**UNITEDSTATES**

**SECURITIESAND 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**

**CommissionFile No. 001-33253**

**FORCEPROTECTION, INC.**

(Exact name ofissuer as specified 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’stelephone number, including area code:**(843)740-7015**

Securitiesregistered under Section 12(b) of the Exchange Act:

**None.**

Securitiesregistered under Section 12(g) of the Exchange Act:

**Commonstock, par value $0.001 per share.**

(Title of class)

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or15(d) of the Act. Yes o  No x

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past twelve months(or such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90days. Yes   x  No   o

Indicate by check mark ifdisclosure of delinquent filers in response to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained in this form, and no disclosurewill be contained, to the best of registrant’s knowledge, in definitive proxyor information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K.    o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. (Check one).

Large acceleratedfiler o       Acceleratedfiler o       Non-acceleratedfiler x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o  No   x

The aggregate marketvalue of the voting and non-voting common equity held by non-affiliates as ofDecember 31, 2005 was $22,353,816 based on a total of 28,658,739 shares ofour common stock held by non-affiliates on December 31, 2005 at the closingprice of $0.78 per share.

We had 36,114,217 sharesof common stock outstanding as of December 31, 2005.

Documents incorporated by reference: None.

 

----

TABLE OF CONTENTS

**FORCE PROTECTION, INC. FORM 10-K/A**
| EXPLANATORY NOTE                    |   |
|-------------------------------------|--------|
|                                |   |
| PART II                             |   |
|                                |   |
| ITEM 8. FINANCIAL  STATEMENTS       |   |
| ITEM 9A. CONTROLS  & PROCEDURES |   |
|                                |   |
| PART IV                             |   |
|                                |   |
| ITEM 15. EXHIBITS                   |   |
|                                |   |
| SIGNATURES                          |   |

 

## **EXPLANATORYNOTE**

Management has reevaluated the effectiveness of ourdisclosure controls and procedures as of December 31, 2005. As a result,management has concluded that our disclosure controls were not effective as ofDecember 31, 2005, because of certain material weaknesses.  Management’s revised evaluation is contained,and the material weaknesses are described, in Item 9A of this Form 10-K/A.

We have also added a legend to the report of MichaelJohnson & Co., LLC, with respect to our financial statements for the yearended December 31, 2003, included in Item 8 of this Form 10-K/A, describing ourinability to obtain and file a reissued report. There are no changes to that report or to the financial statements andother information included in Item 8.

# **PART II**

## **ITEM8.  FINANCIAL STATEMENTS**

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

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

We have audited theaccompanying 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, 2003 financial statements of ForceProtection, Inc. and subsidiary were audited by another auditor who has ceasedoperations.  That auditor expressed an unqualified opinion on thosefinancial statements in his report dated March 2, 2004.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. The company is not required to have, nor were weengaged to perform, an audit of its internal control over financial reporting.Our audit included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the company’s internal control over financial reporting.Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

In our opinion, thefinancial 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 in Note 1 tothe financial statements, certain errors resulting in adjustments to theCompany’s accounting for preferred stock and warrants issued to investors,accounting for stock-based compensation to employees and non-employees and accountingfor rent expense on a straight-line basis as of December 31, 2005 and 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 discussed above, thefinancial statements of Force Protection Inc., and subsidiary as of December31, 2003, and for the year then ended were audited by other auditors who haveceased operations. As described in Note 1, these financial statements have beenrestated. We audited the adjustments described in Note 1 that were applied torestate 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 not express an opinion or any other form of assurance on the2003 financial statements taken as a whole.

The accompanying financialstatements have been prepared assuming the Company will continue as a goingconcern.  As discussed in Note 2, conditions exist which raise substantialdoubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also discussed in Note2.  The financial statements do not include any adjustments that mightresult from this uncertainty.
|  | /s/ Jaspers +  Hall, PC |   |
|--|-------------------------|--------|

 

Denver, Colorado

March 17, 2006(except as to the restatement discussed in Note 1 to the consolidated financial

statements as to which the date is as of April 16,2007)

INDEPENDENT AUDITOR’SREPORT

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

We have audited theaccompanying consolidated balance sheets of Force Protection, Inc., andsubsidiary (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 theresponsibility of the Company’s management.  Our responsibility is to express an opinion onthese financial statements based on our audits.

We conducted our auditsin accordance with auditing standards generally accepted in the United States.Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Force Protection, Inc, and subsidiary, atDecember 31, 2003 and 2002, and the results of their operations and their cashflows for the years then ended, in conformity with accounting principlesgenerally accepted in the United States.

The accompanyingconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern. As discussed in Note 1 to the financialstatements, the Company’s recurring losses from operations and its difficultiesin generating sufficient cash flow to meet its obligation and sustain itsoperations raise substantial doubt about its ability to continue as a goingconcern. Management’s plans concerning these matters are also described in Note1.  The financial statements do notinclude 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                       |

 

**The consolidated statements of income, cash flowsand changes in stockholders’ equity of Force Protection, Inc. for the yearended December 31, 2003 have been audited by Michael Johnson & Co., LLC,independent public accountants.   We havenot been able to obtain a reissued report of Michael Johnson & Co., LLC oftheir audit report regarding such financial statements because Michael Johnson& Co., LLC is no longer registered with the PCAOB as required by Section102 of the Sarbanes-Oxley Act of 2002. The absence of such reissued report from Michael Johnson & Co., LLCmay limit a stockholder’s ability to assert claims against Michael Johnson& Co., LLC under Section 11(a) of the 1933 Act for any untrue statement ofa material fact contained in the financial statements audited by MichaelJohnson & Co., LLC or any omissions to state a material fact required to bestated in the financial statements.**

2

----

**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.

3

----

**FORCE PROTECTION, INC. ANDSUBSIDIARY**

**CONSOLIDATED INCOME STATEMENT**

**For theYears 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 Notesare an integral part of these financial statements.

4

----

**FORCEPROTECTION, INC. AND SUBSIDIARYCONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITYFor 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 | ) |

 

5

----

 
| ** **                                                             | ** ** | **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 |   |

 

6

----

 
| ** **                                                  | ** ** | **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 | ) |

 

7

----

 

**FORCEPROTECTION, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWSYEARS 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 accompanying Notesare an integral part of these financial statements.

8

----

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

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

**NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(RESTATED)**

**2005, 2004 AND 2003 RESTATEMENT**

As discussed in theexplanatory note to this Form 10-K/A and in Note 1 to the Company’s financialstatements included herein, the Company is restating its financial statementsand other financial information for the years ended 2005, 2004 and 2003, andfinancial information for each of the quarters in the years 2005, 2004 and2003.  The restatement adjusts the Company’s accounting for preferredstock and warrants issued to investors, accounting for stock-based compensationto employees and non-employees and accounting for rent expense on astraight-line basis.

The following tables setforth the effects of the error in accounting for the valuation of preferredstock and warrants issued to investors, accounting for stock-based compensationto employees and accounting for 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 | % |

 

9

----

 
|                                                      | ** ** | **(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 sale to militarycustomers.

10

----

**Principles of Consolidation**

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

**General Statement**

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

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

·      Revenuerecognition;

·      Inventorycost and Associated Reserves; and

·      Allocationof direct and indirect cost of sales.

·      Valuationof derivative instruments

·      Valuationof preferred stock and common stock issuances in lieu of cash compensation

**Revenue Recognition**

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 “MaterialInspection and Receiving Report” which under the Federal AcquisitionRegulations signifies contractual inspection and acceptance of the workperformed by the contractor.  It also acts as the contractual invoicecreating payment liability on the United States Government.  In accordancewith standard industry practice, there is a representative from the UnitedStates Defense Contractor Manufacturing Agency (“DCMA”) acting as a contractualrepresentative of the United States Government present at the Company’sfacilities.  This DCMA representative inspects each vehicle as it isdelivered by the Company and upon confirmation of the vehicle’s conformity withthe contractual specifications the inspector signs the Form DD250 and formallyaccepts delivery of the vehicle.  The Company only recognizes revenuesarising from its U.S. Government contracts upon execution of the Form DD250 bythe DCMA inspector. Under some of the Company’s U.S. Government contracts, itreceives performance 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 Company providing on-site personnelon an as-needed basis in a timely manner, and have generally been provided inforeign locations.

The Company negotiatescontracts with its customers which may include revenue arrangements withmultiple deliverables, as outlined by Emerging Issues Task Force No. 00-21(EITF 00-21).  The Company’s accounting policies are defined such thateach deliverable under a contract is accounted for separately. Historically, the Company has negotiated and signed contracts with itscustomers which outline the contract amount and specific terms and conditionsassociated with each deliverable. Allowance for contractual adjustments isrecorded as a reduction to revenue.

11

----

**Allowance for Contractual Adjustments**

The Company’s contractswith the U.S. Government are negotiated as a “sole source” or “open competition”bid process.  A sole source process is one in which the Company is thesole bidder for the contract.  An open competition could involve variousbidders.  Once a bid is accepted, the U.S. Government expects work tocommence immediately.  An open competition results in a final agreed-uponcontract price which the U.S. Government has agreed to.  A sole sourceprocess results in an agreed-upon contract with the U.S. Government, subject toan adjustment process at a later date, termed the “definitization process.” The definitization process commences upon delivery of a product, whereby theU.S. Government completes a detailed review of the Company’s costs involved inthe manufacturing and delivery process.  The U.S. Government and theCompany then work to determine an adequate and fair final contract price. As a result of the potential adjustments related to the definization process,the Company maintains an allowance for contractual adjustments account. This account is reviewed on a monthly basis to determine adequate adjustments,if necessary.  The allowance is maintained and deemed adequate based onthe analysis of historical data and calculation of pro-rata percentages ofcurrent contracts in place, which remain subject to the definitization process.

The Company does notmaintain an allowance for doubtful accounts.  The Company’s significantsales for 2005, 2004, and 2003 involved contracts signed with the U.S.Government.  The Company does not believe an allowance for doubtfulaccounts is necessary due to the credit-worthiness of the U.S. Government.

Historically, the Companyhas not encountered sales returns.  The Company does not anticipate salesreturns in the future.

**Research and Development**

Research, development,and engineering costs are expensed as incurred, in accordance with SFAS No. 2,*Accounting for Research and Development Costs*. Research, development, and engineering expenses primarily include payroll andheadcount related costs, contractor fees, infrastructure costs, andadministrative expenses directly related to research and development support.

**Cash Equivalents**

For purposes of reportingcash flows, the Company considers all highly liquid debt instruments purchasedwith maturity of three months or less to be cash equivalents.

**Inventories**

Inventories are stated atthe lower of cost or market. The cost is determined under thefirst-in-first-out method base (FIFO) valuation method.  An allowance forexcess or obsolete inventory is maintained by the Company.  The Companydetermines an appropriate balance in this account based on historical data andspecific identification of certain inventory items.

**Property, Plant and 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 of Long-Lived Assets**

The Company reviews long-livedassets to be held and used for impairment whenever events or changes incircumstances 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.

12

----

**Goodwill**

Under SFAS No. 142,Goodwill and other Intangible Assets, all goodwill amortization ceasedeffective January 1, 2002. Rather, goodwill is now subject to onlyimpairment reviews. A fair-value based test is applied at the reporting level.This test requires various judgments and estimates. A goodwill impairment losswill be recorded for any goodwill that is determined to be impaired. Goodwillis 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 uses theasset 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.

**Stock-Based Compensation**

The Company applied therecognition and measurement principles of Accounting Principles Board OpinionNo. 25,*  Accounting for StockIssued to Employees*, and related Interpretations in accounting forthose plans through June 30, 2005.

In December 2004,FASB issued Statement No. 123(R),*Share-Based Payment,* which establishes accounting standards fortransactions in which an entity receives employee services in exchange for(a) equity instruments of the entity or (b) liabilities that arebased on the fair value of the entity’s equity instruments or that may besettled by the issuance of equity instruments. Effective on July 1, 2005, the Company adopted SFAS 123(R), which requires the Company to recognize thegrant-date fair value of stock options and equity based compensation issued toemployees in the statement of operations. The statement also requires that suchtransactions be accounted for using the fair-value-based method, therebyeliminating use of the intrinsic method of accounting 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.

13

----

**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.  These reclassifications did not impact theCompany’s net loss for the years ended December 31, 2005, 2004 and 2003,respectively.

**Recent Accounting Pronouncements**

In November 2004,the FASB issued Statement No. 151,*Inventory Costs*, 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 be recognizedas current-period charges. Additionally, Statement No. 151 requires thatallocation of fixed production overhead to the costs of conversion be based onnormal capacity of the production facility. The Company is currently followingStatement No. 151 and does not believe that Statement No. 151 willhave a significant impact on its financial condition 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, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”)which replaces Accounting Principles Board Opinions No. 20 “AccountingChanges” and SFAS No. 3, “Reporting Accounting Changes in InterimFinancial Statements—An Amendment of APB Opinion No. 28.” SFAS 154provides guidance on the accounting for and reporting of accounting changes anderror corrections. It establishes retrospective application, or the latestpracticable date, as the required method for reporting a change in accountingprinciple and the reporting of a correction of an error. SFAS 154 iseffective for accounting changes and a correction of errors made in fiscalyears beginning after December 15, 2005 and is required to be adopted bythe Company in the first quarter of 2006. The Company is currently evaluatingthe effect that the adoption of SFAS 154 will have on its results ofoperations and financial condition but does not expect it to have a materialimpact.

In June 2005, theEmerging Issues Task Force, or EITF, reached a consensus on Issue 05-6,*Determining the Amortization Period for LeaseholdImprovements,* which requires that leasehold improvements acquired ina business combination or purchased subsequent to the inception of a lease beamortized over the lesser of the useful life of the assets or a term thatincludes renewals that are reasonably assured at the date of the businesscombination or purchase. EITF 05-6 is effective for periods beginningafter July 1, 2005. We do not expect the provisions of this consensus tohave a material impact on the financial position, results of operations or cashflows.

**NOTE 2—GOING CONCERN**

The Company’s financialstatements have been prepared on a going concern basis, which contemplatescontinuity of operations, realization of assets and liquidation of liabilitiesin the normal course of business. The Company had cumulative recurring lossesof $50,668,620 as of December 31, 2005 and negative cash flows from operationsduring the year ending December 31, 2005 of $18,495,319. The ability of theCompany to operate as a going concern depends upon its ability to obtainoutside sources of working capital and/or generate positive cash flow fromoperations. Management is aware of these requirements and is undertakingspecific measures to address these liquidity concerns. Specifically, toincrease revenues the Company has focused on increasing its production capacityto maximize revenues from vehicles sales and has continued to expand its integratedlogistics support function to meet the increased demand for spare parts andother support services. The efforts by the Company in these regards have beendramatic, as the Company has been able to increase its average monthly vehicleproduction from four vehicles per month to the current average of 15 vehiclesper month, resulting in an annual production increase of 407% from 2004. TheCompany is also undertaking to increase its gross profitability by reducing thedirect costs to manufacture its products, by focusing on continual improvementof manufacturing processes and reducing rework and waste resulting frominternal inefficiencies. 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

14

----

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 amount andclassification of liabilities that might result should the Company be unable tocontinue as a going concern.

**NOTE 3 — 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 first internationalcustomer, the British Ministry of Defense.

**NOTE 4 — ACCOUNTS RECEIVABLES “DEFINITIZATION”**

The majority of theCompany’s contracts are with the United States Government and as such they are “publicsector” contracts subject to the Federal Acquisition Regulations set out atTitle 41 of the United States Code (the “FAR”), and may result either fromcompetitive bidding or may be awarded as “sole source” contracts “subject todefinitization” 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, theparties make a mutual determination of the direct material and labor costs forthe work based upon the bill of materials and other purchasing information andthen the parties mutually agree upon “rates” for the indirect labor costs andthe General and Administrative costs and upon a “fee” (or profit).  Whilethe direct material costs and labor can be established through objectiveevidence, the “rates” and fee are more subjective and are based upon ananalysis of multiple factors including historical performance data andprojected 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):

*If agreementon a definitive contract action to supersede this undefinitized contract actionis not reached by the target date in paragraph (b) of this clause, or withinany extension of it granted by the Contracting Officer, the Contracting Officermay, with the approval of the head of the contracting activity, determine areasonable price or fee in accordance with subpart 15.4 and part 31 of the FAR,subject to Contractor appeal as provided in the Disputes clause.*

Finally, although bothparties make an effort to definitize the contract as quickly as possible, theprocess is time consuming and can take months (or even years) tocomplete.  During the definitization process the contractor is required toperform the contract work and to make deliveries under the contract before thefinal contract price has been established.  For this reason, as part ofthe original letter award, the contractor provides a rough order of magnitude (“ROM”)price to be used for invoicing and accounting purposes pending definitization.

As a result of thepotential adjustments related to the definitization process, the Companymaintains an allowance for contractual adjustments account.  This accountis reviewed on a regular basis to determine adequate adjustments, if necessary. The allowance is evaluated and deemed adequate based on the analysis ofhistorical data and calculation of pro-rata percentages of current contracts inplace, which remain subject to the definitization 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  Dec. 31, 2005** | ** ** | **Year Ended  Dec. 31, 2004** | ** ** | **Year Ended  Dec. 31, 2003** | ** ** |
|-------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| Beginning  balance      |       | $                                            | —     |                                         | $          | —                                       |       | $ | — |   |
| Additions to  allowance |       | 1,018,051                                    |       | —                                       |       | —                                       |       |
| Reduction to  allowance |       | —                                       |       | —                                       |       | —                                       |       |
| Ending balance          |       | $                                            | 1,018,051  |                                         | $          | —                                       |       | $ | — |   |

15

----

The Company does notmaintain an allowance for doubtful accounts.  The Company’s significantsales for the years ended December 31, 2005, 2004 and 2003 involved contractssigned with the U.S. Government.  The Company does not believe anallowance for doubtful accounts is necessary due to the credit-worthiness ofthe U.S. Government.

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

**NOTE 5 — 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 ofChallenger Powerboats 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.        |       | $        | —     |     | $          | —   |       | $ | — |   |

**NOTE 6—INVENTORIES**

Property, Plant and Equipment at December 31, 2005, 2004 and 2003consisted 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 |   |

Depreciation expense for the years endedDecember 31, 2005, 2004 and 2003 was $386,152, $207,271 and $104,334respectively.

16

----

**NOTE 8—COMMITMENTS ANDCONTINGENCIES**

**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 |   |

**Contract Liabilities**

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 warranty does not apply to any damage orfailure to perform caused by the misuse or abuse of the vehicle, combat damage,fair wear and tear items (brake shoes, track pads, wiper blades, etc.), or bythe customer’s failure to perform proper maintenance or service on thesupplies.

The Company routinelyreviews its exposure for warranty costs and determines warranty and pricingreserves based on historical data and known events.  Below is a tabledetailing the Company’s accruals 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 |   |
|                  |            |          |            |          |            |          |            |  |  |  |

**Vehicle Fees**

The Company is party to aMemorandum of Understanding with Mechem, a division of Denel PTY, a SouthAfrican company pursuant to which Mechem agreed for a period of five years towork exclusively with the Company and not to cede, dispose or transfer to anythird 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 CSIR expiresin March 2007.

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

 

17

----

**Table of Contractual 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 |   |

 

----

(1)                                  Referto the Mechem vehicle fee agreement detailed above in Footnote 8, Commitmentsand Contingencies, “Vehicle Fees.”

(2)                                  Referto the CSIR vehicle fee agreement detailed above in Footnote 8, Commitments andContingencies, “Vehicle Fees.”

On April 23, 2004 theCompany was awarded a contract to deliver 14 Cougar Hardened Engineer Vehicles(“HEV”) to the U.S. Marine Corps under contract M6785404-D-5099. As of December31, 2004 we had delivered only 5 of the Cougar HEV vehicles. On March 8,2005 the U.S. Marine Corps exercised its contractual option to purchase anadditional 14 HEV vehicles, for a total of twenty-eight vehicles to bedelivered by the Company. As of December 31, 2005, we had delivered a total oftwenty seven HEV vehicles, leaving a backlog for 2006 of one HEV vehicle to bedelivered under this contract. The Cougar HEV was a new product when theoriginal contract was signed in 2004 and the Company did not have experiencewith the cost of performance for such vehicle. During 2005, as the Company continuedto perform on the HEV contract, the Company experienced certain costs overrunsresulting from design changes, material rework and other productioninefficiencies inherent in the development of a new product. As of December 31,2005, based on such operating experience and having completed 96.4% of thevehicles required under the contract the Company made a determination that itwould experience a net loss on the HEV contract in the approximate amount of$501,331 as a result of such inefficiencies. This amount was based upon actualcosts incurred for the manufacture of the previous vehicles and an estimationof the costs associated with 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 ofunregistered common stock valued at $12,910.

18

----

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 employmentagreement was terminated effective January 27, 2005. Mr. Aguilarreceived no compensation for his services as a director during 2005.

On March 31, 2003,the Company entered into an employment agreement with Mr. 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 addition, on December 31, 2004, Mr. Kavanaugh received a one timegrant of 10 Series C shares and 41,667 common shares valued at$460,890.  On May 14, 2005, Mr. Kavanaugh resigned from hisemployment with the Company, but continues to serve on the board of directorsas Chairman. In connection with Mr. Kavanaugh’s resignation, the Companyagreed to pay for 24 months of health coverage valued at $24,178.Mr. Kavanaugh received no compensation for his services as a directorduring 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 FAR 52.216-25, contract awards may be madesubject to future “Contract Definitization” pursuant to which the contractoragrees to negotiate with the Government following commencement of the contractwork to finalize detailed conditions of the contract, including pricing,scheduling and other applicable requirements.  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.

**NOTE 9—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.

**NOTE 10—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 atthat time. In connection with such purchase, the Company executed a SecurityAgreement pursuant to which the Subscribers were granted a security interest incertain of the Company’s property. As of December 31, 2005, the Companyhad $7,500,000 in short-term debt, representing the face value of these Notes.On February 18, 2006 the Company entered into an extension agreement withthe holders of the Notes pursuant to which the

19

----

Company paid $1,250,000of the principal amount of the Notes and extended the maturity date of thebalance for an 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 Companyentered into a Security Agreement covering its accounts, inventory, equipment,general intangibles, and certain other assets as collateral to secure paymentof the Demand Note. This Bridge Facility and associated Demand Note was paidoff in full on November 18, 2005 from a portion of the proceeds of theNotes issued to Longview Fund and Longview Equity Fund.

As of December 31, 2004,the Company had a Bridge Facility and associated Demand Note with a statedprinciple amount of $4,000,000 This debt represented the balance outstandingunder the GC Financial Bridge Facility, which carried an annualized interestrate of 48%. The full amount of such outstanding balance was paid off onJanuary 19, 2005.

**NOTE 11 — 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 amount not toexceed $63,000,000. Under the terms of such agreement, the Company receives98.1% of the value of receivables sold to the Factor within 24-48 hours ofdelivery of the invoice. The Factor was granted a security interest in theCompany’s assets and retained the right of full recourse against theCompany.  During June 2006, the Company exceeded the agreed maximum valueof receivable to be factored under the Factoring Agreement. On June 22, 2006,the Factoring Agreement was terminated and no further obligation remainedbetween 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 terminatedsuch 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 |   |

**NOTE 12 — 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 further information regarding Series D 6% ConvertiblePreferred Stock, please refer to the separate footnote disclosure in Note 13.

20

----

The preferredstock has the following characteristics:

Dividends — Each holderof preferred stock shall be entitled to receive dividends in cash, stock orotherwise, if, when and as declared by the Company’s board of directors, withthe exception of the preferred stock designated as Series A, which shall not beentitled to receive dividends. However, the Company will not declare or pay adividend to common stockholders without first declaring and paying a dividendto the preferred shareholders. Each share of Series D Preferred Stock isspecifically entitled to 6% cumulative dividends, payable semi-annually in cashor 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)                                  SeriesA Preferred Stock shall rank senior to Series B Preferred Stock, Series CPreferred Stock, Series D 6% Convertible Preferred Stock and common stock;

(b)                                 SeriesB Preferred Stock shall rank junior to Series A Preferred Stock, senior toSeries C Preferred Stock, Series D 6% Convertible Preferred Stock and commonstock

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

(d)                                 SeriesD 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.

Conversion — Series APreferred Stock shall convert into common stock at a rate of $4.00 per share,as adjusted accordingly. Each share of Series B Preferred Stock shall convertinto 759,167 shares of common stock. Each share of Series C Preferred Stockshall convert into 75,917 shares of common stock. Each share of Series D 6%Convertible Preferred Stock shall convert into common stock at $2.10 per share.

In connection with theprivate placement sale of the Company’s common stock on January 19, 2005, theCompany and the holders of Series B and Series C Preferred Stock agreed toconvert all shares of the Series B and Series C Preferred Stock outstanding toshares of the Company’s common stock. As a result, all shares of Series B andSeries C Preferred Stock were converted into common effective January 19, 2005.The Series D 6% Convertible Preferred Stock issued in connection with theJanuary 19, 2005 private placement remained outstanding following theconversion of the Series B and Series C Preferred Stock. All outstanding sharesof the Series D 6% Convertible Preferred Stock were converted in full in 2006,and no shares of the Series D 6% Convertible Preferred Stock remain outstandingas of September 30, 2006.  Series D 6% Convertible Preferred Stock hasbeen classified as Mezzanine Equity by the Company.  Please refer to Note13 for further details regarding Series D 6% Convertible Preferred Stock.

On January 18, 2005, theCompany’s board of directors, acting pursuant to a resolution of the Company’sshareholders, approved a reverse split of the Company’s stock whereby each 12shares of common stock outstanding on the date of record, February 4, 2005,would be exchanged for 1 new share of common stock. All references to commonstock 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 considersthe following terms and definition significant in ensuring the reader of thesefinancial statements understands the accounting treatments applied by theCompany:

·                  The EmergingIssues Task Force (“EITF”) provides accounting guidance and interpretations onemerging issues in business and accounting

21

----

·                  Statements onFinancial 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,*Accounting for Convertible Securities with Beneficial ConversionFeatures or Contingently Adjustable Conversion Ratios* , EITF 00-19*  Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’ s Own Stock* and EITF 00-27*  Application of Issue No. 98-5 to CertainConvertible Instruments* , is an accounting term defined in EITF 98-5that represents a situation in which a convertible security (debt or equity) isconvertible into the Company’s common stock at a price which is at a discountto the market, at the 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 utilizes Black-Scholes to value stock optionsissued to employees, preferred stock issued to employees and service providers,preferred stock purchased by investors and warrants issued to investors.

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

*COMMON STOCK TRANSACTIONS*

In January 2005, theCompany 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 following issuancesof the Company’s common stock during 2005 were valued by the Company using theCompany’s closing bid price of its common stock as quoted on the OTC BulletinBoard market as of the date of the associated contract or the issuance date ifno contract existed.

·                  41,666 shares ofthe Company’s common stock valued at $112,499 were issued to a director, amember 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.

·                  9,950 shares ofthe 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.

·                  The Companyissued 53,467 shares of the Company’s common stock pursuant to the terms of theCompany’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.

·                  The Companyissued 14,876 shares of the Company’s common stock pursuant to the terms of theCompany’s agreement with GC Financial Services, Inc. were valued at$20,641.  An expense of $20,641 was classified as interest expense and wasrecorded in 2005.

·                  The Company’sformer Chief Executive Office, agreed to rescind 83,333 shares of common stockissued in 2004 valued at $209,999.

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

The Company issued awarrant to purchase 65,833 shares of the Company’s common stock on January 19,2005 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 in Black-Scholes are consistent withthe inputs for the warrants issued with the Series D 6% Convertible PreferredStock.

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 as

22

----

settlement expense in theamount of $158,071. The Company also issued a warrant to purchase 41,667 sharesof the Company’s common stock that can be exercised for $3.96 per share in asettlement agreement with Westor Online.  The value as determined byBlack-Scholes was expensed as settlement expense in the amount of $72,354. Thewarrants were exercised in 2006. Below is a table depicting the valuationattributes used in Black-Scholes calculations related to these warrants issuedin 2005:

**Warrant Valuation 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%          |   |

 

Outstanding warrants topurchase 2,143,085 common stock shares expired or were cancelled during 2005.The warrant valuation of $2,302,850 was added to Additional Paid in Capitalaccordingly in 2005.

The Company issued14,803,750 shares of unregistered common stock resulting for the mandatory conversionon February 8, 2005 of all the outstanding shares of the Company’sSeries B Convertible Preferred Stock.  At the time of conversion, theconversion rate for the Series B Convertible Preferred Stock was 2% of fullydiluted common stock.  The beneficial conversion feature related to theSeries B Convertible Preferred Stock in the amount of $19,102,306 was relievedin full on February 8, 2005.

*PREFERRED STOCK TRANSACTIONS*

*Series D 6% Convertible PreferredStock:*

On January 19, 2005, theCompany issued 15,800 shares of the Company’s Series D 6% Convertible PreferredStock for net cash of $15,305,965.  The issuance of the Company’s Series D6% Convertible Preferred Stock was recorded at $7,301,766 which is the netvalue of the cash received of $15,305,965 less the fair value of the associatedwarrants of $8,004,200.  The Company classified the Series D 6%Convertible Preferred Stock as Mezzanine Equity.  Refer to Note 13 forfurther information regarding Series D 6% Convertible Stock.

On May 23, 2005, 2,796shares 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 year endedDecember 31, 2004, the Company recorded the following transactions withinits stockholders’ equity accounts:

*COMMON STOCK TRANSACTIONS*

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

·                  Common stock issuances, 1,771,874shares of common stock were issued for $4,245,000 in net proceeds.

·                  Issuance of “A” warrants, 1,771,874warrants to purchase common stock were issued in 2004, with an originalexercise price of $1.44 per warrant.  A total of 219,792 shares of commonstock were issued by the Company for net proceeds of $316,497, in connectionwith the exercise of “A” warrants in 2004.  The remaining “A” warrantsexpired on December 31, 2004.

23

----

·                  Issuance of “Green Shoe” warrants,1,771,874 warrants to purchase common stock were issued in 2004, with anoriginal exercise price of $2.40 per warrant. A total of 674,058 shares ofcommon stock were issued by the Company for net proceeds of $1,677,713, inconnection with the exercise of “Green Shoe” warrants in 2004.  Theremaining ”Green Shoe” warrants expired on December 31, 2004.

In November and December2004, the Company issued a total 1,210,843 common shares generating $2,958,217in net proceeds pursuant to the Dutchess Equity agreement.

A total of 1,863,768shares 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 following issuancesof the Company’s common stock during 2004 were valued by the Company using theCompany’s closing bid price of its common stock as quoted on the OTC BulletinBoard market as of the date of the associated contract or the issuance date ifno contract existed.

·                  163,501 shares of the Company’scommon stock valued at $496,956 were issued to a third party for servicesrendered to the Company.  An expense associated with this issuance of$496,956 was recorded in 2004.

·                  70,833 shares of the Company’s commonstock valued at $127,500 were issued to a member of the board of directors, forservices rendered to the Company.  An expense of $127,500 was classifiedas compensation of directors and was recorded in 2004.

·                  91,667 shares of the Company’s commonstock valued at $231,000 were issued to a member of the board of directors, forservices rendered to the Company.  An expense of $231,000 was classifiedas compensation of directors and was recorded in 2004.

·                  208,333 shares of the Company’scommon stock valued at $495,000 to the Company’s former Chief ExecutiveOfficer, for services rendered to the Company.  An expense of $495,000 wasclassified as officer compensation and was recorded in 2004.

·                  125,000 shares of the Company’scommon stock valued at $255,000 to the Company’s former Chief FinancialOfficer, for services rendered to the Company. An expense of $255,000 wasclassified as officer compensation and was recorded in 2004.

·                  41,682 shares of the Company’s commonstock valued at $145,054 to an employee, for services rendered to theCompany.  An expense of $145,054 was classified as stock-basedcompensation and was recorded in 2004.

·                  79,167 shares of the Company’s commonstock valued at $178,250, to various employees for services rendered to theCompany.  An expense of $178,250 was classified as stock-basedcompensation and was recorded in 2004.

·                  304,167 shares of common stock issuedin error in December 2003 were cancelled in the first week of January 2004.

·                  The Company issued 20,421 shares ofcommon stock to third parties upon the conversion of existing debts in theamount of $124,976.

*PREFERRED STOCK TRANSACTIONS*

For information regardingSeries D 6% Convertible Preferred Stock, please refer to the separate footnotedisclosure in Note 13.

Series B and Series CConvertible Preferred Stock are in the form of shares, and have no conditionalor unconditional mandatory redemption provisions obligating the Company in thefuture other than liquidation or company wind-up provisions. Under SFAS150-*  Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity* , the issuances of Series B and Series C Preferred stock havebeen classified as equity.  The conversion options are not consideredderivative liabilities which must be valued at fair value under SFAS 133 orEITF 00-19.  The conversion options are indexed to the Company’s own stockand the host instrument is classified as equity thus meeting the paragraph 11ascope exception 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 with EITF98-5, “Accounting for Convertible Securities with Beneficial ConversionFeatures or Contingently Adjustable Conversion Rates,” the Company records “beneficialconversion feature expense” when and if the Company

24

----

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 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 issuedpreferred stock shares for services provided as follows:

·                  4 shares of the Company’sSeries C Convertible Preferred Stock were issued to a member of the boardof directors, for services rendered.  The Company used Black-Scholes todetermine the value of the shares as $137,583.

·                  20 shares of the Company’sSeries C Convertible Preferred Stock were issued to the Company’s formerChief Executive Office, for services rendered.  The Company usedBlack-Scholes to determine the value of the shares as $692,996.

·                  4 shares of the Company’sSeries C Convertible Preferred Stock were issued to the Company’s formerChief Financial Officer, for services rendered.  The Company usedBlack-Scholes to determine the value of the shares as $138,976.

·                  10 shares of the Company’s Series CConvertible Preferred Stock were issued to a member of the board of directors,for services rendered.  The Company used Black-Scholes to determine thevalue of the shares as $346,526.

The Company issued 20shares of Series C Convertible Preferred Stock in exchange for existing debt inthe amount of $200,000.  The Company used Black-Scholes and calculated thevalue of shares at issuance. A beneficial conversion feature was generated asthe value of the issuance using Black-Scholes was greater than the value of thedebt converted in the amount of $385,530.

The Company issued 1share 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 Conversion Feature for this difference.

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

**Series CPreferred 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:

·                  The Company had 5 Shares of Series CConvertible Preferred Stock voluntarily redeemed for $60,000.  A loss onredemption of $10,000 was recorded.  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 2002of $7,272.

·                  1,330,865 shares of the Company’scommon stock were issued upon the voluntary conversion of 51 shares ofSeries C Convertible Preferred Stock. The conversion rate at the time ofconversion was 0.2% of outstanding common stock. The 

25

----

Company recorded a gain on debt extinguishment relatedto the recapture of beneficial conversion feature expensed in connection withthe issuance of the preferred stock in the amount of $389,810.

·                  1 share of the Company’sSeries C Convertible Preferred Stock was voluntarily rescinded.  Again was recognized in the amount of $83,577 as a result.  The gain wascalculated using the Company’s closing bid price of its common stock as quotedon the OTC Bulletin Board market as of the date the shares were rescinded andthe number of shares of common stock for which the preferred stock wasconvertible into. Additionally, 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 $3,234.

·                  1 share of the Company’sSeries B Convertible Preferred Stock was voluntarily converted to 10Series C Convertible Preferred Stock. The Company used Black Scholes andcalculated a beneficial conversion feature of $269,044, associated as a resultof differences between conversion rates between the two preferred stockclasses.

·                  416,667 shares of the Company’scommon stock were issued upon the conversion of 1 share of Series BConvertible Preferred Stock. The conversion rate at the time of conversion was2% of fully diluted common stock. 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 of $16,324.

The conversion rate forSeries C Convertible Preferred Stock changed to 0.2% of fully diluted stock onSeptember 14, 2004. At that time, there were 144 Series C Preferred Stockshares outstanding. The Company used Black-Scholes to calculate the value ofthis change as $18,558,870, which represents the beneficial conversion featurefor this conversion rate increase for all outstanding Series C Preferred StockShares on September 14, 2004.  After which, 14,263 shares of the Company’scommon stock were issued upon the voluntary conversion of 1 share ofSeries C Convertible Preferred Stock.  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 STOCK TRANSACTIONS*

A private investment inpublic equity (“PIPE”) offering dated April 10, 2002 for Regulation D Section506 Private Placement Memorandum issued in 2003 to numerous accreditedinvestors, consisted of the following:

·                  Common stockissuances, 2,429,272 shares of common stock were issued for $2,966,700 in netproceeds.

·                  Issuance ofwarrants, each common share included 2,429,272 warrant units valued at $2,610,372,to purchase common stock were issued in 2003. Each common stock unit consistedof (a) fifty shares of common stock of the Company, (b) one warrant to purchasetwenty-five shares of common stock of the Company at an exercise price of $2.40per share, and (c) one warrant to purchase twenty-five shares of common stock,at an exercise price of $3.60 per share which has been reduced to $0.12 pershare by the Company’s board of directors on July 15, 2002. No warrants wereexercised in 2003.  The Company used Black-Scholes to calculate the valueof the warrants.  The valuation attributes used in the Black-Scholescalculation 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%          |   |

 

26

----

The Company issued awarrant to purchase 83,333 shares of the Company’s common stock to the Company’sformer Chief Financial Officer.  The warrant has an exercise price of$1.44 per share of common stock.  The warrant was valued at $41,816 usingBlack-Scholes and was expensed in full in 2003 as officer compensationexpense.  The valuation attributes used in the Black-Scholes calculationare as follows:

**Warrant Valuation Information for the Year EndedDecember 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 issued commonstock shares for services provided as follows:

·                  738,791 sharesof the Company’s common stock to consultants for services rendered to theCompany. 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 hiredunder specific contracts and compensation was determined on a case by casebasis by management at the time the services were rendered.

·                  166,065 sharesof the Company’s common stock were issued to employees and were valued at$273,022 using the Company’s closing bid price of its common stock as quoted onthe OTC Bulletin Board market on at the date of issuance.  The stock-basedcompensation to employees was determined on a case by case basis by managementat various times during the year.

·                  75,000 shares ofthe Company’s common stock were issued to the board of directors and werevalued at $130,500 using the Company’s closing bid price of its common stock asquoted on the OTC Bulletin Board market on at the date of issuance.  Thestock-based compensation to the board of directors was determined on a case bycase basis by the board of 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.  Novalue was recorded in accordance with this issuance as the issuance was deemeda financing cost associated with the Company’s efforts to raise capital. Therefore, any value allocated to the share issuance would be an offsettingaccounting entry to both increase and decrease stockholders’ equity in the samevalue.

The Company increased theTSG acquisition price by $720,000 as a result of the final resolution with allparties concerned.  The original transaction in 2002 was recorded at avalue of $1,200,000 with various matters pending.

27

----

*PREFERRED STOCK TRANSACTIONS*

The Company’s Series Band Series 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. TheCompany has reviewed SFAS150-*Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity* , and has classified the issuances of Series B and Series CPreferred stock as equity instruments.  The conversion options are notconsidered derivative liabilities which must be valued at fair value under SFAS133 or EITF 00-19.  The conversion options are indexed to the Company’sown stock and the host instrument is classified as equity thus meeting theparagraph 11a scope exception under*SFAS No.133 – Accounting for Derivative Instruments and Hedging Activities* .The Company also determined that there is no intrinsic value of the conversionoptions for the Series B and Series C Preferred Stock under EITF 00-27.

In accordance with EITF98-5, “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 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 issued 14shares of the Company’s Series C Convertible Preferred Stock for cash proceedsof $140,000.  No beneficial conversion feature existed upon the issuanceof these shares as the Company used Black-Scholes and calculated the value ofthe shares issued to be less than the value of the cash proceeds of $140,000.

The Company issued 28shares of Series C Convertible Preferred Stock in exchange for existing debt inthe amount of $280,000.  A beneficial conversion feature existed as of thedate of issuance.  The Company used Black-Scholes and calculated the valueof the issuance was greater than the value of the debt converted. Accordingly, the Company recorded a beneficial conversion feature in the amountof $90,564.

The Company issued 1share 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 share at $9,064 using Black-Scholes andrecorded interest expense on the loan for $9,064 during 2003.

The Company issued 50shares of the Company’s Series C Convertible Preferred Stock to the Company’sformer Chief Executive Office as compensation for consummating the TSGacquisition.  The Company used Black-Scholes and calculated a value of theshare issuance at $661,720.

The Company issued 12shares of the Company’s Series C Convertible Preferred Stock to employees forservices rendered.  The Company valued the share issuance at $103,596,using Black-Scholes and recorded compensation expense associated with theseissuances of $103,596 during 2003.

The Company recorded aloss on redemption of preferred stock of $10,000 associated with the voluntaryredemption of 5 Shares of the Company’s Series C Convertible Preferred Stock(original payment for preferred was $50,000).  Additionally, the Companyrecorded a gain on debt extinguishment related to the recapture of beneficialconversion feature expensed in connection with the issuance of the preferredstock 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:

**Series CPreferred 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%              |   |

 

28

----

304,167 shares of common stock issued in error inDecember 2003 were cancelled in the first week of January 2004.

**NOTE 13 – SERIES D 6% CONVERTIBLE PREFERRED STOCK**

On January 19, 2005, theCompany issued 15,800 shares of Series D 6% Convertible Preferred Stock (“SeriesD Preferred) at $1,000 per share pursuant to a purchase agreement (the “PurchaseAgreement”) for gross proceeds of $15,800,000. Issuance costs of $494,034 wereincurred and treated as a discount to the carrying value which netted to$15,305,966.  The Series D Preferred may convert at any time, at theholder’s discretion, into shares of Common Stock.  The conversion price is$2.10 per share.  Each share of the Series D Preferred converts into thenumber of shares of Common Stock equal to $1,000 divided by the conversionprice which is approximately 467.19 shares.  Additionally, the Companypays 6% dividends on the Series D Preferred in cash or Common Stock.  TheSeries D Preferred Stock, if not converted to Common Stock, is redeemable for$1,000 per Series D Preferred share on January 19, 2008.

In the same privateplacement, the Company issued Warrants to purchase 2,633,333 shares of CommonStock at an exercise price of $3.75 per share.  The Warrants expire onJanuary 19, 2008.  These warrants are further disclosed below.

The Series D Preferredfalls outside the scope of SFAS No. 150 but the guidance in Rule 5-02.28 ofRegulation S-X, Accounting Series Release No. 268 (ASR 268) and EITF TopicD-98: “Classification and Measurement of Redeemable Securities” areapplicable.  As such, the Company has recorded the Series D Preferred asmezzanine equity on the accompanying balance sheet.

The difference betweenthe initial recorded amount and redemption value is accreted to retainedearnings or, in the absence of retained earnings, additional paid-in capital,over the period from the date of issuance to the earliest redemption date ofthe security using the interest method thus reducing net income attributable tocommon shareholders.  The accretion from the initial value to theredemption amount has been determined using T-Value based on the followinginputs:

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

2.             Numberof payment periods – 36 (three years)

The following tablesummarizes 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  |   |

 

29

----

The Series B Preferredhas the following rights, preferences and privileges:

***RegistrationRights***

The Company and the holders of Series D Preferredentered into a “Registration Rights Agreement” on January 19, 2005. Among otherthings, the Company was obligated to file a registration statement on Form SB-2within 75 days of the agreement and use its commercially reasonable effortsto cause such registration statement to become effective. The Securities &Exchange Commission declared the Registration Statement effective on May 11,2005, pursuant to which the shares of Common Stock issuable upon conversion ofthe Series D Preferred, as well as the shares of Common Stock issuableupon the exercise of warrants, were registered for resale. The agreementprovides for any liquidated damages by the Company to the Series DPreferred holders if the Company is unable to complete the registration, notfiling in timely manner or maintain such effectiveness.

***VotingRights***

Each holder of shares of Series D Preferred shallhave no voting rights so long as the Company shall not, without the affirmativevote of the holders of Series D Preferred then outstanding, alter or change thepowers, preferences or rights of the holders of Series D Preferred, authorizeor create any class of stock ranking as to dividends, redemption, ordistribution of assets upon liquidation senior to Series D Preferred, amendcorporate documents so as to affect adversely any rights of holders or increasethe authorized number of shares of Preferred Stock.

***Dividends***

Cumulative Dividends are payable to all holders ofSeries D Preferred on March 1 and September 1 beginning with the first suchdate after the original issue date and 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 Preferreddividends 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 event dividends are paid on any shares of otherPreferred stock or Common Stock, the Company shall pay any amounts due toSeries D Preferred holders before such dividend 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 D Preferred may convert at any time, at theholder’s discretion, into shares of Common Stock.  The conversion price is$2.10 per share.  Each share of the Series D Preferred converts into thenumber of shares of Common Stock equal to $1,000 divided by the conversionprice which is approximately 467.19 shares.  The Company shall not effectany conversion of the Series D Preferred and the Holder shall not have theright to convert any portion of Series D Preferred to the extent that aftergiving effect to such conversion, the Holder (including it’s affiliates) wouldbeneficially own in excess of 4.99% of the number of shares of common stockoutstanding immediately after giving effect to such conversion.  TheCompany must reserve and keep available out of its authorized and unissuedshares of common stock for the purpose of issuance upon conversion of theSeries D Preferred and payments of dividends on the Series D Preferred. The Company may force a conversion of Series D Preferred if the market value ofthe common stock for 20 consecutive trading days exceeds 180% of the conversionprice effective at that time.

***Redemptions***

On the third anniversary of the original issue date,the corporation shall redeem all remaining outstanding Series D Preferred whichare not yet converted into common stock at a price equal to the Stated Value. Each holder of Series D Preferred to be so redeemed may, in lieu ofredemption, convert such holder’s shares of Series D Preferred Stock inwhole or in part into shares of Common Stock.

30

----

The Company may be obligated to redeem the outstandingshares of Series D Preferred immediately prior to a change of control,failure to file the registration statement on or prior to 210 days after theoriginal issue date, lapsing of the Registration Statement for more than 60calendar days in aggregate or failure to have available the sufficient numberof authorized and unreserved shares of common stock to issue upon conversion ofa holder.

***Warrants***

The Warrants represent a liability under EITF 00-19 inthat the registration rights agreement contains a liquidated damages clauserequiring the Company to pay cash to the holder of the instrument if theCompany fails to obtain an effective registration statement timely, an eventthat is out of the Company’s control.  (Note:  On April 11, 2005, theCompany paid $237,000 in liquidated damages for not filing its registrationstatement timely).  The Warrants would not be classified as equity untilthe effective registration statement was obtained.  As such, in accordancewith EITF 00-19, the Warrant Liability is measure at its fair value at thereporting date, with the change in its fair value from issuance date reportingin the statement of operations.  The fair value of the warrants has beendetermined using the Black-Scholes model using the following inputs:

1.             Numberof Warrant shares – 2,633,333

2.             Stockprice at issuance date – $3.12 per share

3.             Exerciseprice – $3.75 per share

4.             Term– 3 years

5.             Discountrate – 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 yield a fair value of $8,004,200.

The warrants are measured at fair value both initiallyand in subsequent periods until the registration statement has been accepted bythe Security and Exchange Commission. Subsequent changes in the fair value ofthe warrants until that time are recognized in current earnings under “otherincome (expense)” in the consolidated statements of operations. The decrease infair value for the three month period ended March 31, 2005 is $3,431,206. Thefair value of the warrants at March 31, 2005 has been determined using theBlack-Scholes model using the following inputs:

1.             Numberof Warrant shares – 2,633,333

2.             Stockprice at reporting date – $1.84 per share

3.             Exerciseprice – $3.75 per share

4.             Term– 2.75 years

5.             Discountrate – 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 reportingdate

These inputs yield a fair value of $4,572,984 at March31, 2005.

On May 11, 2005, the Company received Form 424B3 fromthe SEC confirming the registration of 17,008,655 common shares.  As aresult, the warrant liability is reclassified to equity on this date. The fairvalue of the warrants has been determined using the Black-Scholes model usingthe following inputs:

1.             Numberof Warrant shares – 2,633,333

2.             Stockprice at reporting date – $2.08 per share

3.             Exerciseprice – $3.75 per share

31

----

4.             Term– 2.70 years

5.             Discountrate – 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 reportingdate

These inputs yield a fair value of $5,173,409. The Unrealized Gain on Financial Instrument and Warrant Liability were reducedby $600,425 accordingly.

**NOTE 14 — STOCK OPTIONS**

The Company does not have a formal stock option plan.However, the Company has offered its employees stock options. During 2005, theCompany 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 adopted Statement of Financial AccountingStandards No. 123(R) (“SFAS 123(R)) as of July 1, 2005.  SFAS 123(R)provides for mandatory expensing of the estimated value of stock optionsgranted to the Company’s employees over the period of time the stock optionsvest.  The Company measures the total cost of each stock option grant atthe date of grant using the Black Schole option trading model.  Werecognize the cost of each stock option on a straight line basis over theapplicable vesting period.

All stock options issued in 2005 do not carry adesignated expiration date and vest over a one year period. Stock optionexpense recorded for 2005, 2004 and 2003 amounted to $92,671, $0 and $0,respectively. The following table summarizes stock options activity for theyear ended December 31, 2005:

**Stock Option Activity**
|                               | ** ** | **Average per share** | ** ** |
|-------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **Shares sub**ject         | ** ** | **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 following table summarizes the attributes used inthe Company’s valuation of stock option grants during 2005:

**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     | %          | —   |       | —   |       |

 

----

(a)           Estimated using Black Scholes optionpricing model

(b)           Not applicable

32

----

**NOTE 15—ACQUISITION AND SALE OFASSETS**

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 preferred stockbut has not yet received the Series A preferred stock.

**NOTE 16—CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

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 $0 for the years ended December 31, 2005,2004 and 2003, respectively.

**NOTE 17 — OTHER COMPREHENSIVE LOSS (RESTATED)**

Other comprehensive lossconsists 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 | ) |

 

**NOTE 18 — TAXES**

The Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting StandardsNumber 109 (“SFAS 109”). “Accounting for Income Taxes”, which required a changefrom the deferred method to the asset and liability method of accounting forincome taxes. Under the asset and liability method, deferred income taxes arerecognized for the tax consequences of “temporary differences” by applyingenacted statutory tax rates applicable to future years to differences betweenthe financial statement carrying amounts and the tax basis of existing assetsand liabilities.

The Company’s netdeferred tax asset as of December 31, 2005, 2004, and 2003 consisted of thefollowing:
|                                  | ** ** | **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           |       | $                               | —     |                            | $          | —                          |       | $ | — |   |

The Company has provideda full valuation allowance for deferred tax assets since these future benefitsmay not be realized. If the Company achieves future profitability, thesedeferred 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.

33

----

As of December 31, 2005, 2004 and 2003,  theCompany has available Federal operating loss carry-forwards of $32,868,929,$21,257,284 and $13,096,137, expiring through 2025 and state operating losscarry-forwards of $21,610,537, $9,879,269 and $2,057,029, expiring through2025, respectively.

The following is a reconciliation of the provision forincome taxes at the U.S. federal income tax rate to the income taxes reflectedin 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                               | %          |

 

**NOTE 19 – EARNINGS (LOSS) PER SHARE**

The Company utilizes SFAS No. 128, “Earnings per Share”to calculate gain/loss per share. Basic gain/loss per share is computed bydividing the gain/loss available to common stockholders (as the numerator) bythe weighted-average number of common shares outstanding (as the denominator). Dilutedgain/loss per share is computed similar to basic gain/loss per share exceptthat the denominator is increased to include the number of additional commonshares that would have been outstanding if all potential common stock(including common stock equivalents) had all been issued, and if suchadditional common shares were dilutive.  Under SFAS No. 128, where thereis a loss, the inclusion of additional common shares is anti-dilutive (sincethe increased number of shares reduces the per share loss available to commonstock holders), and if the additional common shares are anti-dilutive, they arenot added to the denominator in the calculation.  For periods, where theadditional common shares are anti-dilutive, the following common stock equivalentshave been excluded from the calculation of diluted loss 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** | **)** |

 

**NOTE 20 – VALUATION AND QUALIFYING ACCOUNTS ANDRESERVES**

The following tablesummarizes information about valuation and qualifying accounts and reservesrecorded 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                                  |       |

 

34

----

----

(A)          Consists of theAllowance for Contractual Adjustments, as presented on the Company’s balancesheet and explained in Footnote 1 to the financial statements.

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

**NOTE21—DISCONTINUED OPERATIONS**

Discontinued operations follow SFAS No. 144. The lossfrom discontinued operations consist of impairment loss, the loss or gain fromactual operations, and the gain/loss on the disposal of assets. All theseaccounts are included in discontinued operations in the period in which theyoccur.

On October 1, 2003, the Company sold all of theassets associated with its fire and rescue boat business, and discontinued allfire boat related operations. The Company recognized a loss as a result of suchdiscontinued 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  |   |

 

**NOTE 22—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.

**NOTE 23—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.

**NOTE 24—SUMMARIZED QUARTERLY UNAUDITED FINANCIALDATA (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 | ) |

 

35

----

 
| ** **                        | ** ** | **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 | ) |

 

**NOTE 25—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, 2007and were valued on the grant date at $246,580.

36

----

## **ITEM 9A.  CONTROLS & PROCEDURES**

DISCLOSURE CONTROLS ANDPROCEDURES

Our managementevaluated, with the participation of our Chief Executive Officer and our ChiefFinancial Officer, the effectiveness of our disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended (the “Exchange Act”)) as of the end of the period coveredby this Annual Report on Form 10-K/A. Based on this evaluation, our Chief Executive Officer and our ChiefFinancial Officer have concluded that our disclosure controls and procedureswere not effective as of December 31, 2005 to ensure that information we arerequired to disclose in reports that we file or submit under the Exchange Act(i) is recorded, processed, summarized and reported within the timeperiods specified in Securities and Exchange Commission rules and forms,and (ii) is accumulated and communicated to our management, including ourChief Executive Officer and our Chief Financial Officer, as appropriate toallow timely decisions regarding required disclosure. Our disclosure controlsand procedures are designed to provide reasonable assurance that suchinformation is accumulated and communicated to our management.  Our management concluded so because of thematerial weaknesses discussed below.

Our financial and accounting organization was not adequate to supportour financial accounting and reporting needs.  Specifically,we did not maintain a sufficient complement of personnel with an appropriatelevel of accounting knowledge, experience with the Company and training in theapplication of GAAP commensurate with our financial reporting requirements. Thelack of a sufficient complement of personnel with an appropriate level ofaccounting knowledge, experience with our Company and training contributed tothe control deficiencies noted below.

(1)          We did not maintain effective policies and procedures related to theaccounting for specific**equityissuances, including accounting for stock-based compensation in accordance withStatement of Financial Accounting Standard (“SFAS”) No. 123, *Share-Based Payment*, and accounting for convertible andredeemable preferred stock and warrants. This deficiency resulted in errors in the Company’s accounting anddisclosures for these equity issuances and related earnings per sharecalculations.

(2)*         *Wedid not maintain effective controls to ensure the accuracy of disclosures inour financial statements and classification of certain financial transactionsin the financial statements.  Specifically, we failed to classify theallowance for contractual adjustments as a reduction in receivables and hadincorrect or inadequate disclosures in financial statement disclosures relatedto the non-recurring warranty, statement of shareholders’ equity, deferred taxassets, liabilities and related income tax expense, contingency losses,discontinued operations, receivables and factoring accounts, debt and thestatement of cash flows in our financial statements.

The control deficiency described above in (1) resultedin the restatement of our annual consolidated financial statements for 2005,2004, and 2003. The control deficiency described in (2) required amendment ofour annual financial statements for the years 2005, 2004 and 2003 which areincluded in our amended 2005 Form 10-K filing dated June 27, 2007.

CHANGE IN INTERNAL CONTROLOVER 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.

37

----

# **PART IV**

## **ITEM 15.****           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). |

 

38

----

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

 

39

----

 
| 10.19  |   | Employment Agreement between the Company and Frank  Kavanaugh, dated November 15, 2004 (included as Exhibit 10.15 to  the 10-QSB filed November 15, 2004, and incorporated herein by  reference).                                                                     |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                 |
| 10.20  |   | Letter Contract awarded to the Company by the  Department of the Army dated November 18, 2004 (as described in the 8-K  filed November 24, 2004, and incorporated herein by reference).                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                 |
| 10.21  |   | Promissory Note between the Company and Dutchess  Private Equity Fund, II, LP dated December 3, 2004 (included as  Exhibit 10.1 to the Form 8-K filed December 8, 2004, and  incorporated herein by reference).                                             |
|   |   |                                                                                                                                                                                                                                                                                 |
| 10.22  |   | Employment Agreement between the Company and Gordon  McGilton, dated January 27, 2005 (included as Exhibit 10.22 to the  Form 10-KSB/A filed April 22, 2005, and incorporated herein by  reference).                                                             |
|   |   |                                                                                                                                                                                                                                                                                 |
| 10.23  |   | Employment Agreement between the Company and Ted  McQuinn, dated February 4, 2005 (included as Exhibit 10.23 to the  Form 10-KSB/A filed April 22, 2005, and incorporated herein by  reference).                                                                 |
|   |   |                                                                                                                                                                                                                                                                                 |
| 10.24  |   | Order for Supplies or Services between the Company  and U.S. Department of Defense, dated May 13, 2005 (included as  Exhibit 10.1 to the Form 8-K filed May 18, 2005, and  incorporated herein by reference).                                                    |
|   |   |                                                                                                                                                                                                                                                                                 |
| 10.25  |   | Order for Supplies or Services between the Company  and U.S. Department of Defense, dated May 18, 2005 (included as  Exhibit 10.1 to the Form 8-K filed May 23, 2005, and  incorporated herein by reference).                                                    |
|   |   |                                                                                                                                                                                                                                                                                 |
| 10.26  |   | Order for Supplies or Services and Delivery Order  between the Company and U.S. Department of Defense, dated September 23,  2005 (included as Exhibit 10.1 to the Form 8-K filed  September 27, 2005, and incorporated herein by reference).                     |
|   |   |                                                                                                                                                                                                                                                                                 |
| 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).                                                                     |

 

40

----

 
| 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. (included  as Exhibit 23.1 to the Form 10-K/A for the fiscal year ended 2005 filed on  June 27, 2007)  |
|   |   |                                                                                                                                            |
| 31.1   |   | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                   |
|   |   |                                                                                                                                            |
| 31.2   |   | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                   |
|   |   |                                                                                                                                            |
| 32.1   |   | Certification of Officers pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

41

----

# **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: October 12, 2007 |       |                       |
|                        |       | By:                        | /s/ Gordon McGilton |   |
|                        |       |                       | Gordon McGilton |
|                        | * *   | * *                   | *Chief Executive Officer* |
|                        | * *   | * *                   | * * |
| Date: October 12, 2007 | * *   | By:                        | /s/ Michael S. Durski | * * |
|                        | * *   | * *                   | Michael S. Durski |
|                        | * *   | * *                   | *Chief Financial Officer* |
|                        | * *   | * *                   | *Principal Accounting Officer* |

 

42

----