**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-K/A**

**(MarkOne)**

| **x**      |   | **ANNUAL REPORT UNDER SECTION 13 or  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|------------|--------|---------------------------------------------------------------------------------------------------|
| ** ** |   | ** **                                                                                        |
| ** ** |   | **For the  fiscal year ended December 31, 2006**                                             |
| ** ** |   | ** **                                                                                        |
| **o**      |   | **TRANSITION REPORT UNDER SECTION 13 or  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from              to               **

**Commission File No. 001-33253**

**FORCEPROTECTION, INC.**

(Exact name ofissuer as specified in its charter)

 

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

 

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

Securitiesregistered under 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 registered under Section 12(g) ofthe Exchange Act:**None.**

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

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

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

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

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. (Check one).
| Large accelerated  filer o | Accelerated  filer x | Non-accelerated filer o |
|---------------------------------|---------------------------|------------------------------|

 

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

The aggregate marketvalue of the voting and non-voting common equity held by non-affiliates as ofMarch 14, 2007 was $1,102,410,688 based on a total of 66,934,468 shares ofour common stock held by non-affiliates on March 14, 2007 at the closingprice of $16.47 per share.

We had67,817,003 shares of common stock outstanding as of March 14, 2007.

 

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TABLE OF CONTENTS

**FORCE PROTECTION, INC.FORM 10-K**
|                                                     | ** ** | **Page**   |
|-----------------------------------------------------|------------|------------|
| ** **                                          | ** ** | ** ** |
| EXPLANATORY NOTE                                    |       | 1          |
|                                                |       |       |
| PART I                                              |       | 1          |
|                                                |       |       |
| ITEM 1A.RISK FACTORS                                |       | 1          |
|                                                |       |       |
| PART II                                             |       | 5          |
|                                                |       |       |
| ITEM 8.FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA |       | 5          |
|                                                |       |       |
| ITEM  9A.CONTROLS AND PROCEDURES               |       | 41         |
|                                                |       |       |
| PART IV                                             |       | 43         |
|                                                |       |       |
| ITEM 15. EXHIBITS,  FINANCIAL STATEMENT SCHEDULES   |       | 43         |
|                                                |       |       |
| SIGNATURES                                          |       | 47         |

 

i

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## **EXPLANATORY NOTE**

Management has reassessedthe effectiveness of our internal control over financial reporting as ofDecember 31, 2006.  As a result,management has concluded that our internal control over financial reporting wasnot effective as of December 31, 2006, because of certain materialweaknesses.  Management’s revisedassessment is contained, and the material weaknesses are described, in Item 9Aof this Form 10/KA.

As a result of thatreassessment, Jaspers + Hall, PC has revised and reissued its reports withrespect to our consolidated financial statements as of December 31, 2006 andwith respect to management’s assessment of its internal control over financialreporting, and those revised reports appear in Item 8.  There are no changes, however, to thefinancial statements included in Item 8.

We have also madeconforming changes to one “Risk Factor” contained in Item 1A.

# **PART I**

## **ITEM 1A.  RISK FACTORS**

An investment in our common stock is subject to risksand uncertainties. Investors should consider the following factors, in additionto the other information contained or incorporated by reference in this AnnualReport on Form 10-K, as well as our other filings with the SEC, beforedeciding to purchase our securities.

**We depend on the U.S. government for a substantialamount of our sales. If we do not find acceptance of our products within theU.S. government, our business may fail.**

We serve the defense market and our sales are highlyconcentrated within the U.S. government. The customer relationship with theU.S. government involves certain risks that are unique such as the ongoingdevelopment of high-technology products, price, availability and quality ofmaterials and suppliers.

U.S. defense spending has historically been cyclical.Defense budgets have received their strongest support when perceived threats tonational security raise the level of concern over the country’s safety. Asthese threats subside, spending on the military tends to decrease. Accordingly,while Department of Defense funding has grown rapidly over the past few years,there is no assurance that this trend will continue. Rising budget deficits,the cost of the Global War on Terrorism and increasing costs for domesticprograms continue to put pressure on all areas of discretionary spending, whichcould ultimately impact the defense budget. Wartime support for defensespending could wane if the country’s troop deployments in support of operationsin Iraq and Afghanistan are reduced. A decrease in U.S. government defensespending or changes in spending allocation could result in one or more of ourprograms being reduced, delayed or terminated. Reductions in our existingprograms, unless offset by other programs and opportunities, could adverselyaffect our ability to sustain and grow our future sales and earnings.

**U.S. government contracts generally are not fullyfunded at inception and are subject to termination. If the U.S. government doesnot order as many vehicles as we anticipate, our business will be adverselyaffected.**

Government contracts and subcontracts typicallyinvolve long purchase and payment cycles, competitive bidding, qualificationrequirements, delays or changes in funding, extensive specificationdevelopment, price negotiations and milestone requirements. Each governmentagency also maintains its own rules and regulations with which we mustcomply and which can vary significantly among agencies. Governmental agenciesalso often retain some portion of fees payable upon completion of a project andcollection of these fees may be delayed for several months or even years, insome instances.

In addition, an increasing number of governmentcontracts are fixed price contracts which may prevent us from recovering costsincurred in excess of our budgeted costs. Fixed price contracts require us toestimate the total project cost based on preliminary projections of the project’srequirements. The financial viability of any given project depends in largepart on our ability to estimate such costs accurately and complete the projecton a timely basis. In the event actual costs exceed the fixed contractual cost,we may not be able to recover the excess costs.

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Some government contracts are also subject totermination or renegotiation at the convenience of the government, which couldresult in a large decline in revenue in any given quarter. Although governmentcontracts have provisions providing for the reimbursement of costs associatedwith termination, the termination of a material contract at a time when ourfunded backlog does not permit redeployment of staff could result in areduction in the number of employees. In addition, the timing of payments fromgovernment contracts is also subject to significant fluctuation and potentialdelay, depending on the government agency involved. Any such delay could resultin a temporary shortage in working capital.

**We must comply with environmental regulations orwe may have to pay expensive penalties or clean up costs.**

We are subject to federal, state, local and foreignlaws, and regulations regarding protection of the environment, including air,water, and soil. Our manufacturing business involves the use, handling,storage, and contracting for recycling or disposal of, hazardous or toxicsubstances or wastes, including environmentally sensitive materials, such asbatteries, solvents, lubricants, degreasing agents, gasoline and resin. We mustcomply with certain requirements for the use, management, handling, anddisposal of these materials. We do not maintain insurance for pollutant cleanupand removal. If we are found responsible for any hazardous contamination, wemay have to pay expensive fines or penalties or perform costly clean-up. Evenif we are charged, and later found not responsible, for such contamination orclean up, the cost of defending the charges could be high. If we do not complywith government regulations, we may be unable to ship our products or have topay expensive fines or penalties. We are subject to regulation by county, stateand federal governments, governmental agencies, and regulatory authorities fromseveral different countries. If we fail to obtain regulatory approvals orsuffer delays in obtaining regulatory approvals, we may not be able to marketour products and services, and generate product and service revenues. Further,we may not be able to obtain necessary regulatory approvals. Although we do notanticipate problems satisfying any of the regulations involved, we cannotforesee the possibility of new regulations, which could adversely affect ourbusiness. Further our products are subject to export limitations and we may beprevented from shipping our products to certain nations or buyers.

**Our earnings and margins depend on our ability toperform under our contracts and if we do not perform our margins may erode.**

Our contracts require management to make variousassumptions and projections about the outcome of future events over a period ofseveral years. These projections can include future labor productivity andavailability, the nature and complexity of the work to be performed, the costand availability of materials, the impact of delayed performance, and thetiming of product deliveries. If there is a significant change in one or moreof these assumptions, circumstances or estimates, or if we are unable tocontrol the costs incurred in performing under these contracts, theprofitability of one or more of these contracts may be adversely affected.

**If the pricing and availability of subcontractorperformance and raw materials change, our profitability may be adversely affected.**

We rely on subcontractors and other companies toprovide raw materials, major components and subsystems for our products or toperform a portion of the services that we provide to our customers.Occasionally we rely on only one or two sources of supply, which, if disrupted,could have an adverse effect on our ability to meet our commitments tocustomers. We depend on these subcontractors and vendors to fulfill ourcontractual obligations in a timely and satisfactory manner in full compliancewith customer requirements. If one or more of our subcontractors or suppliersare unable to satisfactorily provide on a timely basis the agreed-upon suppliesor perform the agreed-upon services, our ability to perform our obligations asa prime contractor may be adversely affected.

**Some of our product components are manufactured inother foreign countries and if any of those become unstable or governmentregulations change, our costs may increase or we may become unable to sourcecertain parts.**

Some of our product components are manufactured in andsupplied from other foreign countries. If import tariffs or taxes increase forany reason, our cost of goods would increase. Our financial performance may beaffected by changes in political, social and economic environment. The role ofthe central and local governments in the economy is significant. Policiestoward economic liberalization, and laws and policies affecting foreigncompanies, foreign investment, currency exchange rates and other matters couldchange, resulting in greater restrictions on our ability to do business withsuppliers based in other countries. The government could impose surcharges,increase tax rates, or revoke, terminate or suspend operating licenses withoutcompensating us. Also, other countries, from time to time, experience instancesof civil unrest and hostilities. Confrontations have occurred between themilitary, insurgent forces, and civilians. If for these or any other reason, welose our ability to sub-contract or manufacture the components to our products,or the cost of doing business increases, our business, financial condition, andresults of operations would be materially and adversely affected.

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**We may be subject to personal liability claims forour products and if our insurance is not sufficient to cover such claims, ourexpenses may increase substantially.**

As a result, a significant lawsuit could adverselyaffect our business. We may be exposed to liability for personal injury orproperty damage claims relating to the use of the products. Any future claimagainst us for personal injury or property damage could materially adverselyaffect the business, financial condition, and results of operations and resultin negative publicity. Even if we are not found liable, the costs of defendinga lawsuit can be high. We do not currently maintain insurance for this type ofliability. Additionally, even if we do purchase insurance, we may experiencelegal claims outside of our insurance coverage, or in excess of our insurancecoverage, or that insurance will not cover.

**We must develop new technologies and maintain aqualified workforce in order to remain competitive.**

Virtually all of the products we produce and sell arehighly engineered and require sophisticated manufacturing and system integrationtechniques and capabilities. Government markets in which the company operatesare characterized by rapidly changing technologies. The product and programneeds of our government customers change and evolve regularly. Accordingly, ourfuture performance in part depends on our ability to identify emergingtechnological trends, develop and manufacture competitive products, and bringthose products to market quickly at cost-effective prices. In addition, becauseof the highly specialized nature of our business, we must be able to hire andretain the skilled and appropriately qualified personnel necessary to performthe services required by our customers. If we are unable to develop newproducts that meet customers’ changing needs or successfully attract and retainqualified personnel, future sales and earnings may be adversely affected.

**We rely on proprietary designs and rights and ifwe have to litigate those rights, our expenses could substantially increase.**

Our success and ability to compete depend, in part, onthe protection of our designs and technology. In addition, our technology couldinfringe on patents or proprietary rights of others. We have not undertaken orconducted any comprehensive patent infringement searches or studies. If anythird parties hold any conflicting rights, we may be required to stop making,using or selling our products or to obtain licenses from and pay royalties toothers. Further, in such event, we may not be able to obtain or maintain anysuch licenses on acceptable terms, if at all. We may need to engage in futurelitigation to enforce intellectual property rights or the rights of customers,to protect trade secrets or to determine the validity and scope of proprietaryrights of others, including customers. This litigation could result insubstantial costs and diversion of resources and could materially and adverselyaffect our results of operations.

**We have identified material weaknesses in ourinternal control over financial reporting, which could adversely affect ourability to report our financial condition and results of operations accuratelyor on a timely basis.    As aresult, current and potential stockholders could lose confidence in ourfinancial reporting, which could harm our business and the trading price of ourstock**.

As required by Section 404 of the Sarbanes-Oxley Actof 2002, our management has conducted an evaluation of the effectiveness of ourinternal control over financial reporting as of December 31, 2006.   We previously restated our financialstatements in our annual reports on Form 10-K for the fiscal years ended 2003,2004 and 2005 and we amended our annual report on Form 10-K for the 2006 fiscalyear.  Following our restating andamending of our prior annual reports, we identified a number of materialweaknesses in our internal control over financial reporting and have nowconcluded that, as of December 31, 2006, we did not maintain effective controlover financial reporting.  For adiscussion of our internal control over financial reporting and a descriptionof the identified material weaknesses, see “Item 9A:  Controls and Procedures - Management’s Reporton Internal Control over Financial Reporting” of this Form 10-K/A.

Each of our material weaknesses results in more than aremote likelihood that a material misstatement of the annual or interimfinancial statements that we prepare will not be prevented or detected. As aresult, we must perform extensive additional work to obtain reasonableassurance regarding the reliability of our financial statements. Even with thisadditional work, there is a risk of additional errors not being prevented ordetected, which could result in additional restatements. Moreover, othermaterial weaknesses may be identified.

Material weaknesses inour internal control over financial reporting could adversely impact ourability to provide timely and accurate financial information.  If we are unsuccessful in implementing orfollowing our remediation plan, or fail to update our internal control overfinancial reporting as our business evolves, we may be  unable to report financial information timelyand accurately or to 

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maintain effectivedisclosure controls and procedures.  Anysuch failure in the future could also adversely affect the results of periodicmanagement evaluations and annual auditor attestation reports regardingdisclosure controls and the effectiveness of our internal control overfinancial reporting required under Section 404 of the Sarbanes-Oxley Act of2002 and the rules promulgated thereunder. If we are unable to report financialinformation in a timely and accurate manner or to maintain effective disclosurecontrols and procedures, we could be subject to, among other things, regulatoryor enforcement actions by the SEC and NASDAQ, including a delisting from theNASDAQ Stock Market, securities litigation, and a general loss of investorconfidence, any one of which could adversely affect our business prospects andthe valuation of our common stock.

We also have extensive workremaining to remedy the identified material weaknesses in our internal controlover financial reporting and this work will continue through the balance 2007 and perhapsbeyond.  There can be no assurance as towhen all of the material weaknesses will be remedied.  Until our remedial efforts are completed,management will continue to devote significant time and attention to theseefforts, and we will continue to incur expenses associated with the additionalprocedures and resources required to prepare our financial statements. Certainof our remedial actions, such as hiring additional qualified personnel andimplementing a new operating system, will be ongoing and will result in ourincurring additional costs even after our material weaknesses are remedied.

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# **PART II**

## **ITEM 8.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

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

We have audited the accompanying consolidated balancesheets of Force Protection, Inc. and subsidiary as ofDecember 31, 2006, 2005 and 2004, and the related consolidated statementsof income, stockholders’ equity and comprehensive income, and cash flows foreach 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 audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement.The company is not required to have, nor were we engaged to perform, an auditof its internal control over financial reporting. Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the company’sinternal control over financial reporting. Accordingly, we express no suchopinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position of ForceProtection, Inc., and subsidiary as of December 31, 2006, 2005 and 2004,and the results of its operations and its cash flows for each of the yearsin the three-year period ended December 31, 2006 in conformity withaccounting principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements,certain errors resulting in adjustments to the Company’s 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 as of December 31, 2006, 2005 and 2004, werediscovered by management of the Company during the current year. Accordingly,the 2006, 2005 and 2004 financial statements have been restated to correctthese errors.

/s/ JASPERS + HALL, PC
|                    |   |
|--------------------|--------|
| Denver, Colorado   |   |
| June 5,  2007 |   |

 

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of DirectorsandStockholders of Force Protection, Inc. and Subsidiary

We have auditedmanagement’s assessment, included in the accompanying Management’s Report onInternal Control over Financial Reporting, that Force Protection, Inc. andsubsidiary did not maintain effective internal control over financial reportingas of December 31, 2006, because of the effect of the material weaknessidentified in management’s assessment, based on criteria established in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organization of the Treadway Commission(COSO). Force Protection, Inc. and subsidiary’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 ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, evaluating management’s assessment, testing andevaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertain tothe maintenance 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 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 management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

Because of itsinherent limitations, internal control over financial reporting may not preventor detect 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.

A materialweakness is a control deficiency, or combination of control deficiencies, thatresults in more than a remote likelihood that a material misstatement of theannual or interim financial statements will not be prevented or detected. Thefollowing material weaknesses have been identified and included in management’sassessment. Force Protection, Inc. and subsidiary’s financial and accounting organization was not adequate to supporttheir financial accounting and reporting needs.  Specifically,they did not maintain a sufficient complement of personnel with an appropriatelevel of accounting knowledge, experience with the Company and training in theapplication of GAAP commensurate with our financial reporting requirements.  ForceProtection, Inc. and subsidiarydid  not maintain effective policies andprocedures related to the accounting for specific**equity issuances, including accounting forstock-based compensation in accordance with Statement of Financial AccountingStandard (“SFAS”) No. 123, *Share-Based Payment*,and accounting for convertible and redeemable preferred stock and warrants. Inaddition, Force Protection, Inc. and subsidiary did not maintain effectivecontrols to ensure the accuracy of disclosures in their financial statementsand classification of certain financial transactions in the financial statements.

This materialweakness was considered in determining the nature, timing, and extent of audittests applied in our audit of the 2006 financial statements, and this reportdoes not affect our report dated June 5, 2007 on those financial statements.

In our opinion,management’s assessment that Force Protection, Inc. and subsidiary did notmaintain effective internal control over financial reporting as of December 31,2006, is fairly stated, in all material respects, based on criteria establishedin *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). Also, in our opinion, because of the effect of the material weaknessdescribed above on the achievement of the objectives of the control criteria,Force Protection, Inc. and subsidiary has not maintained effective internalcontrol over financial reporting as of December 31, 2006, based on criteriaestablished in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO).

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We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the accompanying consolidated balance sheetsof Force Protection, Inc. and subsidiary as of December 31, 2006, 2005 and2004, and the related consolidated statements of income, stockholders’ equity,and cash flows for each of the three years in the period endedDecember 31, 2006, and our report dated June 5, 2007, expressed anunqualified opinion thereon.

/s/ JASPERS + HALL, PC
|             |   |
|------------------|--------|
| Denver, Colorado |   |
| June 5, 2007     |   |

 

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**FORCEPROTECTION INC. AND SUBSIDIARYCONSOLIDATED STATEMENT OF OPERATIONSFor the Years Ended December 31, 2006, 2005 and 2004**
| ** **                                                 | ** ** | **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  |        | 17,256,359   |       | 9,614,052    |       |
| R & D  expense                                    |       | 3,204,165   |        | 1,657,918    |       | 1,230,290    |       |
| **Operating  Profit (Loss)**                               |       | 6,635,562   |        | (15,630,063  | )          | (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   |        | (14,404,622  | )          | (11,953,803  | )          |
| **Deferred  Tax Benefit**                                  |       | 12,326,491  |        | —       |       | —       |       |
| **Net  Earnings (Loss)**                                   |       | $           | 18,196,943  |         | $          | (14,404,622  | )          | $ | (11,953,803 | ) |
| Net earnings  (loss)                                       |       | $           | 18,196,943  |         | $          | (14,404,622  | )          | $ | (11,953,803 | ) |
| Accretion of  Series D 6% convertible preferred stock |       | (1,297,134  | )           | (2,041,697   | )          | —       |       |
| Preferred  Dividends                                       |       | (325,685    | )           | (778,530     | )          | —       |       |
| Net  Earnings/(Loss) available to common shareholders      |       | $           | 16,574,124  |         | $          | (17,224,849  | )          | $ | (11,953,803 | ) |
| Basic earnings  (loss) per common share                    |       | $           | 0.37        |         | $          | (0.51        | )          | $ | (0.62 | ) |
| Diluted earnings  (loss) per common share                  |       | $           | 0.36        |         | $          | (0.51        | )          | $ | (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                         |       | 50,428,466  |        | 33,926,573   |       | 19,357,939   |       |

 

The accompanying Notesare an integral part of these financial statements.

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**FORCEPROTECTION INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETSDECEMBER 31, 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   |        | 1,898,020    |       | 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  |        | 38,371,858   |       | 10,957,981   |       |
| Long-term debt:                                                                                                                                                                 |       |        |        |         |       |         |       |
| Other long term  liabilities                                                                                                                                                    |       | 167,937     |        | —       |       | 110,732      |       |
| **Total  Liabilities**                                                                                                                                                          |       | 56,536,505  |        | 38,371,858   |       | 11,068,713   |       |
| Commitment and  Contingencies (See Note 7)                                                                                                                                 |       |        |        |         |       |         |       |
| 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; |       | —      |        | 7,901,438    |       | —       |       |
| **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;                 |       | —      |        | —       |       | —       |       |
| 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       |       | 19,358       |       |
| Warrants                                                                                                                                                                        |       | —      |        | 5,780,952    |       | 2,602,800    |       |
| Shares to be  issued                                                                                                                                                            |       | 31          |        | —       |       | —       |       |
| Beneficial  Conversion Feature                                                                                                                                                  |       | —      |        | —       |       | 19,102,306   |       |
| Additional  Paid-in Capital                                                                                                                                                     |       | 249,694,850 |        | 38,714,893   |       | 35,874,565   |       |
| Accumulated  deficit                                                                                                                                                            |       | (31,906,837 | )           | (51,028,720  | )          | (55,040,546  | )          |
| **Total  Shareholders’ Equity**                                                                                                                                            |       | 217,854,807 |        | (6,496,761   | )          | 2,558,483    |       |
| **Total Liabilities and Shareholders’  Equity**                                                                                                                            |       | $           | 274,391,312 |         | $          | 39,776,535   |       | $ | 13,627,196 |   |

 

The accompanying Notesare an integral part of these financial statements.

9

----

**FORCEPROTECTION INC. AND SUBSIDIARYCONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITYFor the Years Ended December 31, 2006, 2005 and 2004**
| ** **                                                                       | ** ** | **Series** B        |       | **Series** C                                                                                                          | ** ** | ** **            |       | ** **                                                                                                                 |       |
|----------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **Preferred **Stock |       | **Preferred **Stock                                                                                                   | ** ** | **Common** Stock |       |
| ** **                                                                       | ** ** | **Shares**               | ** ** | **Par $.001**                                                                                                         |       | **Shares**            |       | **Par $.001**                                                                                                         | ** ** | **Shares** |   | **Par $.001** |   |
| **Balance,  December 31, 2003**                                             |       | 10                       |       | $                    0 |       | 132                   |       | $                    0 |       | 10,190,021 |   | $         10,190 |   |
| Issuance of  common stock for cash                                               |       | 0                        |       | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       | 2,982,717 |   | 2,983 |   |
| Issuance of  common stock for services—Third Parties                        |       | 0                        |       | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       | 163,501 |   | 163 |   |
| Issuance of  common stock for Compensation—Directors &   Employees |       | 0                        |       |                                                                                                                       |       | 0                     |       |                                                                                                                       |       | 616,682 |   | 617 |   |
| Issuance of  common stock for cash (Warrant net change)                     |       | 0                        |       |                                                                                                                       |       | 0                     |       |                                                                                                                       |       | 2,757,618 |   | 2,758 |   |
| Cancellation of  Common shares                                                   |       |                     |       |                                                                                                                       |       |                  |       |                                                                                                                       |       | (304,167 | ) | (304 | ) |
| Issuance of  common shares for Debt                                              |       |                     |       |                                                                                                                       |       |                  |       |                                                                                                                       |       | 20,421 |   | 20 |   |
| Conversion of  preferred stock to common stock                                   |       | (1                       | )          |                                                                                                                       |       | (80                   | )          |                                                                                                                       |       | 2,931,145 |   | 2,931 |   |
| Conversion  between preferred Series B and Series C                    |       | 11                       |       |                                                                                                                       |       | (105                  | )          |                                                                                                                       |       | 0 |   | 0 |   |
| Change in  Beneficial Conversion Feature                                         |       | 0                        |       |                                                                                                                       |       | 0                     |       |                                                                                                                       |       |   |   |   |   |
| Issuance of  Preferred Stock for Cash                                            |       | 0                        |       |                                                                                                                       |       | 1                     |       |                                                                                                                       |       | 0 |   | 0 |   |
| Issuance of  preferred stock for compensation                                    |       | 0                        |       |                                                                                                                       |       | 38                    |       |                                                                                                                       |       | 0 |   | 0 |   |
| Issuance of  preferred stock for conversion of debt                              |       | 0                        |       |                                                                                                                       |       | 20                    |       |                                                                                                                       |       | 0 |   | 0 |   |
| Rescinded and  Redemption of preferred stock                                     |       | 0                        |       |                                                                                                                       |       | (6                    | )          |                                                                                                                       |       | 0 |   | 0 |   |
| Net loss                                                                         |       | 0                        |       |                                                                                                                       |       | 0                     |       |                                                                                                                       |       | 0 |   | 0 |   |
| **Balance,  December 31, 2004**                                             |       | 20                       |       | $                                                                                                                          | 0          |                  | 0          |                                                                                                                       | $          | 0 |   | 19,357,938 |   | $ | 19,358 |   |
| Issuance of  common stock for cash                                               |       | 0                        |       | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       | 185,321 |   | 185 |   |
| Issuance of  common stock for compensation                                       |       | 0                        |       | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       | 51,616 |   | 52 |   |
| Issuance of  common stock for settlement agreements                              |       | 0                        |       | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       | 53,467 |   | 53 |   |
| Issuance of  common stock for interest                                           |       | 0                        |       | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       | 14,876 |   | 15 |   |
| Issuance of  Common Stock as Series D dividend shares                       |       | 0                        |       | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       | 281,697 |   | 282 |   |
| Issuance of  Common Stock to round up post split shares                          |       | 0                        |       | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       | 3,079 |   | 3 |   |
| Issuance of  common stock for cash-warrants                                      |       | 0                        |       | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       | 114,376 |   | 114 |   |
| Warrant issued  for Series D placement                                      |       | 0                        |       | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       |   |   |   |   |
| Conversion of Series Series D  preferred stock to common stock    |       | 0                        |       | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       | 1,331,429 |   | 1,331 |   |
| Accretion of  Series D Preferred Stock                                      |       | 0                        |       | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       |   |   |   |   |
| Reclassification  of Series D Warrants from Liability                       |       | 0                        |       | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       |   |   |   |   |
| Dividends for  Series D-cash                                                |       | 0                        |       | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       |   |   |   |   |
| Dividends for  Series D-accrued                                             |       |                     |       |                                                                                                                       |       |                  |       |                                                                                                                       |       |   |   |   |   |
| Conversion of  Series B preferred stock to common stock                     |       | (20                      | )          | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       | 14,803,750 |   | 14,804 |   |
| Beneficial  Conversion Feature                                                   |       | 0                        |       | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       |   |   |   |   |
|                                                                             |       |                     |       |                                                                                                                       |       |                  |       |                                                                                                                       |       |   |   |   |   |
| Common Share Grants cancelled                                                    |       | 0                        |       | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       | (83,333 | ) | (83 | ) |
| Stock Based Compensation (FAS 123R)                                         |       |                     |       |                                                                                                                       |       |                  |       |                                                                                                                       |       |   |   |   |   |
| Warrants-net (expired & issued)  not including Series D       |       | 0                        |       | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       |   |   |   |   |
| Net loss                                                                         |       | 0                        |       | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       | 0 |   | 0 |   |
| ** **                                                                       | ** ** | ** **               | ** ** | ** **                                                                                                                 | ** ** | ** **            | ** ** | ** **                                                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance,  December 31, 2005**                                             |       | 0                        |       | $                                                                                                                          | 0          |                  | 0          |                                                                                                                       | $          | 0 |   | 36,114,216 |   | $ | 36,114 |   |
| Issuance of  common stock for cash (PIPE’s)                                 |       | 0                        |       |                                                                                                                       |       | 0                     |       |                                                                                                                       |       | 21,250,000 |   | 21,250 |   |
| Issuance of  common stock for stock options exercised                            |       |                     |       |                                                                                                                       |       |                  |       |                                                                                                                       |       | 1,000 |   | 1 |   |
| Issuance of  common stock for compensation                                       |       | 0                        |       |                                                                                                                       |       | 0                     |       |                                                                                                                       |       | 313,644 |   | 314 |   |
| Issuance of  common stock for settlement agreements                              |       | 0                        |       |                                                                                                                       |       | 0                     |       |                                                                                                                       |       | 30,000 |   | 30 |   |
| Issuance of  common stock for dividends on Series D                         |       | 0                        |       |                                                                                                                       |       | 0                     |       |                                                                                                                       |       | 8,937 |   | 9 |   |
| Issuance of Cash  for dividends on Series D                                 |       |                     |       |                                                                                                                       |       |                  |       |                                                                                                                       |       | 0 |   | 0 |   |
| Accretion of  Series D Preferred Stock                                      |       | 0                        |       | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       |   |   |   |   |
| Issuance of  common stock for cash—warrants                                 |       |                     |       |                                                                                                                       |       |                  |       |                                                                                                                       |       | 2,852,140 |   | 2,852 |   |
| Conversion of  Series D preferred stock to common stock                |       |                     |       |                                                                                                                       |       |                  |       |                                                                                                                       |       | 6,192,628 |   | 6,193 |   |
| Stock based  compensation (FAS 123R)                                        |       |                     |       |                                                                                                                       |       |                  |       |                                                                                                                       |       | 0 |   | 0 |   |
| Net earnings  (loss)                                                             |       | 0                        |       | 0                                                                                                                          |       | 0                     |       | 0                                                                                                                          |       | 0 |   | 0 |   |
| **Balance, December 31, 2006**                                              |       | 0                        |       | $                                                                                                                          | 0          |                  | 0          |                                                                                                                       | $          | 0 |   | 66,762,565 |   | $ | 66,763 |   |

 

10

----

 
| ** **                                                                       | ** ** | ** **                                     |       | ** **                                                     |       | **Shares** to                                                                                                                     |       | **Additional**                |       | ** **               |       | ** **                                                |       |
|----------------------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|--------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                       | ** ** | ** **                                     |       | ** **                                                     |       | **be **Issued                                                                                                                     |       | **Paid-in**                   |       | **Accumulated**          |       | ** **                                                |       |
| ** **                                                                       | ** ** | **Warrants**                                   |       | **BCF**                                                        |       | **0**                                                                                                                                  |       | **Capital**                   |       | **Deficit**              |       | **Total**                                                 |       |
| **Balance,  December 31, 2003**                                             |       | $      4,862,765 |       | $         282,890 |       | $                      0 |       | $   18,805,887 |       | $  (24,267,327 | )          | $        (305,595 | )          |
| Issuance of  common stock for cash                                               |       |                                           |       |                                                           |       |                                                                                                                                   |       | 7,200,234                     |       | 0                        |       | 7,203,217                                                 |       |
| Issuance of  common stock for services—Third Parties                        |       |                                           |       |                                                           |       |                                                                                                                                   |       | 496,793                       |       | 0                        |       | 496,956                                                   |       |
| Issuance of  common stock for Compensation—Directors &   Employees |       |                                           |       |                                                           |       |                                                                                                                                   |       | 1,431,187                     |       |                     |       | 1,431,804                                                 |       |
| Issuance of  common stock for cash (Warrant net change)                     |       | (2,259,965                                     | )          |                                                           |       |                                                                                                                                   |       | 6,352,054                     |       |                     |       | 4,094,847                                                 |       |
| Cancellation of  Common shares                                                   |       |                                           |       |                                                           |       |                                                                                                                                   |       | 304                           |       |                     |       | 0                                                         |       |
| Issuance of  common shares for Debt                                              |       |                                           |       |                                                           |       |                                                                                                                                   |       | 124,956                       |       |                     |       | 124,976                                                   |       |
| Conversion of  preferred stock to common stock                                   |       |                                           |       |                                                           |       |                                                                                                                                   |       | (2,931                        | )          | 0                        |       | 0                                                         |       |
| Conversion between  preferred Series B and Series C                    |       |                                           |       |                                                           |       |                                                                                                                                   |       | 0                             |       | 0                        |       | 0                                                         |       |
| Change in  Beneficial Conversion Feature                                         |       |                                           |       | 18,819,416                                                     |       |                                                                                                                                   |       |                          |       | (18,819,416              | )          | 0                                                         |       |
| Issuance of  Preferred Stock for Cash                                            |       |                                           |       |                                                           |       |                                                                                                                                   |       | 10,000                        |       | 0                        |       | 10,000                                                    |       |
| Issuance of  preferred stock for compensation                                    |       |                                           |       |                                                           |       |                                                                                                                                   |       | 1,316,081                     |       | 0                        |       | 1,316,081                                                 |       |
| Issuance of  preferred stock for conversion of debt                              |       |                                           |       |                                                           |       |                                                                                                                                   |       | 200,000                       |       | 0                        |       | 200,000                                                   |       |
| Rescinded and  Redemption of preferred stock                                     |       | 0                                              |       |                                                           |       |                                                                                                                                   |       | (60,000                       | )          | 0                        |       | (60,000                                                   | )          |
| Net loss                                                                         |       |                                           |       |                                                           |       |                                                                                                                                   |       |                          |       | (11,953,803              | )          | (11,953,803                                               | )          |
| **Balance,  December 31, 2004**                                             |       | $                                              | 2,602,800  |                                                           | $          | 19,102,306                                                                                                                             |       | $                             | 0          |                     | $          | 35,874,565                                                |       | $ | (55,040,546 | ) | $ | 2,558,483 |   |
| Issuance of  common stock for cash                                               |       | 0                                              |       |                                                           |       |                                                                                                                                   |       | 513,806                       |       | 0                        |       | 513,991                                                   |       |
| Issuance of  common stock for compensation                                       |       |                                           |       |                                                           |       |                                                                                                                                   |       | 125,357                       |       | 0                        |       | 125,409                                                   |       |
| Issuance of  common stock for settlement agreements                              |       |                                           |       |                                                           |       |                                                                                                                                   |       | 144,842                       |       | 0                        |       | 144,895                                                   |       |
| Issuance of  common stock for interest                                           |       |                                           |       |                                                           |       |                                                                                                                                   |       | 20,626                        |       | 0                        |       | 20,641                                                    |       |
| Issuance of  Common Stock as Series D dividend shares                       |       |                                           |       |                                                           |       |                                                                                                                                   |       | 418,148                       |       | (418,430                 | )          | 0                                                         |       |
| Issuance of  Common Stock to round up post split shares                          |       |                                           |       |                                                           |       |                                                                                                                                   |       | 6,075                         |       | 0                        |       | 6,078                                                     |       |
| Issuance of  common stock for cash-warrants                                      |       | (122,903                                       | )          |                                                           |       |                                                                                                                                   |       | 334,418                       |       | 0                        |       | 211,629                                                   |       |
| Warrant issued  for Series D placement                                      |       | 200,071                                        |       |                                                           |       |                                                                                                                                   |       | (200,071                      | )          |                     |       | 0                                                         |       |
| Conversion of  Series Series D preferred stock to common stock    |       |                                           |       |                                                           |       |                                                                                                                                   |       | 1,440,694                     |       |                     |       | 1,442,025                                                 |       |
| Accretion of Series D  Preferred Stock                                      |       |                                           |       |                                                           |       |                                                                                                                                   |       | (2,041,697                    | )          |                     |       | (2,041,697                                                | )          |
| Reclassification  of Series D Warrants from Liability                       |       | 5,173,409                                      |       |                                                           |       |                                                                                                                                   |       |                          |       |                     |       | 5,173,409                                                 |       |
| Dividends for  Series D-cash                                                |       |                                           |       |                                                           |       |                                                                                                                                   |       |                          |       | (100,020                 | )          | (100,020                                                  | )          |
| Dividends for  Series D-accrued                                             |       |                                           |       |                                                           |       |                                                                                                                                   |       |                          |       | (260,080                 | )          | (260,080                                                  | )          |
| Conversion of  Series B preferred stock to common stock                     |       | 0                                              |       |                                                           |       |                                                                                                                                   |       | (14,804                       | )          | 0                        |       | 0                                                         |       |
| Beneficial  Conversion Feature                                                   |       |                                           |       | (19,102,306                                                    | )          |                                                                                                                                   |       |                          |       | 19,102,306               |       | 0                                                         |       |
|                                                                             |       |                                           |       |                                                           |       |                                                                                                                                   |       |                          |       |                     |       |                                                      |       |
| Common Share Grants cancelled                                                    |       |                                           |       |                                                           |       |                                                                                                                                   |       | (209,916                      | )          |                     |       | (209,999                                                  | )          |
| Stock Based Compensation (FAS 123R)                                         |       |                                           |       |                                                           |       |                                                                                                                                   |       |                          |       | 92,671                   |       | 92,671                                                    |       |
| Warrants-net (expired & issued) not  including Series D            |       | (2,072,425                                     | )          |                                                           |       |                                                                                                                                   |       | 2,302,850                     |       |                     |       | 230,425                                                   |       |
| Net loss                                                                         |       |                                           |       |                                                           |       |                                                                                                                                   |       | 0                             |       | (14,404,621              | )          | (14,404,621                                               | )          |
| ** **                                                                       | ** ** | ** **                                     | ** ** | ** **                                                     | ** ** | ** **                                                                                                                             | ** ** | ** **                    | ** ** | ** **               | ** ** | ** **                                                | ** ** |
| **Balance,  December 31, 2005**                                             |       | $                                              | 5,780,952  |                                                           | $          | 0                                                                                                                                      |       | $                             | 0          |                     | $          | 38,714,893                                                |       | $ | (51,028,720 | ) | $ | (6,496,761 | ) |
| Issuance of  common stock for cash (PIPE’s)                                 |       | 0                                              |       | 0                                                              |       | 0                                                                                                                                      |       | 185,806,511                   |       | 0                        |       | 185,827,761                                               |       |
| Issuance of  common stock for stock options exercised                            |       | 0                                              |       | 0                                                              |       | 4                                                                                                                                      |       | 5,996                         |       | 0                        |       | 6,001                                                     |       |
| Issuance of  common stock for compensation                                       |       | 0                                              |       | 0                                                              |       | 27                                                                                                                                     |       | 883,248                       |       | 0                        |       | 883,589                                                   |       |
| Issuance of  common stock for settlement agreements                              |       | 0                                              |       | 0                                                              |       | 0                                                                                                                                      |       | 187,470                       |       | 0                        |       | 187,500                                                   |       |
| Issuance of  common stock for dividends on Series D                         |       | 0                                              |       | 0                                                              |       | 0                                                                                                                                      |       | 48,816                        |       | (48,825                  | )          | 0                                                         |       |
| Issuance of Cash  for dividends on Series D                                 |       | 0                                              |       | 0                                                              |       | 0                                                                                                                                      |       | 0                             |       | (276,860                 | )          | (276,860                                                  | )          |
| Accretion of  Series D Preferred Stock                                      |       |                                           |       |                                                           |       |                                                                                                                                   |       | (1,297,134                    | )          |                     |       | (1,297,134                                                | )          |
| Issuance of  common stock for cash—warrants                                 |       | (5,780,952                                     | )          | 0                                                              |       | 0                                                                                                                                      |       | 16,152,672                    |       | 0                        |       | 10,374,572                                                |       |
| Conversion of  Series D preferred stock to common stock                |       | 0                                              |       | 0                                                              |       | 0                                                                                                                                      |       | 9,192,378                     |       | 0                        |       | 9,198,571                                                 |       |
| Stock based  compensation (FAS 123R)                                        |       | 0                                              |       | 0                                                              |       | 0                                                                                                                                      |       | 0                             |       | 1,250,625                |       | 1,250,625                                                 |       |
| Net earnings  (loss)                                                             |       | 0                                              |       | 0                                                              |       | 0                                                                                                                                      |       | 0                             |       | 18,196,943               |       | 18,196,943                                                |       |
| **Balance, December 31, 2006**                                              |       | $                                              | 0          |                                                           | $          | 0                                                                                                                                      |       | $                             | 31         |                     | $          | 249,694,850                                               |       | $ | (31,906,837 | ) | $ | 217,854,807 |   |

 

The accompanying Notesare an integral part of these financial statements.

11

----

**FORCEPROTECTION INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWSYEAR ENDED 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  |         | $          | (14,404,622  | )          | $ | (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                                                    |       | 883,589     |        | (84,590      | )          | 3,244,841    |       |
| Common stock issued for  settlement                                                            |       | 187,500     |        | 144,895      |       | —       |       |
| Common stock issued for  interest                                                              |       | —      |        | 20,641       |       | —       |       |
| Stock based  compensation                                                                      |       | 1,250,625   |        | —       |       | —       |       |
| 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  |        | 12,821,492   |       | 1,152,297    |       |
| Increase (decrease) in  other accrued liabilities                                              |       | 1,125,762   |        | 543,554      |       | 1,603,942    |       |
| 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**                                                     |       | (25,920,025 | )           | (18,587,990  | )          | (12,053,361  | )          |
| **CASH FLOWS FROM INVESTING  ACTIVITIES**                                                      |       |        |        |         |       |         |       |
| Purchase of property  and equipment                                                            |       | (7,536,693  | )           | (1,511,337   | )          | (935,197     | )          |
| Proceeds from sale of  assets                                                                  |       | —      |        | 155,442      |       | —       |       |
| **Net cash used in investing  activities**                                                     |       | (7,536,693  | )           | (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                                                        |       | —      |        | 513,991      |       | 11,298,064   |       |
| Proceeds from issuance  of Series D preferred stock                                       |       | —      |        | 15,305,965   |       | —       |       |
| Redemption of Preferred  Stock                                                                 |       | —      |        | —       |       | (50,000      | )          |
| Preferred Stock  Dividends paid                                                                |       | (276,860    | )           | (100,020     | )          | —       |       |
| Issuance of common  stock for cash-warrants                                                    |       | 10,374,572  |        | 211,629      |       | —       |       |
| Issuance of common  stock for stock options exercised                                          |       | 6,001       |        | —       |       | —       |       |
| 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                                             |       | 239,622     |        | (110,732     | )          | 78,271       |       |
| Payments on Capitalized  lease                                                                 |       | (112,883    | )           | (62,870      | )          | —       |       |
| **Net cash provided by Financing  Activities**                                                 |       | 188,558,213 |        | 18,896,988   |       | 14,974,187   |       |
| **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 Notesare an integral part of these financial statements.

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

**These notes are an integral part of the Company’sfinancial statements set forth above.**

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

**2006 Amendment**

The financial information included in this 10-Kreferring to the year ended December 31, 2006 has been amended to includethe effect of the updated restatement to the financial statements for the yearended 2005 (see Note 1, 2005 and 2004 Restatement), and the effect on the basicearning per shares (EPS) of accretion on preferred stock and the calculation ofweighted average common shares used to compute diluted earnings per share.

**Earnings Per Share**

The Company has reviewed the Financial AccountingStandards Board’s Statement of Financial Accounting StandardNo. 128—Earnings Per Share (EPS) and determined that income available tocommon shareholders did not include the accretion related to preferred stockand the weighted average number of common shares outstanding used to calculatediluted earnings per share did not give effect to common shares issued uponconversion for the entire year.

**Effects of Amendment**

**Effects on Consolidated Balance Sheet**
|                                         | ** ** | **2006** | ** ** |
|-----------------------------------------|------------|----------|------------|
| Increase in  Additional Paid-in-capital |       | 374,309  |       |
| Increase in  Accumulative deficit       |       | 374,309  |       |

 

**Effects on Earnings Per Share**
|                                                | ** ** | **2006** | ** ** |
|------------------------------------------------|------------|----------|------------|
| Decrease in  Basic earnings per common share   |       | $        | (0.03      | ) |
| Decrease in Diluted  earnings per common share |       | $        | (0.03      | ) |

 

**2005 and 2004 Restatement**

**Restatement of Accounting for Preferred Stock andWarrants Issued to Investors**

Force Protection, Inc. (the “Company”) will befiling an amendment to its Annual Report on Form 10-K for the year endedDecember 31, 2005 to amend and restate financial statements and otherinformation 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 includeseach accounting restatement. Given that the company is still in the process offinalizing the restatement with the SEC, there is the potential that therestated numbers may change pending final resolution. The Company believes thatthe restatement did not have any material impact on its 2006 financial results.

The items identified by the Company relate to thevaluation method used to account for certain equity issuances which did notproperly include a full analysis of the embedded conversion feature associatedwith such issuances as required under EITF 98-5, Accounting for ConvertibleSecurities with Beneficial Conversion Features or Contingently AdjustableConversion Ratios, or which were otherwise incorrectly valued. As a result, anumber of shares of the Company’s stock issued as compensation to certainexecutives and other third parties and recorded as general and administrativecompensation expense appear to have been valued at less than fair value.

The Company has reviewed its accounting for preferredstock and warrants issued to investors as follows:

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·                  Series Band Series C Convertible Preferred Stock are recorded as equity at fairvalue using the Black-Scholes Method at the time of issuance using a one yearholding period assumption.

·                  A BeneficialConversion Feature (BCF) treated as equity is created when the value receivedfor each issuance is less than the fair value from the Black-Scholescalculation. Changes in conversion rates of Preferred Stock into Common Stockalso can create a Beneficial Conversion Feature if the Preferred Stock can beconverted into more common shares than at issuance or last amendment.

·                  Series D 6%Convertible Preferred Stock is recorded at fair value equaling the net cashproceeds from issuance minus the fair value of warrants issued in conjunctionwith the Series D 6% Convertible Preferred Stock. The Series DPreferred Stock falls outside the scope of SFAS No. 150 but the guidancein Rule 5-02.28 of Regulation S-X, Accounting Series ReleaseNo. 268 (ASR 268) and EITF Topic D-98: “Classification and Measurement ofRedeemable Securities” are applicable. As such, the Company has recorded theSeries D Preferred Stock as mezzanine equity on the accompanying balancesheet. Dividends for Series D 6% Convertible Preferred Stock weredistributed either as Common Stock shares or in cash.

·                  The warrantsissued in conjunction with the Series D 6% Convertible Preferred Stockwere initially recorded at fair value as a liability as liquidating damageswere paid as a result of a late SEC registration of the underlying CommonStock. The Black-Scholes Method was used to determine the fair value atissuance using a three year holding period. These warrants are adjusted eachreporting period to the new fair value using the Black-Scholes Method until theregistration was accepted by the SEC. At that point, the fair value using theBlack-Scholes Method was reclassified into Equity. A realized gain onderivative liability in the amount of $2,830,791 was recorded in 2005 as aresult of the change in fair value from issuance to reclassification to equityfor these warrants.

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

**Restatement of Accounting for Stock-BasedCompensation for Services and Compensation.**

The Company has reviewed its accounting for stockbased compensation issued for services and compensation during 2005, 2004 and2003 taking into account, where applicable, Financial Accounting StandardsBoard’s Statement of Financial Accounting Standard No. 123. Stock basedcompensation issued for services and compensation were valued at the marketprice at the time of issuance. As a result of revaluation, a reduction inexpense of $565,035 was recorded in 2005 and additional expense of $1,621,985and $2,946,137 was recorded in 2004 and 2003.

The Company has reviewed the Financial AccountingStandards Board’s Statement of Financial Accounting StandardNo. 123(Revised) (“SFAS 123(R)”) and has determined that the Company willadopt SFAS 123(R) as of July 1, 2005. Stock option expense of $92,671 wasrecorded for 2005.

**Restatement of Accounting for Operating LeaseCommitments**

The Company has reviewed the Financial AccountingStandards Board’s Statement of Financial Accounting Standard No. 13 andhas determined that in 2005, 2004 and 2003 the Company’s accounting for rentexpense was not recorded on a straight-line basis over the term of the Company’soperating lease commitments. Several of the Company’s operating leases ineffect during 2005, 2004 and 2003 included certain terms which provided forseveral months at the beginning of the lease term whereby rents were not due.Additionally, rent escalation clauses were included within certain operatingleases which previous to this filing had improperly deferred rent expense overthe course of the leases. The Company has calculated the necessary adjustmentsfor 2005, 2004 and 2003 in order to restate its financial statements and recordrent expense associated with operating lease commitments for 2005, 2004 and2003. Additional rent expense for 2005, 2004 and 2003 was recorded in theamount of $12,039, $79,985 and $44,588, respectively.

In light of the restatement, readers should not relyon previously filed financial statements and other financial information forthe years and for each of the quarters in the years 2005, 2004 and 2003.

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**Effects of Restatement**

**Effects on Statements of Earnings**
|                                                                    | ** ** | **2005**   | ** ** | **2004**  | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|-----------|------------|
| Increase in cost  of sales                                         |       | 2,012,989  |       | —    |       |
| Increase in  general and administrative expense                    |       | 669,745    |       | 1,701,970 |       |
| Increase in operating  loss                                        |       | 2,682,734  |       | 1,701,970 |       |
| Increase in  unrealized gain                                       |       | 2,830,791  |       | —    |       |
| (Decrease) in  non recurring warranty expense                      |       | (2,012,089 | )          | —    |       |
| Increase/(decrease)  in loss from continuing operations before tax |       | (2,161,046 | )          | 1,701,970 |       |
| Increase/(decrease) in  net (loss)                                 |       | (2,161,046 | )          | 1,701,970 |       |

 

**Effects on Balance Sheet**
|                                                                  | ** ** | **2005**    | ** ** | **2004**   | ** ** |
|------------------------------------------------------------------|------------|-------------|------------|------------|------------|
| (Decrease) in  accounts receivable                               |       | (367,233    | )          | —     |       |
| (Decrease) in  total assets                                      |       | (367,233    | )          | —     |       |
| Increase in  other accrued liability                             |       | 279,569     |       | 124,575    |       |
| (Decrease) in  contract liabilities                              |       | (367,233    | )          | —     |       |
| Increase in  total liabilities                                   |       | (87,654     | )          | 124,575    |       |
| Increase in  mezzanine equity—Series D preferred stock |       | 7,901,438   |       | —     |       |
| Increase in  Warrants                                            |       | 5,779,452   |       | 2,601,300  |       |
| Increase/(decrease)  in beneficial conversion feature            |       | (19,102,306 | )          | 19,102,306 |       |
| Increase/(decrease)  in accumulated deficit                      |       | 1,815,639   |       | 23,078,723 |       |
| Increase/(decrease) in  shareholders equity                      |       | (8,181,007  | )          | (124,573   | )          |

 

**Nature of the Business**

Force Protection, Inc. and its subsidiaries (the “Company”)design, manufacture and market blast and ballistics armored vehicles for saleto military customers.

**Principles of Consolidation**

The consolidated financial statements include theaccounts of Force Protection, Inc., and its two wholly-owned subsidiaries,Force Protection Industries, Inc. and Force ProtectionTechnologies, Inc. All inter-company balances and transactions areeliminated in consolidation.

**General Statement**

The Securities and Exchange Commission, or SEC, hasissued Financial Reporting Release No. 60, “Cautionary Advice RegardingDisclosure About Critical Accounting Policies,” or FRR 60, suggesting companiesprovide additional disclosure and commentary on their most critical accountingpolicies. In FRR 60, the SEC defined the most critical accounting policies asthe ones that are most important to the portrayal of a company’s financialcondition and operating results, and require management to make its mostdifficult and subjective judgments, often as a result of the need to makeestimates of matters that are inherently uncertain. The methods, estimates andjudgments the Company uses in applying these most critical accounting policieshave a significant impact on the results the Company reports in its financialstatements.

The Company believes the following critical accountingpolicies and procedures, among others, affect its more significant judgmentsand estimates used in the preparation of the Company’s consolidated financialstatements:

·                  Revenuerecognition;

·                  Inventorycost and Associated Reserves; and

·                  Allocation ofdirect and indirect cost of sales.

**Revenue Recognition**

The Company’s revenue is derived principally from thesale of its vehicles and associated spare parts and training services. Revenuefrom product sales and spare part sales, net of an allowance for contractualadjustments, is recognized when the products or spare parts

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are delivered to and “formally” accepted by thecustomer. The Company defines “formal acceptance” as taking place when arepresentative of the United States government signs the United StatesForm DD250 entitled “Material Inspection and Receiving Report” which underthe Federal Acquisition Regulations signifies contractual inspection andacceptance of the work performed by the contractor. It also acts as the contractualinvoice creating payment liability on the United States Government. Inaccordance with standard industry practice, there is a representative from theUnited States Defense Contractor Manufacturing Agency (“DCMA”) acting as acontractual representative of the United States Government present at theCompany’s facilities. This DCMA representative inspects each vehicle as it isdelivered by the Company and upon confirmation of the vehicle’s conformity withthe contractual specifications the inspector signs the Form DD250 andformally accepts delivery of the vehicle. The Company only recognizes revenuesarising from its U.S. Government contracts upon execution of theForm DD250 by the DCMA inspector. Under some of the Company’s U.S.Government contracts, it receives performance based payments based oncompletion of specific milestones stipulated under the contract (for example,delivery of raw material to the Company’s Ladson facility). These payments arerecorded as “deferred revenue” and carried on the Company’s balance sheet untilthe final delivery of the products and formal acceptance by theU.S. Government pursuant to the Form DD250. Upon acceptance of theproducts and the execution of the Form DD250, the Company recognizes thefull sale price of the product as revenue.

Revenues from services provided are recorded inaccordance with specific contractual terms. 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.

The Company negotiates contracts with its customerswhich may include revenue arrangements with multiple deliverables, as outlinedby Emerging Issues Task Force No. 00-21 (EITF 00-21). The Company’saccounting policies are defined such that each deliverable under a contract isaccounted for separately. Historically, the Company has negotiated and signedcontracts with its customers which outline the contract amount and specificterms and conditions associated with each deliverable.

**Allowance for Contractual Adjustments**

The Company’s contracts with the U.S. Government arenegotiated as a “sole source” or “open competition” bid process. A sole sourceprocess is one in which the Company is the sole bidder for the contract. Anopen competition could involve various bidders. Once a bid is accepted, theU.S. Government expects work to commence immediately. An open competitionresults in a final agreed-upon contract price which the U.S. Government hasagreed to. A sole source process results in an agreed-upon contract with theU.S. Government, subject to an adjustment process at a later date, termed the “definitizationprocess.” The definitization process commences upon delivery of a product,whereby the U.S. Government completes a detailed review of the Company’s costsinvolved in the manufacturing and delivery process. The U.S. Government and theCompany then work to determine an adequate and fair final contract price. As aresult of the potential adjustments related to the definitization process, theCompany maintains an allowance for contractual adjustments account. Thisaccount is reviewed on a monthly basis to determine adequate adjustments, ifnecessary. The allowance is maintained and deemed adequate based on theanalysis of historical data and calculation of pro-rata percentages of currentcontracts in place, which remain subject to the definitization process.

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

**Research and Development**

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

**Cash Equivalents**

For purposes of reporting cash flows, the Companyconsiders all highly liquid debt instruments purchased with maturity of threemonths or less to be cash equivalents.

**Inventories**

Inventories are stated at the lower of cost or market.The cost is determined under the first-in-first-out (FIFO) valuation method. Anallowance for excess 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.

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**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   |

 

**Impairment of Long-Lived Assets**

The Company reviews long-lived assets to be held andused for impairment whenever events or changes in circumstances indicate thatthe carrying amount of an asset may not be recoverable. If the sum of theexpected future cash flows (undiscounted and without interest charges) is lessthan the carrying amount of the asset, the Company would recognize animpairment loss based on the estimated fair value of the asset.

**Goodwill**

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

**Foreign Currency Transaction**

Assets and liabilities in foreign currencies aretranslated at the exchange rate prevailing at the balance sheet date. Revenuesand expenses are translated at the exchange rate prevailing at the transactiondate, and the resulting gains and losses are reflected in the statements ofoperations. Gains and losses arising from translation of a subsidiary’s foreigncurrency financial statements are shown as a component of stockholders’ equity(deficit) as accumulated comprehensive income (loss).

**Income Taxes**

The Company uses the asset and liability method ofaccounting for income taxes. The asset and liability method accounts fordeferred income taxes by applying enacted statutory rates in effect for periodsin which the difference between the book value and the tax bases of assets andliabilities are scheduled to reverse. The resulting deferred tax asset orliability is adjusted to reflect changes in tax laws or rates. The companyrecords a valuation allowance for any deferred tax allowance that it believeswill not be realized.

**Stock-Based Compensation**

The Company applied the recognition and measurementprinciples of Accounting Principles Board Opinion No. 25,*Accounting for Stock Issued to Employees*, and related Interpretations in accounting for those plans throughJune 30, 2005.

In December 2004, FASB issued StatementNo. 123(R),*Share-Based Payment,*which establishes accounting standards for transactions in which an entityreceives employee services in exchange for (a) equity instruments of theentity or (b) liabilities that are based on the fair value of the entity’sequity instruments or that may be settled by the issuance of equityinstruments. Effective on July 1, 2005, 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,*  Accounting for Stock Issued to Employees,*  which was permitted under Statement 123, asoriginally issued.

**Earnings (Loss) per Common Share**

The Company utilizes SFAS No. 128, “Earnings perShare” to calculate earnings/loss per share. Basic earnings/loss per share iscomputed by dividing the earnings/loss available to common stockholders (as thenumerator) by the weighted-average number of

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common shares outstanding (as the denominator).Diluted earnings/loss per share is computed similar to basic earnings/loss pershare except that the denominator is increased to include the number ofadditional common shares that would have been outstanding if all potentialcommon stock (including common stock equivalents) had all been issued, and ifsuch additional common shares were dilutive. Under SFAS No. 128, if theadditional common shares are dilutive, they are not added to the denominator inthe calculation. Where there is a loss, the inclusion of additional commonshares is anti-dilutive (since the increased number of shares reduces the pershare loss available to common stock holders).

**Estimates**

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements, as well as the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates. Estimates and assumptions are periodicallyreviewed and the effects of revisions are reflected in the consolidatedfinancial statements in the period they are determined to be necessary.

**Reclassifications**

Certain reclassifications to the Company’s incomestatement have been made in 2006, 2005, and 2004 in order for the 2006, 2005and 2004 financial statements to conform to the presentation of these financialstatements. These reclassifications are the restatement of the Research andDevelopment expenses from General and Administrative expenses.

**Recent Accounting Pronouncements**

In June 2006, the FASB issued FIN No. 48 “Accountingfor Uncertainty in Income Taxes—an interpretation of FASB StatementNo. 109.” This interpretation prescribes a comprehensive model for thefinancial statement recognition, measurement, presentation, and disclosure ofuncertain tax positions taken or expected to be taken in income tax returns.FIN No. 48 is effective for Force Protection in the first quarter offiscal 2007. The Company is currently assessing the impact that FIN No. 48will have on the results of its operations, financial position, or cash flows.

In June 2005, the Emerging Issues Task Force, orEITF, reached a consensus on Issue 05-6,*Determining the Amortization Period for Leasehold Improvements,*  which requires that leasehold improvementsacquired in a business combination or purchased subsequent to the inception ofa lease be amortized over the lesser of the useful life of the assets or a termthat includes renewals that are reasonably assured at the date of the businesscombination or purchase. EITF 05-6 is effective for periods beginningafter July 1, 2005. The Company does not expect the provisions of thisconsensus to have a material impact on the financial position, results ofoperations or cash flows.

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections” (“SFAS 154”) which replaces AccountingPrinciples Board Opinions No. 20 “Accounting Changes” and SFAS No. 3,“Reporting Accounting Changes in Interim Financial Statements—An Amendment ofAPB Opinion No. 28.” SFAS 154 provides guidance on the accounting forand reporting of accounting changes and error corrections. It establishesretrospective application, or the latest practicable date, as the requiredmethod for reporting a change in accounting principle and the reporting of acorrection of an error. SFAS 154 is effective for accounting changes and acorrection of errors made in fiscal years beginning after December 15,2005 and is required to be adopted by the Company in the first quarter of 2006.The Company is currently evaluating the effect that the adoption ofSFAS 154 will have on its results of operations and financial conditionbut does not expect it to have a material impact.

In March 2005, the FASB issued FASB Interpretation No. 47, “Accountingfor Conditional Asset Retirement Obligations” (“FIN 47”). FIN 47provides guidance relating to the identification of and financial reporting forlegal obligations to perform an asset retirement activity. The Interpretationrequires recognition of a liability for the fair value of a conditional assetretirement obligation when incurred if the liability’s fair value can bereasonably estimated. FIN 47 also defines when an entity would havesufficient information to reasonably estimate the fair value of an assetretirement obligation. The provision is effective no later than the end offiscal years ending after December 15, 2005. The Company will adoptFIN 47 beginning the first quarter of fiscal year 2006 and does notbelieve the adoption will have a material impact on its consolidated financialposition or results of operations or cash flows.

 

**NOTE 2—CONCENTRATIONS**

The Company’s future operations and continuedexpansion is subject to a significant concentration risk. During the yearsended December 31, 2006, 2005 and 2004, the Company’s revenues frommilitary units of the U.S. Government accounted for 84%, 90% and 97% of totalrevenues, respectively. The Company’s accounts receivable from military unitsof the U.S. Government at December 31, 2006, 2005 and 2004 amounted to81%, 60% and 95% of total accounts receivable, respectively.

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**NOTE 3—ACCOUNTS RECEIVABLES & “DEFINITIZATION”**

The majority of the Company’s contracts are with the UnitedStates Government and as such they are “public sector” contracts subject to theFederal Acquisition Regulations set out at Title 41 of the United StatesCode or “FAR”, and may result either from competitive bidding or may be awardedas “sole source” contracts “subject to definitization” as provided under FARSection 252.217-7027.

Following the award of a sole source contract, acentral 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 parties mutuallyagree upon “rates” for the indirect labor costs and the General andAdministrative costs and upon a “fee” (or profit). While the direct materialcosts and labor can be established through objective evidence, the “rates” andfee are more subjective and are based upon an analysis of multiple factorsincluding historical performance data and projected operational factors. Thecontractor 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):

*If agreement on a definitivecontract action to supersede this undefinitized contract action is not reachedby the target date in paragraph (b) of this clause, or within anyextension of it granted by the Contracting Officer, the Contracting Officermay, with the approval of the head of the contracting activity, determine areasonable price or fee in accordance with subpart 15.4 and part 31 of the FAR,subject to Contractor appeal as provided in the Disputes clause.*

Finally, although both parties make an effort todefinitize the contract as quickly as possible, the process is time consumingand can take months (or even years) to complete. During the definitization processthe contractor is required to perform the contract work and to make deliveriesunder the contract before the final contract price has been established. Forthis reason, as part of the original letter award, the contractor provides arough order of magnitude or “ROM”, price to be used for invoicing andaccounting purposes pending definitization.

As a result of the potential adjustments related tothe definitization process, the Company maintains an allowance for contractualadjustments account. This account is reviewed on a regular basis to determineadequate 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 table detailing activity within theallowance for contractual adjustments account for the years endedDecember 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 salesfor the years ended December 31, 2006, 2005 and 2004 involved contractssigned with the U.S. Government. As of the date of this report all non-directgovernment year-end receivables have been collected. The Company does notbelieve an allowance for doubtful accounts is necessary due to thecredit-worthiness of the U.S. Government.

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

**NOTE 4—INVESTMENT IN CHALLENGERPOWERBOATS INC.**

On June 1,2003, and modified on September 15, 2003, the Company sold the assetassociated with its boat business to Rockwell Power Systems, Inc., whichsubsequently merged with Xtreme Companies, Inc, now called ChallengerPowerboats, Inc., a public company traded on the Over the Counter BulletinBoard. As consideration for the sale, the Company received 1/3 of ChallengerPowerboats’ outstanding common stock, which was distributed directly to theCompany’s common stock shareholders. Additionally, the Company was to receive500 shares of Challenger Powerboats Series A preferred stock. The Companyhas been in communications with Challenger Powerboats but has yet to receivethese shares. The Company has elected to account for the investment inChallenger Powerboats’ Series A preferred stock under the cost method andhas provided for a full valuation allowance against the fair market value ofthese shares 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 the following:
|                                     | ** ** | **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 |   |

 

Depreciation expense for the years endedDecember 31, 2006, 2005 and 2004 was $769,454, $386,152 and $207,271respectively.

**NOTE 7—COMMITMENTS AND CONTINGENCIES**

**Other Accrued Liabilities**

The Company’s other accrued liabilities include thefollowing:
|                                   | ** ** | **2006**  | ** ** | **2005** | ** ** | **2004**  | ** ** |
|-----------------------------------|------------|-----------|------------|----------|------------|-----------|------------|
| Compensation and  benefits        |       | $         | 1,222,143  |     | $          | 1,396,024 |       | $ | 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  |     | $          | 1,898,020 |       | $ | 1,354,466 |   |

 

**Contract Liabilities**

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. Thewarranty does not apply to any damage or failure to perform caused by themisuse or abuse of the vehicle, combat damage, fair wear and tear items (brakeshoes, track pads, wiper blades, etc.), or by the customer’s failure to performproper maintenance or service on the supplies.

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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 |   |

 

**Vehicle Fees**

The Company is party to a Memorandum of Understandingwith Mechem, a division of Denel PTY, a South African company pursuant to whichMechem agreed for a period of five years to work exclusively with the Companyand not to cede, dispose or transfer to any third party other than the Companyany of its technology, IPR or other proprietary information relating to itsarmored vehicles systems including, but not limited to, designs, drawings, fulltechnical specifications, test data, hardware and software designs andtechnologies, supplier’s list, know-how and all and every piece of informationand data relevant to such systems. In exchange for such exclusivity the Companyagreed to pay Mechem a “vehicle fee” for every Buffalo, Cougar and Tempest theCompany manufactures and sells. The Company is not obligated to pay a vehiclefee in respect of other vehicles it manufactures and sells. OnSeptember 13, 2006 the Company executed a new Memorandum of Agreement withMechem, extending the period of exclusivity for an additional five years, andadding a provision that Mechem would upon request by the Company provideexpertise and know-how on a “work for hire” basis to advise, assist and supportthe Company in its marketing activities. The Company also agreed to make a onetime payment of $394,500 to Mechem, representing vehicle fees in respect ofCougar vehicles previously delivered and sold by the Company during 2005 and2006. The agreement with Mechem expires in September 2011.

The Company is also party to an agreement with CSIRDefencetek (a division of the Council for Scientific and Industrial Research) astatutory council established in accordance with the Laws of the Republic ofSouth Africa, pursuant to which the Company is obligated to pay the CSIR asimilar vehicle fee. The agreement with the CSIR expires in March 2007.

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

**Table ofContractual Obligations**

The following is a table outlining the Company’sactual and projected significant contractual obligations as ofDecember 31, 2006:
|                                  | ** ** | **For the Years Ended** | ** ** |
|----------------------------------|------------|----------------------------------------|------------|
| ** **                       | ** ** | **2007**                               | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Total** | ** ** |
| Operating Lease  Commitments     |       | $                                      | 1,624,286  |   | $ | 992,479 |   | $ | 56,609 |   | — |   | — |   | $ | 2,673,374 |   |
| 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 |   | — |   | — |   | $ | 2,928,046 |   |

 

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(1)           Referto the Mechem vehicle fee agreement detailed above in Footnote 7, Commitmentsand Contingencies, “Vehicle Fees.”

(2)           Referto the CSIR vehicle fee agreement detailed above in Footnote 7, Commitments andContingencies, “Vehicle Fees.”

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**Contract Definitization**

The Company contracts forthe sale of its vehicles to the U.S. Government under fixed price salescontracts, subject to the provisions of the U.S. Federal AcquisitionRegulations (“FAR”). Under FAR 52.216-25, contract awards may be madesubject to future “Contract Definitization” pursuant to which the contractoragrees to negotiate with the Government following commencement of the contractwork to finalize detailed conditions of the contract, including pricing,scheduling and other applicable requirements. As part of such negotiations, thecontractor is subject to audit by the U.S. Defense Contract Audit Agency (“DCAA”)of its direct material and labor costs, manufacturing overhead and margin.Based on such audit and the negotiations with the Government, the final “definitized”contract price may be less than the amount originally established (seeadditional discussions within Footnote 1 and Footnote 3).

**Legal Proceedings**

During June, 2006, theCompany confirmed that two former employees had filed claims under 31 U.S.C.§3730 alleging*inter alia*  that the Company had failed to comply withthe terms of the JERRV contract in respect to the allocation and use of theinitial contract milestone payment for such “accelerated delivery costs.” OnAugust 23, 2006, the Company agreed to settle with the United StatesGovernment and with these former employees all claims relating to or arisingunder the JERRV contract and the payment of such accelerated delivery costs fora total of $1,905,000 plus interest of $23,000. As of December 31, 2006,the Company has paid $1,297,534 under the terms of such settlement agreementand the Company has established a provision of $607,466 for the remainingliability.

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, $12,598,921and $2,645,716, respectively as deferred revenue resulting from its contractswith the U.S. Army and the U.S. Marines.

**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, the Company entered into a Modification and Assignment Agreement withLongview pursuant to which the Company paid $1,250,000 against the principlebalance of the Notes and extended the maturity date of the Notes for anadditional 60 days. In addition, the Company consented to the assignment of$2,500,000 of the Notes to Fort Ashford Funds LLC (the “Ashford Note”). FrankKavanaugh, a director of the Company, is the principal owner of Fort AshfordFunds and a substantial shareholder of the Company’s common stock.Mr. Kavanaugh’s relationship to Fort Ashford Funds LLC was fully disclosedto the Company and Mr. Kavanaugh did not participate in the negotiationsor decision process in respect of the Modification and Assignment Agreement.The Company paid $87,510 to Longview and $50,000 to Fort Ashford in cash ascompensation for the extension of the maturity dates of the Notes.

On April 20, 2006,the Company paid $1,000,000 against the principle balance of the Notes andextended the maturity date on the Notes and the Ashford Note for an additional60 days, through June 20, 2006. The Company paid $55,000 to Longview and$50,000 to Fort Ashford in cash as compensation for this extension.

On June 20, 2006,the Company 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. 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 all applicableaccrued interest under the Ashford Note.

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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 is expected that based on usage estimatesthe note payments in 2007, 2008, and 2009 will be $92,608, $92,608 and $69,456,respectively.

**NOTE 10—FACTORING OF ACCOUNTSRECEIVABLE**

The Company entered intoan agreement with GC Financial Services, Inc. on June 29, 2005,pursuant to which the Company agreed to sell accounts receivables under ourJERRV Contract (M67854-05-D-5091) in an amount not to exceed $63,000,000. Underthe terms of such agreement, the Company received 98.1% of the value ofreceivables sold to the Factor within 24-48 hours of delivery of the invoice.During June 2006, the Company exceeded the agreed maximum value ofreceivable to be factored under the Factoring Agreement. On June 22, 2006,the Factoring Agreement was terminated and no further obligation remainedbetween the Company and GC Financial Services, Inc.

The Company entered intoan agreement with GC Financial Services, Inc. on June 28, 2004,pursuant to which the Company agreed to sell accounts receivables under ourBuffalo contracts with the U.S. Army. Under the terms of such agreement, theCompany receives approximately 98% of the value of receivables sold to theFactor within 24-48 hours of delivery of the invoice. The Factor was granted asecurity interest in the Company’s assets and retained the right of fullrecourse against the Company. The Company terminated such agreement inJanuary 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 |   |

NOTE11—STOCKHOLDERS’ EQUITY

The Company wasoriginally incorporated on November 27, 1996 as a Colorado corporation.The Company incorporated Force Protection, Inc, a Nevada corporation onDecember 13, 2004 and effected a merger with Force Protection, Inc.,a Colorado corporation, on January 1, 2005. The Colorado Corporation wasdissolved upon the merger. The Company has continued its operations as theNevada Corporation from January 1, 2005 forward. The Company has theauthority to issue 310,000,000 shares, in aggregate, consisting of 300,000,000shares of common stock and 10,000,000 shares of preferred stock, of which 1,600have been designated “Series A,” 25 of which have been designated as “Series B,”150 of which have been designated as “Series C” and 20,000 of which havebeen designated as “Series D.” At all times through December 31,2004, the Company’s stock was all issued at “no par value.” By shareholder’sresolution effective January 1, 2005, all classes of stock were declaredto have a par value of $0.001 per share. For further information regardingSeries D 6% Convertible Preferred Stock, please refer to the separatefootnote disclosure in Note 12.

The preferred stock hasthe following characteristics:

Dividends—Each holder ofpreferred stock shall be entitled to receive dividends in cash, stock orotherwise, if, when and as declared by the Company’s board of directors, withthe exception of the preferred stock designated as Series A, which shall notbe entitled to receive dividends. However, the Company will not declare or paya dividend to common stockholders without first declaring and paying a dividendto the preferred shareholders. Each share of Series D Preferred Stock isspecifically entitled to 6% cumulative dividends, payable semi-annually in cashor common stock. See Note 12 for further details regarding Series D 6%Convertible Preferred Stock.

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

(a)    Series APreferred Stock shall rank senior to Series B Preferred Stock,Series C Preferred Stock, Series D 6% Convertible Preferred Stock andcommon stock;

(b)    Series BPreferred Stock shall rank junior to Series A Preferred Stock, senior toSeries C Preferred Stock, Series D 6% Convertible Preferred Stock andcommon stock;

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

(d)    Series D6% Convertible Preferred stock shall rank junior to Series A PreferredStock Series B Preferred Stock, Series C Preferred Stock and seniorto common stock; and

(e)    Common stockshall rank junior to Series A, B, C and D 6% Convertible Preferred Stock.

Additionally, upon aliquidation event, holders of Series A Preferred Stock will receive $1,000per 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 ofthe share of Series C Preferred Stock, or $1,500, after rankconsiderations. In any event whereby the preceding distributions are unable tobe met, the rank considerations outlined above shall be considered and thedistribution of the Company’s net assets shall be determined according to rankand on a pro-rata basis.

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

In connection with theprivate placement sale of the Company’s common stock on January 19, 2005,the Company and the holders of Series B and Series C Preferred Stockagreed to convert all shares of the Series B and Series C PreferredStock outstanding to shares of the Company’s common stock. As a result, allshares of Series B and Series C Preferred Stock were converted intocommon effective January 19, 2005. The Series D 6% ConvertiblePreferred Stock issued in connection with the January 19, 2005 privateplacement remained outstanding following the conversion of the Series Band Series C Preferred Stock. All outstanding shares of the Series D6% Convertible Preferred Stock were converted in full in 2006, and no shares ofthe Series D 6% Convertible Preferred Stock remain outstanding as ofSeptember 30, 2006. Series D 6% Convertible Preferred Stock has beenclassified as Mezzanine Equity by the Company. Please refer to Note 12 forfurther details regarding Series D 6% Convertible Preferred Stock.

On January 18, 2005,the Company’s board of directors, acting pursuant to a resolution of theCompany’s shareholders, approved a reverse split of the Company’s stock wherebyeach 12 shares of common stock outstanding on the date of record,February 4, 2005, would be exchanged for 1 new share of common stock. Allreferences to common stock in the Company’s public filings refers to “postreverse split” shares.

The following disclosuresreference accounting guidelines and certain accounting treatments which theCompany has used throughout 2006, 2005 and 2004. The Company considers thefollowing terms and definition significant in ensuring the reader of thesefinancial statements understands the accounting treatments applied by theCompany:

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

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

·                  Beneficialconversion feature is a topic addressed in EITF 98-5,*Accounting for Convertible Securities with Beneficial ConversionFeatures or Contingently Adjustable Conversion Ratios* , EITF 00-19*  Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled in , aCompany’ s Own Stock*  andEITF 00-27*  Application of Issue No. 98-5 to CertainConvertible Instruments* , is an accounting term defined in EITF 98-5that represents a situation in which a convertible security (debt or equity) isconvertible into the Company’s common stock at a price which is at a discountto the market, at the time the convertible security is issued.

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

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**During the year endedDecember 31, 2006, the Company recorded the following transactions withinits stockholders’ equity accounts:**

**COMMON STOCK TRANSACTIONS**

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

On December 20,2006, the Company closed a private placement sale and issued 13,000,000 sharesof common stock to investors for gross proceeds of $152,750,000. Net proceedsreceived after expenses were $146,640,261.

The following issuancesof the Company’s common stock during 2006 were valued by the Company using theCompany’s closing bid price of its common stock as quoted on the OTC BulletinBoard market as of the date of the associated contract or the issuance date ifno contract existed:

Effective January 1,2006, the Company’s board of directors granted the Company’s Chief ExecutiveOfficer 300,000 shares of the Company’s unregistered common stock valued 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 memberreceived a guarantee of an annual grant of 15,353 shares of the Company’sunregistered common stock. The shares of the Company’s unregistered commonstock are required to be held until the individual’s service as a member of theCompany’s board of directors is complete. The Company awarded 96,149 and issued69,360 shares of the Company’s common stock to the members of the Company’sboard of directors in 2006. A total of 26,789 shares of the Company’s common stockwere included in shares to be issued in the stockholders’ equity table as ofDecember 31, 2006 relating to this award. 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, theCompany granted and issued 12,500 shares of its unregistered common stock to amember of the Company’s board of directors, valued at $40,500 as compensationdue under a previous employment contract with the Company. During 2006, theCompany granted and issued 165,202 shares of its unregistered common stockvalued at $405,786 under various employment agreements. Included withinthese issuances were common stock issuances related to certain employeeagreements which were modified during 2006. A total of 233,418 shares of commonstock were rescinded as a result of the 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 a settlementagreement with Atlantis Partners, Inc. The shares issued were valued at$187,500.

During 2006, employeesexercised stock options to purchase 5,348 shares of the Company’s common stockvalued at $6,001. A total of 4,348 shares of the Company’s common stock wereincluded in shares to be issued in the stockholders’ equity table as ofDecember 31, 2006 related to employee exercised stock options.

The Company adopted SFAS123R as if July 1, 2005. Total stock option expense for 2006, which isinclusive of stock grants in 2006 was $1,250,625.

*PREFERREDSTOCK TRANSACTIONS*

*Series D6% Convertible Preferred Stock:*

·                  During the yearended December 31, 2006, 13,004 shares of Series D Preferred Stockwere voluntarily converted to 6,192,628 shares of common stock. The fullyaccreted conversion value of these shares of common stock at the time convertedwas $9,198,571. See Note 12—Series D 6% Convertible Preferred Stock.

·                  During the threemonth 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.

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·                  During the threemonth period ended September 30, 2006, 8,351 shares of common stock wereissued in lieu of cash dividends for the holders of Series D PreferredStock. The shares issued were valued at $46,448 which was 85% of the average ofthe lowest 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 218,807 shares of commonstock for gross proceeds of $499,573.

·                  As ofDecember 31, 2006, all warrants were exercised or expired. No warrantsremained outstanding as of December 31, 2006.

*SHARESTO BE ISSUED*

·                  During the threemonth period ended December 31, 2006, 26,789 shares of common stock weregranted for compensation to the Company’s board of directors. The shares werevalued at $210,408 but were not issued as of December 31, 2006.

***During the year ended December 31, 2005, the Companyrecorded the following transactions within its stockholders’ equity accounts:***

*COMMONSTOCK TRANSACTIONS*

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

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

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

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

·                  The Companyissued 53,467 shares of the Company’s common stock pursuant to the terms of theCompany’s agreement with certain third parties and were valued at $144,895. Anexpense of $144,895 was classified as settlement expense and was recorded in2005.

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

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

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

The Company issued awarrant to purchase 65,833 shares of the Company’s common stock onJanuary 19, 2005 to HPC Company. The warrant was valued at $200,071 usingBlack-Scholes. The Company recorded a reduction of stockholders’ equityassociated with services provided as a placement agent for the Company’sSeries D 6% Convertible Preferred Stock offering, which closed on 

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January 19, 2005.The inputs for this warrant in Black-Scholes are consistent with the inputs forthe warrants issued with the Series D 6% Convertible Preferred Stock.

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

**Warrant Valuation Information**

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

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

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

*PREFERREDSTOCK TRANSACTIONS*

*Series D6% Convertible Preferred Stock:*

·                  OnJanuary 19, 2005, the Company issued 15,800 shares of the Company’sSeries D 6% Convertible Preferred Stock for net cash of $15,305,966. Theissuance of the Company’s Series D 6% Convertible Preferred Stock wasrecorded at $7,301,766 which is the net value of the cash received of$15,305,966 less the fair value of the associated warrants of $8,004,200. TheCompany classified the Series D 6% Convertible Preferred Stock asMezzanine Equity. Refer to Note 12 for further information regardingSeries D 6% Convertible Stock.

·                  On May 23,2005, 2,796 shares of the Series D Preferred Stock were voluntarilyconverted into 1,331,429 shares of Common Stock. The conversion value of theseshares of common stock at the time of conversion was $1,442,025.

***During the year ended December 31, 2004, the Companyrecorded the following transactions within its stockholders’ equity accounts:***

*COMMONSTOCK TRANSACTIONS*

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

·                  Common stockissuances, 1,771,874 shares of common stock were issued for $4,245,000 in netproceeds.

·                  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 219,792 shares ofcommon stock were issued by the Company for net proceeds of $316,497, inconnection with the exercise of “A” warrants in 2004. The remaining “A”warrants expired on December 31, 2004.

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

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

A total of 1,863,768shares of common stock were issued by the Company for net proceeds of$2,100,637 in connection with the exercise of warrants issued through a privateinvestment in public equity (“PIPE”) offering dated April 10, 2002 for RegulationD Section 506 Private Placement Memorandum issued in 2003 to numerousaccredited investors.

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

·                  163,501 sharesof the Company’s common stock valued at $496,956 were issued to a third partyfor services rendered to the Company. An expense associated with this issuanceof $496,956 was recorded in 2004.

·                  70,833 shares ofthe Company’s common stock valued at $127,500 were issued to a member of theboard of directors, for services rendered to the Company. An expense of$127,500 was classified as compensation of directors and was recorded in 2004.

·                  91,667 shares ofthe Company’s common stock valued at $231,000 were issued to a member of theboard of directors, for services rendered to the Company. An expense of$231,000 was classified as compensation of directors and was recorded in 2004.

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

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

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

·                  79,167 shares ofthe Company’s common stock valued at $178,250, to various employees forservices rendered to the Company. An expense of $178,250 was classified asstock-based compensation and was recorded in 2004.

304,167 shares of commonstock issued in error in December 2003 were cancelled in the first week ofJanuary 2004.

The Company issued 20,421shares of common stock to third parties upon the conversion of existing debtsin the amount of $124,976.

*PREFERREDSTOCK TRANSACTIONS*

For information regardingSeries D 6% Convertible Preferred Stock, please refer to the separatefootnote disclosure in Note 12.

Series B and Series CConvertible Preferred Stock are in the form of shares, and have no conditionalor unconditional mandatory redemption provisions obligating the Company in thefuture other than liquidation or company wind-up provisions. Under SFAS 150—*Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity* , the issuances ofSeries B and Series C Preferred stock have been classified as equity.The conversion options are not considered derivative liabilities which must bevalued at fair value under SFAS 133 or EITF 00-19. The conversion options areindexed to the Company’s own stock and the host instrument is classified as equitythus 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.

In accordance with EITF98-5, “Accounting for Convertible Securities with Beneficial ConversionFeatures or Contingently Adjustable Conversion Rates,” the Company records “beneficialconversion feature expense” when and if the Company issues debt or equityinstruments which are convertible into shares of the Company’s common stock, ata conversion price which is favorable to the 

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holder of the debt orequity instrument. Valuation of this favorable conversion feature is based onthe circumstances of each debt or equity issuance but is generally based on theactual or estimated difference between the fair market value of the underlyingcommon stock less the cost of acquiring the common stock or a beneficialincrease in conversion rates of preferred shares into common stock.

The Company issuedpreferred stock shares for services provided as follows:

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

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

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

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

The Company issued 20shares of Series C Convertible Preferred Stock in exchange for existingdebt in the amount of $200,000. The Company used Black-Scholes and calculatedthe value of shares at issuance. A beneficial conversion feature was generatedas the value of the issuance using Black-Scholes was greater than the value ofthe debt converted in the amount of $385,530.

The Company issued 1share of the Company’s Series C Convertible Preferred Stock for proceedsof $10,000. The value of this issuance was calculated using Black-Scholes andwas greater than the value of the proceeds in the amount of $22,612. TheCompany recorded a Beneficial Conversion Feature for this difference.

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

**Series C Preferred Stock Valuation Information forthe Year Ended December 31, 2004**

 
| Valuation Assumptions                            |   | —          |
|--------------------------------------------------|--------|-----------------|
| Stock price on  grant date                       |   | $1.80-$4.08     |
| Number of shares  of common stock convertible to |   | 2,198,276       |
| Conversion price                                 |   | $1.80-$4.08     |
| Expected option  term (in years)                 |   | 1               |
| Vesting term (in  years)                         |   | N/A             |
| Expected  volatility                             |   | 90.29%-177.0 6% |
| Risk-free  interest rate                         |   | 4.00%-4.2 9%    |
| Expected  forfeiture rate                        |   | 0 %             |
| Estimated corporate  tax rate                    |   | 0 %             |
| Expected  dividend yield                         |   | 0 %             |

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

·                  The Company had5 Shares of Series C Convertible Preferred Stock voluntarily redeemed for$60,000. A loss on redemption of $10,000 was recorded. Additionally, theCompany recorded a gain on debt extinguishment related to the recapture ofbeneficial conversion feature expensed in connection with the issuance of thepreferred stock in 2002 of $7,272.

·                  1,330,865 sharesof the Company’s common stock were issued upon the voluntary conversion of51 shares of Series C Convertible Preferred Stock. The conversionrate at the time of conversion was 0.2% of outstanding common stock. TheCompany recorded a gain on debt extinguishment related to the recapture ofbeneficial conversion feature expensed in connection with the issuance of thepreferred stock in the amount of $243,690.

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

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stockwas convertible into. Additionally, the Company recorded a gain on debtextinguishment related to the recapture of beneficial conversion featureexpensed in connection with the issuance of the preferred stock in the amountof $3,234.

·                  1 share of theCompany’s Series B Convertible Preferred Stock was voluntarily convertedto 10 Series C Convertible Preferred Stock. The Company used Black Scholesand calculated a beneficial conversion feature of $269,044, associated as aresult of differences between conversion rates between the two preferred stockclasses.

·                  416,667 sharesof the Company’s common stock were issued upon the conversion of 1 share ofSeries B Convertible Preferred Stock. The conversion rate at the time ofconversion was 2% of fully diluted common stock. The Company recorded a gain ondebt extinguishment related to the recapture of beneficial conversion featureexpensed in connection with the issuance of the preferred stock in of $16,324.

The conversion rate forSeries C Convertible Preferred Stock changed to 0.2% of fully dilutedstock on September 14, 2004. At that time, there were 144 Series CPreferred Stock shares outstanding. The Company used Black-Scholes to calculatethe value of this change as $18,558,870, which represents the beneficialconversion feature for this conversion rate increase for all outstandingSeries C Preferred Stock Shares on September 14, 2004. After which,14,263 shares of the Company’s common stock were issued upon the voluntaryconversion of 1 share of Series C Convertible Preferred Stock. DuringOctober 2004, all outstanding shares of the Company’s Series CPreferred Convertible stock were either mandatory converted to Series BConvertible Preferred stock or into shares of common stock. The conversion ratewas 10 shares of Series C Convertible Preferred stock for 1 share ofSeries B Convertible Preferred Stock or 0.2% of fully diluted commonstock. In total, 115 shares of Series C Convertible Preferred stock wereredeemed for 11.5 shares of Series B Convertible Preferred Stock.1,169,350 shares of common stock were issued for the conversion of theremaining 28 Series C Convertible Preferred Stock. These transactionsresulted in the Company recorded recording a gain on debt extinguishment relatedto the recapture of beneficial conversion feature expensed in connection withthe issuance of the preferred stock in the amount of $146,120.

**NOTE12—Series D 6% Convertible Preferred Stock**

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

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

The Series DPreferred falls outside the scope of SFAS No. 150 but the guidance inRule 5-02.28 of Regulation S-X, Accounting Series ReleaseNo. 268 (ASR 268) and EITF Topic D-98: “Classification and Measurement ofRedeemable Securities” are applicable. As such, the Company has recorded theSeries D Preferred as mezzanine equity on the accompanying balance sheet.

The difference betweenthe initial recorded amount and redemption value, the discount, is accreted toretained earnings or, in the absence of retained earnings, additional paid-incapital, over the period from the date of issuance to the earliest redemptiondate of the security using the interest method thus reducing net income attributableto common shareholders. This accretion is treated like a dividend on preferredstock. The accretion from the initial value to the redemption amount has beendetermined using T-Value based on the following inputs:

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

2.                                       Numberof payment periods—36 (three years)

The following tablesummarizes the transactions of the Series D Preferred:

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| Series D 6% Convertible  Preferred stock at issuance                                         |   | $         | 15,800,000 |   |
|---------------------------------------------------------------------------------------------------|--------|-----------|------------|--------|
| Less:                                                                                             |   |      |       |
| Issuance costs                                                                                    |   | 494,034   |       |
| Fair value of  warrants at issuance (see “Warrants”)                                    |   | 8,004,200 |       |
| Subtotal  Carrying Value at issuance                                                              |   | $         | 7,301,766  |   |
| Plus:                                                                                             |   |      |       |
| Cumulative  accretion of discount to redemption value first quarter 2005                          |   | 420,695   |       |
| Cumulative  accretion of discount to redemption value second quarter 2005                         |   | 593,609   |       |
| Cumulative  accretion of discount to redemption value third quarter 2005                          |   | 508,577   |       |
| Cumulative  accretion of discount to redemption value fourth quarter 2005                         |   | 518,816   |       |
| Less:                                                                                             |   |      |       |
| Carrying Value  of 2,796 Series D Preferred converted into Common Stock second quarter  2005 |   | 1,442,025 |       |
| Carrying Value  at December 31, 2005                                                         |   | $         | 7,901,438  |   |
| Plus:                                                                                             |   |      |       |
| Cumulative  accretion of discount to redemption value first quarter 2006                          |   | 484,750   |       |
| Cumulative  accretion of discount to redemption value second quarter 2006                         |   | 448,815   |       |
| Cumulative  accretion of discount to redemption value third quarter 2006                          |   | 363,569   |       |
| Less:                                                                                             |   |      |       |
| Carrying Value  of 4,526 Series D Preferred converted into Common Stock first quarter  2006  |   | 2,872,466 |       |
| Carrying Value  of 3,601 Series D Preferred converted into Common Stock second quarter  2006 |   | 2,456,119 |       |
| Carrying Value  of 4,877 Series D Preferred converted into Common Stock third quarter  2006  |   | 3,869,987 |       |
| Carrying Value at  December 31, 2006                                                         |   | $         | —     |   |

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

***Registration Rights***

The Company and theholders of Series D Preferred entered into a “Registration RightsAgreement” on January 19, 2005. Among other things, the Company wasobligated to file a registration statement on Form S-3 within 75 daysof the agreement and use its commercially reasonable efforts to cause suchregistration statement to become effective. The Securities & ExchangeCommission accepted the Registration Statement on Form S-3 on May 11,2005, pursuant to which the shares of Common Stock issuable upon conversion ofthe Series D Preferred, as well as the shares of Common Stock issuableupon the exercise of warrants, were registered for resale. The agreementprovides for any liquidated damages by the Company to the Series DPreferred holders if the Company is unable to complete the registration, notfiling in timely manner or maintain such effectiveness.

***Voting Rights***

Each holder of shares ofSeries D Preferred shall have no voting rights so long as the Companyshall not, without the affirmative vote of the holders of Series DPreferred then outstanding, alter or change the powers, preferences or rightsof the holders of Series D Preferred, authorize or create any class ofstock ranking as to dividends, redemption, or distribution of assets uponliquidation senior to Series D Preferred, amend corporate documents so asto affect adversely any rights of holders or increase the authorized number ofshares of Preferred Stock.

***Dividends***

Cumulative Dividends arepayable to all holders of Series D Preferred on March 1 andSeptember 1 beginning with the first such date after the original issuedate and on any conversion date. Dividends can be paid in cash unless certaincriteria are met (mainly no cash available fro for payment) which allows theCompany to issue shares of Common stock equivalent to the amount due at 85% ofthe average stock price of the preceding 10 trading days to the dividendpayment date. Series D Preferred dividends are recorded as a

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reduction (increase) to retained earnings(accumulated deficit) and net income (loss) available to common shareholders.Dividends, whether declared or not, are payable at a rate of six percent (6%)of the Stated Value per annum.

In the event dividends are paid on any shares of otherPreferred Stock or common stock, the Company shall pay any amounts due toSeries D Preferred holders before such dividend can be paid.
| Dividend Transactions (per equity table)          | ** ** | **Amount** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|
| Dividend Payment March 1,  2005 57,186 common shares issued      |       | $          | 100,075    |   |
| Dividend Payment  September 1, 2005 224,511 common shares issued |       | 318,355    |       |
| Cash payment                                                          |       | 100,020    |       |
| Total Dividend for  September 1, 2005                            |       | 418,375    |       |
| Dividend Accrued as of  December 31, 2005                        |       | 260,080    |       |
| Dividend Payment  March 1, 2006 586 common shares issued         |       | $          | 2,377      |   |
| Cash payment                                                          |       | 117,464    |       |
| Total Dividend for  March 1, 2006                                |       | 119,841    |       |
| Dividend Payment  September 1, 2006 8,351 common shares issued   |       | 46,448     |       |
| Cash payment                                                          |       | 159,396    |       |
| Total Dividend for September 1, 2006                             |       | 205,844    |       |

***Conversion***

The Series D Preferred may convert at any time,at the holder’s discretion, into shares of Common Stock. The conversion priceis $2.10 per share. Each share of the Series D Preferred converts into thenumber of shares of Common Stock equal to $1,000 divided by the conversionprice which is approximately 467.19 shares. The Company shall not effect anyconversion of the Series D Preferred and the Holder shall not have theright to convert any portion of Series D Preferred to the extent thatafter giving effect to such conversion, the Holder (including it’s affiliates)would beneficially own in excess of 4.99% of the number of shares of commonstock outstanding immediately after giving effect to such conversion. TheCompany must reserve and keep available out of its authorized and unissuedshares of common stock for the purpose of issuance upon conversion of theSeries D Preferred and payments of dividends on the Series DPreferred. The Company may force a conversion of Series D Preferred if themarket value of the common stock for 20 consecutive trading days exceeds 180%of the conversion price effective at that time.

***Redemptions***

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

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

***Warrants***

The Warrants represent a liability under EITF 00-19 inthat the registration rights agreement contains a liquidated damages clauserequiring the Company to pay cash to the holder of the instrument if theCompany fails to obtain an effective registration statement timely, an eventthat is out of the Company’s control. (Note: On April 11, 2005, theCompany paid $237,000 in liquidated damages for not filing its registrationstatement timely). The Warrants would not be classified as equity until theeffective registration statement was obtained. As such, in accordance with EITF00-19, the Warrant Liability is measure at its fair value at the reportingdate, with the change in its fair value from issuance date reporting in thestatement of operations. The fair value of the warrants has been determinedusing the Black-Scholes model using the following inputs:

1.                                       Numberof Warrant shares—2,633,333

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2.                                       Stockprice at issuance date—$3.12 per share

3.                                       Exerciseprice—$3.75 per share

4.                                       Term—3years

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

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

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

coincides with the term of the Warrants)

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

1.                                       Numberof Warrant shares—2,633,333

2.                                       Stockprice at reporting date—$1.84 per share

3.                                       Exerciseprice—$3.75 per share

4.                                       Term—2.75years

5.                                       Discountrate—3.96%, representing the three year Treasury at the reporting date

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

These inputs yield a fair value of $4,572,984 atMarch 31, 2005.

On May 11, 2005, the Company filed received Form 424B3from the SEC confirming the registration of 17,008,655 common shares. As aresult, the warrant liability is reclassified to equity on this date. The fairvalue of the warrants has been determined using the Black-Scholes model usingthe following inputs:

7.                                       Numberof Warrant shares—2,633,333

8.                                       Stockprice at reporting date—$2.08 per share

9.                                       Exerciseprice—$3.75 per share

10.                                 Term—2.70years

11.                                 Discountrate—3.96%, representing the three year Treasury at the reporting date

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

These inputs yield a fair value of $5,173,409. The$5,173,409 was reclassified from warrant liability (Series D) to equity.The Unrealized Gain on Financial Instruments was reduced by $600,425.

**NOTE 13—STOCK OPTIONS AND STOCKGRANTS**

***Stock Options***

The Company does not have a formal stock option plan.However, the Company has offered its employees stock options. During 2006 and2005, the Company issued options to purchase 1,508,125 and 652,833 shares ofits unregistered common stock, respectively, to certain employees.

The Company adopted Statement of Financial AccountingStandards No. 123(R) (“SFAS 123(R)) as of July 1, 2005. SFAS123(R) provides for mandatory expensing of the estimated value of stockoptions granted to the Company’s employees over the period of time the stockoptions vest. The Company measures the total cost of each stock option grant atthe date of grant using the Black Scholes option trading model. We recognizethe cost of each stock option on a straight line basis over the applicablevesting period.

All stock options issued in 2005 do not carry adesignated expiration date and vest over a 1 year period.

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

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

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

**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-$7.48 |   | $ | 0.77-$7.48 |   |
| Options exercised                  |       | (5,348                          | )          | $ | 1.38-$1.50 |   |   | (a) |
| Options terminated                 |       | —                          |       | — |   |   | (a) |
| Balance at December 31, 2006  |       | 1,959,443                       |       | $ | 2.53 |   | $ | 17.98 |   |

 

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(a)                                  Notapplicable

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

**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     | %          | —   |       |
|                                                             |            |              |            |          |            |          |            |  |  |

 

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(a)                                  Optionsissued in 2006 vest between 1 day and 14 months

(b)                                 Notapplicable

**Stock Grants**

The Company awarded stock grants to certain employeesduring 2006. The stock grants consisted of 191,016 shares of the Company’scommon stock valued at $1,047,501, subject to certain vesting provisions. Thestock grants 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     |       |

 

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**NOTE 14—ACQUISITION AND SALE OF ASSETS**

In September 2004, the Directors of TSGI agreedto exchange all shares held by it of Technical Solutions Group Inc for the TSGIshares held by the Company, as a result of which the Company reacquired 100% ofthe shares of Technical Solutions Group as a wholly owned subsidiary.

**NOTE 15—CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

The Company’s Chief Executive Officer,Mr. McGilton, is a principle of APT Leadership, a consulting firm theCompany hired to provide various business consulting services, trainingseminars and certain business software. APT Leadership billed the Company$606,817, $225,400 and $21,017 for the years ended December 31, 2006, 2005and 2004, respectively.

On February 18, 2006, the Company entered into aModification and Assignment Agreement with Longview pursuant to which theCompany paid $1,250,000 against the principle balance of the Notes and extendedthe maturity date of the Notes for an additional 60 days. In addition, theCompany consented to the assignment of $2,500,000 of the Notes to Fort AshfordFunds LLC (“Fort Ashford”). Frank Kavanaugh, a director of the Company, is theprincipal owner of Fort Ashford and a substantial shareholder of the Company’scommon stock. Mr. Kavanaugh’s relationship to Fort Ashford Funds LLC wasfully disclosed to the Company and Mr. Kavanaugh did not participate inthe negotiations or decision process with respect to the Modification andAssignment Agreement. The Company paid $87,510 to Longview and $50,000 to FortAshford in cash as compensation for the extension of the maturity dates of theNotes.

On April 20, 2006, the Company paid $1,000,000against the principle balance of the Notes and extended the maturity date onthe Notes and the Note with Fort Ashford for an additional 60 days, throughJune 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, the Company paid off theprinciple balance and all applicable accrued interest under the Notes.Additionally, the Company extended the maturity date of the Ashford Note for anadditional 30 days, through July 20, 2006. The Company paid $50,000to Fort Ashford in cash as compensation for the extension of the Ashford Note.

On August 9, 2006, the Company paid off theprinciple balance of the Ashford Note, and all applicable accrued interestunder the Ashford Note.

**NOTE 16—OTHER COMPREHENSIVE 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 Accounting Standards Board (FASB) hasissued Statement of Financial Accounting Standards Number 109 (“SFAS 109”). “Accountingfor Income Taxes”, which requires the asset and liability method of accountingfor income taxes. Under the asset and liability method, deferred income taxesare recognized for the tax consequences of “temporary differences” by applyingenacted statutory tax rates applicable to future years to differences betweenthe financial statement carrying amounts and the tax basis of existing assetsand liabilities.

The Company’s net deferred tax asset as ofDecember 31, 2006, 2005, and 2004 consisted of the following:

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|                                                                                | ** ** | **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      |       | 2,176,692      |       | 690,363        |       |
| Net operating loss  carryforwards—SC                                      |       | 371,923        |       | 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     |       | 14,186,138     |       | 8,252,373      |       |
| Less valuation  allowance                                                      |       | —         |       | (14,186,138    | )          | (8,252,373     | )          |
| Deferred tax benefit                                                           |       | $              | 12,326,491 |           | $          | —         |       | $ | — |   |

The Company has removedthe valuation allowance for the deferred tax assets since it expects to realizefuture earnings to be offset by future tax benefits. In 2005 and 2004 thecompany recorded a valuation allowance for all of its net deferred tax assets.The Company’s valuation allowance decreased for the year endedDecember 31, 2006, $14,186,138 and increased for the years endedDecember 31, 2005, and 2004 $5,933,765 and $3,713,302, respectively.

As of December 31, 2006, 2005 and 2004, theCompany has available Federal operating loss carry-forwards of $18,611,810,$32,868,929, and $21,257,284, expiring through 2025, respectively, and stateoperating loss carry-forwards of $7,438,470, $21,610,537, and $9,879,269,expiring through 2025, respectively.

The following is a reconciliation of the provision forincome taxes at the U.S. federal income tax rate to the income taxes reflectedin the Statement of Operations:
|                                                 | ** ** | **December 31,  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**

The Company utilizes SFAS No. 128, “Earnings perShare” to calculate gain/loss per share. Basic earnings/loss per share iscomputed by dividing the earnings/loss available to common stockholders (as thenumerator) by the weighted-average number of common shares outstanding (as thedenominator). Diluted earnings/loss per share is computed similar to basicearning/loss per share except that the denominator is increased to include thenumber of additional common shares that would have been outstanding if allpotential common stock (including common stock equivalents) had all beenissued, and if such additional common shares were dilutive.
| Basic Earning Per Share Computation    | ** ** | **2006**   | ** ** |
|------------------------------------------------------------|------------|------------|------------|
| Net Earnings                                               |       | $          | 18,196,943 |   |
| Accretion of Series D  6% convertible preferred stock |       | (1,297,134 | )          |
| Preferred dividends                                        |       | (325,685   | )          |
| Net earnings available  to common shareholders             |       | $          | 16,574,124 |   |
| **Basic Earnings per common share**                        |       | $          | 0.37       |   |
| **Weighted-average shares used to  compute:**              | ** ** | ** ** | ** ** |
| Basic Profit/(loss) per share                              |       | 44,786,083 |       |

 

37

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| Diluted Earning Per Share Computation:               | ** ** | **2006**   | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|
| Earnings available to  common shareholders                               |       | $          | 16,574,124 |   |
| Add Back:                                                                |       |       |       |
| Accretion of  Series D 6% convertible preferred stock               |       | 1,297,134  |       |
| Preferred Dividends                                                      |       | 325,685    |       |
| Profit/(Loss) available  to common shareholders plus assumed conversions |       | $          | 18,196,943 |   |
| Weighted-average number  of common shares outstanding                    |       | 44,786,083 |       |
| Dilutive effect of:                                                      |       |       |       |
| Series D preferred  stock                                           |       | 2,369,259  |       |
| Warrants                                                                 |       | 1,631,822  |       |
| Stock options                                                            |       | 1,543,458  |       |
| Stock grants                                                             |       | 97,844     |       |
| **Weighted-average shares used to  compute:**                            | ** ** | ** ** | ** ** |
| Diluted Earnings/(loss)  per share                                       |       | 50,428,466 |       |
| **Diluted Earnings per common share**                                    |       | $          | 0.36       |   |

Under SFAS No. 128,where there is a loss, the inclusion of additional common shares isanti-dilutive (since the increased number of shares reduces the per share lossavailable to common stock holders), and

if the additional commonshares are anti-dilutive, they are not added to the denominator in thecalculation. For periods where the additional common shares are anti-dilutive,the following common stock equivalents have been excluded from the calculationof diluted loss per share:
|                                            | ** ** | **2005**  | ** ** | **2004**   | ** ** |
|--------------------------------------------|------------|-----------|------------|------------|------------|
| Convertible  Preferred Stock Series B |       | —    |       | 10,493,939 |       |
| Convertible  Preferred Stock Series C |       | —    |       | —     |       |
| Convertible  Preferred Stock Series D |       | 6,288,428 |       | —     |       |
| Warrants                                   |       | 2,104,863 |       | 1,725,942  |       |
| Options                                    |       | 323,420   |       | —     |       |
| Total                                      |       | 8,716,711 |       | 12,219,881 |       |

 
| Basic Earning Per Share Computation    | ** ** | **2005**     | ** **  | **2004**     | ** ** |
|------------------------------------------------------------|------------|--------------|-------------|--------------|------------|
| ** **                                                 | ** ** | **Restated** | ** **  | **Restated** | ** ** |
| Net Loss                                                   |       | $            | (14,404,622 | )            | $          | (11,953,803 | ) |
| Accretion of  Series D 6% convertible preferred stock |       | (2,041,697   | )           | —       |       |
| Preferred Dividends                                        |       | (778,530     | )           | —       |       |
| (Loss) available to  common shareholders                   |       | $            | (17,224,849 | )            | $          | (11,953,803 | ) |
| **Basic Loss per common share**                            |       | $            | (0.51       | )            | $          | (0.62 | ) |
| **Weighted-average shares used to  compute:**              | ** ** | ** **   | ** **  | ** **   | ** ** |
| Basic loss per share                                       |       | 33,926,573   |        | 19,357,939   |       |

 
| Diluted Earning Per Share Computation: | ** ** | **2005**   | ** **  | **2004**   | ** ** |
|------------------------------------------------------------|------------|------------|-------------|------------|------------|
| (Loss) available to  common shareholders                   |       | $          | (17,224,849 | )          | $          | (11,953,803 | ) |
| **Diluted Loss per common share**                          |       | $          | (0.51       | )          | $          | (0.62 | ) |
| **Weighted-average shares used to  compute:**              | ** ** | ** ** | ** **  | ** ** | ** ** |
| Diluted loss per share                                     |       | 33,926,573 |        | 19,357,939 |       |

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

The following table summarizes information aboutaccounts and reserves:

38

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| ** **                         | ** ** | ** **            | ** ** | **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 |   |
| 2005(A)                            |       | $                     | —     |                | $          | 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 |   |
| 2005(B)                            |       | $                     | 729,461    |                | $          | 1,764,264     |       | $          | 807,663    |                | $          | — |   | $ | 1,686,062 |   |
| 2004                               |       | $                     | 180,384    |                | $          | 728,595       |       | $          | 179,518    |                | $          | — |   | $ | 729,461 |   |

 

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| (A)    |   | Consists of the Allowance for Contractual  Adjustments, as presented on the Company’s balance sheet and explained in  Footnote 7 to the financial statements. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                               |
| (B)    |   | Inclusive of the general warranty reserve as well as  the Twin Disc Warranty Reserve of $1,306,018 recorded in 2005.                                               |

 

**NOTE 20—SUMMARIZED QUARTERLY UNAUDITED FINANCIALDATA**
|                                             | ** ** | **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                            |       | 12,826    |       | 1,771,136 |   | 592,150 |   | 4,259,450 |   |
| **Net  Earnings (Loss)**                    |       | (767,449  | )          | 973,024 |   | 602,698 |   | 17,388,670 |   |
| **Basic  Earnings (loss) per common share** |       | $         | (0.04      | ) | $ | 0.01 |   | $ | 0.00 |   | $ | 0.40 |   |
| **Diluted loss per common share**           |       | $         | (0.04      | ) | $ | 0.01 |   | $ | 0.00 |   | $ | 0.39 |   |

 
| ** **                                    | ** ** | **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 |   | (1,525,385 | ) |
| Operating Loss                                |       | (3,528,382             | )          | (473,325 | ) | (5,321,045 | ) | (6,307,311 | ) |
| **Net Loss**                                  |       | (936,306               | )          | (647,344 | ) | (5,666,483 | ) | (7,154,489 | ) |
| **Basic Earnings (loss) per  common share**   |       | (0.05                  | )          | (0.04 | ) | (0.19 | ) | (0.23 | ) |
| **Diluted Earnings (loss) per  common share** |       | (0.05                  | )          | (0.04 | ) | (0.19 | ) | (0.23 | ) |
|                                               |            |                        |            |  |  |  |  |  |  |  |  |  |  |

**NOTE 21—SUBSEQUENT EVENTS**

On January 9, 2007, NASDAQ approved the Company’sapplication to list its common stock on the NASDAQ Stock Market. The Companywill retain its FRPT trading symbol and the listing was effectiveJanuary 18, 2007.

On January 11, 2007, the Company received a lettercontract from the United States Marine Corps for 15 of its Cougar JointExplosive Ordnance Disposal Rapid Response Vehicles (JERRV). The lettercontract for the vehicles, spare parts and sustainment services has a totalvalue of approximately $9,379,370.

On January 19, 2007, the Company’s Board ofDirectors appointed Michael S. Durski to the position of Chief FinancialOfficer.

On January 25, 2007, the Company received afour-vehicle letter contract from the U.S. Marine Corps for testing, productionand sustainability for its Mine Resistant Ambush Protected (MRAP) vehicleprogram. The work under this contract will be performed by Force Dynamics, LLC,the Company’s joint venture with General Dynamics Land Systems, Inc.

On February 14, 2007, the Company received acontract award from the U.S. Marine Corps for 125 vehicles as part of theMine Resistant Ambush Protected (MRAP) vehicle program. The work under thecontract will be performed by Force Dynamics, LLC, the Company’s joint venturewith General Dynamics Land Systems, Inc. The contract award has a totalvalue of approximately $67 million. Under the contract award, Force Dynamicswill produce 65 vehicles for Category I and 60 vehicles for Category II of the 

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MRAP program. The vehicles are to be delivered within120 days from the delivery of the contract and will be used by all branches ofthe U.S. armed forces.

On February 20, 2007, the Company’s Mastiffcontract with the British Ministry of Defense was modified to add 22 additionalMastiff vehicles increasing the total to be delivered to 108.

On March 9, 2007, the Company received a deliveryorder from the U.S. Marine Corps for an additional 19 Buffalomine-protected vehicles worth an estimated $16.2 million. Under aNovember 2006 contract award administered by the Marine Corps SystemsCommand, the Company expects to deliver the 19 Buffalo vehicles byDecember 2007.

On March 9, 2007, the Company purchased theResearch and Developmental Testing Facility of NEWTEC ServicesGroup, Inc., located near Edgefield, SC. The facility will be used toexpand the Company’s research and development activities and support theverification and quality control validation of the Company’s armored vehiclesused to protect military personnel against explosive threats.

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## **ITEM9A.  CONTROLS AND PROCEDURES**

DISCLOSURE CONTROLS ANDPROCEDURES

Our managementevaluated, with the participation of our Chief Executive Officer and our ChiefFinancial Officer, the effectiveness of our disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended (the “Exchange Act”)) as of the end of the period coveredby this Annual Report on Form 10-K/A. Based on this evaluation, our Chief Executive Officer and our ChiefFinancial Officer have concluded that our disclosure controls and procedureswere not effective as of December 31, 2006 to ensure that information we arerequired to disclose in reports that we file or submit under the Exchange Act(i) is recorded, processed, summarized and reported within the timeperiods specified in Securities and Exchange Commission rules and forms,and (ii) is accumulated and communicated to our management, including ourChief Executive Officer and our Chief Financial Officer, as appropriate to allowtimely decisions regarding required disclosure. Our disclosure controls andprocedures are designed to provide reasonable assurance that such informationis accumulated and communicated to our management.  Our management concluded so because of thematerial weaknesses discussed in “Management’s Report on Internal Control OverFinancial Reporting” below. Our disclosure controls and procedures includecomponents of our internal control over financial reporting.

MANAGEMENT’S REPORT ONINTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting as defined inRules 13a-15(f) and 15d-15(f) under the Exchange. Our internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. Our internal control over financial reportingincludes those policies and procedures that:
|        | (i)    | pertain to the maintenance of records that, in  reasonable detail, accurately and fairly reflect the transactions and  dispositions of our assets;                                                                                                                                                                                   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                 |
|   | (ii)   | provide reasonable assurance that transactions are  recorded as necessary to permit preparation of financial statements in  accordance with generally accepted accounting principles, and that receipts  and expenditures of the Company are being made only in accordance with authorizations  of our management and directors; and |
|   |   |                                                                                                                                                                                                                                                                                                                                 |
|   | (iii)  | provide reasonable assurance regarding prevention or  timely detection of unauthorized acquisition, use or disposition of our  assets that could have a material effect on the financial statements.                                                                                                                                 |

 

Internal control over financial reporting includes thecontrols themselves, monitoring and internal auditing practices and actionstaken to correct deficiencies identified.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

Management assessed the effectiveness of our internalcontrol over financial reporting as of December 31, 2006. In making thisassessment, management used the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) in *Internal Control*—*Integrated Framework.*

Based on thisassessment, our management identified the following material weaknesses in theCompany’s internal control over financial reporting as of December 31, 2006:

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

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

(2)          Wedid not maintain effective controls to ensure the accuracy of disclosures inour financial statements and classification of certain financial transactionsin the financial statements. Specifically, we failed to classify the allowance for 

41

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contractual adjustmentsas a reduction in receivables and had incorrect or inadequate disclosures infinancial statement disclosures related to the non-recurring warranty,statement of shareholders’ equity, deferred tax assets, liabilities and relatedincome tax expense, contingency losses, discontinued operations, receivablesand factoring accounts, debt and the statement of cash flows in our financialstatements.

The controldeficiency described above in (1) resulted in the restatement of our annual consolidatedfinancial statements for 2005, 2004, and 2003. The control deficiency describedin (2) required amendment of our annual financial statements for the years2005, 2004 and 2003 which are included in our amended 2005 Form 10-K filing.The control deficiency related to earnings per share in (1) resulted inrestatement of the 2006 earnings per share calculations in the annual financialstatements in the amended 2006 Form 10-K. Additionally, these control deficiencies could result in a misstatement inour annual or interim consolidated financial statements that would not beprevented or detected. Management has determined that each of the controldeficiencies described above constitutes a material weakness.

These deficienciesresult in more than a remote likelihood that a material misstatement of theCompany’s annual or interim financial statements would not be prevented ordetected.  Management has taken or plansto take steps to improve our internal control over financial reporting (seebelow).

As a result of thematerial weaknesses, our management has concluded that our internal controlover financial reporting was not effective as of December 31, 2006.

The Company’sindependent auditor, Jaspers+Hall, PC, an independent registered publicaccounting firm, has issued an attestation report on our assessment of ourinternal control over financial reporting as of December 31, 2006.  This attestation report “Report ofIndependent Registered Public Accounting Firm” appears on page 6.

Plan for Remediationof Material Weaknesses:  We believe thesteps described below, some of which we have already taken as noted herein,together with others that we plan to take, will remediate the materialweaknesses which existed at December 31, 2006.

We have taken or planto take the following steps to improve our internal control over financialreporting:

·                  We hired a newchief financial officer during the first quarter of 2007.

·                  We have engageda professional service organization which specializes in the assessment and theenhancement of the effectiveness of internal controls over financial reporting.

·                  We areimplementing a comprehensive electronic business operating system along with asupporting integrated ERP computer system which will significantly enhance ourprocesses and internal control environment, and change the manner ofcollection, reporting and management of accounting data resulting in a furtherstrengthening the overall reliability of financial data of the Company.

CHANGES IN INTERNAL CONTROL OVER FINANCIALREPORTING.

Ourmanagement, with the participation of our Chief Executive Officer and ChiefFinancial Officer , evaluates any changes in our internal control overfinancial reporting that occurred during each fiscal quarter that havematerially affected, or are reasonably likely to materially affect, suchinternal control over financial reporting. There was no change in internalcontrol over financial reporting (as defined in Rule 13a-15(f) of theSecurities Exchange Act of 1934) that occurred during the fourth quarterof 2006 that materially affected or was reasonably likely to materially affectour internal control over financial reporting.

C*hief Executive Officer and Chief Financial OfficerCertifications. *Thecertifications of our Chief Executive Officer and Chief Financial Officer,which are attached as Exhibits 31.1 and 31.2 to this report, includeinformation about our disclosure controls and procedures and internal controlover financial reporting. These certifications should be read in conjunctionwith the information contained in this Item 9A for a more completeunderstanding of the matters covered by the certifications.

42

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# **PART IV**

## **ITEM15.           EXHIBITS, FINANCIALSTATEMENT SCHEDULES.**

| NUMBER | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                                           |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1    |       | Agreement and Plan of Merger (included as Attachment  A to Exhibit 99.2 to the Form DEF 14A filed November 19, 2004, and  incorporated herein by reference).                                                                                                                                    |
|   |       |                                                                                                                                                                                                                                                                                                      |
| 3.1    |       | Articles of Incorporation (included as Attachment B  to Exhibit 99.2 to the Form DEF 14A filed November 19, 2004,  and incorporated herein by reference).                                                                                                                                  |
|   |       |                                                                                                                                                                                                                                                                                                      |
| 3.2    |       | By-Laws (included as Attachment C to Exhibit 99.2 to  the Form DEF 14A filed November 19, 2004, and incorporated herein  by reference).                                                                                                                                                         |
|   |       |                                                                                                                                                                                                                                                                                                      |
| 3.3    |       | Amended Articles of Incorporation (included as  Attachment D to Exhibit 99.2 to the Form DEF 14A filed November 19,  2004, and incorporated herein by reference).                                                                                                                               |
|   |       |                                                                                                                                                                                                                                                                                                      |
| 4.1    |       | Certificate of Designation for Series D  Convertible Preferred Stock, dated January 19, 2005 (included as Exhibit  4.1 to the Form 8-K filed January 27, 2005, and incorporated herein  by reference).                                                                                |
|   |       |                                                                                                                                                                                                                                                                                                      |
| 4.2    |       | Form of Common Stock Purchase Warrant, dated  January 19, 2005, (included as Exhibit 4.2 to the Form 8-K  filed January 27, 2005, and incorporated herein by reference).                                                                                                         |
|   |       |                                                                                                                                                                                                                                                                                                      |
| 4.3    |       | Securities Purchase Agreement, dated  January 19, 2005 (included as Exhibit 4.3 to the Form 8-K  filed January 27, 2005, and incorporated herein by reference).                                                                                                                       |
|   |       |                                                                                                                                                                                                                                                                                                      |
| 4.4    |       | Registration Rights Agreement, dated  January 19, 2005 (included as Exhibit 4.4 to the Form 8-K  filed January 27, 2005, and incorporated herein by reference).                                                                                                                       |
|   |       |                                                                                                                                                                                                                                                                                                      |
| 4.5    |       | Amended and Restated Certificate of Designation for  Series B Convertible Preferred Stock (included as Exhibit 4.1 of the  Form 8-K filed February 15, 2005, and incorporated herein by  reference).                                                                                       |
|   |       |                                                                                                                                                                                                                                                                                                      |
| 4.6    |       | Amended and Restated Certificate of Designation for  Series C Convertible Preferred Stock (included as Exhibit 4.2 of the  Form 8-K filed February 15, 2005, and incorporated herein by  reference).                                                                                       |
|   |       |                                                                                                                                                                                                                                                                                                      |
| 4.7    |       | Bridge Facility between the Company and GC Financial  Services, Inc., dated September 29, 2005 (included as  Exhibit 4.1 to the Form 8-K filed July 8, 2005, and  incorporated herein by reference).                                                                             |
|   |       |                                                                                                                                                                                                                                                                                                      |
| 4.8    |       | Demand Note between the Company and GC Financial  Services, Inc., dated September 29, 2005 (included as  Exhibit 4.2 to the Form 8-K filed July 8, 2005, and  incorporated herein by reference).                                                                                 |
|   |       |                                                                                                                                                                                                                                                                                                      |
| 10.1   |       | 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).                                              |
|   |       |                                                                                                                                                                                                                                                                                                      |
| 10.2   |       | 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).                                    |
|   |       |                                                                                                                                                                                                                                                                                                      |
| 10.3   |       | 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).                                                                                         |
|   |       |                                                                                                                                                                                                                                                                                                      |
| 10.4   |       | 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).                                                                         |
|   |       |                                                                                                                                                                                                                                                                                                      |
| 10.5   |       | 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). |
|   |       |                                                                                                                                                                                                                                                                                                      |
| 10.6   |       | 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).                                                                                                  |

 

43

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| 10.7   |   | 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).                                                                                                                                                                    |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.8   |   | Registration Rights Agreement between the Company  and Dutchess Private Equities Fund, L.P., dated January 26, 2004  (included as Exhibit 10.9 to the SB-2 filed January 27, 2004, and  incorporated herein by reference).                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.9   |   | Placement Agent Agreement between the Company,  Charleston Capital, LLC, and Dutchess Private Equities Fund, L.P., dated  January 27, 2004 (included as Exhibit 10.10 to the SB-2 filed on  January 27, 2004, and incorporated herein by reference).                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.10  |   | 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). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.11  |   | 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).                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.12  |   | 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).                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.13  |   | 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).                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.14  |   | 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).                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.15  |   | 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).                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.16  |   | 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).                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.17  |   | 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).                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.18  |   | 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).                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.19  |   | 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).                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.20  |   | 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).                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.21  |   | 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).                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.22  |   | 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).                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.23  |   | Order for Supplies or Services and Delivery Order  between the Company and U.S. Department of Defense, dated September 23,  2005 (included as Exhibit 10.1 to the Form 8-K filed  September 27, 2005, and incorporated herein by reference).                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.24  |   | 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).                                                                                                                                                             |

 

44

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| 10.25  |   | 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).                                                                                                                        |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.26  |   | 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).                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.27  |   | 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).                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.28  |   | 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).                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.29  |   | 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).                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.30  |   | 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).                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.31  |   | 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).                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.32  |   | 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).                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.33  |   | 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).                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.34  |   | 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).                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.35  |   | 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).                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.36  |   | 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). |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.37  |   | 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).                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.38  |   | 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).                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.39  |   | 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).                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.40  |   | 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).                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.41  |   | 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).                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.42  |   | 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).                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.43  |   | 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).                                                                                                                  |

 

45

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| 10.44  |   | 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).      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                  |
| 10.45  |   | 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).                     |
|   |   |                                                                                                                                                                                                                                  |
| 10.46  |   | 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.                                                                                       |

 

46

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# **SIGNATURES**

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.
|                        | ** ** | **FORCE PROTECTION, INC.** |
|------------------------|------------|----------------------------|
| Date: October 12, 2007 |       | By:                        | /s/ Gordon McGilton |
|                   |       |                       | Gordon McGilton |
|                   |       |                       | *Chief Executive Officer* |
|                   |       |                       |
| Date: October 12, 2007 |       | By:                        | /s/ Michael Durski |
|                   |       |                       | Michael Durski |
|                   |       |                       | *Chief Financial Officer* |
|                   |       |                       | *Principal Accounting Officer* |

* *

47

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