**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-K**

**(Mark One)**

**x**                              ANNUALREPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**FOR THE FISCAL YEAR ENDEDDECEMBER 31, 2006.**

**o**                                 TRANSITIONREPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**FOR THE TRANSITION PERIODFROM        TO**

**CommissionFile No. 001-33253**

**FORCEPROTECTION, INC.**

(Exact name of issuer asspecified in its charter)

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

 

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

Securities registeredunder Section 12(b) of the Exchange Act:

| **Common Stock, par value $0.001 per share.** |   | **NASDAQ  Stock Market**                     |
|-----------------------------------------------|--------|----------------------------------------------|
| (Title of class)                              |   | (Name of Each  Exchange On Which Registered) |

 

Securities registeredunder Section 12(g) of the Exchange Act:**None.**

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the SecuritiesAct. o

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or 15(d) of theAct. Yes o   No x

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past twelve months (or such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x   No o

Indicate by check mark if disclosure of delinquentfilers in response to Item 405 of Regulation S-K (§229.405 of this chapter) isnot contained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.(Check one).

Large acceleratedfiler o         Acceleratedfiler x         Non-acceleratedfiler o

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct). Yes o   No x

The aggregate market value of the voting andnon-voting common equity held by non-affiliates as of March 14, 2007 was $1,102,410,688based on a total of 66,934,468 shares of our common stock held bynon-affiliates on March 14, 2007 at the closing price of $16.47 per share.

We had 67,817,003 shares of common stock outstandingas of March 14, 2007.

Documents incorporated byreference: Part III incorporates information from certain portions of theregistrant’s definitive proxy statement for the 2007 annual meeting ofshareholders to be filed with the Securities and Exchange Commission within 120days after the close of the fiscal year.

 

 

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

**TABLE OF CONTENTS**
| Part I   |                                                                                             |   |
|---------------|--------------------------------------------------------------------------------------------------|--------|
| Item 1.  | Business                                                                                         |
|          |                                                                                             |   |
|          |                                                                                             |   |
| Item 1A.      | Risk Factors                                                                                     |   |
| Item1B.       | Unresolved Staff Comments                                                                        |   |
| Item 2.       | Properties                                                                                       |   |
| Item  3.      | Legal  Proceedings                                                                               |   |
| Item 4.       | Submission of Matters to a Vote of Security Holders                                              |   |
|          |                                                                                             |   |
| Part II  |                                                                                             |   |
|          |                                                                                             |   |
| Item 5.       | Market for Common Equity, Related Stockholder Matters  and Issuer Purchases of Equity Securities |   |
| Item 6.       | Selected Financial Data                                                                          |   |
| Item 7.       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations      |   |
| Item 7A.      | Quantitative and Qualitative Disclosures About Market  Risk                                      |   |
| Item 8.       | Financial Statements and Supplementary Data                                                      |   |
| Item 9.       | Changes In and Disagreements With Accountants on  Accounting and Financial Disclosure            |   |
| Item 9A.      | Control and Procedures                                                                           |   |
| Item 9B.      | Other Information                                                                                |   |
|          |                                                                                             |   |
| Part III |                                                                                             |   |
|          |                                                                                             |   |
| Item 10.      | Directors, Executive Officers and Corporate Governance                                           |   |
| Item 11.      | Executive Compensation                                                                           |   |
| Item 12.      | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters  |   |
| Item 13.      | Certain Relationships and Related Transactions, and  Director Independence                       |   |
| Item 14.      | Principal Accountant Fees and Services                                                           |   |
|          |                                                                                             |   |
| Part IV  |                                                                                             |   |
|          |                                                                                             |   |
| Item 15.      | Exhibits, Financial Statement Schedules                                                          |   |
|          | Signatures                                                                                       |   |

 

 

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** **

**PART I**

**ITEM1.**                    BUSINESS.

*BusinessOverview*

We organizedunder the laws of the State of Colorado in November 1996. In June 2002, weacquired Technical Solutions Group, Inc., a development stage manufacturer ofballistic and blast protected vehicles based in Charleston, South Carolina. InAugust 2003, we changed our name to Force Protection, Inc. to better reflectour focus on blast and mine-protected vehicles. Effective January 1, 2005, we reincorporated from Colorado to Nevada andchanged the name of our wholly-owned subsidiary to “Force Protection Industries, Inc.”

Our specialtyvehicles are protected against landmines, hostile fire and Improvised ExplosiveDevices or IEDs, commonly referred to as roadside bombs. We believe our mineand ballistic protection technology is among the most advanced in theworld.  Our facility, located 10 milesfrom the Charleston Air Force Base in Ladson, South Carolina, is on a 260-acrecampus comprised of three manufacturing buildings with a combined floor area ofapproximately 452,240 square feet and an additional 90,000 square feet targetedfor occupancy in mid 2007. At December 31, 2006, we employed 658 employees.

*INDUSTRY OVERVIEW*

Mine Protected Vehicles wereinitially developed in Rhodesia and South Africa in response to the landmineproblems arising from the wars in Southern Africa. The vehicles were designedto protect personnel during transport, removal of unexploded ordnance, routeclearance, humanitarian de-mining, and other missions that require protectionfrom landmines and hostile fire. The technology has been developed and used inseveral parts of the world, principally Africa, over the last 20 years inresponse to the intense use of landmines in that region.

We believe the world marketfor mine-protected vehicles is growing rapidly. Landmines and IEDs are weaponsof choice for terrorists and insurgent groups because they are highly effectiveyet have relatively low cost. The global war on terror, especially in Iraq andAfghanistan, has confirmed the sober reality that IEDs, roadside bombs, andland mines will continue to be a significant danger to troops. Vehicles thatmove troops or ordnance economically and provide significant protection againstballistic, incendiary, landmine hazards, and IEDs are useful in thesesituations. Missions include troop transport in and around unexploded ordnanceor mine threat areas as well as route clearance and humanitarian de-miningwhich require entrance into known mine fields or areas of known terroristactivities.

These missions requireoperating in areas of known terrorist activities and have traditionally beenaccomplished using light weight wheeled utility vehicles, including for examplethe High Mobility Multi Wheeled Vehicle or Humvee. However, Humvees were notdesigned to sustain high powered explosive blasts and these un-armored utilityvehicles are vulnerable to enemy fire and offer a prime target for attack. Inresponse to the increasing number of casualties from IEDs and other explosiveduring Operation Enduring Freedom in Afghanistan and Operation Iraqi Freedom,the U.S. has sought to rapidly increase the armor and blast protection of manyof its vehicle fleet, including the Humvee, by retrofitting heavy armor to thehulls of these normally lightly armored vehicles. The results have not beensatisfactory due in part to the high costs of retrofitting armor into the bodyof the vehicles and the increased mechanical wear caused by the added weight.

*Products*

         We currently produce threeblast-protected vehicles with different mission capabilities: (1) the Buffaloseries, (2) the Cougar series and (3) the Cheetah series.

*TheBuffalo series*

         The Buffalo can be configured formultiple missions and is specifically designed to be repaired in the field.Cutting-edge technology combined with the best American automotive componentsgive this vehicle the maximum visibility, load carrying capacity, interiorspace and parts availability of any vehicle in its class. The Buffalo isour heaviest vehicle—weighing 22 tons—and is designed principally for routeclearing activities. It integrates a blast resistant capsule with anAmerican-made truck engine and drive train. The Buffalo is designed to deflectand dissipate the explosive blast away from the passenger compartment, thusprotecting the occupants from harm.

         We believe that the geometric,V-hull design, along with the materials used, the components selected, ourrelationship with critical component suppliers and the overall manufacturingprocess make our vehicles a desirable solution for blast and ballisticprotected vehicles.

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         The U.S. Army tested theBuffalo at the Aberdeen Proving Grounds to determine its measure of “survivability”—i.e.the ability of the Buffalo’s blast capsule to effectively protect the occupantsand the critical automotive components from the effects of explosive blasts.Following such tests, the U.S. Army has ordered and deployed approximately 77Buffalos for service worldwide, and has announced its desire to use the Buffaloin the newly established “Route Clearance Companies” being developed as part ofthe IED Defeat Task Force. We believe that the Buffalo fills a niche in theU.S. Army’s route clearance systems.

*TheCougar series*

         The Cougar is a family of mediummine-protected vehicles which can be supplied in 4X4 or 6X6 layout. It can beconfigured as several different variants for a wide range of tasks as requiredby our customers. These tasks include troop transport (up to 12 in the 6X6),Explosive Ordinance Disposal or EOD (4 troops and a large EOD robot in the4X4), command and control, artillery prime mover, recovery and ambulance duty.There are several variants including the Iraqi Light Armored Vehicle or, ILAVCougar, being produced for the Iraqi National Army, and the Mastiff Cougarvehicle that is being produced for the British Ministry of Defense.

         Launched in 2004, the Cougar wasdesigned to serve a broader market and mission range than the Buffalo. Itsmissions include urban patrol, route clearance support, utility transport andspecial unit activities. Like the Buffalo, the Cougar employs the geometricV-Hull design to deflect blast energy along with an armored steel capsuleaffording ballistic protection, and while lighter than the Buffalo, it offers asimilar level of blast protection. The Cougar uses a standard Americanautomotive drive train and control components which allow service andmaintenance similar to that of a commercial truck, making servicing the Cougarless expensive and easier to maintain. We have produced approximately 304Cougars through December 31, 2006, all of which have been deployed in activeservice.

*TheCheetah series*

         The Cheetah is our newest vehicleseries. It is designed specifically for reconnaissance, forward command andcontrol, urban operations, and combines state-of-the-art ballistic and blastprotection with the mobility of a unique light-armored vehicle. The U.S.military is planning to start replacement of the Humvee fleet in the 2009-2011timeframe under the Joint Light Tactical Vehicle, or JLTV, program with hopesof accelerating the program to early 2008. The Cheetah is being developed as apotential platform for this market. Its speed and road handling make it idealfor homeland security missions. Given the size of the potential market forreplacing the Humvee fleet that we believe is in excess of 200,000 vehicles, itis a fair certainty that there will be strong competition from across the U.S.defense industrial base as well as from International companies for the JLTVprogram.

*CUSTOMER ACTIVITY*

Our primarycustomer is the U. S. Department of Defense where we service two principalservices, the U. S. Army and the U. S. Marine Corps. In the twelve months endedDecember 31, 2006, approximately 59.2% of our revenues were deriveddirectly or indirectly from the U.S. Army and approximately 14.3% from the U.S.Marine Corps. Additionally, 10.5% of our revenues were sales to foreigngovernments via the U.S. Department of Defense. We expect to continue to dependupon contracts with governmental agencies for a substantial portion of ourrevenue for the foreseeable future. In 2006, we also entered into contractswith the U.S. Department of Defense to provide vehicles for the Iraqi Army andthe British Military of Defense through the Department of Defense’s ForeignMilitary Sales section. The vehicle design for the Iraqi Army is based on ourCougar design and is proprietary to Force Protection. We have field servicerepresentatives deployed to Iraq in support of this program.

The followingchart illustrates our product deliveries in the last two calendar years and ourbacklog as of December 31, 2006:

| Vehicle                | ** ** | **2005** | ** ** | **2006** | ** ** | **Backlog** | ** ** |
|------------------------|------------|----------|------------|----------|------------|-------------|------------|
| Buffalo                |       | 31       |       | 26       |       | 59          |       |
| Cougar HEV             |       | 22       |       | 1        |       | 0           |       |
| Cougar JERRV           |       | 18       |       | 173      |       | 8           |       |
| Cougar MRAP            |       |     |       | 0        |       | 200         |       |
| ILAV (Iraq)            |       |     |       | 55       |       | 102         |       |
| Mastiff (British  MOD) |       |     |       | 30       |       | 55          |       |
| Total                  |       | 71       |       | 285      |       | 424         |       |

 

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TheU.S. Military has indicated that it is beginning to transition away from theHumvee towards armored vehicles that will offer greater protection to the menand women of our armed forces. As part of this transition, the U.S. MarineCorps is managing the Mine Resistant Ambush Protected, or  MRAP, Program for all branches of the U.S.Military and, as part of that program, is demanding vehicles that offer moreeffective protection for the servicemen and service women of the U.S. armedforces.  Under the MRAP Program,  we have submitted bids through Requests forProposals, or RFPs, to the U.S. Marine Corps for three different categories ofarmored vehicles.  Category I vehiclesneed to transport no less than six personnel and will be used in urbanoperations.  The U.S. Marine Corpsexpects to purchase a minimum of 1,500 Category I vehicles with an option tobuy an additional 7,500 vehicles.  Our4x4 Cougar design and our Cheetah design both meet the requirements forvehicles in this Category.  The U.S.Marine Corps have also released an RFP to purchase 2,600 Category II vehicleswith an option to buy as many as 13,000 vehicles. The Category II vehicles needto transport no less than ten personnel and will have multi-mission purposesincluding transport, explosive ordnance disposal and combat engineering.  We believe the U.S. Marine Corps willcontinue to favorably consider our 6x6 Cougar to meet their demands in thiscategory. In Category III of the MRAP Program, the Marines have already solesourced 44 vehicles to Force Protection as part of the agreement of November 9,2006, with an option to buy an additional 36 vehicles. The Category III vehiclesneed to transport no less than twelve personnel and will support routeclearance.

Inaddition, the U.S. Army is also in the process of improving its fleet ofarmored vehicles under the Ground Standoff Mine Detection System, or GSTAMIDS,Program.  Contracts under this existingand funded program are to be awarded for two types of vehicles, the MineProtected Clearance Vehicle, or MPCV, and the Medium Mine Protected Vehicle, orMMPV. Our Buffalo vehicle meets the Army’s MPCV specifications and our Cougar JERRVmeets the specifications for the MMPV. The Army has a requirement forapproximately 180 MPCVs and over 600 MMPVs at a total estimated value of $1.4billion.

*COMPETITIVE POSITIONING*

We are subjectto significant competition from companies that market products that performsimilar functions to our products. This competition could harm our ability towin business and increase the price pressure on our products. The firms wecompete against include large, multinational vehicle, defense and aerospacefirms such as BAE Land Systems, Textron, Armor Holdings, International Truck,OshKosh Truck, Australian Defense Industries and General Dynamics. Most of ourcompetitors have considerably greater financial, marketing and technologicalresources than we do that may make it difficult to win new contracts and we maynot be able to compete successfully. Certain competitors operate fabricationfacilities and have longer operating histories and presence in key markets,greater name recognition, larger customer bases and significantly greaterfinancial, sales and marketing, manufacturing, distribution, technical andother resources. As a result, these competitors may be able to adapt morequickly to new or emerging technologies and changes in customer requirements.They may also be able to devote greater resources to the promotion and sale oftheir products.

We believe ourcompetitive advantages include:

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

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

·       Ourability to innovate;

·       Thehigh level of supportability of our vehicles;

·       Our“Made in America” status;

·       Ourexcellent manufacturing facilities; and

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

We believe ourproducts are superior to other vehicles currently in use by the U.S. militaryfor mine and blast protection. Existing military vehicles include Humvees andother non-armored utility support vehicles, or heavy-weight troop transport andoffensive armor such as the Bradley Fighting Vehicle or the M1A1 Abrams Tank.The un-armored utility vehicles offer a prime target for attack and efforts to “up-armor”these vehicles have not been totally successful due to the high costsassociated with retrofitting armor onto the body of the vehicle and theincreased mechanical wear caused by the weight of the armor. Conventionalarmored vehicles such as the Bradley and the Abrams offer protection fromballistic and blast threats, but are expensive, require substantial resourcesto maintain, are large and difficult to maneuver in crowded urban environmentsand are not well-suited to peace keeping missions due to their intimidatingoffensive weapon systems.

 

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

*FORCEDYNAMICS LLC*

On December 15,2006, we entered into a joint venture agreement with General Dynamics LandSystems Inc., pursuant to which we agreed to work together to win and executecontracts for the MRAP Program, a U.S. joint services program to produce andprovide lifecycle support to address the current threat of IEDs in the MiddleEast, as more fully described in solicitation number M67854-07-R-5000 issued bythe Department of the Navy and the U. S. Marine Corps. Together with GeneralDynamics Land Systems, we formed a new Delaware limited liability company namedForce Dynamics, LLC whose purpose will be to win contracts under the MRAPProgram. Under the joint venture agreement, the MRAP Program is defined toinclude any and all solicitations and requests for proposals for MRAPproduction and Lifecycle Support and/or any follow on work that may beperformed including any program name change, changed or future programrequirements, product evolutions and technology insertions related to the MRAPvehicles whether for U.S. or international sales, or non-military/commercialsales. The scope of work to be undertaken by Force Dynamics is limited tothe use of our Cougar 4x4 and 6x6 armored vehicles for the MRAP Category I andCategory II requirements

Our intent, alongwith that of General Dynamics Land Systems, as declared in the joint ventureagreement, is to combine respective strengths to market and promote our Cougarvehicles for the Category I and Category II requirements of the MRAP Program.We will make available to each other our respective resources so that together,we may undertake to develop, manufacture, produce and sustain any vehiclecontracts awarded under the MRAP program, in accordance with the plan set forthin the joint venture agreement.  Both parties are expected to contributeresources equally to the venture, to share equally the costs and responsibilitiesassociated with the performance of the Joint Venture and to share equally theresulting benefits.  To this end, we agreed to divide the joint venturework between us on a 50%/50% basis and to divide revenues from the jointventure on the basis of 50% for General Dynamics Land Systems and 50% forus.  Whenever practicable, Force Dynamics will act as the prime contractorfor joint venture work, and we, along with General Dynamics Land Systems, shallact as the exclusive subcontractors; provided however that Force Dynamics,General Dynamics Land Systems and us intend to give effect to the productionplan consistent with the undertaking of the Agreement.

As of March12, 2007, we have received two contract awards under the MRAP program forvehicles that are to be manufactured by Force Dynamics.  On January 25, 2007, we received afour-vehicle letter contract from the U.S. Marine Corps for testing, productionand sustainability for the MRAP vehicle program. Subsequently, on February 14,2007, we received an additional contract award from the U.S. Marine Corps for125 vehicles as part of the MRAP vehicle program. The contract award has atotal value of approximately $67 million. Under the contract award, ForceDynamics will produce 65 vehicles for Category I and 60 vehicles for CategoryII of the MRAP program.

*PRODUCTION*

Ourmanufacturing process includes production and/or assembly of all criticalcomponents of our vehicles as follows:

·                    Weutilize proprietary technology to design ballistic and blast protected vehiclecapsules that we believe are capable of withstanding the explosive effect oflandmines, IEDs and other blast threats encountered in wars, insurgency andurban conflicts.

·                    Weintegrate commercial American-made automotive drive-trains and other componentsonto the capsules to produce vehicles that have a high level of commonalitywith the existing U.S. military fleet and can be repaired and maintained bytraditional truck mechanics.

·                  We have alsosecured sufficient tools and equipment, and have access to a local pool oflabor, including many skilled welders and skilled automotive mechanics.

·                  We maintain adedicated staff of engineers to provide in-house engineering support andutilize various manufacturing approaches to increase efficiency and productquality.

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·                  Wesource steel and other raw materials from various key vendors in the UnitedStates and overseas, and secure our automotive components from a variety ofU.S. suppliers including:

Caterpillar;

Mack Trucks, a member of the Volvo Group; and

Allison Transmission.

*SALES AND MARKETING*

Our employees,including senior management and the Vice President of Sales, conduct ourprimary sales and marketing efforts. Currently our primary sales staff residesin South Carolina and Connecticut, but we also have agreements in place forexclusive marketing agents in strategic foreign countries.

We activelyparticipate in shows involving countermine operations and technology, militaryvehicle, law enforcement technology and military force protection including theAssociation of the U.S. Army Annual Conference and Winter Symposium, MarineExpo, and Tactical Wheeled Vehicle conferences. Additionally, our marketingefforts include our web site, some advertising focused on the militarycommunity and brochures. We do not use independent referral sources to assistin identifying opportunities for our products and services and we do not payany referral fees or sales commissions.

*RESEARCH AND DEVELOPMENT*

In 2006, 2005,and 2004 we spent $3,204,165, $1,657,918 and $1,230,290, respectively, onresearch and development. None of our research and development costs werefunded by our customers.

*RAW MATERIALS*

We depend onsuppliers and subcontractors for raw materials and components. These supplynetworks can experience price fluctuations and capacity constraints. Rawmaterials can experience cost growth, which would put pressure on pricing. Wehave not experienced, and do not foresee, significant difficulties in obtainingthe materials, components or supplies necessary for our business operations.

*INTELLECTUAL PROPERTY*

We are partyto two long term intellectual property agreements covering technology used inthe production of our ballistic and blast protected vehicles. One agreement iswith the CSIR Defencetek, a division of the Council for Scientific andIndustrial Research, a statutory council established in accordance with theLaws of the Republic of South Africa. The other is with Mechem, a division ofDenel Pty Ltd, a company established in accordance with the Laws of the Republicof South Africa. Under these agreements, we pay a per vehicle fee in exchangefor the exclusive transfer to us of the South African technology used incertain of our products.

On September28, 2006, we extended our period of exclusive cooperation and the payment ofvehicle fees to Mechem for an additional five years through September2011.  Pursuant to the terms of theagreement we will pay Mechem a fee of $1,500 for each Cougar vehicle, orvariant thereof, that we deliver, and $5,000 for each Buffalo vehicle, orvariant thereof, that we deliver.

*PERSONNEL*

As ofDecember 31, 2006, we had a total of 658 employees, 612 in the U.S. and 46located in various foreign countries in support of our vehicles and troops.Employees can be broken down into 396 hourly employees and 262 salariedemployees. We are not a party to any collective bargaining agreement. Webelieve our relations with employees are good.

*ENVIRONMENTAL MATTERS*

We are subject to federal,state, local and foreign laws and regulations regarding protection of theenvironment, including air, water, and soil. Our manufacturing businessinvolves the use, handling, storage, and contracting for recycling or disposalof hazardous or toxic substances or wastes, including environmentally sensitivematerials, such as batteries, solvents, lubricants, degreasing agents, gasolineand resin. We must comply with certain requirements for the use, management,handling, and disposal of these materials. We, however, do not maintaininsurance for pollutant cleanup and removal. If we are found responsible forany hazardous contamination, any fines or penalties we may be required to pay,or 

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any clean up we are requiredto perform, could be very costly. Even if we are charged, and later found notresponsible, for such contamination or clean up, the cost of defending thecharges could be high. If either of the foregoing occurs, our business, resultsfrom operations and financial condition could be materially adversely affected.We do not believe we have any material environmental liabilities or thatcompliance with environmental laws, ordinances, and regulations will,individually or in the aggregate, have a material adverse effect on ourbusiness, financial condition, or results of operations.

*OTHER REGULATORY MATTERS*

Our operations and productsare subject to extensive government regulation, supervision, and licensingunder various federal, state, local and foreign statutes, ordinances andregulations. Certain governmental agencies such as the Environmental ProtectionAgency, or EPA, and the Occupational Safety and Health Administration, or OSHA,monitor our compliance with their regulations, require us to file periodicreports, inspect our facilities and products, and may impose substantialpenalties for violations of the regulations.

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

**ITEM 1A.       RISK FACTORS**

An investment in our commonstock is subject to risks and uncertainties. Investors should consider thefollowing factors, in addition to the other information contained orincorporated by reference in this Annual Report on Form 10-K, as well as ourother filings with the SEC, before deciding to purchase our securities.

**We dependon the U.S. government for a substantial amount of our sales. If we do not findacceptance of our products within the U.S. government, our business may fail.**

We serve the defense marketand our sales are highly concentrated within the U.S. government. The customerrelationship with the U.S. government involves certain risks that are uniquesuch as the ongoing development of high-technology products, price,availability and quality of materials and suppliers.

U.S. defense spending hashistorically been cyclical. Defense budgets have received their strongestsupport when perceived threats to national security raise the level of concernover the country’s safety. As these threats subside, spending on the militarytends to decrease. Accordingly, while Department of Defense funding has grownrapidly over the past few years, there is no assurance that this trend willcontinue. Rising budget deficits, the cost of the Global War on Terrorism andincreasing costs for domestic programs continue to put pressure on all areas ofdiscretionary spending, which could ultimately impact the defense budget.Wartime support for defense spending could wane if the country’s troopdeployments in support of operations in Iraq and Afghanistan are reduced. Adecrease in U.S. government defense spending or changes in spending allocationcould result in one or more of our programs being reduced, delayed orterminated. Reductions in our existing programs, unless offset by otherprograms and opportunities, could adversely affect our ability to sustain andgrow our future sales and earnings.

**U.S.government contracts generally are not fully funded at inception and aresubject to termination. If the U.S. government does not order as many vehiclesas we anticipate, our business will be adversely affected.**

Governmentcontracts and subcontracts typically involve long purchase and payment cycles,competitive bidding, qualification requirements, delays or changes in funding,extensive specification development, price negotiations and milestonerequirements. Each government agency also maintains its own rules andregulations with which we must comply and which can vary significantly amongagencies. Governmental agencies also often retain some portion of fees payable uponcompletion of a project and collection of these fees may be delayed for severalmonths or even years, in some instances.

In addition,an increasing number of government contracts are fixed price contracts whichmay prevent us from recovering costs incurred in excess of our budgeted costs.Fixed price contracts require us to estimate the total project cost based onpreliminary projections of the project’s requirements. The financial viabilityof any given project depends in large part on our ability to estimate suchcosts accurately and complete the project on a timely basis. In the eventactual costs exceed the fixed contractual cost, we may not be able to recoverthe excess costs.

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Somegovernment contracts are also subject to termination or renegotiation at theconvenience of the government, which could result in a large decline in revenuein any given quarter. Although government contracts have provisions providingfor the reimbursement of costs associated with termination, the termination ofa material contract at a time when our funded backlog does not permitredeployment of staff could result in reductions of employees. In addition, thetiming of payments from government contracts is also subject to significantfluctuation and potential delay, depending on the government agency involved.Any such delay could result in a temporary shortage in working capital.

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

We are subjectto federal, state, local and foreign laws, and regulations regarding protectionof the environment, including air, water, and soil. Our manufacturing businessinvolves the use, handling, storage, and contracting for recycling or disposalof, hazardous or toxic substances or wastes, including environmentallysensitive materials, such as batteries, solvents, lubricants, degreasingagents, gasoline and resin. We must comply with certain requirements for theuse, management, handling, and disposal of these materials. We do not maintain insurancefor pollutant cleanup and removal. If we are found responsible for anyhazardous contamination, we may have to pay expensive fines or penalties orperform costly clean-up. Even if we are charged, and later found notresponsible, for such contamination or clean up, the cost of defending thecharges could be high. If we do not comply with government regulations, we maybe unable to ship our products or have to pay expensive fines or penalties. Weare subject to regulation by county, state and federal governments,governmental agencies, and regulatory authorities from several differentcountries. If we fail to obtain regulatory approvals or suffer delays inobtaining regulatory approvals, we may not be able to marketing our productsand services, and generate product and service revenues. Further, we may not beable to obtain necessary regulatory approvals. Although we do not anticipateproblems satisfying any of the regulations involved, we cannot foresee thepossibility of new regulations, which could adversely affect our business.Further our products are subject to export limitations and we may be preventedfrom shipping our products to certain nations or buyers.

**Our earningand margins depend on our ability to perform under our contracts and if we donot perform our margins may erode.**

Our contracts requiremanagement to make various assumptions and projections about the outcome offuture events over a period of several years. These projections can includefuture labor productivity and availability, the nature and complexity of thework to be performed, the cost and availability of materials, the impact ofdelayed performance, and the timing of product deliveries. If there is asignificant change in one or more of these assumptions, circumstances or estimates,or if we are unable to control the costs incurred in performing under thesecontracts, the profitability of one or more of these contracts may be adverselyaffected.

**If thepricing and availability of subcontractor performance and raw materials change,our profitability may be adversely affected.**

Werely on subcontractors and other companies to provide raw materials, majorcomponents and subsystems for our products or to perform a portion of theservices that we provide to our customers. Occasionally we rely on only one ortwo sources of supply, which, if disrupted, could have an adverse effect on ourability to meet our commitments to customers. We depend on these subcontractorsand vendors to fulfill our contractual obligations in a timely and satisfactorymanner in full compliance with customer requirements. If one or more of oursubcontractors or suppliers are unable to satisfactorily provide on a timelybasis the agreed-upon supplies or perform the agreed-upon services, our abilityto perform our obligations as a prime contractor may be adversely affected.

**Some ofour product components are manufactured in other foreign countries and if anyof those become unstable or government regulations change, our costs mayincrease or we may become unable to source certain parts.**

Someof our product components are manufactured in and supplied from other foreigncountries. If import tariffs or taxes increase for any reason, our cost ofgoods would increase. Our financial performance may be affected by changes inpolitical, social and economic environment. The role of the central and localgovernments in the economy is significant. Policies toward economicliberalization, and laws and policies affecting foreign companies, foreigninvestment, currency exchange rates and other matters could change, resultingin greater restrictions on our ability to do business with suppliers based inother countries. The government could impose surcharges, increase tax rates, orrevoke, terminate or suspend operating licenses without compensating us. Also,other countries, from time to time, experience instances of civil unrest and 

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hostilities.Confrontations have occurred between the military, insurgent forces, andcivilians. If for these or any other reason, we lose our ability tosub-contract or manufacture the components to our products, or the cost ofdoing business increases, our business, financial condition, and results ofoperations would be materially and adversely affected.

**We may be subject to personalliability claims for our products and if our insurance is not sufficient tocover such claims, our expenses may increase substantially.**

As a result, a significantlawsuit could adversely affect our business. We may be exposed to liability forpersonal injury or property damage claims relating to the use of the products.Any future claim against us for personal injury or property damage couldmaterially adversely affect the business, financial condition, and results ofoperations and result in negative publicity. Even if we are not found liable,the costs of defending a lawsuit can be high. We do not currently maintaininsurance for this type of liability. Additionally, even if we do purchaseinsurance, we may experience legal claims outside of our insurance coverage, orin excess of our insurance coverage, or that insurance will not cover.

**We mustdevelop new technologies and maintain a qualified workforce in order to remaincompetitive.**

Virtually all of theproducts we produce and sell are highly engineered and require sophisticatedmanufacturing and system integration techniques and capabilities. Governmentmarkets in which the company operates are characterized by rapidly changingtechnologies. The product and program needs of our government customers changeand evolve regularly. Accordingly, our future performance in part depends onour ability to identify emerging technological trends, develop and manufacturecompetitive products, and bring those products to market quickly atcost-effective prices. In addition, because of the highly specialized nature ofour business, we must be able to hire and retain the skilled and appropriatelyqualified personnel necessary to perform the services required by ourcustomers. If we are unable to develop new products that meet customers’changing needs or successfully attract and retain qualified personnel, futuresales and earnings may be adversely affected.

**Werely on proprietary designs and rights and if we have to litigate those rights,our expenses could substantially increase.**

Our success and ability tocompete depend, in part, on the protection of our designs and technology. Inaddition, our technology could infringe on patents or proprietary rights ofothers. We have not undertaken or conducted any comprehensive patent infringementsearches or studies. If any third parties hold any conflicting rights, we maybe required to stop making, using or selling our products or to obtain licensesfrom and pay royalties to others. Further, in such event, we may not be able toobtain or maintain any such licenses on acceptable terms, if at all. We mayneed to engage in future litigation to enforce intellectual property rights orthe rights of customers, to protect trade secrets or to determine the validityand scope of proprietary rights of others, including customers. This litigationcould result in substantial costs and diversion of resources and couldmaterially and adversely affect our results of operations.

**Failureto maintain effective internal controls in accordance with section 404 of theSarbanes-Oxley act could have an adverse effect on our business and stockprice.**

Section 404 ofthe Sarbanes-Oxley Act requires us to evaluate annually the effectiveness ofour internal controls over financial reporting as of the end of each fiscalyear and to include a management report assessing the effectiveness of ourinternal controls over financial reporting in our annual report on Form 10-K.Section 404 also requires our independent registered public accounting firm toattest to, and report on, management’s assessment of our internal controls overfinancial reporting. If we fail to maintain the adequacy of our internalcontrols, as such standards are modified, supplemented or amended from time totime, we cannot assure you that we will be able to conclude in the future thatwe have effective internal controls over financial reporting in accordance withSection 404. If we fail to maintain a system of effective internal controls, itcould have an adverse effect on our business and stock price.

**ITEM 1B.  UNRESOLVED STAFF COMMENTS.**

There were nounresolved staff comments outstanding more than 180 days as of December 31,2006.

**ITEM2.   PROPERTIES.**

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

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We use a portion of Building#1 as our executive offices and warehouse. The term of this office lease is June 1, 2005 to July 14, 2008, with an option to renew for anadditional five years. Annual rent is $119,880 plus utilities, taxes andmaintenance. The base rent is subject to an annual escalation at the ConsumerPrice Index or CPI  rate with a minimumof  3% and a maximum of  7% per year. Wehave approximately 7,190 square feet of office space and 9139 square feet ofwarehouse space pursuant to the Building #1 office lease. The remaining portionof Building #1 is under an industrial lease for additional administrationoffices, engineering and integrated logistics support or ILS. The term of thislease is January 15, 2006 to July 14, 2008 with no options. The total squarefootage is 169,767 and the current annual rental is $604,898 plus utilities,taxes and maintenance.

Building #2 has a lease termof  July 15, 2005 to July 14, 2008,with an option to renew for another five years. Annual rent is $439,500 for thefirst year plus utilities, taxes and maintenance. which will be adjusted byincreases to the CPI rate with a minimum of 3% and a maximum of 7% per year.  This building is used principally formanufacturing  and warehousing ofproduction and ILS “aftermarket” parts**.**

Building #3 has a lease termof three years starting July 15, 2004 with an option to renew for anotherfive years. Annual rent is $258,000 for the first year plus utilities, taxesand maintenance, which will be adjusted by increase to the CPI rate with aminimum of 3% and a maximum of 7% per year. We have 80,096 square feet of spacein Building #3 and 6,300 square feet in and adjacent paint and blast building.This building is used principally for manufacturing, manufacturingtraining  and research and development.

On March 9,2007, we purchased a blast range of approximately 306 acres in EdgefieldCounty, SC along with the purchase of selected assets and a three (3) yearlease of an office building in Edgefield, SC. The intended purpose of thistransaction is to continue our research and development activities and toprovide for the continued use of the blast range as a Federal ATF and South CarolinaState licensed and pre-qualified Department of Defense Explosive Test facilityfor Force Protection Industries, and selected Government/commercial clients

         We have begun excavation in the Ladsoncomplex for a new 90,500 square feet facility warehouse that includes an  8,000 square feet carpentry shop and 8,500square feet for offices.   This newwarehouse is being designed to improve material handling efficiencies tosupport increased production volumes planned. This new facility will allow the redeployment of the current warehousingin Building #2 into additional manufacturing space for planned volumeincreases.

         We are in the process of acquiring anew 60,000 square feet facility in Summerville, S.C. for the intended purposeof expanding research and development operations and to facilitate increasedcustomer training requirements of products and applications.   We intend to move the existing research anddevelopment operations housed in Building #3 to this new facility. We also intend for the current research anddevelopment space in Building # 3 to be redeployed into additionalmanufacturing space.

         We have entered into a non-bindingletter of intent  to lease 120,000 squarefeet of an existing 422,000 square feet manufacturing facility located onapproximately 90 acres in Florence, SC. The agreement also provides for a surviving Right of First Refusal tomatch the terms of any offers received for the 302,000 square feet balance of thefacility.  We intend for this property toprovide for additional manufacturing space for future planned products.

**ITEM 3.**                    LEGAL PROCEEDINGS.

We may be involved fromtime to time in ordinary litigation that will not have a material effect on ouroperations or finances.  We are not awareof any pending or threatened litigation against the company or our officers anddirectors in their capacity as such that could have a material impact on ouroperations or finances.

**ITEM 4.**                    SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS.

No matterswere submitted to security holders during the quarter ended December 31, 2006.

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**PART II**

**ITEM 5.**                    MARKETFOR  REGISTRANT’S COMMON EQUITY, RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

*MARKET FOR OUR COMMON STOCK*

Our common stock began tradingon the OTC Bulletin Board on December 29, 1998 under the symbol “SJET.OB”and subsequently changed to “FRPT.OB”. We list our common stock on the NASDAQ StockMarket effective January 18, 2007 with the same ticker symbol. Bidand ask quotations for our common shares are routinely submitted by registeredbroker dealers who are members of the National Association of SecuritiesDealers on the NASD. These quotations reflect inter-dealer prices, withoutretail mark-up, markdown or commission and may not represent actualtransactions. The following table shows, for the periods indicated, the highand low closing sales prices per share of our common stock.
| ** **     | ** ** | **High**                                   | ** ** | **Low**    | ** ** |
|----------------|------------|--------------------------------------------|------------|------------|------------|
|                | ** ** | **Restated for  reverse split*** | ** ** | ** ** | ** ** |
| 2005           |       |                                       |       |       |       |
| First Quarter  |       | $                                          | 3.60       |       | $          | 1.75 |   |
| Second Quarter |       | $                                          | 2.30       |       | $          | 1.28 |   |
| Third Quarter  |       | $                                          | 1.80       |       | $          | 1.28 |   |
| Fourth Quarter |       | $                                          | 1.39       |       | $          | 0.69 |   |
|           |       |                                       |       |       |       |
| 2006           |       |                                       |       |       |       |
| First Quarter  |       | $                                          | 2.21       |       | $          | 0.72 |   |
| Second Quarter |       | $                                          | 6.40       |       | $          | 1.89 |   |
| Third Quarter  |       | $                                          | 9.26       |       | $          | 5.44 |   |
| Fourth Quarter |       | $                                          | 17.80      |       | $          | 6.80 |   |

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*                    Effective February 4, 2005, we affecteda reverse split of our common stock in the ratio of 12 pre-split shares forevery 1 post-split share (12:1).

*SHAREHOLDERS*

As of December 31,2006, there were 283 shareholders of record of our common stock.

*DIVIDEND POLICY*

We have never declared orpaid a cash dividend on our common stock. We currently intend to retain all ofour future earnings, if any, for use in our business and therefore we do notanticipate paying any cash dividends on our common stock in the foreseeablefuture. Any future determination to pay cash dividends will be at thediscretion of our board of directors and will depend upon our financialcondition, operating results, capital requirements, restrictions contained inour agreements and other factors which our board of directors deems relevant.

On January 21, 2005, weissued 15,800 shares of Series D 6% Convertible Preferred stock. TheSeries D Certificate of Designation provides for the payment of a dividendat the rate of 6% per annum for so long as the Series D shares areoutstanding. Dividend payments are semi-annual due March 1 andSeptember 1 and are payable in cash or shares of common stock. On March 1,2006, we made a cash dividend payment of $377, 554 and on September 1, 2006, wemade a cash dividend payment of $159, 386. All Series D 6% ConvertiblePreferred Stock converted to common shares by December 31, 2006 resulting in nofurther dividends being paid.

*RECENT SALES OF UNREGISTERED SECURITIES*

* The following are ourissuances of unregistered securities for the quarter ending December 31, 2006.*

On October 12,2006, we issued 22,960 shares of our common stock  for compensation of our board of directors.The shares issued were valued at $184,056.

On December20, 2006, we completed a private placement of 13,000,000 shares of our commonstock to institutional investors at $11.75 per share, resulting in grossproceeds of $152,750,000.  The proceeds, net of commissions, were$146,640,261.

Withrespect to the sales of our common stock described above, we relied on theSection 4(2) exemption from securities registration under the federalsecurities laws for transactions not involving any public offering. Noadvertising or general solicitation was employed in offering the shares. Theshares were sold to accredited investors. The shares were offered forinvestment purposes only and not for the purpose of resale or distribution, andthe transfer thereof was appropriately restricted by us.

 

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*FIVE-YEAR FINANCIAL PERFORMANCE GRAPH: 2002-2006*

*Comparison of five-year cumulative return among FPI, S&P500 and Dow Jones Industrial Average*

Theannual changes for the five-year period shown in the graph on this page arebased on the assumption that $100 had been invested in FPI stock, the Standard& Poor’s 500 Stock Index and the Dow Jones Industrial Average on December31, 2001, and that all quarterly dividends were reinvested at the average ofthe closing stock prices at the beginning and end of the quarter. The totalcumulative dollar returns shown on the graph represent the value that suchinvestments would have had on December 31, 2006.

|             | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| FPI         |       | $        | 100        |     | $          | 171      |       | $        | 93         |     | $          | 391      |       | $ | 87 |   | $ | 2,140 |   |
| S&P 500 |       | 100      |       | 78       |       | 100      |       | 111      |       | 117      |       | 135      |       |
| DJIA        |       | 100      |       | 85       |       | 109      |       | 115      |       | 117      |       | 139      |       |
|             |            |          |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |  |

** **

**ITEM 6.**                    SELECTED FINANCIAL DATA.
| ** **                                  | ** ** | **2006**    | ** **  | **2005**     | ** ** | **2004**     | ** ** | **2003**     | ** ** | **2002**   | ** ** |
|---------------------------------------------|------------|-------------|-------------|--------------|------------|--------------|------------|--------------|------------|------------|------------|
| ** **                                  | ** ** | ** **  | ** **  | **Restated** | ** ** | **Restated** | ** ** | **Restated** | ** ** | ** ** | ** ** |
| **Results of Operations**                   | ** ** | ** **  | ** **  | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** ** | ** ** |
| Net Sales                                   |       | $           | 196,017,446 |         | $          | 49,712,829   |       | $            | 10,272,757 |       | $          | 6,247,285 |   | $ | 2,606,634 |   |
| Income (loss)  from continuing operations   |       | 5,870,452   |        | (13,458,599  | )          | (11,953,803  | )          | (5,155,690   | )          | (5,373,377 | )          |
| Extraordinary  (loss)                       |       | —      |        | —       |       | —       |       | (2,932,179   | )          | —     |       |
| Deferred tax  benefit                       |       | 12,326,491  |        | —       |       | —       |       | —       |       | —     |       |
| Net Gain/(Loss)                             |       | 18,196,943  |        | (13,458,599  | )          | (11,953,803  | )          | (8,087,869   | )          | (5,373,377 | )          |
| **Per Common Share**                        | ** ** | ** **  | ** **  | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** ** | ** ** |
| Earnings (Loss)  from continuing operations |       |        |        |         |       |         |       |         |       |       |       |
| Basic                                       |       | 0.40        |        | (0.40        | )          | (0.62        | ))         | (0.99        | )          | (1.58      | )          |
| Assuming  dilution                          |       | 0.39        |        | (0.40        | )          | (0.62        | )          | (0.99        | )          | (1.05      | )          |
| Common Stock  Dividends                     |       | 0.00        |        | 0.00         |       | 0.00         |       | 0.00         |       | 0.00       |       |
| **Financial Position at Year-End**          | ** ** | ** **  | ** **  | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** ** | ** ** |
| Property plant  and equipment, net          |       | 8,963,901   |        | 2,138,703    |       | 1,036,994    |       | 309,068      |       | 336,523    |       |
| Total assets                                |       | 274,391,312 |        | 39,776,535   |       | 13,627,196   |       | 1,620,114    |       | 2,615,451  |       |
| Total debt                                  |       | 239,620     |        | 7,500,000    |       | 4,471,707    |       | 745,584      |       | 549,486    |       |
| Shareholders’  Equity                  |       | 217,854,807 |        | 1,459,600    |       | 2,558,483    |       | (305,595     | ))         | 803,450    |       |
|                                        |       |        |        |         |       |         |       |         |       |       |       |
|                                             |            |             |             |              |            |              |            |              |            |            |            |  |  |  |  |  |

 

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*CAUTIONARY STATEMENT CONCERNINGFORWARD-LOOKING STATEMENTS*

This Report contains forward-looking statements,including, without limitation, statements concerning possible or assumed futureresults of operations and those preceded by, followed by or that include thewords “believes,” “could,” “expects,” “intends,” “anticipates,” or similarexpressions. Our actual results could differ materially from these anticipatedin the forward-looking statements for many reasons including our ability toraise capital when necessary; availability of parts and raw materials for ourproducts; continued customer acceptance of our products; on-going success ofour research and development efforts and other risks described elsewhere inthis report and in our other filings with the Securities and ExchangeCommission. Although we believe the expectations reflected in theforward-looking statements are reasonable, they relate only to events as of thedate on which the statements are made, and our future results, levels ofactivity, performance or achievements may not meet these expectations. We donot intend to update any of the forward-looking statements after the date ofthis document to conform these statements to actual results or to changes inour expectations, except as required by law.

**ITEM7.**                    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

***EXPLANATORYNOTE***

We will be filing an amendment to our Annual Report onForm 10-K for the year ended December 31, 2005 to amend and restate financialstatements and other information for the years 2005, 2004 and 2003.  The restatement adjusts our accounting forpreferred stock and warrants issued to investors, accounting for stock-basedcompensation to employees and non-employees and accounting for rent expense ona straight-line basis. The financial information included in this 10-Kreferring to prior years ended December 31, 2005, 2004 and 2003 includes eachaccounting restatement. Given that we are still in the process of finalizingthe restatement with the SEC, there is the potential the restated numbers maychange pending  final resolution. Webelieve that the restatement did not have any material impact on our 2006financial results.

The items identified by us relate to the valuationmethod used to account for certain equity issuances which did not properlyinclude a full analysis of the embedded conversion feature associated with suchissuances as required under EITF 98-5, Accounting for Convertible Securitieswith Beneficial Conversion Features or Contingently Adjustable ConversionRatios, or which were otherwise incorrectly valued. As a result, a number ofshares of our stock issued as compensation to certain executives and otherthird parties and recorded as general and administrative compensation expenseappear to have been valued at less than fair value.

**          We believe this issue is limited to asmall number of equity issuances made during 2003, 2004 and 2005, with a totalcombined value of not more than an additional cumulative net loss ofapproximately $3.75 million for the years 2003 and 2004, and an approximaterealized gain in the range of $2 to $4 million in 2005. We believe that therestatement will not materially impact our 2006 financial results. Ourmanagement and audit committee has discussed the subject matter giving rise tothis conclusion with Jaspers + Hall, PC, its independent accounting firm forthe fiscal year ended December 31, 2005. (Refer to Note 1 to the ConsolidatedFinancial Statements of this 10-K for additional detail)**

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** **

**RESULTSOF OPERATIONS**

**Consolidated Statement of Operations**
| ** **                             | ** ** | **2006**    | ** **  | **2005**     | ** ** | **Difference** | ** ** | **% Change** | ** **  |
|----------------------------------------|------------|-------------|-------------|--------------|------------|----------------|------------|-------------------|-------------|
| ** **                             | ** ** | ** **  | ** **  | **Restated** | ** ** | ** **     | ** ** | ** **        | ** **  |
| Revenues                               |       | $           | 196,017,446 |         | $          | 49,712,829     |       | $                 | 146,304,617 |   | 294.30 | % |
| Cost of Sales                          |       | 158,994,626 |        | 46,428,615   |       | 112,566,011    |       | 242.45            | %           |
| Gross Profit                           |       | 37,022,820  |        | 3,284,214    |       | 33,738,606     |       | 1027.29           | %           |
| Gross Profit.%                         | * *   | *19*        | *%*         | *7*          | *%*        | * *       | * *   | * *          | * *    |
| G&A Expense                        |       | 27,183,093  |        | 16,310,336   |       | 10,872,757     |       | 66.66             | %           |
| R&D Expense                        |       | 3,204,165   |        | 1,657,918    |       | 1,546,247      |       | 93.26             | %           |
| Total G&A                          |       | 30,387,258  |        | 17,968,254   |       | 12,419,004     |       | 69.11             | %           |
| Operating Profit  (Loss)               |       | 6,635,562   |        | (14,684,040  | )          | 21,319,602     |       | 145.19            | %           |
| Other Income/(Expense)                 |       | 963,390     |        | 102,941      |       | 860,449        |       | 835.87            | %           |
| Interest Expense                       |       | (1,728,500  | )           | (1,708,291   | )          | (13,759        | )          |              |        |
| Realized gain on  derivative liability |       | —      |        | 2,830,791    |       | (2,830,791     | )          | 100.00            | %           |
| Pretax Income  (Loss)                  |       | 5,870,452   |        | (13,458,599  | )          | 19,329,051     |       | 143.61            | %           |
| Deferred tax  benefit                  |       | 12,326,491  |        | —       |       | 12,326,491     |       | n/a               |        |
| Net Income (Loss)                      |       | 18,196,943  |        | (13,458,599  | )          | 31,655,542     |       | 235.21            | %           |
|                                        |            |             |             |              |            |                |            |                   |             |  |  |  |

 

Revenue: ForceProtections’ net sales grew 294%, over 2005 to $196.0 million. The increase wasa result of strong demand for blast protected vehicles, increased ability tomeet this demand and acceptance of our vehicles by  customers. Net sales increased 384% in 2005over 2004, reaching $49.7 million. This sales growth came from increased volumeof vehicle production and acceptance U.S. defense customer as well as increasespare parts revenue.

Cost of Sales: Cost of sales for the twelve monthsended December 31, 2006 was $159.0 million, an increase of 242% percent over2005 as a result of the increased demand and acceptance of our vehicles. Costof sales increased 312 % to $ 46.4 million in 2005 from 2004 due to theincreased activity of vehicle production and the corresponding increased directand indirect labor and material costs associated with the companiesmanufacturing activities and the recording of a warranty provision. Cost ofsales as a percentage of net sales was 81% in 2006, 93% in 2005 and 110% in 2004. This improvement in our grossprofit is the result in part of increasing efficiency of our manufacturing operations.  As we continue to expand our productioncapacity, we expect to achieve increased cost efficiency from volumepurchasing, improvements in our manufacturing process and all the allocation ofindirect costs across a broader production base, resulting in a projecteddecrease in the cost of sales as a percentage of gross revenue.

General andAdministrative Expenses: General and administrative expenses as a percentage ofsales were 15.5% percent in 2006 compared with 36.1 % in 2005 and 105.6% in2004. General and administrative was $30.4 million in 2006, $18.0 million in2005 and $ 10.8 million in 2004. Even though we expect our General andAdministrative expenses to increase as we continue to expand our productioncapabilities, it is expected to decrease as a percentage of Net Sales as we achievegreater efficiencies in our operations.

Net Income(Loss): Netincome for 2006 was $18.2 million as compared to net losses of $13.5 million in2005 and $12.0 million in 2004. The net gain is due to increasing efficienciesand our higher production volumes.

*LIQUIDITYAND CAPITAL RESOURCES*

*Current Liquidity:*   For thetwelve month period ending December 31, 2006, we had a starting cashbalance of $1.2 million and an ending cash balance of $156.3 millionrepresenting a net increase in our cash position for such period of $155.1million. During this period we incurred negative cash flows from operations of$26.5 million due to the increases in accounts receivables and inventories fromincreased production and manufacturing activities as well as spending associatedwith our substantial infra-structure expansion to support our increasedproduction capacity. To meet our cash needs during this period, we raised a nettotal of $189.2 million through various financing activities, including $185.8million from the sale of  21,277,700shares of our Common Stock.

*Future Liquidity:*   During thetwelve month period ending December 31, 2006, we experienced negative cashflows from operations of $26.5 million and needed to rely on outside sources ofworking capital to meet our cash flow requirements. During the upcoming periodending December 31, 2007, we expect the infra-structure expenses we haveincurred in connection with our production ramp-up may remain constant toprovide for further production and manufacturing capabilities to ensuredelivery of expected orders in conjunction, we expect to experience positivecash flow from operations as we increase the volume of vehicle production.

*Uncertainties*:   Theamount of working capital that we will require depends on several factors,including without limitation, the extent and timing of sales of our products,future inventory costs, the timing and costs associated with the expansion ofour manufacturing, development, engineering and customer support capabilities,the timing and cost of our product development and enhancement activities andour operating results. The realization of a major portion of the assets 

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shown on ourbalance sheet is dependent upon the success of such future operations. During2007, we expect to be able to generate cash flows from operations sufficient tosatisfy our cash requirements, but if we are unable to do so, we may need toconsider outside sources of financing.

*BACKLOG*

         On June 2, 2006, we announced that onMay 31, 2006 the U.S. Army Tank-Automotive and Armaments Command or TACOMawarded BAE Systems Land & Armaments L.P. of York, PA  a delivery order in the amount of$180,503,000 as part of a $445,439,000 firm-fixed-price contract for theproduction and delivery of 378 Iraqi Light Armored Vehicles or ILAV to bedelivered to the Iraqi National Army. We have an agreement with BAE pursuant towhich we will license to BAE the use of our Cougar vehicle as the basis for theILAV design, and will act as BAE’s principal subcontractor to provide themanpower and other resources needed to produce 50% of the vehicles in Ladson,South Carolina. Pursuant to the terms of the agreement, we will receive alicense fee of $8,027 for each ILAV vehicle manufacture by BAE under the ILAVcontract. We will also provide 100% of the after sales service and supportrequired under the TACOM agreement. As of December 31, 2006, we have delivered55 ILAV vehicles with a backlog of 102 to be produced and delivered in 2007

       On May 4, 2006, we announced that theU.S. Marine Corps awarded us a contract for 79 Cougar Joint EOD Rapid ResponseVehicles or JERRV. As of December 31, 2006, we delivered 71 of these vehiclesleaving a backlog of 8 JERRVs to be produced and delivered in 2007.

          On August 11, 2006, we announced thatwe had been awarded a contract by the British Ministry of Defense for more than85 Cougar explosive ordnance disposal vehicles, also known as Mastiff ProtectedPatrol Vehicles or Mastiff PPV. The contract also includes associated spares, technicalmanuals, and field service support.  The contract, administered throughthe U.S. Marine Corps System Command  is subject to price definitization.As of December 31, 2006, we delivered 30 of the Mastiffs leaving a backlog of55 vehicles.

          On November 10, 2006, we announced that we hadsigned a U.S. Marine Corps contract for approximately 200 Cougar Joint EODRapid Response vehicles, 80 Buffalo mine-protected clearance vehicles, partsand services. The contract, which will be administered by the Marine CorpsSystems Command, is worth an estimated $214,124,450 subject to contractdefinitization. As of December 31, 2006, our backlog for this contract was 200Cougar JERRVs and 59 Buffalo MPCVs.

The total vehiclebacklog across all programs as of December 31, 2006 was 369 vehicles:

·                  Buffalo:59 vehicles (15-US Army; 44-USMC)

·                  CougarJERRV: 8 vehicles

·                  CougarMRAP: 200 Cougars.

·                  ILAVs:102 vehicles

·                  Mastiff(British MOD): 55 vehicles

*Supplemental awards:*

           On January 15, 2007, the U.S. MarineCorps awarded a firm fixed price contract for 15 Cougar Joint EOD RapidResponse Vehicles (JERRV).  The value ofthis contract is approximately $9.4 million.

          On January 26, 2007, the U.S. MarineCorps awarded us an Indefinite Delivery, Indefinite Quantity or IDIQ contractfor the Mine Resistant Ambush Protected or MRAP program.  This contract allows the U.S. Marine Corps toplace delivery orders for up to 4,100 MRAP vehicles per ordering year for 5years for a total possible vehicle quantity of 20,500.  On January 26, 2007, the U.S. Marine Corpsissued a delivery order for 4 MRAP vehicles to be used in survivability andmobility testing as part of the program. On February 14, 2007, the Marine Corps issued a second delivery orderfor 125 MRAP production vehicles.  Thetotal value of these delivery orders is $74,636,994.

           On February 20, 2007, the Mastiffcontract was modified to add 22 additional Mastiffs increasing the totalMastiffs to be delivered to 108 vehicles.

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*TRENDS, RISKS AND UNCERTAINTIES*

The results of ouroperations for the period ended December 31, 2006 reflect the costsassociated with our  extraordinary growth, as we continue to evolve into afull scale manufacturing facility. At the same time we were working to completethe 2006 backlog, we also undertook the work necessary to increase ourproduction capacity to meet the expected demand for our vehicles for potentialfollow-on orders. This included substantial vehicle and automotive engineeringwork, manufacturing engineering development, hiring and training workforce andthe expansion of our manufacturing and administrative facilities. While the2006 contracts reflects a broader, growing demand for our vehicles, we continueto face the challenge of expanding our manufacturing capacity to fully exploitthis opportunity. During 2006 we have moved aggressively to meet this challengeby expanding our facilities, improving our operating systems and refining ourmanufacturing processes. These activities have required a significantcommitment of short term resources, but we expect the long term benefits willbe substantial.

We recognize thereare risks associated with our on-going expansion activities. We continue torely upon the U.S. Army and the U.S. Marine Corps for our sales, and if eithercustomer elected not to issue further orders to us it would have a dramaticimpact upon our financial performance. In addition, if we are delayed inmeeting the delivery schedule under contracts, we may be obligated to payliquidated damages for any delayed vehicle, and in the event of any substantialfailure to perform, the customer could cancel the contract and/or claimadditional damages. Payment of liquidated damages could negatively impact ourfuture liquidity, and since we are incurring significant costs associated withour expansion program based on the expectation of future contract revenues,loss of contracts would have a dramatic impact on both our liquidity and ourfinancial performance. We currently do not have any reason to expect that ourcustomers will choose to stop buying our vehicles or that any significantcontracts will be cancelled.

 In the past, we have encountered somedifficulties in securing the necessary components for our vehicles, for examplearmor steel, truck chassis, axle sets and ballistic glass. To mitigate thisrisk, we have identified multiple vendors for certain components to ensure wehave alternate sources of supply if necessary. Additionally, we haveimplemented a program of advance purchasing and stockpiling critical materials.For example, we currently have pre-purchased steel and truck parts to ensureavailability of material needed for current and potential future orders. Whilewe do not currently expect the potential non-availability of parts or rawmaterials to materially affect our operations, there is a possibility thatdelays or increased costs could negatively impact our financial performance ifcircumstances change. Apart from the foregoing, the main uncertainty about ourfuture operations is whether we will continue to receive additional orders forour vehicles. It is impossible to predict with certainty whether such futureorders will be placed by existing or new customers. If we do not receive futureorders, it is unlikely that our business will continue. However, we believe ourvehicles provide proven blast and ballistic protection, and that for so long asthere is a risk of bodily harm to service personnel from explosive blasts,there will be a market for our products. A number of recent market surveys andrequests for information issued by the U.S. military, for armored vehicles withcharacteristics substantially similar to ours, support this view.

*SUMMARY OF CRITICAL ACCOUNTING POLICIES*

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

           The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements, aswell as the reported amounts of revenues and expenses during the reportingperiod. Actual results could differ from those estimates.

           As a general rule, financialinformation is accounted for and based on cost, not current market value.Revenues and gains should be matched using the accrual method with the expensesgiving rise to the revenues and gains to determine earnings for the period.Expenses are necessarily incurred to produce revenue. Expenses are then “matched”in the same accounting period against the revenue generated. Revenues arerecognized when they are earned and expenses are recognized in the same periodas the related revenue (matching or using a systematic and rational allocationor expensing in the period in which they expire), not necessarily in the periodin which we receive or expend cash.

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           We believe the following criticalaccounting policies and procedures, among others, affect our more significantjudgments and estimates used in the preparation of our consolidated financialstatements:

·                                          Revenuerecognition;

·                                          Inventorycost and associated reserves; and

·                                          Allocationof direct and indirect cost of sales.

           In December 2004, FASB issuedStatement No. 123(R), Share-Based Payment, which establishes accountingstandards for transactions in which an entity receives employee services inexchange for (a) equity instruments of the entity or (b) liabilitiesthat are based on the fair value of the entity’s equity instruments or that maybe settled by the issuance of equity instruments. Effective October 1, 2005,SFAS 123(R) will require us to recognize the grant-date fair value of stockoptions and equity based compensation issued to employees in the statement ofoperations. The statement also requires that such transactions be accounted forusing the fair-value method, thereby eliminating use of the intrinsic method ofaccounting in APB No. 25.  We utilized APB No. 25 prior to January 1,2006.

           In November 2004, the FASBissued Statement No. 151, Inventory Costs, to amend the guidance inChapter 4, Inventory Pricing, of the FASB Accounting Research BulletinNo. 43, Restatement and Revision of Accounting Research Bulletins, whichbecame effective on January 1, 2006. Statement No. 151 clarifies theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted materials. The Statement requires that those items berecognized as current-period charges. Additionally, Statement No. 151requires that allocation of fixed production overhead to the costs ofconversion be based on normal capacity of the production facility. We haveadopted Statement No. 151 and do not believe that Statement No. 151will have a significant impact on our financial condition and results ofoperations.

*Principlesof Consolidation*: The consolidated financialstatements include the accounts of Force Protection, Inc., and our twowholly owned subsidiaries, Force Protection Industries, Inc. (formerlyTechnical Solutions Group, Inc.) and Force Protection Technologies, Inc(formerly TSG International, Inc.) for the three and nine month periodended September 30, 2006. All inter-company balances and transactions areeliminated in consolidation.

*CashEquivalents*:**Forpurposes of reporting cash flows, we consider all highly liquid debtinstruments purchased with maturity of three months or less to be cashequivalents..

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

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

| Leasehold improvements  |   | 2 to 5 years |
|-------------------------|--------|--------------|
| Furniture and fixtures  |   | 3 years      |
| Machinery and equipment |   | 7 years      |
| Tooling and molds       |   | 7 years      |
| Vehicles                |   | 5 years      |

 

*Goodwill*:**Under SFAS No. 142, Goodwill andother Intangible Assets, all goodwill amortization ceased effective January 1,2002. Rather, goodwill is now subject to annual impairment reviews. A fairvalue test is applied at the reporting level. This test requires variousjudgments and estimates. A goodwill impairment loss will be recorded for anygoodwill that is determined to be impaired.  When the carrying valueexceeds fair value, the impairment is the difference between the carrying valueof goodwill and the fair value. The fair value of goodwill is defined as thefair value as a whole less the value of individual assets and liabilities usingan estimated purchase price, as a whole.

*Estimates*:**The preparation of financial statementsin conformity with generally accepted accounting principles requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements, as well as the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from thoseestimates.

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*Revenue Recognition*:**Ourrevenue is derived principally from the sale of our vehicles and associatedspare parts and training services. Revenue from product sales and spare partsales, net of an allowance for contractual adjustments, is recognized when theproducts or spare parts are delivered to and “formally” accepted by thecustomer. We define “formal acceptance” as taking place when a representativeof the 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 our facilities. This DCMA representative inspects each vehicle as it is delivered by us andupon confirmation of the vehicle’s conformity with the contractualspecifications the inspector signs the Form DD250 and formally accepts deliveryof the vehicle. We only recognize revenues arising from its U.S. Governmentcontracts upon execution of the Form DD250 by the DCMA inspector. Under some ofour U.S. Government contracts, we receive performance based payments based oncompletion of specific milestones stipulated under the contract (for example,delivery of raw material to our Ladson facility). These payments are recordedas “deferred revenue” and carried on our balance sheet until the final deliveryof the products and formal acceptance by the U.S. Government pursuant to theForm DD250. Upon acceptance of the products and the execution of the FormDD250, we recognize the full sale price of the product as revenue.

            Revenues from services provided arerecorded in accordance with specific contractual terms.  Services havehistorically consisted of us providing on-site personnel on an as-needed basisin a timely manner, and have generally been provided in foreign locations.

            We negotiate contracts with ourcustomers that may include revenue arrangements with multiple deliverables, asoutlined by Emerging Issues Task Force No. 00-21 (EITF 00-21).  Ouraccounting policies are defined such that each deliverable under a contract isaccounted for separately.  Historically, we have negotiated and signedcontracts with our customers that outline the contract amount and specificterms and conditions associated with each deliverable.

*Concentration*:Our future operations and continued expansion are subject to a significantconcentration risk.  For the year 2006 and 2005, our revenues frommilitary units of the U.S. Government accounted for 84% and 96% of totalrevenues, respectively.  Our accounts receivable from military units ofthe U.S. Government for 2006 and 2005 amounted to 81% and 60%, of totalaccounts receivable, respectively

*AccountsReceivable and “Definitization”*: A majority of our contractsare with the United States Government and as such they are “public sector”contracts subject to the Federal Acquisition Regulations set out at Title 41 ofthe United States Code, and may result either from competitive bidding or maybe awarded as “sole source” contracts “subject to definitization” as providedunder FAR Section 252.217-7027. Following the award of a sole source contract,a central component of the definitization process is the negotiation andfinalization of the contract price between the contractor and the United Statescontracting officer.  As part of this process, the parties make a mutualdetermination of the direct material and labor costs for the work based uponthe bill of materials and other purchasing information and then the partiesmutually agree upon “rates” for the indirect labor costs and the general andadministrative costs and upon  a “fee” (or profit).  While the directmaterial costs and labor can be established through objective evidence, the “rates”and fee are more subjective and are based upon an analysis of multiple factorsincluding historical performance data and projected operational factors. The contractor has the right to submit proposed rates and fee, but these aresubject to final review and approval by the contracting officer, who may insiston using alternate rates and fee.  As provided in section 252.217-7027(c):

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

             Finally, although both partiesmake an effort to definitize the contract as quickly as possible, the processis time consuming and can take months (or even years) to complete.  Duringthe definitization process the contractor is required to perform the contractwork and to make deliveries under the contract before the final contract pricehas been established.  For this reason, as part of the original letteraward, the contractor provides a rough order of magnitude (“ROM”) price to beused for invoicing and accounting purposes pending definitization.

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

*Dividend Policy*:**Wehave never declared or paid a cash dividend on our common stock, and we do notanticipate paying any cash dividends on our common stock in the foreseeablefuture. Any future determination to pay cash dividends on our common stock willbe at the discretion of our board of directors and will depend upon ourfinancial condition, operating results, capital requirements, restrictionscontained in our agreements and other factors which our board of directorsdeems relevant. Under the terms of the Certificate of Designation for ourSeries D Convertible Preferred stock, we are obligated to pay a 6% dividend incash or shares of common stock on the outstanding shares of Series Dstock.  Such dividend is due and payable on March 1 and September 1 eachyear. As of December 31, 2006, there are no outstanding Series D shares and wehave no further obligation to make such dividend payments.

*Off-Balance Sheet Arrangements:*As of December 31, 2006, other than operatingleases, the company had no off-balance sheet arrangements.  (Refer to Footnote 7 of the FinancialStatements included in this 10-K)

**ITEM 7A.    QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

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

*FOREIGN CURRENCY***:**The majority of our business is denominated in U.S. dollars and as such,movement in the foreign currency markets will have a minimal direct impact onour business.

*INTEREST RATES***:**As we do not have a trading portfolio and our current financing is at a fixedrate, we are not currently directly at risk of interest rate fluctuations. Asour financing needs change in the future, interest rate risk may become a moresignificant issue for us.

To date, we havenot used any derivative financial instruments for the purpose of reducing ourexposure to adverse fluctuations in interest rates, foreign currency exchange,or commodity prices. We are not a party to leveraged derivatives nor do we holdor issue financial investments for speculative purposes.

 

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**ITEM****8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

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

 

We have audited theaccompanying consolidated balance sheets of Force Protection, Inc. andsubsidiary as of December 31, 2006, 2005 and 2004, and the related consolidatedstatements of income, stockholders’ equity and comprehensive income, and cashflows for each of the years in the three-year period ended December 31, 2006. Thesefinancial statements are the responsibility of the company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

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, 2006, 2005 and 2004, and the results of its operations and itscash flows for each of the years in the three-year period ended December 31,2006 in conformity with accounting principles generally accepted in the UnitedStates of America.

 

We also haveaudited, in accordance with the standards of the Public Company Accounting OversightBoard (United States), the effectiveness of Force Protection Inc.’s internalcontrol over financial reporting as of December 31, 2006, based oncriteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 2, 2007expressed an unqualified opinion thereon.

/s/ Jaspers + Hall, PC

Denver, Colorado

March 2, 2007

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** **

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

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

We have audited management’sassessment, included in the accompanying Management’s Report on InternalControl over Financial Reporting, that Force Protection Inc. and subsidiarymaintained effective internal control over financial reporting as ofDecember 31, 2006, based on criteria established in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(the COSO criteria). Force Protection Inc.’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the company’s internal control over financialreporting based on our audit. 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion. 

A company’s internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company;(2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on thefinancial statements. 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate. 

In our opinion, management’sassessment that Force Protection Inc. and subsidiary maintained effectiveinternal control over financial reporting as of December 31, 2006, isfairly stated, in all material respects, based on the COSO criteria. Also, inour opinion, Force Protection Inc. and subsidiary maintained, in all materialrespects, effective internal control over financial reporting as ofDecember 31, 2006, based on the COSO criteria. 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the accompanying consolidated balance sheets of ForceProtection Inc. and subsidiary as of December 31, 2006, 2005 and 2004, andthe related consolidated statements of income, stockholders’ equity, and cashflows for each of the three years in the period ended December 31, 2006,and our report dated March 2, 2007, expressed an unqualified opinion thereon. 

/s/ Jaspers + Hall, PC

Denver, Colorado

March 2, 2007

 

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**FORCE PROTECTION INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENT OF OPERATIONS**

**For the Years Ended December 31, 2006, 2005 and2004**
| ** **                                                           | ** ** | **2006**    | ** **  | **2005**     | ** ** | **2004**     | ** ** |
|----------------------------------------------------------------------|------------|-------------|-------------|--------------|------------|--------------|------------|
| ** **                                                           | ** ** | ** **  | ** **  | **Restated** | ** ** | **Restated** | ** ** |
| **Net Sales**                                                        |       | $           | 196,017,446 |         | $          | 49,712,829   |       | $ | 10,272,757 |   |
| Cost of sales                                                        |       | 158,994,626 |        | 46,428,615   |       | 11,266,998   |       |
| Gross Profit                                                         |       | 37,022,820  |        | 3,284,214    |       | (994,241     | )          |
|                                                                 |       |        |        |         |       |         |       |
| General and administrative  expense                                  |       | 27,183,093  |        | 16,310,336   |       | 9,614,052    |       |
| R & D expense                                                    |       | 3,204,165   |        | 1,657,918    |       | 1,230,290    |       |
| ** **                                                           |       |        |        |         |       |         |       |
| **Operating  Profit (Loss)**                                         |       | 6,635,562   |        | (14,684,040  | )          | (11,838,583  | )          |
|                                                                 |       |        |        |         |       |         |       |
| Other income                                                         |       | 963,390     |        | 102,941      |       | 569,760      |       |
| Interest expense                                                     |       | (1,728,500  | )           | (1,708,291   | )          | (684,980     | )          |
| Realized gain on  derivative liability                               |       | —      |        | 2,830,791    |       | —       |       |
|                                                                 |       |        |        |         |       |         |       |
| **Earnings  (Loss) from Operations**                                 |       | 5,870,452   |        | (13,458,599  |       |         |       |
|                                                                 |       | (11,953,803 | )           |         |       |         |       |
|                                                                 |       |        |        |         |       |         |       |
|                                                                 |       |        |        |         |       |         |       |
| **Deferred  Tax Benefit**                                            |       | 12,326,491  |        | —       |       | —       |       |
| ** **                                                           |       |        |        |         |       |         |       |
| **Net  Earnings (Loss)**                                             |       | $           | 18,196,943  |         | $          | (13,458,599  | )          | $ | (11,953,803 | ) |
|                                                                 |       |        |        |         |       |         |       |
| Basic earnings (loss)  per common share  before extraordinary item   |       | $           | 0.40        |         | $          | (0.42        | )          | $ | (0.62 | ) |
|                                                                 |       |        |        |         |       |         |       |
| Diluted earnings (loss)  per common share before  extraordinary item |       | $           | 0.39        |         | $          | (0.42        | )          | $ | (0.62 | ) |
| ** **                                                           | ** ** | ** **  | ** **  | ** **   | ** ** | ** **   | ** ** |
| **Weighted-average shares used to  compute:**                        | ** ** | ** **  | ** **  | ** **   | ** ** | ** **   | ** ** |
| Basic earnings (loss)  per share                                     |       | 44,786,083  |        | 33,926,573   |       | 19,357,939   |       |
| Diluted earnings(loss) per share                                     |       | 46,435,552  |        | 33,926,573   |       | 19,357,939   |       |

 

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**FORCEPROTECTION INC. AND SUBSIDIARY**

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER31, 2006, 2005 and 2004**
| ** **                                                                                                                                                       | ** ** | **2006**    | ** **  | **2005**     | ** ** | **2004**     | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|--------------|------------|--------------|------------|
| ** **                                                                                                                                                       | ** ** | ** **  | ** **  | **Restated** | ** ** | **Restated** | ** ** |
| **ASSETS**                                                                                                                                                       |       |        |        |         | ** ** | ** **   | ** ** |
| Current Assets:                                                                                                                                                  |       |        |        |         |       |         |       |
| Cash                                                                                                                                                             |       | $           | 156,319,004 |         | $          | 1,217,509    |       | $ | 2,264,406 |   |
| Accounts  receivable, net of allowance for contractual adjustments of $6,068,087 for  2006, $1,018,051 for 2005, and $0 for 2004                                 |       | 36,011,568  |        | 3,666,358    |       | 1,053,973    |       |
| Inventories                                                                                                                                                      |       | 60,396,297  |        | 32,486,776   |       | 9,029,913    |       |
| Other current  assets                                                                                                                                            |       | 374,051     |        | 267,189      |       | 241,910      |       |
| Current Portion  of Deferred Taxes                                                                                                                               |       | 9,562,500   |        | —       |       | —       |       |
| Total current assets                                                                                                                                             |       | 262,663,420 |        | 37,637,832   |       | 12,590,202   |       |
| Investment in  Challenger Powerboats Inc, net of valuation allowance                                                                                             |       | —      |        | —       |       | —       |       |
| Long Term Portion of  Deferred Taxes                                                                                                                             |       | 2,763,991   |        | —       |       | —       |       |
| Property Plant and  equipment, net                                                                                                                               |       | 8,963,901   |        | 2,138,703    |       | 1,036,994    |       |
| **Total  Assets**                                                                                                                                                |       | $           | 274,391,312 |         | $          | 39,776,535   |       | $ | 13,627,196 |   |
| ** **                                                                                                                                                       |       |        |        |         |       |         |       |
| **LIABILITIES &  SHAREHOLDERS’ EQUITY**                                                                                                            | ** ** | ** **  | ** **  | ** **   | ** ** | ** **   | ** ** |
| LIABILITIES                                                                                                                                                      |       |        |        |         |       |         |       |
| Current Liabilities:                                                                                                                                             |       |        |        |         |       |         |       |
| Accounts payable                                                                                                                                                 |       | $           | 38,653,813  |         | $          | 14,688,855   |       | $ | 1,867,363 |   |
| Other accrued  liabilities                                                                                                                                       |       | 2,968,859   |        | 1,843,097    |       | 1,354,466    |       |
| Contract  liabilities                                                                                                                                            |       | 1,850,000   |        | 1,686,062    |       | 729,461      |       |
| Loans payable                                                                                                                                                    |       | —      |        | 7,500,000    |       | 360,975      |       |
| Line of Credit                                                                                                                                                   |       | —      |        | —       |       | 4,000,000    |       |
| Current portion  of long term liabilities                                                                                                                        |       | 71,685      |        | —       |       | —       |       |
| Deferred revenue                                                                                                                                                 |       | 12,824,211  |        | 12,598,921   |       | 2,645,716    |       |
| Total Current  Liabilities                                                                                                                                       |       | 56,368,568  |        | 38,316,935   |       | 10,957,981   |       |
|                                                                                                                                                             |       |        |        |         |       |         |       |
| Long-term debt:                                                                                                                                                  |       |        |        |         |       |         |       |
| Other long term  liabilities                                                                                                                                     |       | 167,937     |        | —       |       | 110,732      |       |
| **Total  Liabilities**                                                                                                                                           |       | 56,536,505  |        | 38,316,935   |       | 11,068,713   |       |
| ** **                                                                                                                                                       |       |        |        |         |       |         |       |
| Commitment and  Contingencies (See Note 7)                                                                                                                  |       |        |        |         |       |         |       |
| ** **                                                                                                                                                       |       |        |        |         |       |         |       |
| **SHAREHOLDERS’ EQUITY**                                                                                                                                    | ** ** | ** **  | ** **  | ** **   | ** ** | ** **   | ** ** |
| Preferred stock: $0.001  par value, authorized: 10,000,000 shares                                                                                                |       | —      |        | —       |       | —       |       |
| Preferred stock series  B, $0.001 par value, authorized: 25 shares issued and outstanding 0, 0, 19.5  shares; for the years 2006, 2005 and 2004 respectively;    |       | —      |        | —       |       | —       |       |
| Preferred stock  series C, $0.001 par value, authorized: 150 shares, issued and  outstanding 0,0,0 shares; for the years 2006, 2005 and 2004 respectively;  |       | —      |        | —       |       | —       |       |
| Preferred stock  series D, $0.001                                                                                                                           |       | —      |        |         |       |         |       |
| par value, authorized:  20,000 shares, issued and outstanding:                                                                                                   |       |        |        |         |       |         |       |
| 0,13,004, 0  shares; for the years 2006, 2005 and 2004 respectively;                                                                                             |       | —      |        | 13           |       | —       |       |
| Common stock, $0.001  par value, authorized: 300,000,000, issued and outstanding: 66,762, 566,  36,114,216, 19,357,938 shares; for the years 2006, 2005 and 2004 |       | 66,763      |        | 36,114       |       | 19,357       |       |
| Warrants                                                                                                                                                         |       | —      |        | 5,780,953    |       | 2,843,874    |       |
| Shares to be issued                                                                                                                                              |       | 31          |        | —       |       | —       |       |
| Beneficial Conversion  Feature                                                                                                                                   |       | —      |        | —       |       | 19,338,330   |       |
| Additional Paid-in  Capital                                                                                                                                      |       | 249,320,540 |        | 46,248,107   |       | 35,633,491   |       |
| Accumulated deficit                                                                                                                                              |       | (31,532,528 | )           | (50,605,587  | )          | (55,276,569  | )          |
| **Total  Shareholders’ Equity**                                                                                                                             |       | 217,854,807 |        | 1,459,600    |       | 2,558,483    |       |
| **Total Liabilities and  Shareholders’ Equity**                                                                                                             |       | $           | 274,391,312 |         | $          | 39,776,535   |       | $ | 13,627,196 |   |

 

 

24

----

**Force Protection Inc - Stockholders' EquityDecember 31, 2005**

 
| ** **                                                           | ** ** | **Series B  Preferred Stock** | ** ** | **Series C  Preferred Stock**                                                           | ** ** | **Series D  Preferred Stock** | ** ** | **Common Stock**                                         | ** ** | ** ** | ** ** | **Shares to**                                                   | ** ** | ** ** | ** ** | **Additional  Paid - in** | ** ** | **Accumulated**                                                     | ** ** | ** **                                                | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------|------------|------------|------------|-------------------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                           | ** ** | **Shares**                              | ** ** | **Par $.001**                                                                                | ** ** | **Shares**                              | ** ** | **Par $.001**                                            | ** ** | **Shares** | ** ** | **Par $.001**                                                   | ** ** | **Shares** | ** ** | **Par $.001**                  | ** ** | **Warrants**                                                        | ** ** | **be issued**                                        | ** ** | **BCF** | ** ** | **Capital** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| **Balance,  December 31, 2003**                                      |       | 10.0                                    |       | —                                                                                            |       | 132.0                                   |       | —                                                        |       | 0.0        |       | —                                                               |       | 10,190,019 |       | 10,190                              |       | 5,011,303                                                           |       |                                                      |       | 282,890 |   | 18,657,348 |   | (24,267,326 | ) | (305,595 | ) |
| Issuance of  common stock for cash                                   |       | 0.0                                     |       |                                                                                              |       | 0.0                                     |       |                                                          |       | 0.0        |       |                                                                 |       | 2,973,598  |       | 2,974                               |       |                                                                |       |                                                      |       |   |   | 7,207,724 |   |   |   | 7,210,698 |   |
| Issuance of  common stock for services-Third Parties                 |       | 0.0                                     |       | —                                                                                            |       | 0.0                                     |       | —                                                        |       | 0.0        |       | —                                                               |       | 41,667     |       | 42                                  |       |                                                                |       |                                                      |       |   |   | 79,958 |   | — |   | 80,000 |   |
| Issuance of  common stock for Compensation-Directors & Employees |       | 0.0                                     |       | —                                                                                            |       | 0.0                                     |       | —                                                        |       | 0.0        |       |                                                                 |       | 616,680    |       | 617                                 |       |                                                                |       |                                                      |       |   |   | 2,136,182 |   |   |   | 2,136,799 |   |
| Issuance of  common stock for cash (Warrant net change))             |       | 0.0                                     |       |                                                                                              |       | 0.0                                     |       | —                                                        |       | 0.0        |       |                                                                 |       | 2,604,832  |       | 2,605                               |       | (2,167,429                                                          | )          |                                                      |       |   |   | 6,082,075 |   |   |   | 3,917,251 |   |
| Conversion of  preferred stock to common stock                       |       | (1.0                                    | )          |                                                                                              |       | (80.0                                   | )          | —                                                        |       | 0.0        |       |                                                                 |       | 2,931,142  |       | 2,931                               |       |                                                                |       |                                                      |       |   |   | (2,931 | ) | — |   | 0 |   |
| Conversion  between preferred Series B and Series C                  |       | 10.5                                    |       |                                                                                              |       | (105.0                                  | )          | —                                                        |       | 0.0        |       |                                                                 |       | —     |       | —                              |       |                                                                |       |                                                      |       |   |   | — |   | — |   | 0 |   |
| Change in  Benficial Conversion Feature                              |       | 0.0                                     |       |                                                                                              |       | 0.0                                     |       | —                                                        |       | 0.0        |       |                                                                 |       |       |       |                                |       |                                                                |       |                                                      |       | 19,055,440 |   |   |   | (19,055,440 | ) | (0 | ) |
| Issuance of  Preferred Stock for Cash                                |       | 0.0                                     |       |                                                                                              |       | 1.0                                     |       | —                                                        |       | 0.0        |       |                                                                 |       | —     |       | —                              |       |                                                                |       |                                                      |       | — |   | 10,000 |   | — |   | 10,000 |   |
| Issuance of  preferred stock for compensation                        |       | 0.0                                     |       |                                                                                              |       | 38.0                                    |       | —                                                        |       | 0.0        |       |                                                                 |       | —     |       | —                              |       |                                                                |       |                                                      |       | — |   | 1,323,135 |   | — |   | 1,323,135 |   |
| Issuance of  preferred stock for conversion of debt                  |       | 0.0                                     |       |                                                                                              |       | 20.0                                    |       |                                                          |       | 0.0        |       |                                                                 |       | —     |       | —                              |       |                                                                |       |                                                      |       | — |   | 200,000 |   | — |   | 200,000 |   |
| Rescinded and  Redemption of preferred stock                         |       | 0.0                                     |       |                                                                                              |       | (6.0                                    | )          |                                                          |       | 0.0        |       |                                                                 |       | —     |       | —                              |       | —                                                              |       |                                                      |       | — |   | (60,000 | ) | — |   | (60,000 | ) |
| Net loss                                                             |       | —                                  |       |                                                                                              |       | —                                  |       |                                                          |       | —     |       |                                                                 |       | —     |       | —                              |       |                                                                |       |                                                      |       |   |   | — |   | (11,953,803 | ) | (11,953,803 | ) |
| **Balance,  December 31, 2004**                                      |       | 19.5                                    |       | —                                                                                            |       | 0.0                                     |       | —                                                        |       | 0.0        |       | —                                                               |       | 19,357,938 |       | 19,357                              |       | 2,843,874                                                           |       | —                                                    |       | 19,338,330 |   | 35,633,491 |   | (55,276,570 | ) | 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 |   | — |   | 125,408 |   |
| Issuance of  common stock for settlement agreements                  |       | —                                  |       | —                                                                                            |       | —                                  |       | —                                                        |       | —     |       | —                                                               |       | 53,467     |       | 53                                  |       | —                                                              |       |                                                      |       |   |   | 144,842 |   | — |   | 144,896 |   |
| Issuance of  common stock for interest                               |       | —                                  |       | —                                                                                            |       | —                                  |       | —                                                        |       | —     |       | —                                                               |       | 14,876     |       | 15                                  |       | —                                                              |       |                                                      |       |   |   | 20,626 |   | — |   | 20,640 |   |
| 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 |   | — |   | 211,630 |   |
| Warrant issued  for Series D placement                               |       | —                                  |       | —                                                                                            |       | —                                  |       | —                                                        |       | —     |       | —                                                               |       |       |       |                                |       | 200,071                                                             |       |                                                      |       |   |   | (200,071 | ) |   |   | 0 |   |
| Conversion of  Series Series D preferred stock to common stock       |       | —                                  |       | —                                                                                            |       | —                                  |       | —                                                        |       | (2,796     | )          | (3                                                                   | )          | 1,331,429  |       | 1,331                               |       | —                                                              |       |                                                      |       |   |   | (1,328 | ) |   |   | 0 |   |
| Reclassification  of Series D Warrants from Liability                |       | —                                  |       | —                                                                                            |       | —                                  |       | —                                                        |       | —     |       | —                                                               |       |       |       |                                |       | 5,173,409                                                           |       |                                                      |       |   |   |   |   |   |   | 5,173,409 |   |
| Issuance of  Common Stock as Series D dividend shares                |       | —                                  |       | —                                                                                            |       | —                                  |       | —                                                        |       | —     |       | —                                                               |       | 281,697    |       | 282                                 |       | —                                                              |       |                                                      |       |   |   | 429,937 |   | (430,219 | ) | (0 | ) |
| Cash Dividends  for Series D                                         |       | —                                  |       | —                                                                                            |       | —                                  |       | —                                                        |       | —     |       | —                                                               |       |       |       |                                |       |                                                                |       |                                                      |       |   |   |   |   | (871,201 | ) | (871,201 | ) |
| Issuance of  preferred stock for cash—Series D                  |       | 0.0                                     |       | —                                                                                            |       | 0.0                                     |       | —                                                        |       | 15,800     |       | 16                                                                   |       | —     |       | —                              |       | —                                                              |       |                                                      |       |   |   | 7,301,749 |   | — |   | 7,301,765 |   |
| Conversion of  Series B preferred stock to common stock              |       | (19.5                                   | )          | —                                                                                            |       | 0.0                                     |       | —                                                        |       | 0.0        |       | —                                                               |       | 14,803,750 |       | 14,804                              |       | —                                                              |       |                                                      |       |   |   | (14,804 | ) | — |   | 0 |   |
| Benficial  Conversion Feature                                        |       | 0.0                                     |       | —                                                                                            |       | 0.0                                     |       | —                                                        |       | 0.0        |       | —                                                               |       |       |       |                                |       |                                                                |       |                                                      |       | (19,338,330 | ) |   |   | 19,338,330 |   | 0 |   |
| Common Share  Grants cancelled                                       |       | 0.0                                     |       | —                                                                                            |       | 0.0                                     |       | —                                                        |       | 0.0        |       | —                                                               |       | (83,333    | )          | (83                                 | )          |                                                                |       |                                                      |       |   |   | (589,914 | ) |   |   | (589,998 | ) |
| Warrants—net  (expired & issued) not including Series D     |       | 0.0                                     |       | —                                                                                            |       | 0.0                                     |       | —                                                        |       | 0.0        |       | —                                                               |       |       |       |                                |       | (2,313,499                                                          | )          |                                                      |       |   |   | 2,543,925 |   |   |   | 230,426 |   |
| Stock based  compensation                                            |       |                                    |       |                                                                                              |       |                                    |       |                                                          |       |       |       |                                                                 |       |       |       |                                |       |                                                                |       |                                                      |       |   |   |   |   | 92,671 |   | 92,671 |   |
| Net loss                                                             |       | —                                  |       | —                                                                                            |       | —                                  |       | —                                                        |       | —     |       | —                                                               |       | —     |       | —                              |       | —                                                              |       |                                                      |       | — |   | — |   | (13,458,599 | ) | (13,458,599 | ) |
| **Balance,  December 31, 2005**                                      |       | 0                                       |       | 0                                                                                                 |       | 0                                       |       | 0                                                             |       | 13,004     |       | 13                                                                   |       | 36,114,216 |       | 36,114                              |       | (5,780,953                                                          | )          | 0                                                         |       | 0 |   | 46,248,107 |   | (50,605,587 | ) | 1,459,600 |   |
| Issuance of  common stock for cash (PIPE's)                          |       | 0.0                                     |       | —                                                                                            |       | 0.0                                     |       | —                                                        |       | 0.0        |       | —                                                               |       | 21,277,700 |       | 21,278                              |       |                                                                |       |                                                      |       |   |   | 185,806,483 |   | — |   | 185,827,761 |   |
| Issuance of  common stock for stock options exercised                |       |                                    |       |                                                                                              |       |                                    |       |                                                          |       |       |       |                                                                 |       | 1,000      |       | 1                                   |       |                                                                |       | 4                                                         |       |   |   | 5,995 |   |   |   | 6,001 |   |
| Issuance of  common stock for compensation                           |       | 0.0                                     |       | —                                                                                            |       | 0.0                                     |       | —                                                        |       | 0.0        |       | —                                                               |       | 313,644    |       | 315                                 |       |                                                                |       | 27                                                        |       |   |   | 877,148 |   |   |   | 877,490 |   |
| Issuance of  common stock for settlement agreements                  |       | 0.0                                     |       | —                                                                                            |       | 0.0                                     |       | —                                                        |       | 0.0        |       | —                                                               |       | 30,000     |       | 30                                  |       |                                                                |       |                                                      |       |   |   | 187,470 |   |   |   | 187,500 |   |
| Issuance of  common stock for dividends on Series D                  |       | 0.0                                     |       | —                                                                                            |       | 0.0                                     |       | —                                                        |       | 0.0        |       | —                                                               |       | 8,937      |       | 9                                   |       |                                                                |       |                                                      |       |   |   | 48,816 |   | (48,825 | ) | (0 | ) |
| Issuance of Cash  for dividends on Series D                          |       |                                    |       |                                                                                              |       |                                    |       |                                                          |       |       |       |                                                                 |       |       |       |                                |       |                                                                |       |                                                      |       |   |   |   |   | (325,684 | ) | (325,684 | ) |
| Issuance of  common stock for cash—warrants                     |       |                                    |       |                                                                                              |       |                                    |       |                                                          |       |       |       |                                                                 |       | 2,824,440  |       | 2,824                               |       | (5,780,953                                                          | )          |                                                      |       |   |   | 16,152,701 |   |   |   | 10,374,572 |   |
| Conversion of  Series Series D preferred stock to common stock       |       |                                    |       |                                                                                              |       |                                    |       |                                                          |       | (13,004    | )          | (13                                                                  | )          | 6,192,628  |       | 6,193                               |       |                                                                |       |                                                      |       |   |   | (6,180 | ) |   |   | — |   |
| Stock based  compensation                                            |       | —                                  |       |                                                                                              |       |                                    |       |                                                          |       |       |       |                                                                 |       |       |       | —                              |       |                                                                |       |                                                      |       |   |   |   |   | 1,250,625 |   | 1,250,625 |   |
| Net earnings  (loss)                                                 |       | 0                                       |       | 0                                                                                                 |       | 0                                       |       | 0                                                             |       | 0          |       | 0                                                                    |       | 0          |       |                                |       |                                                                |       |                                                      |       |   |   |   |   | 18,196,943 |   | 18,196,943 |   |
| Balance, December  31, 2006                                          |       | 0                                       |       | $               — |       | 0                                       |       | $         — |       | 0          |       | $           0 |       | 66,762,566 |       | $  66,763                 |       | $          — |       | $         31 |       | $            — |   | $ 249,320,540 |   | $ (31,532,528 | ) | 217,854,807 |   |
|                                                                 |       |                                    |       |                                                                                              |       |                                    |       |                                                          |       |       |       |                                                                 |       |       |       |                                |       |                                                                |       |                                                      |       |   |   |   |   |   |   |   |   |

 

25

----

**FORCEPROTECTION INC. AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**YEARENDED DECEMBER 31, 2006, 2005 AND 2004**

**(Indollars)**
| ** **                                                                                     | ** ** | **2006**    | ** **  | **2005**     | ** ** | **2004**     | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------|-------------|--------------|------------|--------------|------------|
| ** **                                                                                     | ** ** | ** **  | ** **  | **Restated** | ** ** | **Restated** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES**                                                      | ** ** | ** **  | ** **  | ** **   | ** ** | ** **   | ** ** |
| Net Earnings (loss)  from continuing operations                                                |       | $           | 18,196,943  |         | $          | (13,458,599  | )          | $ | (11,953,803 | ) |
| **Adjustments to reconcile net  loss to net cash (used in) provided by operating activities:** |       |        |        |         |       |         |       |
| Depreciation and  amortization                                                                 |       | 769,454     |        | 386,152      |       | 207,271      |       |
| Deferred Tax  Benefit                                                                          |       | (12,326,491 | )           |         |       |         |       |
| Realized gain on  derivative liability                                                         |       | —      |        | (2,830,791   | )          | —       |       |
| Stock issued for  services and compensation                                                    |       | 676,278     |        | (326,400     | )          | 3,749,932    |       |
| Common stock  issued for settlement                                                            |       | 187,500     |        | 165,536      |       | —       |       |
| Stock based  compensation                                                                      |       | 1,250,625   |        | 92,671       |       | —       |       |
| Issuance of  common stock for interest                                                         |       | 48,824      |        |         |       |         |       |
|                                                                                           |       |        |        |         |       |         |       |
| Change in assets  and liabilities:                                                             |       |        |        |         |       |         |       |
| Decrease  (increase) in accounts receivable                                                    |       | (32,345,210 | )           | (2,612,385   | )          | (909,041     | )          |
| Decrease  (increase) in inventories                                                            |       | (27,909,521 | )           | (23,456,863  | )          | (8,202,576   | )          |
| Decrease  (increase) in other current assets                                                   |       | (106,862    | )           | (25,279      | )          | (181,910     | )          |
| Increase  (decrease) in accounts payable                                                       |       | 23,964,958  |        | 12,710,760   |       | 1,152,297    |       |
| Increase  (decrease) in other accrued liabilities                                              |       | 724,513     |        | 488,630      |       | 1,278,966    |       |
| Increase  (decrease) in contract liabilities                                                   |       | 163,938     |        | 956,601      |       | 549,077      |       |
| Deferred Revenue                                                                               |       | 225,290     |        | 9,953,205    |       | 2,436,541    |       |
| **Net cash used in operating  activities**                                                     |       | (26,479,761 | )           | (17,956,762  | )          | (11,873,246  | )          |
| ** **                                                                                     | ** ** | ** **  | ** **  | ** **   | ** ** | ** **   | ** ** |
| **CASH FLOWS FROM INVESTING  ACTIVITIES**                                                      | ** ** | ** **  | ** **  | ** **   | ** ** | ** **   | ** ** |
| Purchase of property  and equipment                                                            |       | (7,596,005  | )           | (1,511,337   | )          | (935,197     | )          |
| Proceeds from sale of  assets                                                                  |       | —      |        | 155,442      |       | —       |       |
| **Net cash used in investing  activities**                                                     |       | (7,596,005  | )           | (1,355,895   | )          | (935,197     | )          |
| ** **                                                                                     | ** ** | ** **  | ** **  | ** **   | ** ** | ** **   | ** ** |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                     | ** ** | ** **  | ** **  | ** **   | ** ** | ** **   | ** ** |
| Proceeds from issuance  of Private Placement common stock                                      |       | 185,827,761 |        | —       |       | —       |       |
| Proceeds from issuance  of common stock                                                        |       |        |        | 731,699      |       | 11,127,949   |       |
| Proceeds from issuance  of Series D preferred stock                                       |       | —      |        | 15,305,965   |       | —       |       |
| Redemption of Preferred  Stock                                                                 |       | —      |        | —       |       | (60,000      | )          |
| Conversion of Series D  preferred stock                                                        |       | 12,602,070  |        | —       |       | —       |       |
| Preferred Stock  Dividends paid                                                                |       | (435,220    | )           | (778,530     | )          | —       |       |
| Issuance of common  stock for cash-warrants                                                    |       | (1,279,199  | )           |         |       |         |       |
| Proceeds from (Payments  on) loans, net                                                        |       | (7,500,000  | )           | 7,139,025    |       | (175,187     | )          |
| Proceeds from (Payments  on) Line of Credit, net                                               |       | —      |        | (4,000,000   | )          | 3,823,039    |       |
| Proceeds from (Payments  on) long term liabilities                                             |       | —      |        | —       |       | 78,271       |       |
| Payments on Capitalized  lease                                                                 |       | (38,151     | )           | (132,400     | )          | —       |       |
| **Net cash provided by Financing  Activities**                                                 |       | 189,177,261 |        | 18,265,759   |       | 14,794,072   |       |
| **Net increase (decrease) in cash**                                                            |       | 155,101,495 |        | (1,046,897   | )          | 1,985,629    |       |
| ** **                                                                                     |       |        |        |         |       |         |       |
| **CASH—beginning of period**                                                              |       | 1,217,509   |        | 2,264,406    |       | 278,777      |       |
| **CASH—end of period**                                                                    |       | $           | 156,319,004 |         | $          | 1,217,509    |       | $ | 2,264,406 |   |
|                                                                                           |       |        |        |         |       |         |       |
| Interest Paid                                                                                  |       | $           | 1,722,119   |         | $          | 1,010,160    |       | $ | 454,512 |   |
| Taxes Paid                                                                                     |       | —      |        | —       |       | —       |       |

 

The accompanying Notes are an integral part of these financialstatements.

26

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**FORCE PROTECTION, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**These notes are an integral partof the Company’s financial statements set forth above.**

**NOTE 1—SUMMARY OF SIGNIFICANTACCOUNTING POLICIES (Restated)**

**2005 and 2004 Restatement**

**Restatement of Accounting forPreferred Stock and Warrants Issued to Investors**

Force Protection, Inc.(the “Company”) will be filing an amendment to its Annual Report on Form 10-Kfor the year ended December 31, 2005 to amend and restate financial statementsand other information for the years 2005 and 2004.  The restatement adjusts the Company’saccounting for preferred stock and warrants issued to investors, accounting forstock-based compensation to employees and non-employees and accounting for rentexpense on a straight-line basis. The financial information included in this10-K referring to prior years ended December 31, 2005 and 2004 includes eachaccounting restatement.  Given that thecompany is still in the process of finalizing the restatement with the SEC,there is the potential the restated numbers may change pending  final resolution. The Company believes thatthe restatement did not have any material impact its 2006 financial results.

The itemsidentified by the Company relate to the valuation method used to account forcertain equity issuances which did not properly include a full analysis of theembedded conversion feature associated with such issuances as required underEITF 98-5, Accounting for Convertible Securities with Beneficial ConversionFeatures or Contingently adjustable Conversion Ratios, or which were otherwiseincorrectly valued. As a result, a number of shares of the Company’s stockissued as compensation to certain executives and other third parties andrecorded as general and administrative compensation expense appear to have beenvalued at less than fair value.

The Company hasreviewed its accounting for Preferred Stock and Warrants Issued to Investors asfollows:

·                    Series B andSeries C Convertible Preferred Stock are recorded as equity at fair value usingthe Black Scholes Method at the time of issuance using a one year holdingperiod.

·                    A BeneficialConversion Feature treated as equity is created when the value received foreach issuance is less than the fair value from the Black Scholescalculation.  Changes in conversion ratesof Preferred Stock into Common Stock also can create a Beneficial ConversionFeature if the Preferred Stock can be converted into more common shares than atissuance or last amendment.

·                    Series D MandatoryRedeemable Convertible Preferred Stock is recorded at fair value equaling thenet cash proceeds from issuance minus the fair value of Warrants issued inconjunction with the Series D Preferred Stock. Dividends for Series D Preferred Stock were distributed either as CommonStock shares or in cash.

·                    The Warrantsissued in conjunction with the Series D Preferred Stock were initially recordedat fair value as a liability as liquidating damages were paid as a result of alate SEC registration of the underlying Common Stock.  The Black-Scholes Method was used todetermine the fair value at issuance using a three year holding period.  These Warrants are adjusted each reportingperiod to the new fair value using the Black Scholes Method until theregistration was accepted by the SEC.  Atthat point, the fair value using the Black Scholes Method was reclassified intoEquity.  A realized gain on derivativeliability in the amount of $2,830,791 was recorded in 2005 as a result of thechange in fair value from issuance to reclassification to equity for theseWarrants.

·                    Other warrantsare recorded at fair value using the Black Scholes Method.

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**Restatement of Accounting for Stock-Based Compensationfor Services and Compensation.**

The Company hasreviewed its accounting for stock based compensation issued for services andcompensation during 2005, 2004 and 2003 taking into account, were applicable,Financial Accounting Standards Board’s Statement of Financial AccountingStandard No. 123. Stock based compensation issued for services and compensationwere valued at the market price at the time of issuance.  As a result of revaluation, a reduction inexpense of $222,737 was recorded in 2005 and additional expense of $1,626,663and $2,946,137 was recorded in 2004 and 2003.

The Company hasreviewed the Financial Accounting Standards Board’s Statement of FinancialAccounting Standard No. 123(Revised) (“SFAS 123(R)”) and has determined thatthe Company will adopt SFAS 123(R) as of July1, 2005 Stock option expense of$92,671 was recorded for 2005.

**Restatement of Accounting for Operating LeaseCommitments**

The Company hasreviewed the Financial Accounting Standards Board’s Statement of FinancialAccounting Standard No. 13 and has determined that in 2005, 2004 and 2003 theCompany’s accounting for rent expense was not recorded on a straight-line basisover the term of the Company’s operating lease commitments.  Several of the Company’s operating leases ineffect during 2005, 2004 and 2003 included certain terms which provided for severalmonths at the beginning of the lease term whereby rents were not due.  Additionally, rent escalation clauses wereincluded within certain operating leases which previous to this filing hadimproperly deferred rent expense over the course of the leases.  The Company has calculated the necessaryadjustments for 2005, 2004 and 2003 in order to restate its financialstatements and record rent expense associated with operating lease commitmentsfor 2005, 2004 and 2003.  Additional rentexpense for 2005, 2004 and 2003 was recorded in the amount of $12,039, $79,985and $44,588, respectively.

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

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**Effects ofRestatement**

**Effects on Statements ofEarnings**
| ** **                                                         | ** ** | **2005**   | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|-----------|------------|-----------|------------|
|                                                               |       |       |       |      |       |      |       |
| Increase/(decrease)  in general and administrative expense         |       | (276,278   | )          | 1,701,970 |       | 2,766,245 |       |
|                                                               |       |       |       |      |       |      |       |
| Increase/(decrease)  in operating loss                             |       | (276,278   | )          | 1,701,970 |       | 2,766,245 |       |
|                                                               |       |       |       |      |       |      |       |
| Increase in  unrealized gain                                       |       | 2,830,791  |       | —    |       | —    |       |
|                                                               |       |       |       |      |       |      |       |
| Increase/(decrease)  in loss from continuing operations before tax |       | (3,107,069 | )          | 1,701,970 |       | 2,766,245 |       |
|                                                               |       |       |       |      |       |      |       |
| Increase/(decrease)  in net loss                                   |       | (3,107,069 | )          | 1,701,970 |       | 2,766,245 |       |

 

**Effects on Balance Sheet**
| ** **                                            | ** ** | **2005**   | ** ** | **2004**    | ** ** | **2003**  | ** ** |
|-------------------------------------------------------|------------|------------|------------|-------------|------------|-----------|------------|
|                                                  |       |       |       |        |       |      |       |
| Increase in  other accrued liability                  |       | 244,645    |       | 124,575     |       | 44,589    |       |
|                                                  |       |       |       |        |       |      |       |
| Decrease in  current liabilities                      |       | 244,645    |       | 124,575     |       | 44,589    |       |
|                                                  |       |       |       |        |       |      |       |
| Increase in  total liabilities                        |       | 244,645    |       | 124,575     |       | 44,589    |       |
|                                                  |       |       |       |        |       |      |       |
| (Increase)/decrease  in beneficial conversion feature |       | 19,338,330 |       | (19,338,330 | )          | (282,890  | )          |
|                                                  |       |       |       |        |       |      |       |
| Increase in  accumulated deficit                      |       | 1,564,495  |       | 23,537,915  |       | 2,787,801 |       |
|                                                  |       |       |       |        |       |      |       |
| Increase/(decrease) in  shareholders equity           |       | (224,646   | )          | (124,573    | )          | (44,589   | )          |

 

**Nature of theBusiness**

ForceProtection, Inc. and its subsidiaries (the “Company”) design, manufactureand market blast and ballistics armored vehicles for sale to militarycustomers.

**Principles ofConsolidation**

Theconsolidated financial statements include the accounts of ForceProtection, Inc., and its two wholly-owned subsidiaries, Force ProtectionIndustries, Inc. and Force Protection Technologies, Inc.  All inter-company balances and transactionsare eliminated in consolidation.

**GeneralStatement**

TheSecurities and Exchange Commission, or SEC, has issued Financial ReportingRelease No. 60, “Cautionary Advice Regarding Disclosure About CriticalAccounting Policies,” or FRR 60, suggesting companies provide additionaldisclosure and commentary on their most critical accounting policies. In FRR60, the SEC defined the most critical accounting policies as the ones that aremost important to the portrayal of a company’s financial condition and 

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operatingresults, and require management to make its most difficult and subjectivejudgments, often as a result of the need to make estimates of matters that areinherently uncertain. The methods, estimates and judgments the Company uses inapplying these most critical accounting policies have a significant impact onthe results the Company reports in its financial statements.

The Company believes thefollowing critical accounting policies and procedures, among others, affect itsmore significant judgments and estimates used in the preparation of the Company’sconsolidated financial statements:

·                    Revenuerecognition;

·                    Inventorycost and Associated Reserves; and

·                    Allocation ofdirect and indirect cost of sales.

**RevenueRecognition**

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

Revenuesfrom services provided are recorded in accordance with specific contractualterms.  Services have historicallyconsisted of the Company providing on-site personnel on an as-needed basis in atimely manner, and have generally been provided in foreign locations.

TheCompany negotiates contracts with its customers which may include revenuearrangements with multiple deliverables, as outlined by Emerging Issues TaskForce No. 00-21 (EITF 00-21).  TheCompany’s accounting policies are defined such that each deliverable under acontract is accounted for separately. Historically, the Company has negotiated and signed contracts with itscustomers which outline the contract amount and specific terms and conditionsassociated with each deliverable.

**Allowance forContractual Adjustments**

TheCompany’s contracts with the U.S. Government are negotiated as a “sole source”or “open competition” bid process.  Asole source process is one in which the Company is the sole bidder for thecontract.  An open competition couldinvolve various bidders.  Once a bid isaccepted, the U.S. Government expects work to commence immediately.  An open competition results in a finalagreed-upon contract price which the U.S. Government has agreed to.  A sole source process results in an agreed-uponcontract with the U.S. Government, subject to an adjustment process at a laterdate, termed the “definitization process.” The definitization process commences upon delivery of a product, wherebythe U.S. Government completes a detailed review of the Company’s costs involvedin the manufacturing and delivery process. The U.S. Government and the Company then work to determine an adequateand fair final contract price.  As aresult of the potential adjustments related to the definitization process, theCompany maintains an allowance for contractual adjustments account.  This account is reviewed on a monthly basisto determine adequate adjustments, if necessary.  The allowance is maintained and deemedadequate based on the analysis of historical data 

30

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andcalculation of pro-rata percentages of current contracts in place, which remainsubject to the definitization process.

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

**Research andDevelopment**

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

**CashEquivalents**

Forpurposes of reporting cash flows, the Company considers all highly liquid debtinstruments purchased with maturity of three months or less to be cashequivalents.

**Inventories**

Inventoriesare stated at the lower of cost or market. The cost is determined under thefirst-in-first-out  (FIFO) methodvaluation method.  An allowance forexcess or obsolete inventory is maintained by the Company.  TheCompany determines an appropriate balance in this account based on historicaldata and specific identification of certain inventory items.

**Property,Plant and Equipment**

Property and equipment are stated at cost or at thevalue of the operating agreement. The Company capitalizes additions andimprovements which include all material, labor and engineering cost to design,install or improve the asset. Routine repairs and maintenance are expensed asincurred. Depreciation and amortization are computed using the straight-linemethod over the following estimated useful lives:

| Leasehold Improvements   |   | 2-5 years |   |
|--------------------------|--------|-----------|--------|
| Furniture and  fixtures  |   | 3 years   |   |
| Machinery and  equipment |   | 7 years   |   |
| Tooling and  molds       |   | 7 years   |   |
| Vehicles                 |   | 5 years   |   |

 

**Impairmentof Long-Lived Assets**

TheCompany reviews long-lived assets to be held and used for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. If the sum of the expected future cash flows(undiscounted and without interest charges) is less than the carrying amount ofthe asset, the Company would recognize an impairment loss based on theestimated fair value of the asset.

**Goodwill**

*Under SFAS No. 142,* Goodwill and other Intangible Assets, all goodwill amortization ceased effectiveJanuary 1, 2002. Rather, goodwill is now subject to only impairmentreviews. A fair-value based test is applied at the reporting level. This testrequires various judgments and estimates. A goodwill impairment loss will berecorded for any goodwill that is determined to be impaired. Goodwill is testedfor impairment at least annually.

**ForeignCurrency Transaction**

Assetsand liabilities in foreign currencies are translated at the exchange rateprevailing at the balance sheet date. Revenues and expenses are translated atthe exchange rate prevailing at the transaction date, and the resulting gainsand losses are reflected in the statements of operations. Gains and lossesarising from translation of a subsidiary’s 

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foreigncurrency financial statements are shown as a component of stockholders’ equity(deficit) as accumulated comprehensive income (loss).

**IncomeTaxes**

TheCompany uses the asset and liability method of accounting for income taxes. Theasset and liability method accounts for deferred income taxes by applyingenacted statutory rates in effect for periods in which the difference betweenthe book value and the tax bases of assets and liabilities are scheduled toreverse. The resulting deferred tax asset or liability is adjusted to reflectchanges in tax laws or rates. The company records a valuation allowance for anydeferred tax allowance that it believes will not be realized.

**Stock-BasedCompensation**

TheCompany applied the recognition and measurement principles of AccountingPrinciples Board Opinion No. 25,*  Accounting for Stock Issued to Employees*, and related Interpretations in accounting for those plans through June 30,2005.

InDecember 2004, FASB issued Statement No. 123(R), *Share-Based Payment,* which establishesaccounting standards for transactions in which an entity receives employeeservices in exchange for (a) equity instruments of the entity or(b) liabilities that are based on the fair value of the entity’s equityinstruments or that may be settled by the issuance of equity instruments.Effective on July 1, 2005, SFAS 123(R) the Company adopted SFAS 123(R),which requires the Company to recognize the grant-date fair value of stockoptions and equity based compensation issued to employees in the statement ofoperations. The statement also requires that such transactions be accounted forusing the fair-value-based method, thereby eliminating use of the intrinsicmethod of accounting in APB No. 25, *Accountingfor Stock Issued to Employees,*which was permitted under Statement123, as originally issued.

***Earnings (Loss) per Common Share***

The Company utilizes SFASNo. 128, “Earnings per Share” to calculate earnings/loss per share. Basicearnings/loss per share is computed by dividing the earnings/loss available tocommon stockholders (as the numerator) by the weighted-average number of commonshares outstanding (as the denominator). Diluted earnings/loss per share iscomputed similar to basic earnings/loss per share except that the denominatoris increased to include the number of additional common shares that would havebeen outstanding if all potential common stock (including common stockequivalents) had all been issued, and if such additional common shares weredilutive. Under SFAS No. 128, if the additional common shares are dilutive,they are not added to the denominator in the calculation. Where there is aloss, the inclusion of additional common shares is anti-dilutive (since theincreased number of shares reduces the per share loss available to common stockholders).

**Estimates**

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

**Reclassifications**

Certain reclassificationsto the Company’s income statement have been made in 2006, 2005, and 2004 in orderfor the 2006, 2005 and 2004 financial statements to conform to the presentationof these financial statements.  Thesereclassifications are the restatement of the Research and Development expensesfrom General and Administrative expenses.

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**Recent AccountingPronouncements**

In June 2006, the FASBissued FIN No. 48 “Accounting for Uncertainty in Income Taxes  — an interpretation of FASB Statement No. 109.This interpretation prescribes a comprehensive model for the financialstatement recognition, measurement, presentation, and disclosure of uncertaintax positions taken or expected to be taken in income tax returns.  FIN No. 48 is effective for Force Protectionin the first quarter of fiscal 2007.  TheCompany is currently assessing the impact that FIN No. 48 will have on theresults of its operations, financial position, or cash flows.

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

**NOTE 2 — CONCENTRATIONS**

The Company’s futureoperations and continued expansion is subject to a significant concentrationrisk.  During the years ended December 31, 2006, 2005 and 2004, theCompany’s revenues from military units of the U.S. Government accounted for84%, 90% and 97%  of total revenues,respectively.  The Company’s accounts receivable from military units ofthe U.S. Government at December 31, 2006, 2005 and 2004 amounted to 81%, 60%and 95% of total accounts receivable, respectively.

**NOTE 3 —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 or “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, the parties make a mutual determination of thedirect material and labor costs for the work based upon the bill of materialsand other purchasing information and then the parties mutually agree upon “rates”for the indirect labor costs and the General and Administrative costs andupon  a “fee” (or profit).  While the direct material costs and labor canbe established through objective evidence, the “rates” and fee are moresubjective and are based upon 

33

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an analysis of multiplefactors including historical performance data and projected operationalfactors.  The contractor has the right tosubmit proposed rates and fee, but these are subject to final review andapproval by the contracting officer, who may insist on using alternate ratesand fee.  As provided in section252.217-7027(c):

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

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) to complete.  During the definitization process the contractoris required to perform the contract work and to make deliveries under thecontract before the final contract price has been established.  For this reason, as part of the originalletter award, the contractor provides a rough order of magnitude or “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 account is reviewed on a regular basisto determine adequate adjustments, if necessary.  The allowance is evaluated and deemedadequate based on the analysis of historical data and calculation of pro-ratapercentages of current contracts in place, which remain subject to thedefinitization process.

Below is a tabledetailing activity within the allowance for contractual adjustments account forthe years ended December 31, 2006, 2005, and 2004 respectively.

|                         | ** ** | **Year Ended**         | ** ** | **Year Ended**         | ** ** | **Year Ended**         | ** ** |
|-------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **Dec. 31, 2006** | ** ** | **Dec. 31, 2005** | ** ** | **Dec. 31, 2004** | ** ** |
| Beginning  balance      |       | $                           | 1,018,051  |                        | $          | —                      |       | $ | — |   |
| Additions to  allowance |       | 6,317,077                   |       | 1,018,051                   |       | —                      |       |
| Reduction to  allowance |       | (1,267,041                  | )          | —                      |       | —                      |       |
| Ending balance          |       | $                           | 6,068,087  |                        | $          | 1,018,051                   |       | $ | — |   |

 

The Company does notmaintain an allowance for doubtful accounts. The Company’s significant sales for the years ended December 31, 2006,2005 and 2004 involved contracts signed with the U.S. Government. As of thedate of this report all non-direct government year-end receivables have beencollected. The Company does not believe an allowance for doubtful accounts isnecessary due to the credit-worthiness of the U.S. Government.

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

**NOTE 4 —INVESTMENT IN CHALLENGER POWERBOATS 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, 2006, 2005 and 2004, respectively.

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|                                                       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Challenger Powerboats,  Inc. Series A preferred stock |       | $        | —     |     | $          | —   |       | $ | — |   |
| Valuation Allowance                                   |       | —   |       | —   |       | —   |       |
| Net Investment in Challenger Powerboats, Inc          |       | —   |       | —   |       | —   |       |
|                                                       |            |          |            |          |            |          |            |  |  |  |

 

**NOTE 5—INVENTORIES**

Inventories  at December 31, 2006, 2005 and 2004consisted of the following:

|                                           | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Raw materials and  supplies               |       | $          | 45,131,126 |       | $          | 15,222,503 |       | $ | 5,268,798 |   |
| Work in process                           |       | 17,688,784 |       | 17,762,554 |       | 3,756,921  |       |
| Finished Goods                            |       | —     |       | —     |       | 4,194      |       |
| Less: Allowance for  surplus and obsolete |       | (2,423,613 | )          | (498,281   | )          | —     |       |
| Inventories, net                          |       | $          | 60,396,297 |       | $          | 32,486,776 |       | $ | 9,029,913 |   |

 

**NOTE 6—PROPERTY,PLANT AND EQUIPMENT**

Property,Plant and Equipment at December 31, 2006, 2005 and 2004 consisted of thefollowing:

|                                     | ** ** | **2006**   | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|-------------------------------------|------------|------------|------------|-----------|------------|-----------|------------|
| Furniture and fixtures              |       | $          | 1,022,984  |      | $          | 227,613   |       | $ | 252,608 |   |
| Leasehold improvements              |       | 1,534,057  |       | 59,928    |       | —    |       |
| Machinery and equipment             |       | 6,534,550  |       | 2,024,436 |       | 983,955   |       |
| Test Equipment                      |       | 16,790     |       | 16,790    |       | 16,790    |       |
| Manuals                             |       | 104,797    |       | 104,798   |       | 104,798   |       |
| Vehicles                            |       | 143,464    |       | 56,464    |       | 10,110    |       |
| Demo vehicles                       |       | 1,095,925  |       | 425,845   |       | 192,530   |       |
| Less depreciation and  amortization |       | (1,488,666 | )          | (777,171  | )          | (523,797  | )          |
| Net property and equipment          |       | $          | 8,963,901  |      | $          | 2,138,703 |       | $ | 1,036,994 |   |

 

Depreciationexpense for the years ended December 31, 2006, 2005 and 2004 was $769,454,$386,152 and $207,271 respectively.

**NOTE 7—COMMITMENTSAND CONTINGENCIES**

**OtherAccrued Liabilities**

The Company’s other accrued liabilities includethe following:

|                                   | ** ** | **2006**  | ** ** | **2005** | ** ** | **2004**  | ** ** |
|-----------------------------------|------------|-----------|------------|----------|------------|-----------|------------|
| Compensation and  benefits        |       | $         | 1,222,143  |     | $          | 1,341,101 |       | $ | 1,195,705 |   |
| Vehicle Fee Payable               |       | 1,139,250 |       | —   |       | —    |       |
| Liquidated damage  settlement     |       | 607,466   |       | —   |       | —    |       |
| Dividends on preferred  stock     |       | —    |       | 260,080  |       | —    |       |
| Common Stock shares to be  issued |       | —    |       | 212,606  |       | —    |       |
| Other                             |       | —    |       | 29,310   |       | 158,761   |       |
| Total                             |       | $         | 2,968,859  |     | $          | 1,843,097 |       | $ | 1,354,466 |   |

 

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**ContractLiabilities**

The Company’s sales contracts generally include awarranty such that the Company’s products are free from defects in design,material, and workmanship for a period of 1 year from 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 routinely reviews its exposure forwarranty costs and determines warranty and pricing reserves based on historicaldata and known events. Below is a table detailing the Company’s accruals forwarranty-related costs as of December 31, 2006, 2005 and 2004:

|                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004**  | ** ** |
|------------------|------------|----------|------------|----------|------------|-----------|------------|
| General warranty |       | $        | 1,850,000  |     | $          | 1,686,062 |       | $ | 228,130 |   |
| Loss contingency |       | —   |       | —   |       | 501,331   |       |
|             |       | $        | 1,850,000  |     | $          | 1,686,062 |       | $ | 729,461 |   |

 

**VehicleFees**

TheCompany is party to a Memorandum of Understanding with Mechem, a division ofDenel PTY, a South African company pursuant to which Mechem agreed for a periodof five years to work exclusively with the Company and not to cede, dispose ortransfer to any third party other than the Company any of its technology, IPRor other proprietary information relating to its armored vehicles systemsincluding, but not limited to, designs, drawings, full technical specifications,test data, hardware and software designs and technologies, supplier’s list,know-how and all and every piece of information and data relevant to suchsystems. In exchange for such exclusivity the Company agreed to pay Mechem a “vehiclefee,” for every Buffalo, Cougar and Tempest the Company manufactures and sells.The Company is not obligated to pay a vehicle fee in respect of other vehiclesit manufactures and sells. On September 13, 2006 the Company executed a newMemorandum of Agreement with Mechem, extending the period of exclusivity for anadditional five years, and adding a provision that Mechem would upon request bythe Company provide expertise and know-how on a “work for hire” basis toadvise, assist and support the Company in its marketing activities. The Companyalso agreed to make a one time payment of $394,500 to Mechem, representingvehicle fees in respect of Cougar vehicles previously delivered and sold by theCompany during 2005 and 2006. The agreement with Mechem expires in September 2011.

TheCompany is also party to an agreement with CSIR Defencetek (a division of theCouncil for Scientific and Industrial Research) a statutory council establishedin accordance with the Laws of the Republic of South Africa, pursuant to whichthe Company is obligated to pay the CSIR a similar vehicle fee. The agreementwith the CSIR expires in March 2007.

Thefollowing table is a summary of the vehicle fees to be paid per vehicle:

|         | ** ** | **Mechem** | ** ** | **CSIR** | ** ** |
|---------|------------|------------|------------|----------|------------|
| Buffalo |       | $          | 5,000      |     | $          | 3,000 |   |
| Cougar  |       | $          | 1,500      |     | $          | 1,500 |   |
| Tempest |       | $          | 3,000      |     | $          | 1,500 |   |
| Cheetah |       | $          | 0          |     | $          | 0 |   |

 

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**Table of Contractual Obligations**

Thefollowing is a table outlining the Company’s actual and projected significantcontractual obligations as of December 31, 2006:
| ** **                       | ** ** | **For the Years Ended** | ** ** |
|----------------------------------|------------|----------------------------------------|------------|
| ** **                       | ** ** | **2007**                               | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Total** | ** ** |
| Operating Lease  Commitments     |       | $                                      | 1,624,286  |   | $ | 992,479 |   | $ | 56,609 |   | — |   | — |   | $ | 2,673,373 |   |
| Capital Equipment Note  Payments |       | $                                      | 92,608     |   | $ | 92,608 |   | $ | 69,456 |   | — |   | — |   | $ | 254,672 |   |
| Mechem—Vehicle Fees(1)      |       | Variable                               |       | Variable |   | Variable |   | Variable |   | Variable |   | Variable |   |
| CSIR—Vehicle Fees(2)        |       | Variable                               |       | Variable |   | — |   | — |   | — |   | Variable |   |
| Total                            |       | $                                      | 1,716,894  |   | $ | 1,085,087 |   | $ | 126,065 |   | — |   | — |   | $ | 2,928,045 |   |

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(1)          Refer to the Mechemvehicle fee agreement detailed above in Footnote 7, Commitments andContingencies, “Vehicle Fees.”

(2)          Refer to the CSIRvehicle fee agreement detailed above in Footnote 7, Commitments andContingencies, “Vehicle Fees.”

**ContractDefinitization**

TheCompany contracts for the sale of its vehicles to the U.S. Government underfixed price sales contracts, subject to the provisions of the U.S. FederalAcquisition Regulations (“FAR”).  UnderFAR 52.216-25, contract awards may be made subject to future “ContractDefinitization” pursuant to which the contractor agrees to negotiate with theGovernment following commencement of the contract work to finalize detailedconditions of the contract, including pricing, scheduling and other applicablerequirements.  As part of suchnegotiations, the contractor is subject to audit by the U.S. Defense ContractAudit Agency (“DCAA”) of its direct material and labor costs, manufacturingoverhead and margin. Based on such audit and the negotiations with theGovernment, the final “definitized” contract price may be less than the amountoriginally established (see additional discussions within Footnote 1 andFootnote  3).

**LegalProceedings**

During June, 2006, theCompany confirmed that two former employees had filed claims under 31 U.S.C.§3730 alleging *inter alia* that the Company hadfailed to comply with the terms of the JERRV contract in respect to theallocation and use of the initial contract milestone payment for such “accelerateddelivery costs.” On August 23, 2006, the Company agreed to settle with theUnited States Government and with these former employees all claims relating toor arising under the JERRV contract and the payment of such accelerateddelivery costs for a total of $1,905,000 plus interest of $23,000. As ofDecember 31, 2006 the Company has paid $1,297,534 under the terms of such settlementagreement and the Company has established a provision of $607,466 for theremaining liability .

The Company may beinvolved from time to time in ordinary litigation that will not have a materialeffect on our operations or finances. Other than the litigation describedabove, we are not aware of any pending or threatened litigation against thecompany or our officers and directors in their capacity as such that could havea material impact on our operations or finances

**NOTE 8—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, 2006, 2005 and 2004 the Company had $12, 824, 211,$12,598,921 and $2,645,716 respectively as deferred revenue resulting from itscontracts with the U.S. Army and the U.S. Marines.

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**NOTE 9—DEBT**

On November 18,2005, Longview Fund, LP and Longview Equity Fund, LP (collectively, “Longview”)issued secured promissory notes (the “Notes”) to the Company for gross proceedsof $7,500,000. The Notes matured on February 18, 2006. Interest is payableon the Notes at the annualized rate of 24%. The Company also executed aSecurity Agreement that granted Longview a first preferred UCC-1 securityinterest in all of the Company’s assets and property.

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

On April 20, 2006, theCompany paid $1,000,000 against the principle balance of the Notes and extendedthe maturity date on the Notes and the Ashford Note for an additional 60 days,through June 20, 2006. The Company paid $55,000 to Longview and $50,000 to FortAshford in cash as compensation for this extension

On June 20, 2006, theCompany paid off the principle balance and all applicable accrued interestunder the Notes. Additionally, the Company extended the maturity date of theAshford Note for an additional 30 days, through July 20, 2006. The Company paid$50,000 to Fort Ashford in cash as compensation for the extension of theAshford Note.

On August 9, 2006, theCompany paid off the principle balance of the Ashford Note, and all applicableaccrued interest under the Ashford Note.

In October 2006 theCompany acquired capital equipment valued at $234,875 using a note with impliedinterest of 11.25% from the supplier with a repayment based on usage ofmaterials used with the equipment.  It isexpected that based on usage estimates the note payments in 2007, 2008, and2009 will be $92,608, $92,608 and $69,456 respectively.

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**NOTE 10—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 received98.1% of the value of receivables sold to the Factor within 24-48 hours ofdelivery of the invoice. During June 2006, the Company exceeded the agreedmaximum value of receivable to be factored under the Factoring Agreement. OnJune 22, 2006, the Factoring Agreement was terminated and no further obligationremained between the Company and GC Financial Services, Inc.

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

The Company’s factoringtransactions in 2006, 2005 and 2004 are summarized below:
| ** **                     | ** ** | **Year Ended**             | ** ** | **Year Ended**             | ** ** | **Year Ended**             | ** ** |
|--------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|                           |       |                            |       |                            |       |                            |       |
| Sale of Receivables to  Factor |       | $                               | 44,692,632 |                            | $          | 17,170,086                      |       | $ | 11,895,363 |   |
| Payments to Factor             |       | (45,482,504                     | )          | (16,380,214                     | )          | (11,294,319                     | )          |
| Balance at end of  period      |       | $                               | —     |                            | $          | 789,872                         |       | $ | 601,044 |   |
|                           |       |                            |       |                            |       |                            |       |
| Charges by Factor              |       | $                               | 849,160    |                            | $          | 311,443                         |       | $ | 237,907 |   |

 

**NOTE 11—STOCKHOLDERS’EQUITY**

TheCompany was originally incorporated on November 27, 1996 as a Coloradocorporation and reincorporated as a Nevada corporation on January 1, 2005.  The Company has the authority to issue310,000,000 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.

Thepreferred stock has the following characteristics:

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

Liquidation—In the event of any voluntary orinvoluntary liquidation, dissolution or winding-up of the Company, the assetsof the Company available for distribution to its stockholders shall bedistributed as follows:

(a) Series A Preferred Stock shall rank senior toSeries B Preferred Stock, Series C Preferred Stock, Series D Preferred Stockand common stock;

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

(c) Series C Preferred Stock shall rank junior toSeries A Preferred Stock, Series B Preferred Stock and senior to Series DPreferred Stock and common stock;

(d) Series D Preferred stock shall rank junior toSeries A Preferred Stock Series B Preferred Stock, Series C Preferred Stock andsenior to common stock; and

(e) Common stock shall rank junior to Series A, B, Cand D Preferred Stock

Additionally,upon a liquidation event, holders of Series A Preferred Stock will receive$1,000 per share of Series A Preferred Stock. Holders of Series B PreferredStock will receive the greater of $2,500 or the pro-rata share of the Company’sremaining net assets to be distributed, after rank considerations. Holders ofSeries C Preferred Stock will receive a 150% return on the face value of theshare of Series C Preferred Stock, or $1,500, after rank considerations. In anyevent whereby 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—SeriesA Preferred 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 DPreferred Stock shall convert into common stock at $2.10 per share.

Inconnection with the private placement sale of the Company’s common stock onJanuary 19, 2005, the Company and the holders of Series B and Series CPreferred Stock agreed to convert all shares of the Series B and Series CPreferred Stock outstanding to shares of the Company’s common stock. As aresult, all shares of Series B and Series C Preferred Stock were converted intocommon effective January 19, 2005. The Series D Preferred Stock issued inconnection with the January 19, 2005 private placement remained outstandingfollowing the conversion of the Series B and Series C Preferred Stock. Alloutstanding shares of the Series D Preferred Stock were converted in full in2006, and no shares of the Series D Preferred Stock remain outstanding as ofDecember 31, 2006.

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

Thefollowing disclosures reference accounting guidelines and certain accountingtreatments which the Company has used throughout 2006, 2005 and 2004.  The Company considers the following terms anddefinition significant in ensuring the reader of these financial statementsunderstands the accounting treatments applied by the Company:

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

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

·                    TheBlack-Scholes option pricing model (Black-Scholes) is an analytical model usedto value an option to purchase a security based on certain market fundamentalssuch as the volatility of a security, the market for effective interest ratesover a period of time and constraints placed on the option to purchase thesecurity such as time horizons or the expiration of the option to purchase thesecurity.  The Company utilizes Black-

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Scholes to valuestock options issued to employees, preferred stock issued to employees andservice providers, preferred stock purchased by investors and warrants issuedto investors.

**During the year ended December 31, 2006, theCompany recorded the following transactions within its stockholders’ equityaccounts:**

*COMMONSTOCK TRANSACTIONS*

·                    On July 24,2006, the Company closed a private placement sale and issued 8,250,000 sharesof common stock to investors for gross proceeds of $41,250,000. Net proceedsreceived after expenses were $39,187,500.

·                    On December28, 2006, the Company closed a private placement sale and issued 13,027,700shares of common stock to investors for gross proceeds of $152,000,000. Netproceeds received after expenses were $146,640,261.

The following issuances of the Company’s common stockduring 2006 were valued by the Company using the Company’s closing bid price ofits common stock as quoted on the OTC Bulletin Board market as of the date ofthe associated contract or the issuance date if no contract existed:

·                    EffectiveJanuary 1, 2006, the Company’s board of directors granted the Company’s ChiefExecutive Officer 300,000 shares of the Company’s unregistered common stockvalued at $216,000. The shares were fully vested upon issuance.

·                    On April 21,2006, the board of directors adopted a resolution approving payment of annualcompensation to each member of the Company’s board of directors. Each member isto receive annual cash compensation of $24,000. In addition, each member receiveda guarantee of an annual grant of 15,353 shares of the Company’s unregisteredcommon stock. The shares of the Company’s unregistered common stock arerequired to be held until the individual’s service as a member of the Company’sboard of directors is complete.   TheCompany awarded 96,149 and issued 69,360 shares of the Company’s common stockto the members of the Company’s board of directors in 2006. A total of 26,789shares of the Company’s common stock were included in shares to be issued inthe stockholders’ equity table as of December 31, 2006 relating to thisaward.  The value for the 96,149 sharesof common stock awarded to the members of the board of directors was recordedas stock based compensation of $445,990.

·                    On June 2,2006, the Company granted and issued 12,500 shares of its unregistered commonstock to a member of the Company’s board of directors, valued at $40,500 ascompensation due under a previous employment contract with the Company.  During 2006, the Company granted and issued 165,202shares of its unregistered common stock valued at $399,688 under variousemployment agreements.  Included withinthese issuances were common stock issuances related to certain employeeagreements which were modified during 2006. A total of 233,418 shares of common stock were rescinded as a result ofthe modifications to employee agreements. These transactions resulted in a reduction of the total stock-basedcompensation for 2006 of $224,688.

·                    On August 8,2006, the Company agreed to issue 30,000 shares of common stock under asettlement agreement with Atlantis Partners, Inc. The shares issued were valuedat $187,500.

·                    During 2006,employees exercised stock options to purchase 5,348 shares of the Company’scommon stock valued at $6,001.  A totalof 4,348 shares of the Company’s common stock were included in shares to be 

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issued in the stockholders’ equity table as ofDecember 31, 2006 related to employee exercised stock options.

·                    The Companyadopted SFAS 123R as if July 1, 2005. Total stock option expense for 2006, which is inclusive of stock grantsin 2006 was $1,250,625.

*PREFERREDSTOCK TRANSACTIONS*

*Series D Mandatory Convertible Preferred Stock:*

·                    During theyear ended December 31, 2006, 13,004 shares of Series D Preferred Stock werevoluntarily converted to 6,192,628 shares of common stock.  The fully accreted conversion value of theseshares of common stock with a conversion price of $2.10 per share was$13,004,519.

·                    During thethree month period ended June 30, 2006, 586 shares of common stock were issuedin lieu of cash dividends for the holders of Series D Preferred Stock. Theshares issued were valued at $2,377 which was 85% of the average of the lowestmarket value for 3 of the prior 10 trading days.

·                    During thethree month period ended September 30, 2006, 8,351 shares of common stock wereissued in lieu of cash dividends for the holders of Series D Preferred Stock.The shares issued were valued at $46,448 which was 85% of the average of thelowest market value for 3 of the prior 10 trading days.

*WARRANTTRANSACTIONS*

·                    During 2006,warrants associated with Series D Preferred Stock were exercised and theCompany issued 2,633,333 shares of common stock for gross proceeds of $9,874,999.

·                    During 2006,various warrants were exercised and the Company issued 191,107 shares of commonstock for gross proceeds of $499,573.

·                    As of December31, 2006, all warrants were exercised or expired. No warrants remainedoutstanding as of December 31, 2006.

*SHARES TOBE ISSUED*

·                    During thethree month period ended December 31, 2006, 26,789 shares of common stock weregranted for compensation to the Company’s board of directors.  The shares were valued at $210,408 but werenot issued as of December 31, 2006.

**During the year ended December 31, 2005, theCompany recorded the following transactions within its stockholders’ equityaccounts:**

*COMMONSTOCK TRANSACTIONS*

InJanuary 2005, the Company issued a total 188,400 shares of the Company’s commonstock at an average price of $2.76 per share, generating $520,069 in netproceeds pursuant to the Investment Agreement between the Company and DutchessPrivate Equities Fund, L.P., dated January 26, 2004.

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Thefollowing issuances of the Company’s common stock during 2005 were valued bythe Company using the Company’s closing bid price of its common stock as quotedon the OTC Bulletin Board market as of the date of the associated contract orthe issuance date if no contract existed.

- 41,666 shares of the Company’s common stock valuedat $112,498 were issued to a director, a member of the board of directors, forservices rendered to the Company.  Anexpense of $112,498 was classified as compensation of directors and wasrecorded in 2005.

- 9,950 shares of the Company’s common stock valued at$12,910, to the Company’s former President, for services rendered to theCompany.  An expense of $12,910 wasclassified as officer compensation and was recorded in 2005.

- The Company issued 53,467 shares of the Company’scommon stock pursuant to the terms of the Company’s agreement with certainthird parties and were valued at $144,896. An expense of $144,896 was classified as settlement expense and wasrecorded in 2005.

- The Company issued 14,876 shares of the Company’scommon stock pursuant to the terms of the Company’s agreement with GC FinancialServices, Inc. were valued at $20,640. An expense of $20,640 was classified as interest expense and wasrecorded in 2005.

- Michael Watts, the Company’s former Chief ExecutiveOffice, agreed to rescind 83,333 shares of common stock issued in 2004 valuedat $589,998.

Atotal of 114,376 shares of common stock were issued by the Company for netproceeds of $211,630 in connection with the exercise of warrants issued througha PIPE offering completed on April 10, 2002.

TheCompany issued a warrant to purchase 65,833 shares of the Company’s commonstock on January 19, 2005 to HPC Company. The warrant was valued at $200,071 using Black Scholes.  The Company recorded a reduction ofstockholders’ equity associated with services provided as a placement agent forthe Company’s Series D Mandatory Redeemable Convertible Preferred Stockoffering, which closed on January 19, 2005.

TheCompany issued warrants to purchase 150,000 shares of the Company’s commonstock that can be exercised for $3.75 per share in a settlement agreement with H.C.Wainwright & Co.  The value asdetermined by Black Scholes was expensed as settlement expense in the amount of$158,072. The warrants were exercised in 2006.

TheCompany issued a warrant to purchase 41,667 shares of the Company’s commonstock that can be exercised for $3.96 per share in a settlement agreement withWestor Online.  The value as determinedby Black Scholes was expensed as settlement expense in the amount of $72,354. Thewarrants were exercised in 2006.

TheCompany issued 14,803,750 shares of unregistered common stock resulting for themandatory conversion on February 8, 2005 of all the outstanding shares ofthe Company’s Series B Convertible Preferred Stock.  At the time of conversion, the conversionrate for the Series B Convertible Preferred Stock was 2% of fully dilutedcommon stock.  The beneficial conversionfeature related to the Series B Convertible Preferred Stock in the amount of$19,338,330 was relieved in full on February 8, 2005.

*PREFERREDSTOCK TRANSACTIONS*

*Series D Mandatory Convertible Preferred Stock:*

·       OnJanuary 19, 2005, the Company issued 15,800 shares of the Company’s Series DMandatory Redeemable Convertible Preferred Stock for net cash of$15,305,965.  The issuance of the Company’sSeries D Mandatory Redeemable Preferred Stock was recorded at $7,301,765 whichis the net value of the cash received of $15,305,965 less the fair value of theassociated warrants of $8,004,200 which is covered in Footnote 13.

·       OnMay 23, 2005, 2,796 shares of the Series D Preferred Stock were voluntarilyconverted into 1,331,429 shares of Common Stock.  The accretion of the 15,800 shares of SeriesD Preferred Stock recorded up to that date was $847,019. The conversion valueof these shares of common stock based on the conversion price of 

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$2.10 per share was$2,796,001.  The accreted value of the2,796 Series D Preferred Stock was recorded at a value of $1,442,025.

·       Theremaining Series D Preferred Stock was further accreted $1,095,248 from May 24,2005 to year end.

·       TheSeries D Preferred Stock pays 6% Cumulative Dividends.  If cash is not available to pay thesedividends, the Company may issue Common Stock at 85% of the average of thelowest market value for 3 of the prior 10 trading days.  On March 3, 2005, 57,186 shares of commonstock valued at $100,076 were issued as payment of the semi-annual dividend dueto the Company’s Series D Convertible Preferred stockholders. On September 1,2005, 224,511 shares of common stock valued at $330,143 were issued as paymentof the semi-annual dividend due to the Company’s Series D ConvertiblePreferred stockholders. In accordance with EITF 98-5, “Accounting forConvertible Securities with Beneficial Conversion Features or ContingentlyAdjustable Conversion Rates,” the Company records “beneficial conversionfeature expense” when and if the Company issues debt or equity instrumentswhich are convertible into shares of the Company’s common stock, at aconversion price which is favorable to the holder of the debt or equityinstrument. Valuation of this favorable conversion feature is based on thecircumstances of each debt or equity issuance but is generally based on theactual or estimated difference between the fair market value of the underlyingcommon stock less the cost of acquiring the common stock.

**During the year ended December 31, 2004, theCompany recorded the following transactions within its stockholders’ equityaccounts:**

*COMMON STOCKTRANSACTIONS*

The Company closed on a private investment in publicequity (“PIPE”) offering on March 23, 2004. The PIPE, sold to numerousaccredited investors, consisted of the following:

Commonstock issuances, 1,771,874 shares of common stock were issued for $4,252,482 innet proceeds

Issuance of “A”warrants, 1,771,874 warrants to purchase common stock were issued in 2004, withan original exercise price of $1.44 per warrant.  A total of 219,790 shares of common stockwere issued by the Company for net proceeds of $316,498, in connection with theexercise of “A” warrants in 2004.  Theremaining “A” warrants expired on December 31, 2004.

Issuance of “Green Shoe” warrants, 1,771,874 warrants to purchasecommon stock were issued in 2004, with an original exercise price of $2.40 perwarrant. A total of 607,388 shares of common stock were issued by the Companyfor net proceeds of $1,457,738, in connection with the exercise of “Green Shoe”warrants in 2004.  The remaining  “Green Shoe” warrants expired on December 31,2004.

InNovember and December 2004, the Company issued a total 1,201,724 common sharesat an average price of $2.43 per share, generating $2,958,216 in net proceedspursuant to the Dutchess Equity agreement.

The following issuances of the Company’s common stockduring 2004 were valued by the Company using the Company’s closing bid price ofits common stock as quoted on the OTC Bulletin Board market as of the date ofthe associated contract or the issuance date if no contract existed.

- 41,667 shares of the Company’s common stock valuedat $80,000 were issued to a third party for services rendered to theCompany.  An expense associated with thisissuance of $80,000 was recorded in 2004.

- 70,834 shares of the Company’s common stock valuedat $127,501 were issued to a member of the board of directors, for servicesrendered to the Company.  An expense of$127,501 was classified as compensation of directors and was recorded in 2004.

- 91,666 shares of the Company’s common stock valuedat $176,000 were issued to a member of the board of directors, for servicesrendered to the Company.  An expense of$176,000 was classified as compensation of directors and was recorded in 2004.

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- 208,334 shares of the Company’s common stock valuedat $1,255,001 to the Company’s former Chief Executive Officer, for servicesrendered to the Company.  An expense of$1,255,001 was classified as officer compensation and was recorded in 2004.

- 124,999 shares of the Company’s common stock valued at $254,999 to theCompany’s former Chief Financial Officer, for services rendered to the Company.An expense of $254,999 was classified as officer compensation and was recordedin 2004.

- 41,682 shares of the Company’s common stock valued at $145,052 to anemployee, for services rendered to the Company. An expense of $145,052 was classified as stock-based compensation andwas recorded in 2004.

- 79,165 shares of the Company’s common stock valued at $178,246, to variousemployees for services rendered to the Company. An expense of $178,246 was classified as stock-based compensation andwas recorded in 2004.

A totalof 1,777,654 shares of common stock were issued by the Company for net proceedsof $2,143,015 in connection with the exercise of warrants issued through a PIPEoffering completed on April 10, 2002.

*PREFERREDSTOCK TRANSACTIONS*

Series B and Series C Convertible Preferred Stock are in the form ofshares, and have no conditional or unconditional mandatory redemptionprovisions obligating the Company in the future other than liquidation orcompany wind-up provisions. Under SFAS150-*Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity*,the issuances of Series B and Series C Preferred stock have been classified asequity.  The conversion options are notconsidered derivative liabilities which must be valued at fair value under SFAS133 or EITF 00-19.  The conversionoptions are indexed to the Company’s own stock and the host instrument isclassified as equity thus meeting the paragraph 11a scope exception under SFASNo. 133 — Accounting for Derivative instruments and hedging activities. TheCompany determined that there is no intrinsic value of the conversion optionsfor the Series B and Series C Preferred Stock under EITF 00-27.

The Company issued 20 shares of Series C Convertible Preferred Stock inexchange for existing debt in the amount of $200,000.  The Company used Black-Scholes and calculateda beneficial conversion feature value which was greater than the value of thedebt converted in the amount of $396,111.

The Company issued 1 share of the Company’s Series C ConvertiblePreferred Stock for $10,000.  Abeneficial conversion feature was calculated using Black-Scholes which wasgreater than the value of the proceeds in the amount of $23,344.

The Company had 5 Shares of Series C Convertible Preferred Stockvoluntarily redeemed for $60,000.  A losson redemption of $10,000 was recorded. Additionally, the Company recorded a gain on debt extinguishment relatedto the recapture of beneficial conversion feature expensed in connection withthe issuance of the preferred stock in 2002 of $7,272.

The following issuances of the Company’s preferredstock during 2004 were related to voluntary conversions of both Series B andSeries C preferred stock into the Company’s common stock:

- 309,751 shares of the Company’s common stock were issued upon theconversion of 13 shares of Series C Convertible Preferred Stock. Theconversion rate at the time of conversion was 0.2% of outstanding common stock.

- 1 share of the Company’s Series B Convertible Preferred Stockwas voluntarily converted to 10 Series C Convertible Preferred Stock. TheCompany used Black Schole and calculated a beneficial conversion feature of$290,462, associated as a result of differences between conversion ratesbetween the two preferred stock classes.

- 854,064 shares of the Company’s common stock were issued upon thevoluntary conversion of 34 shares of Series C Convertible Preferred Stock.The conversion rate at the time of conversion was 0.2% of outstanding commonstock.

45

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- 1 share of the Company’s Series C ConvertiblePreferred Stock was voluntarily rescinded. A gain was recognized in the amount of $83,577 as a result.  The gain was calculated using the Company’sclosing bid price of its common stock as quoted on the OTC Bulletin Boardmarket as of the date the shares were rescinded and the number of shares ofcommon stock for which the preferred stock was convertible into.

- 167,050 shares of the Company’s common stock were issued upon thevoluntary conversion of 4 shares of Series C Convertible Preferred Stock.The conversion rate at the time of conversion was 0.2% of outstanding commonstock.

- 416,667 shares of the Company’s common stock were issued upon thevoluntary conversion of 1 share of Series B Convertible Preferred Stock.The conversion rate at the time of conversion was 2% of fully diluted commonstock.

-                    14,263shares of the Company’s common stock were issued upon the voluntary conversionof 1 share of Series C Convertible Preferred Stock. The conversion rate at thetime of conversion was 0.2% of outstanding common stock.

Theconversion rate for Series C Convertible Preferred Stock changed to 0.2% of fullydiluted stock on September 14, 2004. The Company used Black-Scholes tocalculate the value of $19,338,330, which represents the beneficial conversionfeature for this conversion rate increase for all outstanding Series CPreferred Stock Shares on September 14, 2004.

During October 2004, all outstanding shares of the Company’sSeries C Preferred Convertible stock were either mandatory converted toSeries B Convertible Preferred stock or into shares of common stock. Theconversion rate was 10 shares of Series C Convertible Preferred stock for 1share of Series B Convertible Preferred Stock or 0.2% of fully diluted commonstock.  In total, 115 shares ofSeries C Convertible Preferred stock were redeemed for 11.5 shares ofSeries B Convertible Preferred.  1,169,347shares of common stock were issued for the conversion of the remaining 28Series C Convertible Preferred Stock.

The Company issued preferred stock shares for services provided asfollows:

- 4 shares of the Company’s Series C Convertible Preferred Stockwere issued to a member of the board of directors, for services rendered.  The Company used Black-Scholes to determinethe value of the shares at $138,324.

- 20 shares of the Company’s Series C Convertible Preferred Stockwere issued to the Company’s former Chief Executive Office, for servicesrendered.  The Company used Black-Scholesto determine the value of the shares at $696,701.

- 4 shares of the Company’s Series C Convertible Preferred Stockwere issued to the Company’s former Chief Financial Officer, for servicesrendered.  The Company used Black-Scholesto determine the value of the shares at $139,717.

- 10 shares of the Company’s Series C Convertible Preferred Stock wereissued to a member of the board of directors, for services rendered.  The Company used Black-Scholes to determinethe value of the shares at $348,393.

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

46

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**Series C Preferred Stock Valuation Information for the YearEnded 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%-4.29    | %          |
| Expected forfeiture rate                        |   | 0             | %          |
| Estimated corporate tax rate                    |   | 0             | %          |
| Expected  dividend yield                        |   | 0             | %          |

 

 

**Series C Preferred Stock Valuation Information for the YearEnded 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              | %          |

 

 

**NOTE 12 — STOCKOPTIONS AND STOCK GRANTS**

***Stock Options***

The Company does not havea formal stock option plan. However, the Company has offered its employeesstock options. During 2006 and 2005, the Company issued options to purchase1,508,125 and 652,833 shares of its unregistered common stock, respectively, tocertain employees

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

All stock options issuedin 2005 do not carry a designated expiration date and vest over a 1 yearperiod.

Stock option expenserecorded for 2006, 2005 and 2004 amounted to $701,124, $92,671 and $0,respectively.

***The Company adopted SFAS 123(R) as of July 1, 2005.  Had the Company adopted SFAS 123(R) as ofJanuary 1, 2005, the pro forma impact on the 2005 net loss would have been anincrease in the net loss reported by the Company of $39,128.***

The following table summarizes stock options activityfor the years ended December 31, 2006, 2005 and 2004:

47

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**Stock Option Activity**
| ** **                    | ** ** | **Average per share** | ** ** |
|-------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **Shares subject**         | ** ** | **Exercise** | ** ** | **Market** | ** ** |
| ** **                    | ** ** | **to option**              | ** ** | **price** | ** ** | **price** | ** ** |
|                          |       |                            |       |   |   |   |   |
| Balance at  December 31, 2003 |       | —                          |       | — |   | (a) |   |
| Options granted               |       | —                          |       | — |   | (a) |   |
| Options exercised             |       | —                          |       | — |   | (a) |   |
| Options terminated            |       | —                          |       | — |   | (a) |   |
| Balance at  December 31, 2004 |       | —                          |       | — |   | — |   |
| Options granted               |       | 652,833                         |       | $ | 1.50 |   | $ | 1.50 |   |
| Options exercised             |       | —                          |       | — |   | (a) |   |
| Options terminated            |       | (196,167                        | )          | $ | 1.50 |   | (a) |   |
| Balance at  December 31, 2005 |       | 456,666                         |       | $ | 1.50 |   | $ | 1.50 |   |
| Options granted               |       | 1,508,125                       |       | $  | 0.72-$7.4 | 8 | $  | 0.77-$7.4 | 8 |
| Options exercised             |       | (5,348                          | )          | $  | 1.38-$1.5 | 0 | (a) |   |
| Options terminated            |       | —                          |       | — |   | (a) |   |
| Balance at  December 31, 2006 |       | 1,959,443                       |       | $ | 2.53 |   | $ | 17.98 |   |

 

----

(a) Not applicable

 

The following table summarizes the attributes used inthe Company’s valuation of stock option grants during 2006, 2005 and 2004:

48

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**Option Valuation Information**
| ** **                                                  | ** ** | **2006**     | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------|------------|--------------|------------|----------|------------|----------|------------|
|                                                        |       |         |       |     |       |     |       |
| Valuation  Assumptions                                      |       |         |       |     |       |     |       |
| Stock price on date of grant                                |       | $            | 0.77-$7.48 |     | $          | 1.50     |       |   |   |
| Expected option term (in years)                             |       | 2            |       | 2        |       | —   |       |
| Expected duration from grant to expiration date (in  years) |       | 4 and 5      |       | 5        |       |     |       |
| Option vesting term (in years)                              |       | (a)          |       | 1        |       |     |       |
| Expected volatility                                         |       | 45.82%-70.31 | %          | 48.61    | %          | —   |       |
| Risk-free interest rate                                     |       | 4.40%-4.97   | %          | 3.42     | %          | —   |       |
| Expected forfeiture rate                                    |       | 5.00         | %          | 5.00     | %          | —   |       |
| Estimated corporate tax rate                                |       | 40.00        | %          | 40.00    | %          | —   |       |
| Expected dividend yield                                     |       | 0.00         | %          | 0.00     | %          | —   |       |
|                                                             |            |              |            |          |            |          |            |  |  |

*** ***

----

***(a) Options issued in 2006 vest between 1 day and 14 months***

***(b) Not applicable***

*** ***

***Stock Grants***

***The Company awarded stock grants to certain employees during2006.  The stock grants consisted of191,016 shares of the Company’s common stock valued at $1,047,501 subject tocertain vesting provisions.  The stockgrants vest on a schedule as shown below:***

***Stock grant vesting dates***

| January 1, 2007 |   | 50,000 |   |
|-----------------|--------|--------|--------|
| May 4, 2007     |   | 20,513 |   |
| Total for 2007  |   | 70,513 |   |
|            |   |   |   |
| January 1, 2008 |   | 50,000 |   |
| May 4, 2008     |   | 20,513 |   |
| Total for 2008  |   | 70,513 |   |
|            |   |   |   |
| January 1, 2009 |   | 50,000 |   |
| Total for 2009  |   | 50,000 |   |
|            |   |   |   |

*** ***

*** ***

***NOTE 13—SERIES D WARRANTS TO PURCHASE COMMON STOCK***

Warrants to purchase 2,633,333 shares of common stockwere issued to the purchasers of the Series D Preferred Stock and were valuedat $8,004,200 and recorded initially as a Warrant Liability on January 19,2005.  While EITF 00-19 outlines variousinstances for determining appropriate accounting treatment of the warrants,these warrants contained registration rights where significant cash liquidateddamages could be required to be paid to the holder of the instrument if theissuer fails to register shares timely. The potential penalty equal to 1.5% of the aggregate purchase price isconsidered substantial based on the financial condition and operating cashflows of the Company.  During 2005,approximately $237,000 was paid in liquidated damages related to the Company’sfailure to register shares in a timely manner. The Warrant Liability was valuedon January 19, 2005 using Black-Scholes with the following inputs:

 

49

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·                  Numberof Warrant shares — 2,633,333

·                  Stockprice at issuance date — $3.12 per share

·                  Exerciseprice — $3.75 per share

·                  Term— 3 years

·                  Discountrate — 3.42%, representing the three* year Treasury at the date of issuance

·                  Volatility— 259%, based on the stock prices during three* years prior to issuance(*coincides with the term of the Warrants)

**In accordance with EITF 00-19**, the Warrants issued inconjunction with the Series D Preferred Stock were initially recorded at fairvalue as a liability as liquidating damages were paid as a result of a late SECregistration of the underlying Common Stock. The Black Scholes Method was used to determine the fair value atissuance using a three year holding period. These Warrants are adjusted each reporting period to the new fair valueusing the Black-Scholes Method until the registration was accepted by theSEC.  At that point, the fair value usingthe Black-Scholes Method was reclassified into Equity.  A realized gain on derivative liability inthe amount of $2,830,791 was recorded in 2005 as a result of the change in fairvalue from issuance to reclassification to equity for these Warrants.

The Warrant Liability wasvalued for reclassification on May 11, 2005 using Black-Scholes with thefollowing inputs:

1.               Number of Warrantshares — 2,633,333

2.               Stock price atreporting date — $2.08 per share

3.               Exercise price —$3.75 per share

4.               Term — 2.7 years

5.               Discount rate —3.960%, representing the three year Treasury at the reporting date

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

**NOTE14—ACQUISITION AND SALE OF ASSETS**

InSeptember 2004, the Directors of TSGI agreed to exchange all shares heldby it of Technical Solutions Group Inc for the TSGI shares held by the Company,as a result of which the Company reacquired 100% of the shares of TechnicalSolutions Group as a wholly owned subsidiary

**NOTE 15—CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

The Company’sChief Executive Officer, Mr. McGilton, is a principle of APT Leadership, aconsulting firm the Company hired to provide various business consultingservices, training seminars and certain business software. APT Leadershipbilled the Company $606,817, $225,400 and $21,017 for the years ended December31, 2006, 2005 and 2004, respectively.

OnFebruary 18, 2006, the Company entered into a Modification and AssignmentAgreement with Longview pursuant to which the Company paid $1,250,000 againstthe principle balance of the Notes and extended the maturity date of the Notesfor an additional 60 days. In addition, the Company consented to the assignmentof $2,500,000 of the Notes to Fort Ashford Funds LLC. Frank Kavanaugh, adirector of the Company, is the principal owner of Fort Ashford Funds and asubstantial shareholder of the Company’s common stock. Mr. Kavanaugh’srelationship to Fort Ashford Funds LLC was fully disclosed to the Company andMr. Kavanaugh did not participate in the negotiations or decision process inrespect of the Modification and Assignment Agreement. The Company paid $87,510to Longview and $50,000 to Fort Ashford in cash as compensation for theextension of the maturity dates of the Notes.

OnApril 20, 2006, the Company paid $1,000,000 against the principle balance ofthe Notes and extended the maturity date on the Notes and the Note with FortAshford for an additional 60 days, through June 20, 2006. The Company paid$55,000 to Longview and $50,000 to Fort Ashford in cash as compensation forthis extension

OnJune 20, 2006, the Company paid off the principle balance and all applicableaccrued interest under the Notes. Additionally, the Company extended thematurity date of the Ashford Note for an additional 30 days, through 

50

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July 20, 2006. TheCompany paid $50,000 to Fort Ashford in cash as compensation for the extensionof the Ashford Note.

On August 9, 2006,the Company paid off the principle balance of the Ashford Note, and allapplicable accrued interest under the Ashford note.

**NOTE 16 — OTHERCOMPREHENSIVE LOSS (Restated)**

Other comprehensive earnings/(loss) consists of thefollowing:
| ** **                                | ** ** | **2006**     | ** ** | **2005**     | ** ** | **2004**    | ** ** |
|-------------------------------------------|------------|--------------|------------|--------------|------------|-------------|------------|
| ** **                                | ** ** | **Restated** | ** ** | **Restated** | ** ** | ** **  | ** ** |
| ** **                                |       |         |       |         |       |        |       |
| **Net  Earnings (Loss)**                  |       | $            | 18,196,943 |         | $          | (13,458,599 | )          | $ | (11,953,803 | ) |
| Other  Comprehensive Earnings, net of tax |       |         |       |         |       |        |       |
| **Comprehensive Earnings (Loss)**         |       | $            | 18,196,943 |         | $          | (13,458,599 | )          | $ | (11,953,803 | ) |

 

**NOTE 17 — TAXES**

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

The Company’s netdeferred tax asset as of December 31, 2006, 2005, and 2004 consisted of thefollowing:

 
| ** **                                                                     | ** ** | **12/31/2006** | ** ** | **12/31/2005** | ** ** | **12/31/2004** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|
| Deferred tax  assets                                                           |       |           |       |           |       |           |       |
| Inventory reserves and inventory tax law (uniform  capitalization) differences |       | $              | 2,544,527  |           | $          | 894,392        |       | $ | 401,336 |   |
| Allowance for uncollectible accounts                                           |       | 328,224        |       | 248,942        |       | —         |       |
| Difference in recognition of rent expense                                      |       | 52,254         |       | 52,254         |       | 47,649         |       |
| Warranty and contract provisions                                               |       | 2,477,165      |       | 785,382        |       | 64,241         |       |
| Difference in recognition of stock based  compensation expense                 |       | 285,232        |       | 35,447         |       | —         |       |
| Payroll accruals                                                               |       | 57,906         |       | 364,761        |       | 345,859        |       |
|                                                                           |       |           |       |           |       |           |       |
| Deferred tax assets                                                            |       | 5,745,308      |       | 2,381,178      |       | 859,085        |       |
|                                                                           |       |           |       |           |       |           |       |
| Deferred tax  liability                                                        |       |           |       |           |       |           |       |
| Depreciation differences                                                       |       | (268,110       | )          | (204,486       | )          | (168,722       | )          |
|                                                                           |       |           |       |           |       |           |       |
| Net deferred tax  assets before net operating loss carryforwards               |       | 5,477,198      |       | 2,176,691      |       | 690,363        |       |
|                                                                           |       |           |       |           |       |           |       |
| Net operating  loss carryforwards - SC                                         |       | 371,924        |       | 1,080,527      |       | 493,963        |       |
| Future benefit  of offset of Alternative Minimum Tax                           |       | 288,943        |       |           |       |           |       |
| Net operating  loss carryforwards - US                                         |       | 6,188,427      |       | 10,928,919     |       | 7,068,047      |       |
|                                                                           |       |           |       |           |       |           |       |
| Net deferred tax assets                                                        |       | 12,326,491     |       | 14,186,137     |       | 8,252,374      |       |
|                                                                           |       |           |       |           |       |           |       |
| Less valuation allowance                                                       |       | —         |       | (14,186,137    | )          | (8,252,374     | )          |
|                                                                           |       |           |       |           |       |           |       |
| Deferred tax  benefit                                                          |       | $              | 12,326,491 |           | $          | —         |       | $ | — |   |

 

The Company hasremoved the valuation allowance for the deferred tax assets since it expects torealize future earning to be offset by future tax benefits. In 2005 and 2004the company recorded a valuation allowance for all of its 

51

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net deferred taxassets.  The Company’s valuationallowance decreased for the year ended December 31, 2006,  $14,186,137 and increased for the years endedDecember 31, 2005, and 2004 $5,933,763 and $3,713,302  respectively.

**As of December 31, 2006, 2005 and 2004, the Company hasavailable Federal operating loss carry-forwards of $18,611,810, $32,868,929,and $21,257,284, expiring through 2025 respectively and state operating losscarry-forwards of $7,438,470, $21,610,537, and $9,879,269, expiring through2025, respectively.**

The following is areconciliation of the provision for income taxes at the U.S. federal income taxrate to the income taxes reflected in the Statement of Operations:
| ** **                                      | ** ** | **December 31, 2006** | ** ** | **December  31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|---------------------------------------|------------|---------------------------------|------------|
| 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                 |       | (209.98                         | )%         | (38.25                                | ))%        | (38.25                          | )%         |
| Tax expense at actual  rate                     |       | 209.98                          | %          | 0                                     | %          | 0                               | %          |

 

**NOTE 18 — EARNINGS/LOSS PER SHARE**

TheCompany utilizes SFAS No. 128, “Earnings per Share” to calculate gain/loss pershare. Basic earnings/loss per share is computed by dividing the earnings/lossavailable to common stockholders (as the numerator) by the weighted-averagenumber of common shares outstanding (as the denominator). Diluted earnings/lossper share is computed similar to basic earning/loss per share except that thedenominator is increased to include the number of additional common shares thatwould have been outstanding if all potential common stock (including commonstock equivalents) had all been issued, and if such additional common shareswere dilutive. 

| Basic Earning Per Share Computation | ** ** | **2006**   | ** ** |
|---------------------------------------------------------|------------|------------|------------|
|                                                    |       |       |       |
| Net  Profit/(Loss)                                      |       | $          | 18,196,943 |   |
|                                                    |       |       |       |
| Preferred  Dividends                                    |       | (477,791   | )          |
|                                                    |       |       |       |
| Profit/(Loss)  available to common shareholders         |       | $          | 17,719,152 |   |
|                                                    |       |       |       |
| **Basic  Earnings per common share**                    |       | $          | 0.40       |   |
|                                                    |       |       |       |
| **Weighted-average  shares used to compute:**           |       |       |       |
| Basic  Profit/(loss) per share                          |       | 44,786,083 |       |

 

| Dilutive Earning Per Share Computation: | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------|------------|------------|------------|
|                                                        |       |       |       |
| Profit/(Loss)  available to common shareholders             |       | $          | 17,719,152 |   |
|                                                        |       |       |       |
| Add back:  Preferred Dividends                              |       | 477,791    |       |
|                                                        |       |       |       |
| Profit/(Loss)  available to shareholders                    |       | $          | 18,196,943 |   |
|                                                        |       |       |       |
| Weighted-average  number of Common shares outstanding       |       | 44,786,083 |       |
| Dilutive effect  of stock options                           |       | 1,964,791  |       |
| Dilutive effect  of Stock Grants                            |       | 191,026    |       |
| **Weighted-average  shares used to compute:**               |       |       |       |
| Diluted Earnings  /(loss) per share                         |       | 46,941,900 |       |
|                                                        |       |       |       |
| **Dilutive  Earnings per common share**                     |       | $          | 0.39       |   |

 

52

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UnderSFAS No. 128, where there is a loss, the inclusion of additional common sharesis anti-dilutive (since the increased number of shares reduces the per shareloss available to common stock holders), and if the additional common sharesare anti-dilutive, they are not added to the denominator in thecalculation.  For periods, where theadditional common shares are anti-dilutive, the following common stockequivalents have been excluded from the calculation of diluted loss per share:

|                                       | ** ** | **2005**  | ** ** | **2004**   | ** ** |
|---------------------------------------|------------|-----------|------------|------------|------------|
|                                  |       |      |       |       |       |
| Convertible  Preferred Stock Series B |       | —    |       | 10,493,939 |       |
| Convertible  Preferred Stock Series C |       | —    |       | —     |       |
| Convertible  Preferred Stock Series D |       | 6,192,381 |       | —     |       |
| Warrants                              |       | 2,994,167 |       | 1,725,942  |       |
| Options                               |       | 456,666   |       | —     |       |
| Total                                 |       | 9,643,214 |       | 12,219,881 |       |

 

| Basic Earning Per Share  Computation          | ** ** | **2005**     | ** **  | **2004**     | ** ** |
|-----------------------------------------------|------------|--------------|-------------|--------------|------------|
| ** **                                    | ** ** | **Restated** | ** **  | **Restated** | ** ** |
|                                          |       |         |        |         |       |
| Net Loss                                      |       | $            | (13,458,599 | )            | $          | (11,953,803 | ) |
|                                          |       |         |        |         |       |
| Preferred  Dividends                          |       | (822,180     | )           | —       |       |
|                                          |       |         |        |         |       |
| (Loss) available  to common shareholders      |       | $            | (14,280,779 | )            | $          | (11,953,803 | ) |
|                                          |       |         |        |         |       |
| **Basic  Loss per common share**              |       | $            | (0.42       | )            | $          | (0.62 | ) |
|                                          |       |         |        |         |       |
| **Weighted-average  shares used to compute:** |       |         |        |         |       |
| Basic loss per  share                         |       | 33,926,573   |        | 19,357,939   |       |
|                                          |       |         |        |         |       |
| ** **                                    |       |         |        |         |       |

 

| Dilutive Earning Per Share  Computation:      | ** ** | **2005**   | ** **  | **2004**   | ** ** |
|-----------------------------------------------|------------|------------|-------------|------------|------------|
|                                          |       |       |        |       |       |
| Net Loss                                      |       | $          | (13,458,599 | )          | $          | (11,953,803 | ) |
|                                          |       |       |        |       |       |
| Preferred  Dividends                          |       | (822,180   | )           | —     |       |
|                                          |       |       |        |       |       |
| Loss available  to common shareholders        |       | $          | (14,280,779 | )          | $          | (11, 953,803) |   |
|                                          |       |       |        |       |       |
| **Dilutive  Loss per common share**           |       | $          | (0.42       | )          | $          | (0.62 | ) |
|                                          |       |       |        |       |       |
| **Weighted-average  shares used to compute:** |       |       |        |       |       |
| Diluted loss per  share                       |       | 33,926,573 |        | 19,357,939 |       |

 

53

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**NOTE 19 — VALUATION AND QUALIFYINGACCOUNTS AND RESERVES**

The following tablesummarizes information about accounts and reserves:
| ** **           | ** ** | ** **            | ** ** | **Additions**       | ** ** | ** **    | ** ** | ** ** | ** ** | ** **          | ** ** |
|----------------------|------------|-----------------------|------------|---------------------|------------|---------------|------------|------------|------------|---------------------|------------|
| ** **           | ** ** | **Balance at**   | ** ** | **Charged to** | ** ** | ** **    | ** ** | ** ** | ** ** | **Balance at** | ** ** |
| ** **           | ** ** | **Beginning of** | ** ** | **Costs and**  | ** ** | ** **    | ** ** | ** ** | ** ** | **End of**     | ** ** |
| **Description**      | ** ** | **Period**            | ** ** | **Expenses**        | ** ** | **Writeoffs** | ** ** | **Other**  | ** ** | **Period**          | ** ** |
|                 |       |                  |       |                |       |          |       |       |       |                |       |
| **Revenue  Based**   | ** ** | ** **            | ** ** | ** **          | ** ** | ** **    | ** ** | ** ** | ** ** | ** **          | ** ** |
| **Provisions**       | ** ** | ** **            | ** ** | ** **          | ** ** | ** **    | ** ** | ** ** | ** ** | ** **          | ** ** |
| 2006                 |       | $                     | 1,018,051  |                | $          | 6,317,077     |       | $          | 1,267,041  |                | $          | — |   | $ | 6,068,087 |   |
| 2005A                |       | $                     | —     |                | $          | 1,018,051     |       | $          | —     |                | $          | — |   | $ | 1,018,051 |   |
| 2004                 |       | $                     | —     |                | $          | —        |       | $          | —     |                | $          | — |   | $ | — |   |
|                 |       |                  |       |                |       |          |       |       |       |                |       |
| **Allowance  for**   | ** ** | ** **            | ** ** | ** **          | ** ** | ** **    | ** ** | ** ** | ** ** | ** **          | ** ** |
| **Inventory Losses** | ** ** | ** **            | ** ** | ** **          | ** ** | ** **    | ** ** | ** ** | ** ** | ** **          | ** ** |
| 2006                 |       | $                     | 498,281    |                | $          | 1,925,332     |       | $          | —     |                | $          | — |   | $ | 2,423,613 |   |
| 2005                 |       | $                     | —     |                | $          | 498,281       |       | $          | —     |                | $          | — |   | $ | 498,281 |   |
| 2004                 |       | $                     | —     |                | $          | —        |       | $          | —     |                | $          | — |   | $ | — |   |
|                 |       |                  |       |                |       |          |       |       |       |                |       |
| **Warranty**         | ** ** | ** **            | ** ** | ** **          | ** ** | ** **    | ** ** | ** ** | ** ** | ** **          | ** ** |
| **Reserve**          | ** ** | ** **            | ** ** | ** **          | ** ** | ** **    | ** ** | ** ** | ** ** | ** **          | ** ** |
| 2006                 |       | $                     | 1,686,062  |                | $          | 163,938       |       | $          | —     |                | $          | — |   | $ | 1,850,000 |   |
| 2005B                |       | $                     | 167,950    |                | $          | 1,824,444     |       | $          | 306,332    |                | $          | — |   | $ | 1,686,062 |   |
| 2004                 |       | $                     | 180,384    |                | $          | 167,084       |       | $          | 179,518    |                | $          | — |   | $ | 167,950 |   |

----

(A)         Consistsof the Allowance for Contractual Adjustments, as presented on the Company’s balance sheet and explained in Footnote 1 tothe financial statements.

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

**NOTE 20—SUMMARIZEDQUARTERLY UNAUDITED FINANCIAL DATA **
| ** **                                  | ** ** | **2006**  | ** ** |
|---------------------------------------------|------------|-----------|------------|
| ** **                                  | ** ** | **Q1**    | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| **Net  Sales**                              |       | $         | 34,802,585 |   | $ | 56,074,537 |   | $ | 42,160,858 |   | $ | 62,979,466 |   |
| Gross Profit                                |       | 6,637,769 |       | 10,156,786 |   | 7,918,508 |   | 12,309,757 |   |
| Operating Income                            |       | 114,642   |       | 2,032,127 |   | 592,150 |   | 3,896,643 |   |
| **Net  Earnings (Loss)**                    |       | (665,633  | )          | 1,234,015 |   | 602,698 |   | 17,025,863 |   |
| **Basic  Earnings (loss) per common share** |       | $         | (0.02      | ) | 0.03 |   | 0.01 |   | 0.32 |   |
| **Diluted loss per common share**           |       | $         | (0.02      | ) | 0.03 |   | 0.01 |   | 0.32 |   |
|                                             |            |           |            |  |  |  |  |  |  |  |  |  |  |

 

54

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| ** **                                    | ** ** | **2005 Restated** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **Q1**                 | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| **Net  Sales**                                |       | $                      | 5,853,423  |   | $ | 18,295,357 |   | $ | 9,303,526 |   | $ | 16,260,523 |   |
| Gross Profit                                  |       | (541,896               | )          | 4,036,672 |   | (1,314,823 | ) | 1,104,261 |   |
| Operating Loss                                |       | (3,048,253             | )          | (7,431 | ) | (5,321,045 | ) | (6,307,311 | ) |
| **Net  Earnings (Loss)**                      |       | 342,823                |       | (981,450 | ) | (5,666,483 | ) | (7,154,489 | ) |
| **Basic  Earnings (loss) per common share**   |       | (0.01                  | )          | (0.01 | ) | (0.17 | ) | (0.23 | ) |
| **Diluted Earnings (loss) per common  share** |       | (0.01                  | )          | (0.01 | ) | (0.17 | ) | (0.23 | ) |
|                                               |            |                        |            |  |  |  |  |  |  |  |  |  |  |

 

**NOTE 21—SUBSEQUENTEVENTS**

On January 9,2007, NASDAQ approved the Company’s application to list its common stock on theNASDAQ Stock Market.  The Company will retain its FRPT trading symbol andthe listing was effective January 18, 2007.

On January 11,2007, the Company received a letter contract from the United States MarineCorps for 15 of its Cougar Joint Explosive Ordnance Disposal Rapid ResponseVehicles (JERRV).  The letter contract for the vehicles, spare parts andsustainment services has a total value of approximately $9,379,370.

On January 19,2007, the Company’s Board of Directors appointed Michael S. Durski to theposition of Chief Financial Officer.

On January 25,2007, the Company received a four-vehicle letter contract from the U.S. MarineCorps for testing, production and sustainability for its Mine Resistant AmbushProtected (MRAP) vehicle program. The work under this contract will beperformed by Force Dynamics, LLC, the Company’s joint venture with GeneralDynamics Land Systems, Inc.

On February 14,2007, the Company received a contract award from the U.S. Marine Corps for 125vehicles as part of the Mine Resistant Ambush Protected (MRAP) vehicle program.The work under the contract will be performed by Force Dynamics, LLC, theCompany’s joint venture with General Dynamics Land Systems, Inc. The contractaward has a total value of approximately $67 million. Under the contract award,Force Dynamics will produce 65 vehicles for Category I and 60 vehicles forCategory II of the MRAP program. The vehicles are to be delivered within 120days from the delivery of the contract and will be used by all branches of theU.S. armed forces.

On February 20,2007, the Company’s Mastiff contract with the British Ministry of Defense wasmodified to add 22 additional Mastiff vehicles increasing the total to bedelivered to 108.

On March 9, 2007,the Company received a delivery order from the U.S. Marine Corps for anadditional 19 Buffalo mine-protected vehicles worth an estimated $16.2 million.Under a November 2006 contract award administered by the Marine Corps SystemsCommand, the Company expects to deliver the 19 Buffalo vehicles by December2007.

On March 9, 2007,the Company purchased the Research and Developmental Testing Facility of NEWTECServices Group, Inc., located near Edgefield, SC.  The facility will be used to expand theCompany’s research and development activities and support the verification andquality control validation of the Company’s armored vehicles used to protectmilitary personnel against explosive threats.

**ITEM9.**                    CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

At a meeting ofthe Audit Committee held on November 10, 2006, the Audit Committeeapproved the engagement of Elliott Davis, LLC to serve as our independentregistered accounting firm for the fiscal year ending December 31, 2007.In addition, the Audit Committee dismissed Jaspers + Hall, P.C. as our  independent registered 

55

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accounting firm effectiveupon completion of the audit of our consolidated financial statements as of andfor the fiscal year ending December 31, 2006.

During the yearsended December 31, 2005 and 2004, and through November 16, 2006, wedid not consult Elliott Davis, LLC regarding the application of accountingprinciples to a specified transaction, either completed or proposed, the typeof audit opinion that might be rendered on our financial statements or anymatter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv)and the related instructions to Item 304 of Regulation S-K) or areportable event (as defined in Item 304(a)(1)(v) of Regulation S-K).

The reports ofJaspers + Hall, P.C. on our consolidated financial statements for the yearsended December 31, 2005 and 2004 did not contain an adverse opinion or adisclaimer of opinion and were not qualified or modified as to uncertainty,audit scope or accounting principle.

During the yearsended December 31, 2005 and 2004, and through November 16, 2006, therewere no disagreements with Jaspers + Hall, P.C. on any matter of accountingprinciples or practices, financial statement disclosure or auditing scope orprocedure, which disagreements, if not resolved to the satisfaction of Jaspers+ Hall, P.C., would have caused Jaspers + Hall, P.C.  to make referencethereto in its reports on our consolidated financial statements for such years.During the years ended December 31, 2005 and 2004, and throughNovember 16, 2006, there were no reportable events (as defined inItem 304(a)(1)(v) of Regulation S-K) with respect to us.

We requestedJaspers + Hall, P.C. to furnish a letter addressed to the Securities andExchange Commission stating whether or not it agrees with the above statements.A copy of such letter is filed as Exhibit 16.1 to the Form 8-K filed onNovember 16, 2006.

**ITEM9A.**           CONTROLS ANDPROCEDURES

**Management'sReport on Internal Control Over Financial Reporting**

      Our managementis responsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rules 13a-15(f) and 15d-15(f) under theSecurities Exchange Act of 1934. Our internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. Ourinternal control over financial reporting includes those policies andprocedures that:

      (i)pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of our assets;

      (ii)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of our managementand directors; and

      (iii)provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use or disposition of our assets that could have amaterial effect on the financial statements.

      Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

      Managementassessed the effectiveness of our internal control over financial reporting asof December 31, 2006. In making this assessment, management used thecriteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO) in *InternalControl-Integrated Framework.*

      Based on thisassessment, management determined that we maintained effective internal controlover financial reporting as of December 31, 2006.

      Management'sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2006 has been audited by Jaspers + Hall, PC,an independent registered public accounting firm, as stated in their reportwhich is included in “Item 8. Financial Statements and SupplementaryData.”

**ITEM9B:**          OTHERINFORMATION

None.

56

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** **

**PART III**

**ITEM 10.**            DIRECTORS, EXECUTIVEOFFICERS AND CORPORATE GOVERNANCE.

The informationrequired to be set forth herein will be included in our Proxy Statement, whichis incorporated herein by reference

**ITEM 11.**            EXECUTIVECOMPENSATION.

The information requiredto be set forth herein will be included in our Proxy Statement, which isincorporated herein by reference.

**ITEM 12.**            SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS.

The information requiredto be set forth herein will be included in our Proxy Statement, which isincorporated herein by reference.

**ITEM 13.**            CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS,  AND DIRECTORINDEPENDENCE.

The information requiredto be set forth herein will be included in our Proxy Statement, which isincorporated herein by reference

**ITEM 14.**            PRINCIPAL ACCOUNTANTFEES AND SERVICES

*AUDITFEES*

Wepaid Jaspers + Hall, P.C., an independent accounting firm, $40,000 for auditfees in 2005. In 2006, we paid $55,000 in audit fees.

*AUDIT-RELATEDFEES*

None.

*TAXFEES & ACCOUNTING SERVICES*

Wepaid Bryan, Truesdale, Adkins & Williams, PA, an independent accountingfirm  $97,703 for  services in 2006.

*OTHERFEES*

None.

**PART IV**

**ITEM15.**             EXHIBITS,FINANCIAL STATEMENT SCHEDULES.

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). |       |       |

 

57

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|        |   |                                                                                                                                                                                                                                                                                                      |   |   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 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).                                                                                 |   |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |   |
| 10.2   |   | Series B Convertible Preferred Stock Purchase  Agreement between the Company and Ashford Capital, LLC, dated  December 27, 2001 (included as exhibit 10.1 to the Form 8-K filed  January 7, 2002, and incorporated herein by reference).                                              |   |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |   |
| 10.3   |   | Series C Convertible Preferred Stock Purchase  Agreement between the Company and eFund Capital Partners, LLC, dated  December 27, 2001 (included as exhibit 10.2 to the Form 8-K filed  on January 7, 2002, and incorporated herein by reference).                                    |   |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |   |
| 10.4   |   | Letter Agreement between the Company and Ashford  Capital, LLC, dated April 15, 2003 (included as exhibit 4.9 to the  Form 10-QSB filed November 18, 2003, and incorporated herein by  reference).                                                                                         |   |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |   |
| 10.5   |   | Industrial Lease between the Company and  Aerospace/Defense, Inc., dated September 2, 2003 (included as  Exhibit 10.12 to the Form 10-QSB filed August 13, 2004, and  incorporated herein by reference).                                                                         |   |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |   |
| 10.6   |   | Modification of Business Asset Sale, License  Agreement & Assignment of Rights between the Company and Rockwell Power  Systems, Inc., dated September 15, 2003 (included as exhibit 2.3 to  the Form 10-QSB filed November 18, 2003, and incorporated herein by  reference). |   |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |   |
| 10.7   |   | Non-Employee Directors and Consultants Retainer  Stock Plan, dated March 31, 2003 (included as exhibit 4 to the  Form S-8 filed November 7, 2003, and incorporated herein by  reference).                                                                                                  |   |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |   |
| 10.8   |   | Investment Agreement between the Company and  Dutchess Private Equities Fund, L.P., dated January 26, 2004 (included  as exhibit 10.8 to the SB-2 filed January 27, 2004, and incorporated  herein by reference).                                                                               |   |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |   |
| 10.9   |   | Registration Rights Agreement between the Company  and Dutchess Private Equities Fund, L.P., dated January 26, 2004  (included as exhibit 10.9 to the SB-2 filed January 27, 2004, and  incorporated herein by reference).                                                                      |   |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |   |

 

58

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| 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,                                                                                                                                                                              |   |   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| 10.11  |   | Form of Subscription Agreement between the  Company and Gamma Opportunity Capital Partners, LP, Longview Fund, LP, Alpha  Capital Aktiengesellschaft, Domino International Ltd, Magellan International  Ltd, and Mountain Ridge Capital LLC, dated March 23, 2004 (included as  exhibit 4 to the Form 8-K filed on March 26, 2004, and incorporated  herein by reference). |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| 10.12  |   | Royalty Agreement between the Company and J.J. van  Eck, dated April 1, 2004 (included as exhibit 10.13 to the  Form 10-QSB filed August 13, 2004, and incorporated herein by  reference).                                                                                                                                                                                      |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| 10.13  |   | Contract between the Company and the U.S. Marines,  dated April 21, 2004 (included as exhibit 10.14 to the 10-QSB filed  August 13, 2004, and incorporated herein by reference).                                                                                                                                                                                                     |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| 10.14  |   | Term Sheet between the Company and GC Financial  Services, Inc., dated September 16, 2004 (included as exhibit 10.14  to the 10-QSB filed November 15, 2004, and incorporated herein by  reference).                                                                                                                                                                            |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| 10.15  |   | Employment Agreement between the Company and Thomas  Thebes (included as Exhibit 10.10 to the Form 10-QSB filed  August 13, 2004, and incorporated herein by reference).                                                                                                                                                                                                        |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| 10.16  |   | Letter re: Industrial Lease Agreement between the  Company and Aerospace/Defense, Inc., dated July 13, 2004 (included  as Exhibit 10.11 to the Form 10-QSB filed August 13, 2004, and  incorporated herein by reference).                                                                                                                                             |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| 10.17  |   | Employment Agreement between the Company and Frank  Kavanaugh, dated November 15, 2004 (included as exhibit 10.15 to the  10-QSB filed November 15, 2004, and incorporated herein by reference).                                                                                                                                                                                     |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| 10.18  |   | Letter Contract awarded to the Company by the  Department of the Army dated November 18, 2004 (as described in the 8-K  filed November 24, 2004, and incorporated herein by reference).                                                                                                                                                                                              |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| 10.19  |   | Promissory Note between the Company and Dutchess  Private Equity Fund, II, LP dated December 3, 2004 (included as  Exhibit 10.1 to the Form 8-K filed December 8, 2004, and  incorporated herein by reference).                                                                                                                                                       |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| 10.20  |   | Employment Agreement between the Company and Gordon  McGilton, dated January 27, 2005 (included as Exhibit 10.22 to the  Form 10-KSB/A filed April 22, 2005, and incorporated herein by  reference).                                                                                                                                                                       |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| 10.21  |   | 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).                                                                                                                                                                           |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| 10.22  |   | 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).                                                                                                                                                              |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| 10.23  |   | 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).                                                                                                                                                              |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| 10.24  |   | 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).                                                                                                                               |   |   |

 

59

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|        |   |                                                                                                                                                                                                                                                                                                              |   |   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 10.25  |   | 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).                                                                                |   |   |
|   |   |                                                                                                                                                                                                                                                                                                              |   |   |
| 10.26  |   | 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).                                                                                         |   |   |
|   |   |                                                                                                                                                                                                                                                                                                              |   |   |
| 10.27  |   | 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).                                                                                                 |   |   |
|   |   |                                                                                                                                                                                                                                                                                                              |   |   |
| 10.28  |   | 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).                              |   |   |
|   |   |                                                                                                                                                                                                                                                                                                              |   |   |
| 10.29  |   | Engineering Services Agreement between the Company  and TecStar, dated August 22, 2005 (included as Exhibit 10.31 to  the Form 10-QSB filed November 11, 2005, and incorporated herein by  reference).                                                                                        |   |   |
|   |   |                                                                                                                                                                                                                                                                                                              |   |   |
| 10.30  |   | Contract between the Company and the United States  Army (included as Exhibit 10.36 to the Form 10-K filed April 13, 2006, and  incorporated herein by reference).                                                                                                                                                |   |   |
|   |   |                                                                                                                                                                                                                                                                                                              |   |   |
| 10.31  |   | Form of Common Stock Purchase Agreement dated July  24, 2006 (included as exhibit 10.1 to the Form 8K filed on July 25, 2006, and  incorporated herein by reference).                                                                                                                                             |   |   |
|   |   |                                                                                                                                                                                                                                                                                                              |   |   |
| 10.32  |   | Production License Agreement between the Company and  BAE Systems Land & Armaments, LP, dated June 13, 2006 (included as  Exhibit 10.1 to the Form 10-Q filed August 14, 2006, and incorporated herein  by reference).                                                                                        |   |   |
|   |   |                                                                                                                                                                                                                                                                                                              |   |   |
| 10.33  |   | Logistic Support Agreement between the Company and  BAE Systems Land & Armaments, LP, dated June 13, 2006 (included as  Exhibit 10.2 to the Form 10-Q filed August 14, 2006, and incorporated herein  by reference).                                                                                          |   |   |
|   |   |                                                                                                                                                                                                                                                                                                              |   |   |
| 10.34  |   | Contract between the Company and the British  Ministry of Defense, dated August 11, 2006 (included as Exhibit 10.1 to the  Form 8-K filed August 17, 2006, and incorporated herein by reference).                                                                                                                 |   |   |
| 10.35  |   | Memorandum of Agreement and Cooperation between the  Mechem, a division of Denel (PTY), Ltd., and the Company, dated September 28,  2006 (included as Exhibit 10.1 to the Form 8-K filed September 28, 2006, and  incorporated herein by reference).                                                              |   |   |
|   |   |                                                                                                                                                                                                                                                                                                              |   |   |
| 10.36  |   | Memorandum of Understanding between the Company and  General Dynamics Land Systems, Inc., dated November 9, 2006 (included as  Exhibit 10.1 to the Form 8-K filed November 17, 2006, and incorporated herein  by reference).                                                                                      |   |   |
|   |   |                                                                                                                                                                                                                                                                                                              |   |   |
| 10.37  |   | Memorandum of Understanding between the Company and  Stewart & Stevenson Tactical Vehicle Systems LP d/b/a Tactical Vehicle  Systems, a Division of Armor Holdings, Inc., dated November 10, 2006  (included as Exhibit 10.1 to the Form 8-K filed November 20, 2006, and  incorporated herein by reference). |   |   |
|   |   |                                                                                                                                                                                                                                                                                                              |   |   |
| 10.38  |   | Form of Securities Purchase Agreement, dated  December 20, 2006 (included as Exhibit 10.1 to the Form 8-K filed December  21, 2006, and incorporated herein by reference).                                                                                                                                        |   |   |
|   |   |                                                                                                                                                                                                                                                                                                              |   |   |
| 10.39  |   | Certificate of the Company’s Corporate Secretary,  dated January 10, 2007 (included as Exhibit 10.2 to the Form S-8 filed  January 12, 2007, and incorporated herein by reference).                                                                                                                          |   |   |
|   |   |                                                                                                                                                                                                                                                                                                              |   |   |
| 10.40  |   | Common Stock Purchase Option issued by the Company  to Gordon McGilton, dated January 10, 2006 (included as Exhibit 10.2 to the  Form S-8 filed January 12, 2007, and incorporated herein by reference).                                                                                                          |   |   |
|   |   |                                                                                                                                                                                                                                                                                                              |   |   |

 

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|  10.41 |   | Common Stock Purchase Warrant issued by the Company  to Gordon McGilton, dated October 31, 2006 (included as Exhibit 10.3 to the  Form S-8 filed January 12, 2007, and incorporated herein by reference).   |   |   |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|        |   |                                                                                                                                                                                                        |   |   |
| 10.42       |   | Letter contract issued to the Company by the U.S.  Marine Corps, dated January 11, 2007 (included as Exhibit 10.1 to the Form  8-K filed January 18, 2007, and incorporated herein by reference).           |   |   |
|        |   |                                                                                                                                                                                                        |   |   |
| 10.43       |   | Employment Offer Letter between the Company and  Michael S. Durski, dated January 19, 2007 (included as Exhibit 10.1 to the  Form 8-K filed January 25, 2007, and incorporated herein by reference).        |   |   |
|        |   |                                                                                                                                                                                                        |   |   |
| 10.44       |   | Letter Contract issued to the Company by the United  States Marine Corps, dated January 25, 2007 (included as Exhibit 10.1 to the  Form 8-K filed February 5, 2007, and incorporated herein by reference).  |   |   |
|        |   |                                                                                                                                                                                                        |   |   |
| 10.45       |   | Letter Contract issued to the Company by the United  States Marine Corps dated February 14, 2007 (included as Exhibit 10.1 to the  Form 8-K filed February 20, 2007, and incorporated herein by reference). |   |   |
|        |   |                                                                                                                                                                                                        |   |   |
| 10.46       |   | Letter Contract issued to the Company by the U. S.  Marine Corps dated March 9, 2007 (included as Exhibit 10.1 to the Form 8-K  filed March 15, 2007, and incorporated herein by reference).                |   |   |
|        |   |                                                                                                                                                                                                        |   |   |
| 10.47       |   | Purchase and Sale Agreement between the Company and  NEWTEC Services Group, Inc. dated March 9, 2007 (include as Exhibit 10.2 to  the Form 8-K filed March 15, 2007, and incorporated herein by reference). |   |   |
|        |   |                                                                                                                                                                                                        |   |   |
| 23.1        |   | Consent of Jaspers + Hall, PC                                                                                                                                                                               |   |   |
|        |   |                                                                                                                                                                                                        |   |   |
| 31.1        |   | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                    |   |   |
|        |   |                                                                                                                                                                                                        |   |   |
| 31.2        |   | Certification of the Chief Financial Officer pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                    |   |   |
|        |   |                                                                                                                                                                                                        |   |   |
|  32.1  |   | Certification of Officers pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                       |   |   |

 

61

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**SIGNATURES**

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|                       | **FORCE PROTECTION,  INC.** | ** **                | ** ** |
|-----------------------|-----------------------------|---------------------------|------------|
| Date: March 16,  2007 |                        |                      |       |   |
|                  | By:                         | /s/ GORDON  MCGILTON      |       |   |
|                  |                        | Gordon McGilton           |       |   |
|                  | * *                    | *Chief Executive Officer* | * *   | * * |

 
| Date: March 16, 2007 |     |                           |     |     |
|----------------------|----------|--------------------------------|----------|----------|
|                 | By:      | /s/ MICHAEL  DURSKI            |     |     |
|                 |     | Michael Durski                 |     |     |
|                 | * * | *Chief Financial Officer*      | * * | * * |
|                 | * * | *Principal Accounting Officer* | * * | * * |

 

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

**Signatures**
| **Name**                 | ** ** | **Title**                     | ** ** | **Date**       |
|--------------------------|------------|-------------------------------|------------|----------------|
|                     |       |                          |       |           |
| /s/ Frank  Kavanaugh     |       | Chairman, Board of Directors  |       | March 16, 2007 |
| Frank Kavanaugh          |       |                          |       |           |
|                     |       |                          |       |           |
| /s/ Gordon  McGilton     |       | Director, and Chief Executive |       | March 16, 2007 |
| Gordon McGilton          |       | Officer                       |       |           |
|                     |       |                          |       |           |
| /s/ Michael  Moody       |       | Director                      |       | March 16, 2007 |
| Michael Moody            |       |                          |       |           |
|                     |       |                          |       |           |
| /s/ Roger  Thompson, Jr. |       | Director                      |       | March 16, 2007 |
| Roger Thompson,  Jr.     |       |                          |       |           |
|                     |       |                          |       |           |
| /s/ Jack Davis           |       | Director                      |       | March 16, 2007 |
| Jack Davis               |       |                          |       |           |

 

 

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