescue Boat Division to Rockwell Power Systems Inc. (“RPSI”),which subsequently merged with Xtreme Companies, Inc. As part of theconsideration for such sale, RPSI caused to be delivered to the Company 1/3 ofXtreme’s authorized common stock, which was then distributed to the Company’sshareholders of record as at December 5, 2003. In addition, the Companywas to receive 500 shares of Xtreme’s Series A Preferred stock. TheCompany has contacted Xtreme Companies regarding the Series A preferredstock  but has not yet received theSeries A preferred stock.

**NOTE16—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

The Company’s ChiefExecutive 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. APT Leadershipbilled the Company  $225,400, $0 and $0for the years ended December 31, 2005, 2004 and 2003, respectively.

**NOTE17 — OTHER COMPREHENSIVE LOSS (RESTATED)**

Othercomprehensive loss consists of the following: 
|                                        | ** ** | **2005**     | ** **  | **2004**     | ** ** | **2003**     | ** ** |
|----------------------------------------|------------|--------------|-------------|--------------|------------|--------------|------------|
| ** **                             | ** ** | **Restated** | ** **  | **Restated** | ** ** | **Restated** | ** ** |
| **Net Loss**                           |       | $            | (14,404,622 | )            | $          | (11,953,803  | )          | $ | (8,087,869 | ) |
| Other Comprehensive Income, net of tax |       |         |        |         |       |         |       |
| **Comprehensive Income (Loss)**        |       | $            | (14,404,622 | )            | $          | (11,953,803  | )          | $ | (8,087,869 | ) |

 

**NOTE18 — TAXES**

The FinancialAccounting Standards Board (FASB) issued Statement of Financial AccountingStandards Number 109 (“SFAS 109”). “Accounting for Income Taxes”, whichrequired a change from the deferred method to the asset and liability method ofaccounting for income taxes. Under the asset and liability method, deferred incometaxes are recognized for the tax consequences of “temporary differences” byapplying enacted statutory tax rates applicable to future years to differencesbetween the financial statement carrying amounts and the tax basis of existingassets and liabilities. 

The Company’s netdeferred tax asset as of December 31, 2005, 2004, and 2003 consisted  of the following: 
| ** **                        | ** ** | **December 31, 2005** | ** ** | **December  31, 2004** | ** ** | **December 31, 2003** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|---------------------------------------|------------|---------------------------------|------------|
| Deferred tax assets:              |       |                            |       |                                  |       |                            |       |
| Provisions and  allowances        |       | $                               | 2,381,178  |                                  | $          | 859,085                         |       | $ | 111,350 |   |
| Depreciation difference           |       | (204,486                        | )          | (168,722                              | )          | (29,595                         | )          |
| Net operating loss  carryforwards |       | 12,009,446                      |       | 7,562,010                             |       | 5,498,351                       |       |
|                              |       | 14,186,138                      |       | 8,252,373                             |       | 5,580,106                       |       |
| Valuation allowance               |       | (14,186,138                     | )          | (8,252,373                            | )          | (5,580,106                      | )          |
| Net Deferred Tax asset            |       | $                               | —     |                                  | $          | —                          |       | $ | — |   |

 

48

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The Company hasprovided a full valuation allowance for deferred tax assets since these futurebenefits may not be realized. If the Company achieves future profitability,these deferred tax assets could be available to offset future income taxes. TheCompany’s valuation allowance was increased $5,933,765 and $2,672,267 for theyears ended December 31, 2005, and 2004 respectively. 

As of December 31,2005, 2004 and 2003,  the Company hasavailable Federal operating loss carry-forwards of $32,868,929, $21,257,284 and$13,096,137, expiring through 2025 and state operating loss carry-forwards of$21,610,537, $9,879,269 and $2,057,029, expiring through 2025, respectively. 

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

| ** **                                     | ** ** | **December 31, 2005** | ** ** | **December  31, 2004** | ** ** | **December 31, 2003** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|---------------------------------------|------------|---------------------------------|------------|
| Tax expense (credit) at statutory rate-federal |       | (35.00                     | )%         | (35.00                                | )%         | (35.00                          | )%         |
| State tax expense net of federal tax           |       | (3.25                      | )%         | (3.25                                 | )%         | (3.25                           | )%         |
| Changes in valuation allowance                 |       | 38.25                      | %          | 38.25                                 | )%         | 38.25                           | %          |
| Tax expense at actual rate                     |       | 0                          | %          | 0                                     | %          | 0                               | %          |

 

**NOTE19 – EARNINGS (LOSS) PER SHARE**

The Company utilizes SFASNo. 128, “Earnings per Share” to calculate gain/loss per share. Basic gain/lossper 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.  Under SFAS No. 128, where there is a loss,the inclusion of additional common shares is anti-dilutive (since the increasednumber of shares reduces the per share loss available to common stock holders),and if the additional common shares are anti-dilutive, they are not added tothe denominator in the calculation.  Forperiods, where the additional common shares are anti-dilutive, the followingcommon stock equivalents have been excluded from the calculation of dilutedloss per share:
| **  **                                                 | ** ** | **2005 Restated** | ** **      | **2004 Restated** | ** ** | **2003 Restated** | ** ** |
|------------------------------------------------------------------|------------|------------------------|-----------------|------------------------|------------|------------------------|------------|
| **Common  stock equivalents excluded from calculation**          | ** ** | ** **             | ** **      | ** **             | ** ** | ** **             | ** ** |
| Convertible  Preferred Stock Series B                            |       | —                 |            | 10,493,939             |       | 3,553,270              |       |
| Convertible  Preferred Stock Series C                            |       | —                 |            | —                 |       | 4,619,251              |       |
| Convertible  Preferred Stock Series D                            |       | 6,288,428              |            | —                 |       | —                 |       |
| Warrants                                                         |       | 2,104,863              |            | 1,725,942              |       | 1,141,667              |       |
| Options                                                          |       | 323,420                |            | —                 |       | —                 |       |
| **Total**                                                        | ** ** | **8,716,711**          | ** **      | **12,219,881**         | ** ** | **9,314,188**          | ** ** |
| ** **                                                       |       |                   |            |                   |       |                   |       |
| **Basic & diluted loss per share computations  (Restated):** |       |                   |            |                   |       |                   |       |
| Net loss                                                         |       | $                      | (14,404,622     | )                      | $          | (11,953,803            | )          | $ | (8,087,869 | ) |
| Accretion of  Series D 6% convertible preferred stock            |       | (2,041,697             | )               | —                 |       | —                 |       |
| Preferred stock  dividends                                       |       | (778,530               | )               | —                 |       | —                 |       |
| **Loss  available to common shareholders**                       | ** ** | **$**                  | **(17,224,849** | **)**                  | **$**      | **(11,953,803**        | **)**      | **$** | **(8,087,869** | **)** |
| **Weighted  average shares used to compute:**                    |       |                   |            |                   |       |                   |       |
| Basic and  diluted loss per common share                         |       | 33,926,573             |            | 19,357,939             |       | 8,185,153              |       |
| Basic loss per  common share before discontinued operations      |       | $                      | (0.51           | )                      | $          | (0.62                  | )          | $ | (0.63 | ) |
| Basic loss per  common share from discontinued operations        |       | —                 |            | —                 |       | (0.36                  | )          |
| **Basic loss per common share**                                  | ** ** | **$**                  | **(0.51**       | **)**                  | **$**      | **(0.62**              | **)**      | **$** | **(0.99** | **)** |

 

**NOTE20 – VALUATION AND QUALIFYING ACCOUNTS AND RESERVES**

Thefollowing table summarizes information about valuation and qualifying accountsand reserves recorded for 2005, 2004 and 2003.
| **Description**                     | ** ** | **Year** | ** ** | **Balance at  Beginning  of Period** | ** ** | **Additions Charged  to Costs and  Expenses** | ** ** | **Writeoffs** | ** ** | **Other** | ** ** | **Balance at  End of  Period** | ** ** |
|-------------------------------------|------------|----------|------------|------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------|------------|-----------|------------|------------------------------------------|------------|
| **Revenue  Based Provisions (A)**   |       | 2005     |       | $                                              | —     |                                                         | $          | 1,018,051     |       | $         | —     |                                     | $          | — |   | $ | 1,018,051 |   |
| **Allowance  for Inventory Losses** |       | 2005     |       | $                                              | —     |                                                         | $          | 498,281       |       | $         | —     |                                     | $          | — |   | $ | 498,281 |   |
| **Warranty  Reserve (B)**           |       | 2005     |       | $                                              | 729,461    |                                                         | $          | 1,764,264     |       | $         | 807,663    |                                     | $          | — |   | $ | 1,686,062 |   |
|                                |       | 2004     |       | 180,384                                        |       | 728,595                                                      |       | 179,518       |       | —    |       | 729,461                                  |       |
|                                |       | 2003     |       | —                                         |       | 180,384                                                      |       | —        |       | —    |       | 180,384                                  |       |

 

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(A)      Consists of the Allowance for Contractual Adjustments, as presented onthe Company’s balance sheet and explained in Footnote 1 to the financialstatements.

(B)        Inclusive of the general warranty reserve as well as the Twin DiscWarranty Reserve of $1,306,018 recorded in 2005.

49

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**NOTE21—DISCONTINUED OPERATIONS**

Discontinued operationsfollow SFAS No. 144. The loss from discontinued operations consist ofimpairment loss, the loss or gain from actual operations, and the gain/loss onthe disposal of assets. All these accounts are included in discontinuedoperations in the period in which they occur.

On October 1, 2003,the Company sold all of the assets associated with its fire and rescue boatbusiness, and discontinued all fire boat related operations. The Companyrecognized a loss as a result of such discontinued operations as follows:
| Discontinued operations:                       |   |   |      |
|------------------------------------------------|--------|--------|-----------|
| Loss from  operations including                |   |   |      |
| Impairment loss                                |   | $      | 2,932,179 |   |
| Income tax  benefit                            |   | — |      |
| Loss from Discontinued  Operations, net of tax |   | $      | 2,932,179 |   |

 

**NOTE22—RESTRUCTURING EXPENSES—NET**

The Company implementedrestructuring actions to streamline operations and exit the boat business.These actions include workforce reductions, rationalization and the exit of theboat business. Charges and credits related to discontinued operations areincluded in income (loss) from operations of discontinued operations. As ofDecember 31, 2003, there is no longer a restructuring reserve on thebalance sheet. Restructuring expense for 2003 was $224,947.

SFAS 146 requires that aliability for a cost associated with an exit or disposal activity be recognizedand measured initially at fair value only when the liability is incurred. Theadoption of SFAS 146 did not have a material impact on the Company’s financialcondition.

**NOTE23—GOODWILL**

There is no goodwill onthe balance sheet as of December 31, 2005.

In 2002, the Companyincurred impairment expense of $1,400,000, of which $482,874 was reclassifiedfrom “Investment in TSG” to Goodwill during the period ending December 31,2002. In 2003, the Company incurred a goodwill impairment expense of $1,917,747and as of December 31, 2003, the Company had no goodwill on our balancesheet.

**NOTE24—SUMMARIZED QUARTERLY UNAUDITED FINANCIAL DATA (RESTATED)**
|                                   | ** ** | **2005**   | ** ** |
|-----------------------------------|------------|------------|------------|
| ** **                        | ** ** | **Q1**     | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| **Net Sales**                     |       | $          | 5,853,423  |   | $ | 18,295,357 |   | $ | 9,303,526 |   | $ | 16,260,523 |   |
| Gross Profit/(Loss)               |       | (541,896   | )          | 4,036,672 |   | (1,314,823 | ) | 1,104,261 |   |
| Operating Loss                    |       | (3,528,382 | )          | (473,325 | ) | (5,321,045 | ) | (6,307,311 | ) |
| **Net Loss**                      |       | $          | (936,306   | ) | $ | (647,344 | ) | $ | (5,666,483 | ) | $ | (7,154,489 | ) |
| **Basic loss per common share**   |       | $          | (0.05      | ) | $ | (0.04 | ) | $ | (0.19 | ) | $ | (0.23 | ) |
| **Diluted loss per common share** |       | $          | (0.05      | ) | $ | (0.04 | ) | $ | (0.19 | ) | $ | (0.23 | ) |

 
|                                   | ** ** | **2004**   | ** ** |
|-----------------------------------|------------|------------|------------|
| ** **                        | ** ** | **Q1**     | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| **Net Sales**                     |       | $          | 1,642,853  |   | $ | 15,578 |   | $ | 93,727 |   | $ | 8,520,599 |   |
| Gross Profit/ (Loss)              |       | 410,816    |       | (280,949 | ) | (663,732 | ) | (460,376 | ) |
| Operating Loss                    |       | (1,910,483 | )          | (1,920,175 | ) | (3,719,662 | ) | (4,288,263 | ) |
| **Net Loss**                      |       | $          | (1,913,786 | ) | $ | (1,923,831 | ) | $ | (3,885,820 | ) | $ | (4,230,366 | ) |
| **Basic loss per common share**   |       | $          | (0.16      | ) | $ | (0.14 | ) | $ | (0.28 | ) | $ | (0.04 | ) |
| **Diluted loss per common share** |       | $          | (0.16      | ) | $ | (0.14 | ) | $ | (0.28 | ) | $ | (0.04 | ) |

 

**NOTE25—SUBSEQUENT EVENTS**

On January 10, 2006, theCompany issued a stock option to the Company’s Chief Executive Officer topurchase 1,000,000 shares of its unregistered common stock at a fixed exerciseprice of $0.72 per share. These options vest in full on January 1, 2007nad were valued on the grant date at $246,580.

50

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** **
| **ITEM 9.** | **CHANGES IN AND DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING & FINANCIAL DISCLOSURE** |
|-------------|--------------------------------------------------------------------------------------------------|

 

None.
| **ITEM 9A.** | **CONTROLS & 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 Annual Report on Form 10-K.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 over financialreporting is expressed at the level of reasonable assurance that the controlsystem, no matter how well designed and operated, can provide only reasonable,but not absolute, assurance that the control system’s objectives will be met.

*CHANGEIN INTERNAL CONTROL OVER FINANCIAL REPORTING*

There were no changes inour internal control over financial reporting that occurred during our lastfiscal year that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting. However, asdiscussed above we are committed to a process of change and improvementthroughout the enterprise intended to optimize our operations, and this processwill necessarily entail improvements to our financial controls over the comingyear.
| **ITEM 9B:** | **OTHER INFORMATION** |
|--------------|-----------------------|

 

·      On January 13, 2006, we announced theappointment of Mr. Jack Davis as a member of our Board of Directors.

·      On January 26, 2006, we announced theappointment of the firm of C.E. Unterberg Towbin as investment bankers.

·      On February 3, 2006, we announced theaward of a Letter Contract from the United States Army for the delivery of 19Buffalo Vehicles with an option for an additional 27 vehicles.

·      On February 13, 2006, we announcedthe extension of $6,250,000 of the principal amount due under the Notesexecuted by the Company in favor of Longview Fund and Longview Equity Fund onNovember 18, 2005.

·      On March 1, 2006, we announced thepayment of the semi-annual dividend in the amount of $377,554 due under ourConvertible Preferred Series D stock.

·      On March 2, 2006, we announced theaward of a contract from the United States Army for Authorized Stock Lists forspare parts for  our vehicles.

·      On March 31, 2006 we announced theresignation of the President of our operating subsidiary.

**PART III**

**ITEM 10.**            DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT

*DIRECTORS,EXECUTIVE OFFICERS*

The followingtable sets forth certain information about our directors and executive officersas of April 1. 
| Name               | ** ** | **Age** | ** ** | **Position**                                                |
|--------------------|------------|---------|------------|-------------------------------------------------------------|
| Gordon McGilton    |       | 62      |       | Chief Executive Officer, Director                           |
| R. Scott Ervin     |       | 51      |       | Interim Chief Financial Officer, Director, General  Counsel |
| Frank Kavanaugh    |       | 45      |       | Chairman of the Board                                       |
| Gale Aguilar       |       | 73      |       | Director                                                    |
| Raymond W. Pollard |       | 63      |       | Director                                                    |
| Jack Davis         |       | 59      |       | Director                                                    |

 

*BIOGRAPHIESOF EXECUTIVE OFFICERS AND DIRECTORS*

GordonMcGilton:—Director, Chief Executive Officer. Mr. McGilton has served as aSenior Executive for a multitude of organizations in manufacturing, medicaldevices, and Education. He has extensive experience in manufacturing, andbusiness

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management. He is apartner in a technology company, APT Leadership and teaches business processseminars worldwide specializing in the creation of model companies. As aconsultant, over the prior 5 years Mr. McGilton advised several companiesthroughout the U.S. including JD Edwards, the United States Navy, UnitedHealthcare and Cigna Insurance Companies.

R. Scott Ervin:—Director,General Counsel, Interim Chief Financial Officer. Mr. Ervin actedinitially as a director from June through October 2001, and hasserved on the board continuously since February 2002. He is an attorney,having graduated from Boston College Law School (JD 1984) and is licensed topractice in New York and Texas. From 1984 through 1991 Mr. Ervin wasassociated with the New York law firm of Burlingham, Underwood and from 1991through 1999, he practiced law with the law offices of Dr. AbdelrahmanAbbar, in Jeddah Saudi Arabia. Since 1999 Mr. Ervin has been in privatepractice in Austin, Texas. He is a director of Interlex, Inc. a Texascorporation and a director of The Behavioural Sciences Foundation, a non-profitscientific research foundation. He also acts as trustee for several private trusts.

Frank Kavanaugh:—Chairmanof the Board. Mr. Kavanaugh was appointed to the board of directors, inDecember of 2003 and became Chairman in January of 2005. He currentlyis the managing director of Fort Ashford Funds, LLC, a provider of securedbridge loans, and a principal of Ashford Capital, LLC an equity investmentfirm. He was employed by the Company from July of 2002 until he resignedon May 14, 2005 as a VP with responsibility for strategic investment. Overthe last 10 years he has acted as a principal at Ashford Capital, LLC and itspredecessor. In that capacity he has served in several interim executivepositions including operational or executive roles at several portfoliocompanies. He co-founded and served as President of QuickStart Technologies andheld positions at Microsoft and Hewlett Packard. His education includes: an MBAfrom Pepperdine University, and a BS degree in Information & ComputerScience, from University of California, Irvine. He serves on several communityboards including the Child Guidance Center of Orange County, and the board ofadvisors at Chaprman University’s Leatherby Center.

Gale Aguilar:—Director.Mr. Aguilar has served as our director since October of 2003, andserved as interim CEO in 2004 and 2005. Currently he is the President and amember of the Board of Directors at MITEM Corporation which he joined in 1995.His experience includes SF2 Corp, Stardent Corporation, and Prime Computer asSenior VP of Marketing, VP of Corp. Strategy and Corp. Development he was amember of the operating committee. In addition, he worked at IBM for 27 yearsin several positions including \ Director of Marketing and Service GeneralProducts Division, IBM Director of Product Marketing, and Director of SystemsStrategy. His experience includes active duty in the Army 1951-53. Heparticipates on several corporate and charitable boards.

Raymond W.Pollard:—Director. Mr. Pollard has worked for more than 30 years in theautomotive and forging industries and has held positions of engineeringmanagement, manufacturing operations management, supplier development, contractnegotiations, strategic alliance development, quality and logistics managementand purchasing. Mr. Pollard is currently the Executive Director ofSupplier development and Strategic Alliances for General Motors Corporation’sFuel Cell Activity. Mr. Pollard has a B.S. degree in ManufacturingEngineering and Business from Utah State University and is a veteran of theVietnam War.

Jack Davis:—Director.Mr. Davis has held various senior level positions over the past 35 yearsin the military, law enforcement and business fields. He served in the UnitedStates Marine Corps from 1968 until his retirement in 2005 where he held therank of Major General. In 1999, Mr. Davis retired from the North CarolinaState Bureau of Investigation after 20 years of distinguished service. He isalso the founder of J.A. Davis & Associates, a security trainingcompany. Mr. Davis holds undergraduate and masters degrees from IndianaState University and a Masters of Urban Administration from the University ofNorth Carolina at Charlotte.

*COMPLIANCEWITH SECTION 16(A) OF THE EXCHANGE ACT.*

Section 16(a) ofthe Exchange Act, as amended, requires our executive officers, directors andpersons who beneficially own more than 10% of our common stock to file reportsof their beneficial ownership and changes in ownership (Forms 3, 4 and 5, andany amendment thereto) with the SEC. Executive officers, directors, andgreater-than-ten percent holders are required to furnish us with copies of allSection 16(a) forms they file. Based on our review of the activity ofour officers and directors for the fiscal year ended December 31, 2005, webelieve Forms 3, 4 or 5 were timely filed, except for the following:Mr. McGilton filed a Form 3 304 days late, Mr. Pollard filed aform 3 113 days late, Mr. Ervin filed a Form 3 1460 days late,Mr. Davis filed a Form 3 67 days late and Mr. Aguilar filed aForm 3 880 days late.

*CODEOF ETHICS*

We have adopted a Code ofEthics that applies to our principal executive officer, principal financialofficer, principal accounting officer or controller, or persons performingsimilar functions. Our Code of Ethics is available for review on our website(www.forceprotection.net).

*NUMBERAND ELECTION OF DIRECTORS*

We currently have sixdirectors. Directors are elected according to a staggered election cycleaccording to Class. There are three classes: Class A to be elected in2006, for a period of three years, Class B to be elected in 2007 for aperiod of three years and Class C to be elected in 2008 for a period ofthree years.

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*AUDITCOMMITTEE*

We do not have a separateAudit Committee. Our Board of Directors performs the functions usuallydesignated to an Audit Committee. We do not currently have a director that qualifiesas an Audit Committee expert as defined by the rules of the SEC. We arecurrently searching for a director that meets this requirement. We employ anoutside firm to advise and consult management and the board on matters relatingto our financial statements.

**ITEM11.**            EXECUTIVECOMPENSATION

*SUMMARYCOMPENSATION TABLE*

The following tablepresents a summary of the compensation paid to our Chief Executive Officer andother highly compensated employees during the last three fiscal years. Exceptas listed below, there are no bonuses, other annual compensation, restrictedstock awards or options/SARs or any other compensation paid to executiveofficers.
| ** **                                     | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **   | ** ** | ** **   | ** ** | **Long Term Compensation** | ** ** | ** **     | ** ** |
|------------------------------------------------|------------|------------|------------|------------------------------|------------|--------------|------------|--------------|------------|--------------------------------------|------------|----------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | ** **   | ** ** | **Awards**   | ** ** | ** **                           | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **   | ** ** | **Other**    | ** ** | **Restricted**                       | ** ** | **Securities** | ** ** | **All** | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **   | ** ** | **Annual**   | ** ** | **Stock**                            | ** ** | **Underlying** | ** ** | **Other** | ** ** |
| **Name and Principal Position** | ** ** | **Year**   | ** ** | **Salary($)**                | ** ** | **Bonus($)** | ** ** | **Comp.($)** | ** ** | **Awards ($)**                  | ** ** | **Options**    | ** ** | **Comp.** | ** ** |
| Gordon  McGilton(1)                            |       | 2004       |       | n/a                          |       |         |       |         |       |                                 |       |           |       |   |   |
| Chief Executive Officer                        |       | 2005       |       | $                            | 289,327    |         | $          | 60,000       |       |                                 |       |           |       |   |   | $ | 20,000 |   |
| Mike Aldrich                                   |       | 2003       |       | $                            | 96,000     |         |       |         |       |                                 |       |           |       |   |   |   |
| Vice President Sales                           |       | 2004       |       | $                            | 113,758    |         |       |         |       |                                 |       |           |       |   |   |   |
|                                           |       | 2005       |       | $                            | 118,560    |         | $          | 234,761      |       |                                 |       |           |       |   |   |   |   |
| Ted McQuinn(2)                                 |       | 2004       |       | n/a                          |       |         |       |         |       |                                 |       |           |       |   |   |
| President FPII                                 |       | 2005       |       | $                            | 159,919    |         |       |         |       |                                 | $          | 20,000         |       |   |   | $ | 30,000 |   |
| R. Scott Ervin(3)                              |       | 2003       |       | n/a                          |       |         |       |         |       |                                 |       |           |       |   |   |
| General Counsel& Acting CFO                |       | 2004       |       | $                            | 56,800     |         |       |         |       |                                 | $          | 108,000        |       |   |   | $ | 15,000 |   |
|                                           |       | 2005       |       | $                            | 139,842    |         |       |         |       |                                 |       |           |       |   |   |   |
| Mark Edwards(4)                                |       | 2004       |       | $                            | 67,308     |         |       |         |       |                                 |       |           |       |   | $ | 10,000 |   |
| Sr. VP Vehicle Systems                         |       | 2005       |       | $                            | 144,070    |         |       |         |       |                                 |       |           | 82,666     |   |   |   |
| Michael Watts(5)                               |       | 2003       |       | $                            | 180,500    |         |       |         |       |                                 | $          | 240,000        |       |   |   |   |   |
| Former Chief Executive                         |       | 2004       |       | $                            | 207,962    |         |       |         |       |                                 | $          | 360,000        |       |   |   | $ | 30,000 |   |
| Officer                                        |       | 2005       |       |                         |       |         |       | $            | 150,000    |                                 |       |           |       |   | $ | 4,621 |   |
| Gale Aguilar(6)                                |       | 2003       |       | n/a                          |       |         |       |         |       |                                 |       |           |       |   |   |
| Former Interim Chief                           |       | 2004       |       | n/a                          |       |         |       |         |       | $                                    | 40,000     |           |       |   |   |   |
| Executive  Officer                             |       | 2005       |       | $                            | 45,000     |         |       |         |       |                                 | $          | 122,000        |       |   |   |   |   |
|                                                |            |            |            |                              |            |              |            |              |            |                                      |            |                |            |  |  |  |  |  |  |  |

 

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The value shown for issuances of restricted (unregistered) common sharesis 100% of the market price as of the effective date of the grant by the Boardof Directors (or the vesting date if different). LTIP Payout column has beenomtted as no transactions were reportable thereunder. 

(1)          Mr. McGiltonreceived $20,000 as additional “in kind” compensation during 2005 in the formof a jet boat. 

(2)          Mr. McQuinnwas granted 9,950 shares of our unregistered common stock as compensationduring 2005. During 2005 Mr. McQuinn received $30,000 cash as a relocationbenefit

(3)          Mr. Ervinwas granted 41,667 shares of our unregistered common stock and 4 shares of ourSeries C stock as compensation during 2004 During 2004 Mr. Ervin received$15,000 cash as a relocation benefit

(4)          Mr. Edwards wasgranted an option to purchase 83,334 shares of our unregistered common stock ascompensation during 2005 During 2004 Mr. Edwards received a $10,000 cashas a relocation benefit

(5)          Mr. Wattsserved as a consultant to the Company for 12 months following his resignationas CEO in October 2004. During 2003 Mr. Watts was granted 166,667shares of our unregistered common stock as compensation. During 2004Mr. Watts was granted 83,333 shares of our unregistered common stock and20 shares of our Series C stock as compensation. During 2005 Mr. Watreceived consulting fees of $150,000 and $4,621 in health insurance benefits. 

(6)          Mr. Aguilarresigned as our Interim Chief Executive Officer on January 27, 2005.During 2004 Mr. Aguilar was granted 20,833 shares of our unregisteredcommon stock as compensation. During 2005 Mr. Aguilar was granted 20,833shares of our unregistered common stock and 1 share of our Series C stockas compensation 

*AGREEMENTS WITH KEYPERSONS*

On January 27, 2005,the Company entered into an agreement with Mr. Gordon McGilton to act asits Chief Quality Officer. Under the terms of such agreement, Mr. McGiltonis to receive a base salary of $180,000 plus an annual bonus of $180,000 and reimbursementfor travel, lodging and other out of pocket expenses incurred duringemployment. The Company also agreed to provide Mr. McGilton stock optionsonce it adopts a stock option plan. Effective April 18, 2005, the Companyappointed 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. 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 $12,910.

 

53

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OnNovember 15, 2004, the Company entered into an employment agreement withMr. R. Scott Ervin to act as its General Counsel. Under the terms of suchagreement, Mr. Ervin is to receive compensation of $118,000 per year, plusrelocation expenses of $15,000, plus a grant of unregistered common stockvalued at $75,001. Effective January 1, 2005, the annual compensationunder such agreement was increased to $140,000. On January 27, 2005,Mr. Ervin was appointed by the Board to act as Interim Chief Executive Officerduring the Company’s search for a Chief Executive Officer. Upon the appointmentof the new Company Chief Executive Officer on April 18, 2005,Mr. Ervin ceased to serve as the Interim Chief Executive Officer butcontinues to serve as General Counsel and a member of the board of directors.Mr. Ervin received no compensation for his services as a director during2005. On November 14, 2005, the Board appointed Mr. Ervin to serve asthe Acting Chief Financial Officer following the resignation of the former CFO.

OnNovember 8, 2004, the Company entered into an employment agreement withMr. Gale Aguilar to act as the Interim Chief Executive Officer. Under theterms of such agreement, Mr. Aguilar is to receive compensation of$180,000 per year, plus a grant of 15,099 shares of unregistered common stockvesting on November 18, 2004 valued at $72,650.  Mr. Aguilar’s employment agreement wasterminated effective January 27, 2005. Mr. Aguilar received nocompensation 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$460,890.  On May 14, 2005,Mr. Kavanaugh resigned from his employment with the Company, but continuesto serve on the board of directors as Chairman. In connection withMr. Kavanaugh’s resignation, the Company agreed to pay for 24 months ofhealth coverage valued at $24,178. Mr. Kavanaugh received no compensationfor his services as a director during 2005. 

*DIRECTORCOMPENSATION*

During 2004 and 2005 wereimbursed Directors for travel expenses associated with their work for thecompany, but did not pay Directors any compensation. During 2003, wecompensated directors in the form of grants of unregistered common stock. ScottErvin was awarded 20,833 shares of common stock valued at $20,000 during 2003for services as an independent director.

**ITEM12.**            SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

*PRINCIPALSHAREHOLDERS*

The following table setsforth, to our knowledge, certain information concerning the beneficialownership of our common stock as of March 31, 2006 by each stockholderknown by us to be (i) the beneficial owner of more than 5% of theoutstanding shares of common stock, (ii) each current director, (iii) eachof the executive officers named in the Summary Compensation Table who wereserving as executive officers at the end of the 2005 fiscal year and(iv) all of our directors and current executive officers as a group.

Beneficial ownership isdetermined in accordance with the rules of the Securities and ExchangeCommission and includes voting or investment power with respect to sharesbeneficially owned. Shares of Common Stock subject to options or warrantscurrently exercisable are deemed outstanding for computing the percentageownership of the person holding such options or warrants, but are not deemedoutstanding for computing percentage ownership of any other person.
| ** **                                  | ** ** | **Number of Shares** | ** ** | **Percentage**   | ** ** |
|---------------------------------------------|------------|--------------------------------|------------|------------------|------------|
| **Name of Beneficial Owner** | ** ** | **Beneficially Owned**    | ** ** | **Ownership(1)** | ** ** |
| Gordon McGilton(2)                          |       | 1,383,333                      |       | 2.9              | %          |
| R. Scott Ervin                              |       | 505,835                        |       | 1.1              | %          |
| Frank Kavanaugh(3)                          |       | 6,448,727                      |       | 13.7             | %          |
| Gale Aguilar(4)                             |       | 117,583                        |       | 0.2              | %          |
| Raymond Pollard                             |       | 500                            |       |             | *          |
| All Officer and Directors as a Group        |       | 8,455,978                      |       | 17.9             | %          |

 

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*                    less than 1%

(1)             The number of shares of fully diluted commonstock outstanding as of March 31, 2006 is 47,117,377.

(2)             Includes an option for 1,000,000 shares at$0.72 per share. The option vests on January 1, 2007.

(3)             Mr. Kavanaugh is a principal in AshfordCapital, LLC and his total beneficial share holdings include shares owned byAshford Capital.

(4)             As compensation for Mr. Aguilar’semployment as our Interim Chief Executive Office during the period ofOctober 2004 through January 2005, we granted to him a total of117,583 shares of our unregistered common stock valued at $122,000. 20,833 ofthese shares vested on November 18, 2004 and 96,750 of these shares vestedon January 1, 2005. The share certificates representing all these shareswere issued on February 28, 2006.

**ITEM13.**            CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

Our ChiefExecutive Officer, Mr. McGilton, is a principle of APT Leadership, aconsulting firm we hired to provide various business consulting services,training seminars and certain business software. For the years 2005 and 2004,APT Leadership billed us $225,400  and$21,017, respectively, for such services, training and software, of which$21,017 remains unpaid as of December 31, 2005. 

54

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**ITEM14.**            PRINCIPALACCOUNTANT FEES AND SERVICES

*AUDIT FEES*

We paid our principalaccountant $20,000 for audit fees in 2004. In 2005, we paid $40,000 in auditfees. 

*AUDIT-RELATEDFEES*

None.

*TAXFEES*

None.

*OTHERFEES*

None.

*NOTE*

The independent Auditor’sReport dated April 18, 2005 inadvertently referred to “Jaspers +Hall PC (formerly Michael Johnson & Company LLC).” This was anincorrect identification of the audit firm, which is “Jaspers + Hall.”

*THEBOARD OF DIRECTORS PRE-APPROVAL POLICY AND PROCEDURES*

We do not have a separateAudit Committee. Our full Board of Directors performs the functions of an AuditCommittee. During fiscal year 2004, the Board of Directors adopted policies andprocedures for the pre-approval of audit and non-audit services for the purposeof maintaining the independence of our independent auditors. We may not engageour independent auditors to render any audit or non-audit service unless eitherthe service is approved in advance by the Board of Directors or the engagementto render the service is entered into pursuant to the Board of Director’spre-approval policies and procedures. On an annual basis, the Board ofDirectors may pre-approve services that are expected to be provided to us bythe independent auditors during the following 12 months. At the time suchpre-approval is granted, the Board of Directors must (1) identify theparticular pre-approved services in a sufficient level of detail so thatmanagement will not be called upon to make judgment as to whether a proposedservice fits within the pre-approved services and (2) establish a monetarylimit with respect to each particular pre-approved service, which limit may notbe exceeded without obtaining further pre-approval under the policy.

The Board hasconsidered whether the provision of the services described above under thecaption “All Other Fees” is compatible with maintaining the auditor’sindependence. 

55

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**PART IV**

**ITEM15.**             EXHIBITS
| NUMBER | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                        |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1    |       | Agreement and Plan of Merger (included as Attachment  A to Exhibit 99.2 to the Form DEF 14A filed November 19, 2004,  and incorporated herein by reference).                                                                                            |
|   |       |                                                                                                                                                                                                                                                                   |
| 3.1    |       | Articles of Incorporation (included as Attachment B  to Exhibit 99.2 to the Form DEF 14A filed November 19, 2004,  and incorporated herein by reference).                                                                                               |
|   |       |                                                                                                                                                                                                                                                                   |
| 3.2    |       | By-Laws (included as Attachment C to Exhibit 99.2 to  the Form DEF 14A filed November 19, 2004, and incorporated herein  by reference).                                                                                                                      |
|   |       |                                                                                                                                                                                                                                                                   |
| 3.3    |       | Amended Articles of Incorporation (included as  Attachment D to Exhibit 99.2 to the Form DEF 14A filed November 19, 2004,  and incorporated herein by reference).                                                                                       |
|   |       |                                                                                                                                                                                                                                                                   |
| 4.1    |       | Certificate of Designation for Series D  Convertible Preferred Stock, dated January 19, 2005 (included as Exhibit  4.1 to the Form 8-K filed January 27, 2005, and incorporated  herein by reference).                                             |
|   |       |                                                                                                                                                                                                                                                                   |
| 4.2    |       | Form of Common Stock Purchase Warrant, dated  January 19, 2005, (included as Exhibit 4.2 to the Form 8-K  filed January 27, 2005, and incorporated herein by reference).                                                                      |
|   |       |                                                                                                                                                                                                                                                                   |
| 4.3    |       | Securities Purchase Agreement, dated  January 19, 2005 (included as Exhibit 4.3 to the Form 8-K  filed January 27, 2005, and incorporated herein by reference).                                                                                    |
|   |       |                                                                                                                                                                                                                                                                   |
| 4.4    |       | Registration Rights Agreement, dated  January 19, 2005 (included as Exhibit 4.4 to the Form 8-K  filed January 27, 2005, and incorporated herein by reference).                                                                                    |
|   |       |                                                                                                                                                                                                                                                                   |
| 4.5    |       | Amended and Restated Certificate of Designation for  Series B Convertible Preferred Stock (included as Exhibit 4.1 of the  Form 8-K filed February 15, 2005, and incorporated herein by  reference).                                                    |
|   |       |                                                                                                                                                                                                                                                                   |
| 4.6    |       | Amended and Restated Certificate of Designation for  Series C Convertible Preferred Stock (included as Exhibit 4.2 of the  Form 8-K filed February 15, 2005, and incorporated herein by  reference).                                                    |
|   |       |                                                                                                                                                                                                                                                                   |
| 4.7    |       | Bridge Facility between the Company and GC Financial  Services, Inc., dated September 29, 2005 (included as  Exhibit 4.1 to the Form 8-K filed July 8, 2005, and  incorporated herein by reference).                                          |
|   |       |                                                                                                                                                                                                                                                                   |
| 4.8    |       | Demand Note between the Company and GC Financial  Services, Inc., dated September 29, 2005 (included as  Exhibit 4.2 to the Form 8-K filed July 8, 2005, and  incorporated herein by reference).                                              |
|   |       |                                                                                                                                                                                                                                                                   |
| 4.9    |       | Secured Note between the Company and Longview Equity  Fund, LP, dated November 18, 2005 (included as Exhibit 4.1 to the  Form 8-K filed November 23, 2005, and incorporated herein by  reference).                                                      |
|   |       |                                                                                                                                                                                                                                                                   |
| 4.10   |       | Secured Note between the Company and Longview Fund,  LP, dated November 18, 2005 (included as Exhibit 4.2 to the Form 8-K  filed November 23, 2005, and incorporated herein by reference).                                                              |
|   |       |                                                                                                                                                                                                                                                                   |
| 10.1   |       | Sonic Jet Corporation 2000 Stock Option  Plan & Advisory and Consulting Agreement, dated May 1, 2000  (included as Appendix A to the Form 14C filed September 30, 2000,  and incorporated herein by reference).                                |
|   |       |                                                                                                                                                                                                                                                                   |
| 10.2   |       | Series B Convertible Preferred Stock Purchase  Agreement between the Company and Ashford Capital, LLC, dated  December 27, 2001 (included as Exhibit 10.1 to the Form 8-K  filed January 7, 2002, and incorporated herein by reference).           |
|   |       |                                                                                                                                                                                                                                                                   |
| 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).                                                      |

 

56

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

 

57

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|        |   |                                                                                                                                                                                                                                                                                 |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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).                     |
|   |   |                                                                                                                                                                                                                                                                                 |
| 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 (included as Exhibit 10.31 to  the Form 10-QSB filed November 15, 2005, and incorporated herein by  reference).                                                           |
|   |   |                                                                                                                                                                                                                                                                                 |
| 10.32  |   | Security Agreement between the Company and Barbara  R. Mittman, dated November 18, 2005 (included as Exhibit 10.1 to the Form 8-K  filed November 23, 2005, and incorporated herein by reference).                                                                    |
|   |   |                                                                                                                                                                                                                                                                                 |
| 10.33  |   | Form of Guaranty between the Company, Longview  Equity Fund, LP, and Longview Fund, LP, dated November 18, 2005  (included as Exhibit 10.2 to the Form 8-K filed November 23,  2005, and incorporated herein by reference).                                 |
|   |   |                                                                                                                                                                                                                                                                                 |
| 10.34  |   | Subscription Agreement between the Company, Longview  Equity Fund, LP, and Longview Fund, LP, dated November 18, 2005  (included as Exhibit 10.3 to the Form 8-K filed November 23,  2005, and incorporated herein by reference).                                     |
|   |   |                                                                                                                                                                                                                                                                                 |
| 10.35  |   | Letter Contract between the Company and the United  States Army dated February 3, 2006 (included as Exhibit 10.1 to the  Form 8-K filed February 9, 2006, and incorporated herein by  reference).                                                                     |
|   |   |                                                                                                                                                                                                                                                                                 |
| 10.36  |   | Contract between the Company and the United States  Army (included as Exhibit 10.36 to the Form 10-K filed on April 20,  2006).                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                 |
| 23.1   |   | Consent of Jaspers + Hall, PC.                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                 |
| 31.1   |   | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                 |
| 31.2   |   | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                 |
| 32.1   |   | Certification of Officers pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                      |

 

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**SIGNATURES**

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.
|                     | **Force  Protection, Inc.** |
|---------------------|-----------------------------|
| Date: June 27, 2007 |                        |   |
|                | By:                         | GORDON MCGILTON |   |
|                |                        | Gordon McGilton |
|                | * *                    | *Chief Executive  Officer* |

 
| Date: June 27, 2007 |     |                            |
|---------------------|----------|---------------------------------|
|                | By:      | MICHAEL S. DURSKI               |   |
|                |     | Michael S. Durski               |
|                | * * | *Chief  Financial Officer*      |
|                | * * | *Principal  Accounting Officer* |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

**Signatures**
| Name                    | ** ** | **Title** | ** **                   | **Date** |
|-------------------------|------------|-----------|------------------------------|----------|
|                    |       |      |                         |     |
| /s/ GORDON MCGILTON     |       |      | Director and Chief Executive |     | June 27, 2007 |
| Gordon McGilton         |       | Officer   |                         |     |
|                    |       |      |                         |     |
| /s/ MICHAEL MOODY       |       |      | Director                     |     | June 27, 2007 |
| Michael Moody           |       |      |                         |     |
|                    |       |      |                         |     |
| /s/ JACK DAVIS          |       |      | Director                     |     | June 27, 2007 |
| Jack Davis              |       |      |                         |     |
|                    |       |      |                         |     |
| /s/ ROGER THOMPSON, JR. |       |      | Director                     |     | June 27, 2007 |
| Roger Thompson, Jr.     |       |      |                         |     |

 

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