Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-Q/A**

**(AMENDMENT NO. 1)**

 

(Mark One)

** **

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

 

**For the quarterly period ended June 30, 2007**

 

**OR**

** **

| **o** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------------|

 

**For thetransition period from                                    to                                   **

 

**Commission File Number 001-33253**

 

**Force Protection, Inc.**

(Exact Name of Registrant as Specified in ItsCharter)

 

| **Nevada**                                                      | ** ** | **84-1383888**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |

 

| **9801 Highway 78, Building No. 1  Ladson, SC** | ** ** | **29456**  |
|------------------------------------------------------|------------|------------|
| (Address of Principal Executive Offices)             |       | (Zip Code) |

 

**(843) 574-7000**

(Registrant’s Telephone Number, Including AreaCode)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. o Yes   x  No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

(CheckOne):

 

| Large accelerated filer  x |   | Accelerated  filer  o         |
|--------------------------------------|--------|-----------------------------------------|
|                                 |   |                                    |
| Non-accelerated filer  o   |   | Smaller  reporting company  o |

(Donot check if a smaller reporting company)

 

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

 

Theregistrant had 68,318,162 shares of common stock outstanding as of September 30,2008.

 

 

 

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TABLE OF CONTENTS

 
| **PART I—FINANCIAL INFORMATION**                                                                |       | 2          |
|-----------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                                | ** ** | ** ** |
| Item 1. Financial Statements                                                                         |       | 2          |
|                                                                                                      |       |       |
| Item  2. Management’s Discussion and Analysis of Financial Condition and  Results of Operations |       | 31         |
|                                                                                                      |       |       |
| Item  4. Controls and Procedures                                                                     |       | 45         |
|                                                                                                      |       |       |
| **PART II—OTHER INFORMATION**                                                                   |       | 48         |
| ** **                                                                                                | ** ** | ** ** |
| Item 6. Exhibits                                                                                     |       | 48         |

 

**i**

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**EXPLANATORY NOTE REGARDING RESTATEMENTS**

 

ThisQuarterly Report on Form 10-Q/A for the three- and six- month periodsended June 30, 2007 includes restatements of the previously filedcondensed consolidated financial statements and data (and related disclosures)for the period ended June 30, 2007. These corrections are discussed inNote 2, *Restatement and Reclassification of PreviouslyIssued Condensed Consolidated Financial Statements,* included in theaccompanying condensed consolidated financial statements for the period ended June 30,2007. These corrections are also discussed in Item 2, Management’sDiscussion and Analysis of Financial Condition and Results of Operations ofthis Quarterly Report on Form 10-Q/A and are further discussed in Item 7,Management’s Discussion and Analysis of Financial Condition and Results ofOperations and Note 16, Summarized Quarterly Unaudited Financial Data, tothe consolidated financial statements included in our Annual Report on Form 10-Kfor our fiscal period ended December 31, 2007 filed with the United StatesSecurities and Exchange Commission (“SEC”) on September 15, 2008. Wepreviously announced, in a Form 8-K filed with the SEC on August 28,2008, that we would restate our previously reported condensed consolidatedfinancial statements for the three-month period ended March 31, 2007 andthe three- and six-month periods ended June 30, 2007 as a result of errorsdiscovered by management during its year-end and quarterly review, includingerrors associated with recognizing the value of revenues, certain accruedliabilities, inventory and deferred expenses in the proper quarterlyperiods.  The information contained inthis Quarterly Report on Form 10-Q/A amends only Items 1, 2 and 4 of Part Iand Item 6 of Part II to the originally filed Quarterly Report on Form 10-Qfiled with the SEC on August 9, 2007 (the “Original Report”).

 

This Quarterly Report on Form 10-Q/Adoes not reflect all events occurring after the original filing of the OriginalReport or modify or update all the disclosures affected by subsequent events.Information not modified or updated herein reflects the disclosures made at thetime of the filing of the Original Report on August 9, 2007. Accordingly,this Form on 10-Q/A should be read in conjunction with all of our periodicfilings, as amended if applicable, including our Annual Report on Form 10-Kfor the year ended December 31, 2007, filed with the SEC subsequent to thefiling date of the Original Report.

 

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**PART I. FINANCIAL INFORMATION**

 

**Item 1.**           FinancialStatements (Unaudited)

 

**Force Protection, Inc. and Subsidiaries**

**Condensed Consolidated Balance Sheets**

**(Unaudited)**

 
| ** **                                           | ** ** | **As of  June 30, 2007  (Restated)** | ** ** | **As of  December 31, 2006** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                           | ** ** | **(In Thousands)**                        | ** ** |
| **Assets**                                           |       |                                           |       |                                   |       |
| **Current  assets:**                                 |       |                                           |       |                                   |       |
| Cash and cash equivalents                            |       | $                                              | 37,874     |                                   | $          | 156,319 |   |
| Accounts receivable, net of allowance                |       | 107,829                                        |       | 42,035                                 |       |
| Inventories                                          |       | 143,309                                        |       | 60,396                                 |       |
| Deferred income tax assets                           |       | 12,373                                         |       | 9,563                                  |       |
| Income taxes receivable                              |       | 75                                             |       | —                                 |       |
| Other current assets                                 |       | 9,977                                          |       | 373                                    |       |
| Total current assets                                 |       | 311,437                                        |       | 268,686                                |       |
| Property and equipment, net                          |       | 31,107                                         |       | 8,964                                  |       |
| Intangible assets, net                               |       | 1,706                                          |       | —                                 |       |
| Deferred income tax assets                           |       | 2,764                                          |       | 2,764                                  |       |
| **Total  assets**                                    |       | $                                              | 347,014    |                                   | $          | 280,414 |   |
| **Liabilities  and Shareholders’ Equity**       |       |                                           |       |                                   |       |
| **Current  liabilities:**                            |       |                                           |       |                                   |       |
| Accounts payable                                     |       | $                                              | 99,536     |                                   | $          | 38,654 |   |
| Due to United States government                      |       | 11,213                                         |       | 6,023                                  |       |
| Other current liabilities                            |       | 9,910                                          |       | 4,891                                  |       |
| Advance payments on contracts                        |       | 2,800                                          |       | 12,824                                 |       |
| Total current liabilities                            |       | 123,459                                        |       | 62,392                                 |       |
| Other long-term liabilities                          |       | 412                                            |       | 168                                    |       |
|                                                 |       | 123,871                                        |       | 62,560                                 |       |
| Commitments and contingencies                        |       |                                           |       |                                   |       |
| **Shareholders’  equity:**                      |       |                                           |       |                                   |       |
| Common stock                                         |       | 68                                             |       | 67                                     |       |
| Additional paid-in capital                           |       | 256,143                                        |       | 251,038                                |       |
| Accumulated deficit                                  |       | (33,068                                        | )          | (33,251                                | )          |
| Total shareholders’ equity                      |       | 223,143                                        |       | 217,854                                |       |
| **Total  liabilities and shareholders’ equity** |       | $                                              | 347,014    |                                   | $          | 280,414 |   |

 

The accompanying notes to condensed consolidated financialstatements are an integral part of these balance sheets.

 

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**Force Protection, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                                 | ** ** | **For the three months ended June 30,**                            | ** ** | **For the six months ended June 30,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                 | ** ** | **2007**                                                           | ** ** | ** **                                      | ** ** | **2007** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **(Restated)**                                                     | ** ** | **2006**                                        | ** ** | **(Restated)** | ** ** | **2006** | ** ** |
| ** **                                                 | ** ** | **(In Thousands, Except Per Share Data)** | ** ** |
| Net sales                                                  |       | $                                                                  | 138,659    |                                            | $          | 56,075 |   | $ | 243,484 |   | $ | 90,877 |   |
| Cost of sales                                              |       | 118,090                                                            |       | 45,918                                          |       | 203,215 |   | 74,082 |   |
| Gross profit                                               |       | 20,569                                                             |       | 10,157                                          |       | 40,269 |   | 16,795 |   |
|                                                       |       |                                                               |       |                                            |       |   |   |   |   |
| General and administrative expenses                        |       | 17,339                                                             |       | 7,745                                           |       | 34,405 |   | 13,706 |   |
| Research and development expenses                          |       | 3,503                                                              |       | 641                                             |       | 8,504 |   | 1,305 |   |
| Operating income (loss)                                    |       | (273                                                               | )          | 1,771                                           |       | (2,640 | ) | 1,784 |   |
| Other income, net                                          |       | 1,106                                                              |       | 21                                              |       | 2,894 |   | 48 |   |
| Interest expense                                           |       | (22                                                                | )          | (819                                            | )          | (31 | ) | (1,626 | ) |
| Income before income tax expense                           |       | 811                                                                |       | 973                                             |       | 223 |   | 206 |   |
| Income tax expense                                         |       | (148                                                               | )          | —                                          |       | (40 | ) | — |   |
| Net income                                                 |       | 663                                                                |       | 973                                             |       | 183 |   | 206 |   |
| Accretion of Series D 6% convertible  preferred stock |       | —                                                             |       | (100                                            | )          | — |   | (261 | ) |
| Preferred stock dividend                                   |       | —                                                             |       | (449                                            | )          | — |   | (934 | ) |
| Net income (loss) available to common  shareholders        |       | $                                                                  | 663        |                                            | $          | 424 |   | $ | 183 |   | $ | (989 | ) |
| **Earnings  (loss) per common share:**                     |       |                                                               |       |                                            |       |   |   |   |   |
| Basic                                                      |       | $                                                                  | 0.01       |                                            | $          | 0.01 |   | $ | 0.00 |   | $ | (0.03 | ) |
| Diluted                                                    |       | $                                                                  | 0.01       |                                            | $          | 0.01 |   | $ | 0.00 |   | $ | (0.03 | ) |
| **Weighted  average common shares outstanding:**           |       |                                                               |       |                                            |       |   |   |   |   |
| Basic                                                      |       | 68,123                                                             |       | 39,512                                          |       | 67,879 |   | 38,488 |   |
| Diluted                                                    |       | 68,555                                                             |       | 39,512                                          |       | 68,248 |   | 38,488 |   |

 

The accompanying notes to condensed consolidated financialstatements are an integral part of these statements.

 

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**Force Protection, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                         | ** ** | **For the six months ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2007  (Restated)**                                           | ** ** | **2006** | ** ** |
| ** **                                                                                         | ** ** | **(In Thousands)**                                        | ** ** |
| **Cash  flows from operating activities:**                                                         |       |                                                           |       |   |   |
| Net Income                                                                                         |       | $                                                              | 183        |   | $ | 206 |   |
| Adjustments to reconcile net income to net  cash (used in) provided by operating activities – |       |                                                           |       |   |   |
| Depreciation and amortization                                                                      |       | 2,079                                                          |       | 338 |   |
| Deferred tax benefit                                                                               |       | (2,810                                                         | )          | — |   |
| Income tax benefit realized from stock  options exercised                                          |       | (2,276                                                         | )          | — |   |
| Stock-based compensation                                                                           |       | 1,553                                                          |       | 363 |   |
| Allowance for doubtful accounts                                                                    |       | (45                                                            | )          | — |   |
| Provision for inventory obsolescence                                                               |       | 3,284                                                          |       | 1,507 |   |
| Warranty reserve                                                                                   |       | 838                                                            |       | 944 |   |
| (Increase) decrease in assets –                                                               |       |                                                           |       |   |   |
| Accounts receivable                                                                                |       | (65,749                                                        | )          | (4,244 | ) |
| Inventories                                                                                        |       | (86,197                                                        | )          | 11,145 |   |
| Income tax receivable                                                                              |       | (75                                                            | )          |   |   |
| Other current assets                                                                               |       | (9,604                                                         | )          | (27 | ) |
| Increase (decrease) in liabilities –                                                          |       |                                                           |       |   |   |
| Accounts payable                                                                                   |       | 60,882                                                         |       | 7,212 |   |
| Due to United States government                                                                    |       | 5,190                                                          |       | 176 |   |
| Other current liabilities                                                                          |       | 6,291                                                          |       | (85 | ) |
| Advance payments on contracts                                                                      |       | (10,024                                                        | )          | (12,383 | ) |
| Total adjustments                                                                                  |       | (96,663                                                        | )          | 4,946 |   |
| **Net cash  (used in) provided by operating activities**                                           |       | (96,480                                                        | )          | 5,152 |   |
| **Cash  flows from investing activities:**                                                         |       |                                                           |       |   |   |
| Capital expenditures                                                                               |       | (25,538                                                        | )          | (2,348 | ) |
| **Net cash  used in investing activities**                                                         |       | (25,538                                                        | )          | (2,348 | ) |
| **Cash  flows from financing activities:**                                                         |       |                                                           |       |   |   |
| Proceeds from issuance of common stock:                                                            |       |                                                           |       |   |   |
| Other                                                                                              |       | 1,277                                                          |       | 5,971 |   |
| Dividends on Series D preferred stock                                                         |       |                                                           |       | (378 | ) |
| Payments on debt                                                                                   |       |                                                           |       | (5,000 | ) |
| Income tax benefit realized from stock  options exercised                                          |       | 2,276                                                          |       | — |   |
| Net increase in long-term liabilities                                                              |       | 20                                                             |       | — |   |
| **Net cash  provided by financing activities**                                                     |       | 3,573                                                          |       | 593 |   |
| **Increase  (decrease) in cash and cash equivalents**                                              |       | (118,445                                                       | )          | 3,397 |   |
| **Cash and  cash equivalents at beginning of period**                                              |       | 156,319                                                        |       | 1,217 |   |
| **Cash and  cash equivalents at end of period**                                                    |       | $                                                              | 37,874     |   | $ | 4,614 |   |
| **Supplemental  cash flow information:**                                                           |       |                                                           |       |   |   |
| Cash paid during the period for                                                                    |       |                                                           |       |   |   |
| Interest, net of amounts capitalized                                                               |       | $                                                              | 31         |   | $ | 1,609 |   |
| Income taxes                                                                                       |       | $                                                              | 700        |   | $ | 338 |   |
| **Supplemental  schedule of noncash investing and financing activities:**                          |       |                                                           |       |   |   |
| Note payable, net of discount, issued as  consideration for non-compete agreement                  |       | $                                                              | 390        |   | $ | — |   |

 

The accompanying notes to condensed consolidated financialstatements are an integral part of these statements.

 

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**Force Protection, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements**

 

**1.****             ****Summary of Significant AccountingPolicies**

 

***Organization and Description of the Business***

 

Force Protection, Inc., reincorporated under the laws of Nevada in2005, and its subsidiaries, is an important provider of blast- andballistic-protected products used to support armed forces and securitypersonnel in harm’s way. We design, manufacture, test, deliver and support ourblast- and ballistic-protected products with the purpose to increasesurvivability of the users of the products. Our specialty vehicles, which webelieve are at the forefront of blast- and ballistic-protected technology, aredesigned to protect their occupants from landmines, hostile fire, andimprovised explosive devices (“IEDs”). Our primary customer is the UnitedStates Department of Defense (“DoD”) where we service two principal services,the U. S. Army and U. S. Marine Corps.

 

References herein to “Force Protection,” the “Company,” “we,” “our,” or“us” refer to Force Protection, Inc. and its subsidiaries unless otherwisestated or indicated by context.

 

Commencingin March 2008, in conjunction with the preparation of our consolidatedfinancial statements for the year ended December 31, 2007, we undertook acomprehensive review of our previously issued unaudited condensed consolidatedfinancial statements for the periods ended March 31, 2007, June 30,2007 and September 30, 2007, collectively referred to as the (QuarterlyFinancial Statements). As a result of this review, we have determined that thepreviously issued unaudited Quarterly Financial Statements were not prepared inaccordance with generally accepted accounting principles in the United Statesof America (“GAAP”) and we have restated those previously issued QuarterlyFinancial Statements. The condensed consolidated financial statements for theperiod ended June 30, 2007, include the effects of these restatements.(See Note 2, *Restatement and Reclassification ofPreviously Issued Condensed Consolidated Financial Statements*).

 

***Basis of Presentation and Consolidation***

 

These unaudited condensed consolidated financial statements should beread in conjunction with (i) our audited consolidated financial statementsincluded in our Annual Report on Form 10-K for the year ended December 31,2006 filed with the United States Securities and Exchange Commission (“SEC”) onMarch, 16, 2007, as amended on July 12, 2007 and on October 15, 2007,and (ii) because of the timing of the filing of this amended QuarterlyReport on Form 10-Q/A, our audited consolidated financial statementsincluded in our Annual Report on Form 10-K for the year ended December 31,2007, filed with the SEC on September 15, 2008.  These unaudited condensed consolidated financialstatements have been prepared pursuant to Rule 10-01 of Regulation S-X.Certain information and note disclosures normally included in annual financialstatements prepared in accordance with GAAP have been condensed or omittedpursuant to those rules and regulations, although we believe that thedisclosures made herein are adequate to make the information not misleading.

 

The unaudited results of operations for the interim periods shown inthese financial statements are not necessarily indicative of operating resultsfor the entire year. In our opinion, the accompanying condensed consolidatedfinancial statements recognize all adjustments of a normal recurring natureconsidered necessary to fairly state the financial position, results ofoperations, and cash flows for each interim period presented.

 

These unaudited condensed consolidated financial statements include theassets, liabilities, revenues and expenses of our two wholly ownedsubsidiaries, Force Protection Industries, Inc. and Force Protection Technologies, Inc.  We eliminate from our financial results allsignificant intercompany accounts and transactions.

 

***Use of Estimates***

 

Thepreparation of our unaudited condensed consolidated financial statements inconformity with GAAP requires the use of estimates and assumptions that affectthe reported amounts of assets and liabilities, the disclosure of contingentassets and liabilities at the date of the unaudited condensed consolidatedfinancial statements, and the reported amounts of revenues and expenses duringthe reporting periods. Significant estimates and assumptions are used for, butare not limited to: (1) revenue recognition; (2) allowance fordoubtful accounts; (3) definitization and advance payments on contracts; (4) inventorycosts and reserves; (5) asset impairments; (6) depreciable lives ofassets; (7) economic lives and fair

 

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**Force Protection, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)**

 

valueof leased assets; (8) income tax reserves and valuation allowances; (9) fairvalue of stock options; (10) allocation of direct and indirect cost ofsales; and (11) contingent liabilities, warranty, and litigation reserves.Future events and their effects cannot be predicted with certainty;accordingly, our accounting estimates require the exercise of judgment. Theaccounting estimates used in the preparation of our unaudited condensed consolidatedfinancial statements will change as new events occur, as more experience isacquired, as additional information is obtained and as our operatingenvironment changes. We evaluate and update our assumptions and estimates on anongoing basis and may employ outside experts to assist in our evaluation, asconsidered necessary. Actual results could differ from those estimates.

 

***Risks and Uncertainties***

 

Weare exposed to a number of risks in the normal course of our operations that couldpotentially affect our financial position, results of operations, and cashflows.

 

*CustomerConcentration*

 

Substantiallyall of our revenue comes from our DoD contracts either as a prime contractor oras a subcontractor to another prime contractor to the U.S. government.  Revenue from those contracts approximated 88%and 89 % of*Net sales* for the sixmonths ended June 30, 2007 and 2006, respectively.  Our accounts receivable from the U.S.government as of June 30, 2007 was 99 % of our accounts receivable.

 

*Law andRegulations*

 

As a result of those DoD contracts, we are required to participate inthe U.S. government contracting process, which involves extensive statutes,regulations and requirements of the U.S. government agencies and entities thatgovern these programs, including award, administration, funding, andperformance of contracts. These statutes and regulations impose a broad rangeof requirements, many of which are unique to government contracting, includingvarious procurement, import and export, federal national security, contractpricing and cost, funding, contract termination and adjustment, auditrequirements, and protection of classified information. Our failure to complywith these regulations and requirements could result in reductions of the valueof contracts, contract modifications or termination, loss of securityclearance, and the assessment of civil or criminal penalties and fines,inability to win new contracts, and lead to suspension or debarment fromgovernment contracting or subcontracting for a period of time, any of whichcould have a material adverse affect on our financial position, results ofoperations, and cash flows.

 

We are also subject to certain unique business risks associated withthe defense market, including changes in budget appropriations, procurementpolicies, political developments both domestically and abroad, and otherfactors. Any material deterioration in the economic and environmental factorsthat impact the defense industry could have a material adverse effect on ourfinancial position, results of operations, and cash flows.

 

There are certain federal laws that, while not specifically directed atus as a contractor, may affect our U.S. government contracts. TheAnti-Deficiency Act is one of the major laws through which Congress exercisesits constitutional control of the public purse. The Anti-Deficiency Actindirectly regulates how the agency awards our contracts and pays our invoices.Accounts receivable related to DoD contracts approximated 99% of our accountsreceivable as of June 30, 2007.

 

Our operations also are subject to a broad range of environmental,health and safety laws and regulations in the jurisdictions in which weoperate. These laws and regulations impose increasingly stringent environmental,health and safety protection standards and permitting requirements regarding,among other things, air emissions, wastewater storage, treatment anddischarges, the use and handling of hazardous or toxic materials, wastedisposal practices, and the remediation of environmental contamination andworking conditions for our employees. Some environmental laws, such as the U.S.Comprehensive Environmental Response,Compensation, and Liability Act, also known as CERCLA or Superfund, andcomparable state laws, impose joint and several liability for the cost ofenvironmental remediation, natural resource damages, third-party claims, andother expenses, without regard to the fault or the legality of the originalconduct, on those persons who contributed to the release of a hazardoussubstance into the environment.

 

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**Force Protection, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)**

 

The costs of complying with these laws and regulations, includingparticipation in assessments and remediation of contaminated sites andinstallation of pollution control facilities could be significant. In addition,if we are found responsible for any hazardous contamination, we may have to payexpensive fines or penalties or perform costly clean-up. Even if we arecharged, and later found not responsible for such contamination and clean-up,the costs of defending the charges could be significant.

 

*Sources and Supply of Materials*

 

Our products incorporate engines, transmissions, axles and a number ofother components that are available only from the source or sources selected bythe U.S. military.Identifyingadditional or replacement suppliers approved by the U.S. military for any ofthe numerous components used in our products may not be accomplished quickly oron commercially reasonable terms, if at all. In addition to suppliers specifiedby the U.S. military, we use other suppliers for certain components of ourproducts, some of which are small businesses that are not well capitalized. Inthe event that we are unable to obtain required components from our existingsuppliers, and if we are unable to mitigate the impact or find an alternatesupplier in a timely manner, it could have a material adverse effect on ourability to produce our vehicles. Significant interruptions in the supply ofcomponents may occur for a variety of reasons, including capacity constraintsat our suppliers, competition for components with other manufacturers ofvehicles, insolvency of a supplier, work stoppages at suppliers andtransportation interruptions, which could involve significant additional costsand result in delays in production and product deliveries and could have amaterial adverse effect on our results of operations. In addition, theunavailability or scarcity of certain components or raw material could resultin increased costs, which could have a material adverse effect on our financialposition, results of operations, and cash flows.

 

In addition, some of our product components are manufactured in andsupplied from foreign countries. If import tariffs or taxes increase for anyreason, our cost of goods would increase. Our financial performance could beadversely affected by changes in the political, social and economic environmentin these foreign countries. The role of the central and local governments inthe economies of these foreign countries may be significant. Policies towardeconomic liberalization, and laws and policies affecting foreign companies,foreign investment, currency exchange rates and other matters could change,resulting in greater restrictions on our ability to do business with suppliersbased in other countries. A foreign government could impose surcharges,increase tax rates, or revoke, terminate or suspend operating licenses withoutcompensating us. In addition, the U.S. government could impose charges andtaxes and could take other actions that could make it more expensive or costlyfor us to obtain components from sources in foreign countries or could preventus from acquiring those components. Also, other countries, from time to time,experience instances of civil unrest and hostilities and confrontations haveoccurred between the military, insurgent forces, and civilians. If for these orany other reason, we are unable to obtain required components from foreignsources as and when required, or at all, it could have a material adverseeffect on our financial position, results of operations, and cash flows.

 

***Revenue Recognition***

 

Substantially all of our revenues from the U.S. government and certainof our revenues from others are earned pursuant to written contractualarrangements to design, develop, manufacture and/or modify blast- andballistic-protected products and to provide related engineering and technicalor other services according to the specifications of the buyers (customers).These contracts are generally fixed-price, cost-reimbursable, or time andmaterial based. We recognize revenues and earnings on fixed-productioncontracts, whose units are produced and delivered in a continuous or sequentialprocess, based upon the unit’s contract selling price as we deliver it and thecustomer’s *formal acceptance* of the unit. We chargethe actual unit cost to *Cost of sales*.

 

We define *formal acceptance* under the U.S.government contract as taking place when a representative of the U.S.government signs the United States Form DD250 entitled “Material Inspectionand Receiving Report.” Under the Federal Acquisition Regulation (“FAR”), asigned Form DD250 signifies contractual inspection and acceptance by theUnited States of the work performed by Force Protection. A signed Form DD250also is the event contractually obligating the U.S. government to pay us forthe approved goods or services (subject to any “definitization” contractualadjustment(s), as discussed below).

 

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**Force Protection, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)**

 

In accordance with standard industry practice, there is arepresentative from the United States Defense Contract Management Agency (“DCMA”)acting as a contractual representative of the U.S. government present at ourfacilities. This DCMA representative inspects each vehicle as it is deliveredby us, and upon confirmation of the vehicle’s conformity with the contractualspecifications, the inspector or other contractually designated official signsthe Form DD250 and formally accepts delivery of the vehicle. We onlyrecognize revenues arising from our U.S. government contracts upon execution ofthe Form DD250 by the DCMA inspector.

 

Under some of our U.S. government contracts, we receiveperformance-based payments based on completion of specific milestonesstipulated under the contract (for example, completion of manufacturingfabrication). We report these payments as *Advance payments oncontracts* in our condensed consolidated balance sheets until thefinal delivery of the products and formal acceptance by the U.S. government asevidenced by an executed Form DD250. As discussed above, upon acceptanceof the products and the execution of the Form DD250, we recognize the fullsale price of the product as revenue.

 

We recognize revenue from other items, such as foreign and domesticuser training, field support (including vehicle repairs), performing vehicle modifications,and providing test support to the U.S. government for its vehicle testing, whenwe meet four basic criteria: (i) persuasive evidence that a customerarrangement exists; (ii) the price is fixed or determinable; (iii) collectibilityis reasonably assured; and (iv) delivery of product has occurred orservices have been rendered.

 

We negotiate contracts with our customers that may include revenuearrangements with multiple deliverables. We account for each deliverable undera contract separately. Historically, we negotiate and sign contracts with ourcustomers that provide a contract amount and specific terms and conditionsassociated with each deliverable.

 

Shipping and handling costs are expensed as incurred and included in *Cost of sales.*

 

*Definitization / Due to the United States government*

 

Our contracts with the U.S. government are negotiated as either a “solesource” or “open competition” bid process. A sole source process is one inwhich we are the sole bidder for the contract. An open competition couldinvolve various bidders. Once a bid is accepted, the U.S. government usuallyexpects work to commence immediately. An open competition results in a finalagreed-upon contract price to which the U.S. government has agreed. A solesource process results in an agreed-upon contract with the U.S. government,subject to an adjustment process at a later date, termed the “definitizationprocess.” The definitization process commences upon awarding of a contract,whereby the U.S. government undertakes a detailed review of our costs involvedin the manufacturing and delivery process. We then work with the U.S.government to determine an adequate and fair final contract price. We have theright to submit proposed prices, but they are subject to final review andapproval by the contracting officer, who may require that we use differentprices. Although both parties make an effort to definitize the contract asquickly as possible, the process is time consuming and can take months tocomplete. In addition, if an agreement is not reached as to price by a specificdate, the contracting officer may unilaterally determine a price. Duringdefinitization, we are usually required to perform the contract work and makedeliveries before the final contract price has been established. For thisreason, as part of the original award, we bill the U.S. government at apredetermined price that is used for invoicing and accounting purposes pendingfinal definitization.

 

As a result of the adjustments related to the definitization process,we recognize a liability, *Due to United**States government*, and reduce gross sales to arrive at netsales. As of June 30, 2007 and December 31, 2006, our liability forcontracts subject to the definitization process has been estimated based upon anexpected adjustment percentage.

 

*Sales Returns and Allowance for Doubtful Accounts*

 

Historically,we have not encountered sales returns or significant uncollectible accountsreceivable and we do not anticipate them in the near future.  The majority of our accounts receivable arewith the U. S. government and 

 

8

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Tableof Contents

 

**Force Protection, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)**

 

wedo not maintain an allowance for doubtful accounts for those accounts due tothe credit-worthiness of the U. S. government. We do maintain an allowance for doubtful accounts for ournon-governmental customers, which is based upon specific identification.

 

***Cash and Cash Equivalents***

 

*Cash and cash equivalents* includes investments that are highly liquidand have maturities of three months or less when purchased. The carrying valuesof cash and cash equivalents approximate their fair value due to the short-termnature of these instruments.

 

Wemaintain amounts on deposit with various financial institutions, which may attimes exceed federally insured limits. However, management periodicallyevaluates the credit-worthiness of those institutions, and we have notexperienced any losses on such deposits.

 

***Inventories***

 

Wecarry our inventories at the lower of their cost or market value, reduced byreserves for excess and obsolete items. Cost is determined using the first-in,first-out (“FIFO”) method. Market is determined based on net realizable value.Appropriate consideration is given to obsolescence, excess quantities, andother factors in evaluating net realizable value.

 

***Property and Equipment***

 

Wereport land, buildings, leasehold improvements, and machinery and equipment,including tooling and pattern equipment, at cost, net of depreciation and assetimpairments, if applicable. We report assets under capital lease obligations atthe lower of their fair value or the present value of the aggregate futureminimum lease payments as of the beginning of the lease term. We depreciate ourassets using the straight-line method over the shorter of the lease term or theestimated useful lives of the assets.

 

Theranges of estimated useful lives are as follows:

 
| ** **                                            | ** ** | **Years** | ** ** |
|-------------------------------------------------------|------------|-----------|------------|
| Buildings                                             |       | 29        |       |
| Leasehold improvements                                |       | 2-5       |       |
| Machinery and equipment, including tooling  and molds |       | 7         |       |
| Computer equipment and software                       |       | 3         |       |
| Furniture and fixtures                                |       | 3         |       |
| Demonstration vehicles                                |       | 5         |       |
| Manuals                                               |       | 5         |       |
| Vehicles                                              |       | 5         |       |

 

Thecarrying amounts of all long-lived assets are evaluated periodically todetermine if adjustment to the depreciation and amortization period or to theunamortized balance is warranted. Such evaluation is based principally on theexpected utilization of the long-lived assets.

 

Maintenanceand repairs of property and equipment are expensed as incurred. We capitalizereplacements and improvements that increase the estimated useful life of anasset and we capitalize interest on major construction and development projectswhile in progress.

 

Weretain fully depreciated assets in property and accumulated depreciationaccounts until we remove them from service. In the case of sale, retirement, ordisposal, the asset cost and related accumulated depreciation balance isremoved from the respective account, and the resulting net amount, less anyproceeds, is included as a component of income from operations in the unauditedcondensed consolidated statements of operations.

 

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Tableof Contents

 

**Force Protection, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)**

 

Werecognize escalated rents, including any rent holidays, on a straight-linebasis over the term of the lease for those lease agreements where we receivethe right to control the use of the entire leased property at the beginning ofthe lease term.

 

Wetest for impairment of long-lived assets, including intangible assets, wheneverevents or changes in circumstances indicate that the carrying value of an assetor asset group (hereinafter referred to as “asset group”) may not berecoverable by comparing the sum of the estimated undiscounted future cashflows expected to result from use of the asset group and its eventualdisposition to the carrying value. If the sum of the estimated undiscountedfuture cash flows is less than the carrying value, an impairment determinationis required.  The amount of impairment iscalculated by subtracting the fair value of the asset group from the carryingvalue of the asset group.  An impairmentcharge, if any, is recognized within *Operating income (loss*)*.*

 

***Intangible Assets***

 

Weamortize the cost of intangible assets over their respective estimated usefullives on a straight-line basis. The amortization periods are as follows:

 
| ** **                    | ** ** | **Years** | ** ** |
|-------------------------------|------------|-----------|------------|
| Licenses                      |       | 3         |       |
| Non-compete agreements        |       | 4         |       |
| Customer base                 |       | 2         |       |
| Special expertise             |       | 2         |       |
| Weighted-average useful lives |       | 3         |       |

 

***Investments in and Advances toNon-consolidated Affiliates***

 

Equitymethod investments are recorded at original cost and adjusted periodically torecognize (i) our proportionate share of the investees’ net income orlosses after the date of investment; (ii) additional contributions madeand dividends or distributions received; and (iii) impairment lossesresulting from adjustments to net realizable value.  However, for contracts not yet novated to anequity method investee we continue to recognize the revenues and expenses fromthose contracts in our unaudited condensed consolidated financial statements.

 

Weassess the potential impairment of our equity method investments. We determinefair value based on valuation methodologies, as appropriate, including thepresent value of estimated future cash flows, estimates of sales proceeds, andexternal appraisals. If an investment is determined to be impaired and thedecline in value is other than temporary, we record a write-down.

 

*Force Dynamics LLC*

 

We entered into a joint venture with General Dynamics LandSystems Inc. (“GDLS”) on December 15, 2006 (“Workshare Agreement”)pursuant to which we and GDLS would fulfill the obligations of the MineResistant Ambush Protected (“MRAP”) Competitive Contract (“MRAP CompetitiveContract”).  GDLS manufacturesapproximately 50% of the Cougar vehicles to be manufactured under, and performsapproximately 50% of the life cycle support required by the MRAP CompetitiveContract, based on revenues.  We formed aDelaware limited liability company, Force Dynamics, LLC (“Force Dynamics”),to govern the terms of the joint venture. However, the MRAP CompetitiveContract was awarded to us and not to Force Dynamics or GDLS. We have attemptedto novate this contract to Force Dynamics, although the U.S. government has notyet agreed to the novation. If the contract is novated, we and GDLS may berequired to guarantee payment of all liabilities and performance of allobligations that Force Dynamics will assume under the novated contract. We willnot fund and Force Dynamics will remain inactive until such time the MRAPCompetitive Contract is assigned to Force Dynamics.

 

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Tableof Contents

 

**Force Protection, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)**

 

In connection with our joint venture arrangement with GDLS, we enteredinto a technology license agreement with Force Dynamics and GDLS. The agreementprovides that we grant Force Dynamics and GDLS a non-exclusive license withoutthe right to sublicense. Force Dynamics and GDLS will pay us a vehicle fee foreach MRAP vehicle produced. The term of this technology agreement is the laterof completion or complete termination of the MRAP program or the WorkshareAgreement.

 

***Stock-Based Compensation***

 

ForceProtection does not have a formal stock option plan.  However, we provided some of our employeesstock-based compensation in the form of stock options and shares of our commonstock. Prior to July 1, 2005, we accounted for those stock-basedcompensation awards using the recognition and measurement principles of theintrinsic value method of Accounting Principles Board (“APB”) Opinion No. 25,*Accounting for Stock Issued to Employees,*and its related interpretations, and applied the disclosure-only provisions ofFASB Statement No. 123,*Accounting forStock-Based Compensation*. Under the intrinsic value method, werecognized compensation expense on the date of grant only if the current marketprice of the underlying stock on the grant date exceeded the exercise price ofthe stock-based award.

 

InDecember 2004, the FASB issued FASB Statement No. 123 (revised 2004),*Share-Based Payment*, whichrevises FASB Statement No. 123 and supersedes APB Opinion No. 25.FASB Statement No. 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based on their fair values beginning with the firstinterim or annual period after June 15, 2005. Subsequent to the effectivedate, the pro forma disclosures previously permitted under FASB Statement No. 123are no longer an alternative to financial statement recognition.

 

InMarch 2005, the Staff of the SEC issued Staff Accounting Bulletin (“SAB”) No. 107,*Share-Based Payment*. SAB No. 107expresses the view of the SEC Staff regarding the interaction between FASBStatement No. 123(R) and certain SEC rules and regulations andprovides the SEC Staff’s views regarding the valuation of share-based paymentarrangements for public companies. The SEC Staff believes the guidance in SAB No. 107will assist public companies in their initial implementation of FASB Statement No. 123(R) beginningwith the first interim or annual period of the first fiscal year that beginsafter June 15, 2005.

 

EffectiveJuly 1, 2005, we adopted FASB Statement No. 123(R) using themodified prospective method. Under this method, compensation cost recognizedduring 2006 included: (1) compensation cost for the portions of allshare-based payments granted prior to, but not yet vested as of July 1,2005, based on the grant date fair value estimated in accordance with theoriginal provisions of FASB Statement No. 123 amortized on a straight-linebasis over the options’ remaining vesting period beginning July 1, 2005,and (2) compensation cost for all share-based payments granted subsequentto July 1, 2005, based on the grant-date fair value estimated in accordancewith the provisions of FASB Statement No. 123(R) amortized on astraight-line basis over the options’ requisite service period. Pro formaresults for prior periods have not been restated.

 

***Warranty***

 

Oursales contracts generally include a warranty that our products are free fromdefects in design, material, and workmanship for a period of one year from theacceptance date. The warranty does not apply to any damage or failure toperform caused by the misuse or abuse of the vehicle, combat damage, fair wearand tear items (brake shoes, wiper blades, etc.), or by the customer’s failureto perform proper maintenance or service on the supplies.  We base our warranty accruals on estimates ofthe expected warranty costs that incorporate historical information and forwardassumptions about the nature, frequency, and average cost of warranty claims.Warranty costs are included in*Cost ofsales.*

 

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Tableof Contents

 

**Force Protection, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)**

 

***Litigation Reserve***

 

Weaccrue for loss contingencies associated with outstanding litigation, claimsand assessments for which management has determined it is probable that a losscontingency exists and the amount of loss can be reasonably estimated. Weexpense professional fees associated with litigation claims and assessments asincurred.

 

***Research and development***

 

Weincur costs in connection with research and development programs that areexpected to contribute to future earnings, and charge such costs against incomeas incurred.  Research and developmentcosts consist primarily of payroll and personnel related costs, contractorfees, infrastructure costs, and administrative expenses directly related toresearch and development support.

 

***Income Taxes***

 

Weprovide for income taxes using the asset and liability method. This approachrecognizes the amount of federal, state, and local taxes payable or refundablefor the current year, as well as deferred tax assets and liabilities for thefuture tax consequence of events recognized in the consolidated financial statementsand income tax returns. Deferred income tax assets and liabilities are adjustedto recognize the effects of changes in tax laws or enacted tax rates. Inaddition, we establish reserves for tax contingencies in accordance with FASBInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes.*

 

Avaluation allowance is required when it is more likely than not that someportion of the deferred tax assets will not be realized. Realization isdependent on generating sufficient future taxable income.

 

ForceProtection and its subsidiaries file a consolidated federal income tax return.State income tax returns are filed on a separate, combined, or consolidatedbasis in accordance with relevant state laws and regulations.

 

***Earnings (Loss) Per Common Share***

 

Thecalculation of basic earnings (loss) per common share is based on theweighted-average number of our common shares outstanding during the applicableperiod. The calculation for diluted earnings (loss) per common share recognizesthe effect of all potential dilutive common shares that were outstanding duringthe respective periods, unless their impact would be anti-dilutive.

 

***Recent Accounting Pronouncements***

 

InMay 2008, the FASB issued FASB Statement No. 162, *The Hierarchy of Generally**Accepted Accounting Principles*. FASBStatement No. 162 defines the order in which accounting principles thatare generally accepted should be followed. FASB Statement No. 162 iseffective for fiscal years beginning after November 15, 2008.  We have not yet commenced evaluating thepotential impact, if any, of the adoption of FASB Statement No. 162 on ourconsolidated financial position, results of operations, and cash flows.

 

InApril 2008, the FASB issued Staff Position (“FSP”) No. FAS 142-3,*Determination of Useful Life of Intangible Assets,*(FSP FAS 142-3).  FSP FAS 142-3amends the factors that should be considered in developing the renewal orextension assumptions used to determine the useful life of a recognizedintangible asset under FASB Statement No. 142, *Goodwill andOther Intangible Assets*. FSP FAS 142-3 also requires expandeddisclosure related to the determination of intangible asset useful lives. FSPFAS 142-3 is effective for fiscal years beginning after December 15,2008. Earlier adoption is prohibited. We have not yet commenced evaluating thepotential impact, if any, of the adoption of FSP FAS 142-3 on our consolidatedfinancial position, results of operations and cash flows.

 

InMarch 2008, the FASB issued FASB Statement No. 161, *Disclosures about Derivative**Instruments and Hedging Activities*, anamendment of FASB Statement No. 133, *Accountingfor Derivative Instruments and Hedging Activities*. FASB Statement No. 161changes the disclosure requirements for derivative instruments and hedgingactivities. Entities are required to provide enhanced disclosures about (i) howand why an entity uses derivative instruments, (ii) how derivativeinstruments and related hedged items are accounted for under FASB Statement 

 

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Tableof Contents

 

**ForceProtection, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)**

 

No. 133,*Accounting for Derivative Instruments andHedging Activities,*and its related interpretations and (iii) howderivative instruments and related hedged items affect an entity’s financialposition, results of operations, and cash flows. FASB Statement No. 161 iseffective for financial statements issued for fiscal years and interim periodsbeginning after November 15, 2008, with early application permitted. FASBStatement No. 161 permits, but does not require, comparative disclosuresfor earlier periods at initial adoption. We have not yet commenced evaluatingthe potential impact, if any, of the adoption of FASB Statement No. 161 onour consolidated financial position, results of operations, cash flows ordisclosures related to derivative instruments and hedging activities.

 

InDecember 2007, the FASB issued FASB Statement No. 141 (revised2007), *Business Combinations*,which establishes principles and requirements for how the acquirer in abusiness combination (i) recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, and anycontrolling interest, (ii) recognizes and measures the goodwill acquiredin the business combination or a gain from a bargain purchase, and (iii) determineswhat information to disclose to enable users of the financial statements toevaluate the nature and financial effects of the business combination.  FASB Statement No. 141(R) appliesto fiscal years beginning after December 15, 2008. Earlier adoption isprohibited.

 

InDecember 2007, the FASB issued FASB Statement No. 160, *Noncontrolling Interests in Consolidated FinancialStatements*, which establishes accounting and reporting standardsthat require (i) the ownership interest in subsidiaries held byparties other than the parent to be clearly identified and presented in theconsolidated balance sheet within shareholders’ equity, but separate from theparent’s equity; (ii) the amount of consolidated net incomeattributable to the parent and the noncontrolling interest to be clearlyidentified and presented on the face of the consolidated statement ofoperations; and (iii) changes in a parent’s ownership interest while theparent retains its controlling financial interest in its subsidiary to beaccounted for consistently.  FASBStatement No. 160 applies to fiscal years beginning after December 15,2008. Earlier adoption is prohibited.

 

InFebruary 2007, the FASB issued FASB Statement No. 159, *The Fair Value Option**for Financial Assets and Financial Liabilities*,which provides companies with an option to report selected financial assets andliabilities at fair value. FASB Statement No. 159 establishes presentationand disclosure requirements designed to facilitate comparisons betweencompanies that choose different measurement attributes for similar types ofassets and liabilities and requires companies to provide additional informationthat will help investors and other users of financial statements to more easilyunderstand the effect of a company’s choice to use fair value on its earnings.FASB Statement No. 159 also requires entities to display the fair value ofthose assets and liabilities for which the company has chosen to use fair valueon the face of the balance sheet. FASB Statement No. 159 does noteliminate disclosure requirements included in other accounting standards,including requirements for disclosures about fair value measurements includedin FASB Statements No. 157, *Fair Value**Measurements*, and No. 107, *Disclosures about Fair Value of FinancialInstruments.* FASB Statement No. 159 is effective as of thebeginning of an entity’s first fiscal year beginning after November 15,2007. We adopted FASB Statement No. 159 on January 1, 2008 and we didnot elect the fair value option for any other financial instruments or certainother financial assets and liabilities that were not previously required to bemeasured at fair value.

 

InSeptember 2006, the FASB issued FASB Statement No. 157, *Fair Value**Measurements*, which defines fair value, establishes aframework for measuring fair value under GAAP and expands disclosures aboutfair value measurements. FASB Statement No. 157 applies to otheraccounting pronouncements that require or permit fair value measurements. Thenew guidance is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007, and for interim periods within thosefiscal years. We adopted FASB Statement No. 157 on January 1, 2008and it did not have an impact on our consolidated financial position, resultsof operations and cash flows.

 

Wehave determined that all other recently issued accounting pronouncements willnot have a material impact on our consolidated financial position, results ofoperations and cash flows, or do not apply to our operations.

 

**2.Restatement and Reclassification of Previously Issued Condensed ConsolidatedFinancial Statements**

 

OnFebruary 29, 2008, we concluded we needed to restate our previously issuedcondensed consolidated financial statements for the third quarter of 2007 anddelay the filing of our Annual Report on Form 10-K for the year ended December 31,2007.  On August 26, 2008, weconcluded we needed to restate our previously issued unaudited 

 

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Tableof Contents

 

**Force Protection,Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)**

 

condensedconsolidated financial statements for the first and second quarters of2007.  We have concluded thatmisstatements in those previously issued financial statements were significantenough to warrant the restatement of the first, second, and third quarters of2007.  The misstatements primarilyrelated to the recognition of revenue and liabilities in the proper periods andthe determination of deferred incomes taxes. In connection with therestatement, certain presentation reclassifications have been made to conformto the current period presentation.

 

Thefollowing table summarizes the effects of the restatement and presentationreclassifications on our previously issued unaudited condensed consolidatedfinancial statements:

** **
| **Summary of increases  (decreases) in Net income (unaudited)**       | ** ** |
|-----------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | **June 30, 2007** | ** ** |
| **(in thousands, except per share amounts)** | ** ** | ** ** | **Three  months  ended** | ** ** | **Six  months  ended** | ** ** |
| Net income, as previously reported                                    |       | $ | 9,627 |   | $ | 12,105 |   |
| Net adjustments                                                       |       |   |   |   |   |
| Revenue recognition                                                   |       | 3,957 |   | 8,623 |   |
| Liability recognition                                                 |       | (21,157 | ) | (29,936 | ) |
| Inventory burden calculation                                          |       | 2,849 |   | 3,618 |   |
| Stock-based compensation                                              |       | (61 | ) | (1,008 | ) |
| Income tax expense                                                    |       | 5,238 |   | 7,146 |   |
| Other                                                                 |       | 210 |   | (365 | ) |
| Effect of restatement adjustments                                     |       | (8,964 | ) | (11,922 | ) |
| Net Income, restated                                                  |       | $ | 663 |   | $ | 183 |   |
|                                                                  |       |   |   |   |   |
| **Basic earning (loss) per common share:**                            |       |   |   |   |   |
| Net income, as previously reported                                    |       | $ | 0.14 |   | $ | 0.18 |   |
| Net adjustments                                                       |       |   |   |   |   |
| Revenue recognition                                                   |       | 0.06 |   | 0.13 |   |
| Liability recognition                                                 |       | (0.31 | ) | (0.45 | ) |
| Inventory burden calculation                                          |       | 0.04 |   | 0.05 |   |
| Stock-based compensation                                              |       | Nil |   | (0.01 | ) |
| Income tax expense                                                    |       | 0.08 |   | 0.11 |   |
| Other                                                                 |       | Nil |   | (0.01 | ) |
| Effect of restatement adjustments                                     |       | (0.13 | ) | (0.18 | ) |
| Net Income, restated                                                  |       | $ | 0.01 |   | $ | 0.00 |   |
|                                                                  |       |   |   |   |   |
| **Diluted earning (loss) per common share:**                          |       |   |   |   |   |
| Net income, as previously reported                                    |       | $ |  0.14 |   | $ |  0.18 |   |
| Net adjustments                                                       |       |   |   |   |   |
| Revenue recognition                                                   |       | 0.06 |   | 0.13 |   |
| Liability recognition                                                 |       | (0.31 | ) | (0.45 | ) |
| Inventory burden calculation                                          |       | 0.04 |   | 0.05 |   |
| Stock based compensation                                              |       | Nil |   | (0.01 | ) |
| Income tax expense                                                    |       | 0.08 |   | 0.11 |   |
| Other                                                                 |       | Nil |   | (0.01 | ) |
| Effect of restatement adjustments                                     |       | (0.13 | ) | (0.18 | ) |
| Net income, restated                                                  |       | $ | 0.01 |   | $ | 0.00 |   |
|                                                                       |            |  |  |  |  |  |  |  |  |  |

 

*Revenue recognition*

 

Wedid not recognize revenue in the appropriate quarters in 2007, including someinstances when we recognized revenue when billable to the customer rather thanat the earlier date when we earned the revenue. We also did not account for our advance payments on contracts in theappropriate quarters in 2007.

 

*Inventory burden calculation*

 

Wedid not properly determine our inventory for financial reporting purposes.  We inappropriately included costs that werenot part of the production process and we omitted other costs because they werenot properly classified in cost of sales.

 

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**ForceProtection, Inc. and Subsidiaries**

**Notes to Condensed ConsolidatedFinancial Statements (Continued)**

 

*Liability recognition*

 

Wedid not recognize our accounts payable in the appropriate quarters in2007.  In addition, we had overstated ourwarranty liability and understated our royalties payable.

 

*Stock-based compensation*

 

Wedid not properly apply the provisions of FASB Statement No. 123(R) relatedto determination of the volatility of the options granted in all quarters of2007 and we did not properly determine the related current and deferred incometax expense related to the exercising of options in the first quarter of 2007in our condensed consolidated financial statements.  We also did not appropriately withhold theappropriate payroll taxes for one employee’s option exercise.

 

*Income tax expense*

 

Asa result of the adjustments, we had to revise our previously calculated incometax expense for each quarter in 2007.  Weused our annual effective rate of 18.4% (See Note 12, *Income Taxes*).

 

*Other*

 

Wedid not properly account for prepaid insurance or the acquisition anddisposition of property and equipment in the appropriate quarter in 2007.  In addition, we did not account for certainof operating lease costs on a straight-line basis in each of the quarters in2007.

 

***Balance Sheet Impact***

 

Thefollowing table sets forth the unaudited condensed consolidated balance sheetinformation for the Company, showing previously reported amounts, adjustments,reclassifications and restated and reclassified amounts as of June 30,2007 (in thousands):

*** ***
| ** **                                    | ** ** | **As of June 30, 2007** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **As  Previously   Reported**          | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** | **Reclassifi-  cations** | ** ** | **As Restated  and  Reclassified** | ** ** |
| **Assets**                                    |       |                                        |       |   |   |   |   |   |   |   |   |
| **Current assets:**                           |       |                                        |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                     |       | $                                           | 37,871     |   | $ | 3 |   | $ | 37,874 |   | $ | — |   | $ | 37,874 |   |
| Accounts receivable                           |       | 91,239                                      |       | 16,590 |   | 107,829 |   | — |   | 107,829 |   |
| Inventories                                   |       | 148,366                                     |       | (5,057 | ) | 143,309 |   | — |   | 143,309 |   |
| Deferred income tax assets                    |       | —                                      |       | 12,373 |   | 12,373 |   | — |   | 12,373 |   |
| Income taxes receivable                       |       | 8,850                                       |       | (8,775 | ) | 75 |   | — |   | 75 |   |
| Other current assets                          |       | 1,723                                       |       | 8,254 |   | 9,977 |   | — |   | 9,977 |   |
| Total current assets                          |       | 288,049                                     |       | 23,388 |   | 311,437 |   | — |   | 311,437 |   |
| Property and equipment, net                   |       | 30,303                                      |       | 804 |   | 31,107 |   | — |   | 31,107 |   |
| Intangible assets, net                        |       | 1,836                                       |       | (130 | ) | 1,706 |   | — |   | 1,706 |   |
| Deferred income tax assets                    |       | —                                      |       | 2,764 |   | 2,764 |   | — |   | 2,764 |   |
| **Total assets**                              |       | $                                           | 320,188    |   | $ | 26,826 |   | $ | 347,014 |   | $ | — |   | $ | 347,014 |   |
| **Liabilities and Shareholders’ Equity** |       |                                        |       |   |   |   |   | — |   |   |   |
| **Current liabilities:**                      |       |                                        |       |   |   |   |   |   |   |   |   |
| Accounts payable                              |       | $                                           | 68,022     |   | $ | 31,514 |   | $ | 99,536 |   | $ | — |   | $ | 99,536 |   |
| Due to United States government (a)           |       | —                                      |       | 11,213 |   | 11,213 |   | — |   | 11,213 |   |
| Warranty reserve (b)                          |       | 4,398                                       |       | (1,710 | ) | 2,688 |   | (2,688 | ) | — |   |
| Deferred income tax liabilities               |       | 3,708                                       |       | (3,708 | ) | — |   | — |   | — |   |

 

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**ForceProtection, Inc. and Subsidiaries**

**Notesto Condensed Consolidated Financial Statements (Continued)**

 
| ** **                                          | ** ** | **As of June 30, 2007** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                          | ** ** | **As  Previously  Reported**                | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** | **Reclassifi-  cations** | ** ** | **As Restated  and  Reclassified** | ** ** |
| Other current liabilities (b)                       |       | —                                      |       | — |   | — |   | 9,910 |   | 9,910 |   |
| Advance payments on contracts                       |       | 5,872                                       |       | (3,072 | ) | 2,800 |   |   |   | 2,800 |   |
| Other accrued liabilities (b)                       |       | 5,405                                       |       | 1,578 |   | 6,983 |   | (6,983 | ) | — |   |
| Current portion of long-term liabilities  (b)       |       | 222                                         |       | 17 |   | 239 |   | (239 | ) | — |   |
| Total current liabilities                           |       | 87,627                                      |       | 35,832 |   | 123,459 |   | — |   | 123,459 |   |
| Other long-term liabilities                         |       | 429                                         |       | (17 | ) | 412 |   | — |   | 412 |   |
|                                                |       | 88,056                                      |       | 35,815 |   | 123,871 |   | — |   | 123,871 |   |
|                                                |       |                                        |       |   |   |   |   |   |   |   |   |
| **Shareholders’ equity:**                      |       |                                        |       |   |   |   |   |   |   |   |   |
| Common stock                                        |       | 68                                          |       | — |   | 68 |   | — |   | 68 |   |
| Additional paid-in capital                          |       | 251,332                                     |       | 4,811 |   | 256,143 |   | — |   | 256,143 |   |
| Accumulated deficit                                 |       | (19,268                                     | )          | (13,800 | ) | (33,068 | ) | — |   | (33,068 | ) |
| Total shareholders’ equity                     |       | 232,132                                     |       | (8,989 | ) | 223,143 |   | — |   | 223,143 |   |
| **Total liabilities and shareholders’ equity** |       | $                                           | 320,188    |   | $ | 26,826 |   | $ | 347,014 |   | $ | — |   | $ | 347,014 |   |
|                                                     |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(a) Adjustmentsrelated to the definitization process, which were previously reported as partof the allowance for doubtful accounts, have been reclassified to report themas a liability, *Due to United States government.*

(b) Otheraccrued liabilities, warranty reserve, and current portion of long-termliabilities have been reclassified to *Other current liabilities.*

 

***Statements of Operations Impact***

 

The following tables present unaudited condensed consolidated statementsof operations information for the Company showing previously reported amounts,adjustments and restated amounts for the three months and the six months ended June 30,2007 (in thousands, except share data):

 
| ** **                                      | ** ** | **For the three months ended June 30, 2007** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **As previously  reported**                                                | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| Net sales                                       |       | $                                                                               | 134,702    |   | $ | 3,957 |   | $ | 138,659 |   |
| Cost of sales                                   |       | 101,945                                                                         |       | 16,145 |   | 118,090 |   |
| Gross profit                                    |       | 32,757                                                                          |       | (12,188 | ) | 20,569 |   |
|                                            |       |                                                                            |       |   |   |   |   |
| General and administrative expenses             |       | 15,501                                                                          |       | 1,838 |   | 17,339 |   |
| Research and development expenses               |       | 3,306                                                                           |       | 197 |   | 3,503 |   |
| Operating income (loss)                         |       | 13,950                                                                          |       | (14,223 | ) | (273 | ) |
|                                            |       |                                                                            |       |   |   |   |   |
| Other income, net                               |       | 1,107                                                                           |       | (1 | ) | 1,106 |   |
| Interest expense                                |       | (44                                                                             | )          | 22 |   | (22 | ) |
| Income before income tax expense                |       | 15,013                                                                          |       | (14,202 | ) | 811 |   |
|                                            |       |                                                                            |       |   |   |   |   |
| Income tax expense                              |       | (5,386                                                                          | )          | 5,238 |   | (148 | ) |
| Net income                                      |       | $                                                                               | 9,627      |   | $ | (8,964 | ) | $ | 663 |   |
| **Earnings per common share:**                  |       |                                                                            |       |   |   |   |   |
| Basic                                           |       | $                                                                               | 0.14       |   | $ | (0.13 | ) | $ | 0.01 |   |
| Diluted                                         |       | $                                                                               | 0.14       |   | $ | (0.13 | ) | $ | 0.01 |   |
| **Weighted average common shares outstanding:** |       |                                                                            |       |   |   |   |   |
| Basic                                           |       | 68,121                                                                          |       |   |   | 68,123 |   |
| Diluted                                         |       | 68,919                                                                          |       |   |   | 68,555 | ** ** |

 

16

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Tableof Contents

 

**ForceProtection, Inc. and Subsidiaries**

**Notesto Condensed Consolidated Financial Statements (Continued)**

*** ***
| ** **                                      | ** ** | **For the six months ended June, 2007** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **As previously  reported**                                      | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| Net sales                                       |       | $                                                                     | 234,861    |   | $ | 8,623 |   | $ | 243,484 |   |
| Cost of sales                                   |       | 179,575                                                               |       | 23,640 |   | 203,215 |   |
| Gross profit                                    |       | 55,286                                                                |       | (15,017 | ) | 40,269 |   |
|                                            |       |                                                                  |       |   |   |   |   |
| General and administrative expenses             |       | 30,663                                                                |       | 3,742 |   | 34,405 |   |
| Research and development expenses               |       | 8,148                                                                 |       | 356 |   | 8,504 |   |
| Operating income (loss)                         |       | 16,475                                                                |       | (19,115 | ) | (2,640 | ) |
|                                            |       |                                                                  |       |   |   |   |   |
| Other income, net                               |       | 2,895                                                                 |       | (1 | ) | 2,894 |   |
| Interest expense                                |       | (79                                                                   | )          | 48 |   | (31 | ) |
| Income before income tax expense                |       | 19,291                                                                |       | (19,068 | ) | 223 |   |
|                                            |       |                                                                  |       |   |   |   |   |
| Income tax expense                              |       | (7,186                                                                | )          | 7,146 |   | (40 | ) |
| Net income                                      |       | $                                                                     | 12,105     |   | $ | (11,922 | ) | $ | 183 |   |
| **Earnings per common share:**                  |       |                                                                  |       |   |   |   |   |
| Basic                                           |       | $                                                                     | 0.18       |   | $ | (0.18 | ) | $ | 0.00 |   |
| Diluted                                         |       | $                                                                     | 0.18       |   | $ | (0.18 | ) | $ | 0.00 |   |
| **Weighted average common shares outstanding:** |       |                                                                  |       |   |   |   |   |
| Basic                                           |       | 67,875                                                                |       |   |   | 67,879 |   |
| Diluted                                         |       | 68,909                                                                |       |   |   | 68,248 |   |

 

***Statement of Cash Flows Impact***

 

Thefollowing table presents selected unaudited condensed consolidated statement ofcash flows information for the Company showing previously reported cash flows,adjustments and restated cash flows for the six months ended June 30, 2007(in thousands):

 
| ** **                                        | ** ** | **For the six months ended June 30, 2007** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                                        | ** ** | **As  previously   reported**                                            | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
|                                              |       |                                                                          |       |   |   |   |   |
| Net cash used in operating activities             |       | $                                                                             | (94,622    | ) | $ | (1,858 | ) | $ | (96,480 | ) |
| Net cash used in investing activities             |       | (25,513                                                                       | )          | (25 | ) | (25,538 | ) |
| Net cash provided by financing activities         |       | 1,687                                                                         |       | 1,886 |   | 3,573 |   |
| Increase (decrease) in cash and cash  equivalents |       | (118,448                                                                      | )          | 3 |   | (118,445 | ) |
| Cash and cash equivalents at beginning of  year   |       | 156,319                                                                       |       | — |   | 156,319 |   |
| Cash and cash equivalents at end of period        |       | $                                                                             | 37,871     |   | $ | 3 |   | $ | 37,874 |   |

 

17

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Tableof Contents

 

**ForceProtection, Inc. and Subsidiaries**

**Notes to Condensed ConsolidatedFinancial Statements (Continued)**

 

**3.****             ****Accounts Receivable**

 

Accountsreceivable consists of the following (in thousands):

 
| ** **                            | ** ** | **As of   June 30,   2007  (Restated)** | ** ** | **As of   December 31,  2006** | ** ** |
|---------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------|------------|
| U. S. government                      |       | $                                                 | 106,666    |                                | $          | 39,770 |   |
| Other accounts receivable             |       | 1,163                                             |       | 2,310                               |       |
|                                  |       | 107,829                                           |       | 42,080                              |       |
| Less: Allowance for doubtful accounts |       | —                                            |       | (45                                 | )          |
| Accounts receivable, net              |       | $                                                 | 107,829    |                                | $          | 42,035 |   |

 

Otheraccounts receivable primarily relate to the sale of excess raw materials tosuppliers and others.  Any gain or losson these sales is included in *Other income, net*in the accompanying condensed consolidated statement of operations. As of June 30,2007, our accounts receivable from the U.S. government includes $5.0 million ofearned and unbilled accounts receivable.

 

**4.****             ****Inventories**

 

Inventoriesconsist of the following (in thousands):

 
| ** **                               | ** ** | **As of  June 30,  2007  (Restated)** | ** **    | **As of  December 31,  2006** | ** ** |
|------------------------------------------|------------|--------------------------------------------|---------------|------------------------------------|------------|
| Raw material and supplies |       | $                                          |  116,227 |                               | $          |  36,418 |   |
| Work in process                          |       | 15,443                                     |          | 23,978                             |       |
| Finished goods                           |       | 11,639                                     |          | —                             |       |
| Inventories                              |       | $                                          | 143,309       |                               | $          | 60,396 |   |

 

**5.****             ****Property and Equipment**

 

Propertyand equipment consist of the following (in thousands):

 
| ** **                                            | ** ** | **As of   June 30,  2007  (Restated)** | ** ** | **As of  December 31,  2006** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|------------------------------------|------------|
| Land                                                  |       | $                                           | 3,420      |                               | $          | — |   |
| Building                                              |       | 2,502                                       |       | —                             |       |
| Leasehold improvements                                |       | 5,147                                       |       | 1,534                              |       |
| Machinery and equipment; including tooling  and molds |       | 5,947                                       |       | 3,795                              |       |
| Computer equipment and software                       |       | 4,714                                       |       | 2,757                              |       |
| Furniture and fixtures                                |       | 3,502                                       |       | 1,023                              |       |
| Demonstration vehicles                                |       | 1,096                                       |       | 1,096                              |       |
| Manuals                                               |       | 705                                         |       | 105                                |       |
| Vehicles                                              |       | 394                                         |       | 143                                |       |
|                                                  |       | 27,427                                      |       | 10,453                             |       |
| Less: Accumulated depreciation                        |       | (3,334                                      | )          | (1,489                             | )          |
|                                                  |       | 24,093                                      |       | 8,964                              |       |
| Construction in progress                              |       | 7,014                                       |       | —                             |       |
| Property and equipment, net                           |       | $                                           | 31,107     |                               | $          | 8,964 |   |

 

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Tableof Contents

 

**Force Protection, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)**

 

Depreciationexpense for the six months ended June 30, 2007 and June 30, 2006 was$1.8 million and $0.3 million respectively.

 

***Significant Asset Acquisitions***

 

InMarch 2007, we purchased the research and developmental testing facilityof NEWTEC Services Group, Inc., located near Edgefield, South Carolina,for $5.5 million ($5,050,000 in cash and $450,000 note payable, which wasdiscounted using an implied interest rate of 7.25%). We intend to use thefacility to expand our research and development activities and support theverification and quality control validation of our armored vehicles used toprotect military personnel against explosive threats.  The purchase price was allocated as follows(in thousands):

 
| ** **                                         | ** ** | **Amount** | ** ** |
|----------------------------------------------------|------------|------------|------------|
| Land                                               |       | $          | 2,100      |   |
| Furniture and fixtures                             |       | 800        |       |
| Manuals                                            |       | 600        |       |
| Intangible assets (See Note 6,*Intangible Assets)* |       | 1,940      |       |
| Total                                              |       | $          | 5,440      |   |

 

InMarch 2007, we purchased real and personal property located inSummerville, South Carolina, for $4.1 million in cash. We intend to use thefacility as a product development and logistic services training center.  The purchase price was allocated as follows(in thousands):

 
| ** **             | ** ** | **Amount** | ** ** |
|------------------------|------------|------------|------------|
| Land                   |       | $          | 1,320      |   |
| Building               |       | 2,502      |       |
| Furniture and fixtures |       | 278        |       |
| Total                  |       | $          | 4,100      |   |

 

***Leases***

 

We lease certain buildings under non-cancelable operating leasesexpiring on June 30, 2009; with four separate five-year renewal optionswhich must be exercised six months prior to the expiration of the lease term.Our other operating leases generally have 3- to 5-year terms, with one or morerenewal options, with terms to be negotiated at the time of renewal. Contingentrents are included in rent expense in the year incurred. The excess ofcumulative rent expense (recognized on the straight-line basis) over cumulativerent payments made on leases with fixed escalation terms is recognized asstraight-line rental accrual and is included in *Othercurrent liabilities* in the accompanying condensed consolidatedbalance sheets, as follows (in thousands):

 
| ** **                   | ** ** | **As of   June 30,  2007  (Restated)** | ** ** | **As of   December 31,  2006** | ** ** |
|------------------------------|------------|---------------------------------------------|------------|-------------------------------------|------------|
| Straight-line rental accrual |       | $                                           | 300        |                                | $          | — |   |
|                              |            |                                             |            |                                     |            |  |  |

 

***Construction in Progress***

 

Amountsin construction in progress as of June 30, 2007, relate primarily to theconstruction of an assembly line at our Ladson, South Carolina manufacturingplant.

 

19

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**Force Protection, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)**

 

**6.****    ****Intangible Assets**

 

Intangibleassets consist of the following as of June 30, 2007 (in thousands):

 
| ** **            | ** ** | **Gross  Carrying  Amount  (Restated)** | ** ** | **Accumulated  Amortization  (Restated)** | ** ** | **Net  (Restated)** | ** ** |
|-----------------------|------------|-----------------------------------------|------------|-------------------------------------------|------------|---------------------|------------|
| Licenses              |       | $                                       | 800        |                                      | $          | 89                  |       | $ | 711 |   |
| Non-compete agreement |       | 540                                     |       | 45                                        |       | 495                 |       |
| Customer base         |       | 200                                     |       | 33                                        |       | 167                 |       |
| Special expertise     |       | 400                                     |       | 67                                        |       | 333                 |       |
| Total                 |       | $                                       | 1,940      |                                      | $          | 234                 |       | $ | 1,706 |   |

 

Asdiscussed in Note 5, *Property and Equipment,*we acquired the above intangible assets in March 2007 in connection withthe purchase of a research and development testing facility located inEdgefield, South Carolina.

 

Amortizationexpense for intangible assets for the six months ended June 30, 2007 was$0.2 million.

 

**7.****    ****Other Current Liabilities**

 

Othercurrent liabilities consist of the following (in thousands):

 
| ** **                                      | ** ** | **As of   June 30,  2007  (Restated)** | ** ** | **As of   December 31,  2006** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------|------------|
| Current portion of other long-term  liabilities |       | $                                           | 239        |                                | $          | 72 |   |
| Compensation and benefits                       |       | 2,260                                       |       | 1,223                               |       |
| Warranty reserves                               |       | 2,688                                       |       | 1,850                               |       |
| Vehicle fee payable                             |       | 1,569                                       |       | 1,139                               |       |
| Liquidated damages settlement                   |       | 2,854                                       |       | 607                                 |       |
| Straight-line rent accrual                      |       | 300                                         |       | —                              |       |
| Other current liabilities                       |       | $                                           | 9,910      |                                | $          | 4,891 |   |

 

***Compensation and Benefits — Gain ShareProgram***

 

Thecompensation and benefits accrued liabilities account balance includes wagesand benefits that were earned at the end of the applicable quarter, and not yetpaid. Additionally, the compensation and benefits account balance may includean accrued liability amount attributable to our Gain Sharing Program forquarters in which gain sharing was approved but not paid. The Gain SharingProgram was authorized by the Board of Directors on March 1, 2007 andprovides for additional compensation that is paid quarterly to employees duringperiods in which we earn net income. Under the gain share program, we distributeten percent of each quarter’s net income equally to all employees.

 

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**Force Protection, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)**

 

***Warranty Reserves***

 

Warrantyreserves consist of the following (in thousands):

 
| ** **                      | ** ** | **As of  June 30,  2007  (Restated)** | ** ** | **As of  December 31,  2006** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|-------------------------------|------------|
| Balance at beginning of year    |       | $                                     | 1,850      |                          | $          | 1,686 |   |
| Charges to expense              |       | 894                                   |       | 164                           |       |
| Costs paid or otherwise settled |       | (56                                   | )          | —                        |       |
| Balance at end of period        |       | $                                     | 2,688      |                          | $          | 1,850 |   |

 

***Vehicle Fee Payable***

 

We are party to two long-term intellectual property agreements pursuantto which we have the right to use certain intellectual property technologyrelating to blast- and ballistic-protected vehicles. One agreement is with theCSIR Defencetek (“CSIR”), a division of the Council for Scientific andIndustrial Research, a statutory council established in accordance with theLaws of the Republic of South Africa. The other is with Mechem, a division ofDenel Pty Ltd, a company established under the Laws of the Republic ofSouth Africa. Under these agreements, we pay a per-vehicle royalty fee inexchange for the exclusive transfer to us of certain technology.

 

The agreement with CSIR provides for the license, on an exclusivebasis, by CSIR to us of certain technical, scientific and commercialintellectual property rights pertaining to the development of our Cougar andBuffalo vehicles. Under our agreement with CSIR, we pay CSIR a fee for eachvehicle sold and/or manufactured by us using the licensed intellectual propertyduring the term of the agreement, including vehicles manufactured by oursubcontractors. We are not obligated to pay a fee in respect of our Cheetahvehicle, and the manufacture of the Cheetah vehicles is not dependent upon thetechnology granted to us under the agreement. The initial term of the agreementwas March 8, 2002 through March 7, 2007, and the term of the renewedagreement is March 8, 2007 through March 7, 2012. We have no right toextend the agreement after March 2012 and, if the agreement expireswithout renewal, after such date CSIR may granta license to the licensed intellectualproperty to other parties. However, even upon expiration of the agreement wewill have the ability to manufacture and deliver the Cougar and Buffalovehicles.

 

The agreement with Mechem provides for the provision, on an exclusivebasis, by Mechem to us of certain technical, scientific and commercialintellectual property rights pertaining to the development of our Cougar andBuffalo vehicles. Under our agreement with Mechem, we pay Mechem a fee for eachvehicle sold and/or manufactured by us using the licensed intellectual propertyduring the term of the agreement, including vehicles manufactured by oursubcontractors. We are not obligated to pay a fee with respect to our Cheetahvehicle, and the manufacture of the Cheetah vehicle is not dependent upon thetechnology granted to us under the agreement with Mechem. Our originalagreement with Mechem was effective October 15, 2001 and expired October 15,2006. Our current agreement with Mechem, which we entered into on September 13,2006, expires on September 12, 2011. We have no right to extend theagreement after September 2011 and, if the agreement expires withoutrenewal, after such date Mechem may license the licensed intellectual propertyto other parties. However, even upon expiration of the agreement, we will havethe ability to manufacture and deliver the Cougar and Buffalo vehicles.

 

***Liquidated Damages Settlement***

 

OnDecember 20, 2006, we completed a private placement of 13 million sharesof our common stock to institutional investors at $11.75 per share, resultingin gross proceeds of $152.8 million. The proceeds, net of commissions, were$146.6 million. Per the Securities Purchase Agreement, we agreed to file aregistration statement to register all 13 million shares of common stock forresale and distribution under the Securities Act of 1933, as amended, within 30calendar days thereafter (January 19, 2007) and cause the registrationstatement to be declared effective by the SEC no later than 120 calendar daysthereafter (April 19, 2007). If the registration statement registeringthese shares was not declared effective on or before the applicable date, thenwe were required to deliver 

 

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**Force Protection, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)**

 

toeach purchaser, as liquidated damages, an amount equal to one and one thirdpercent (1 1/3%) for each 30 days (or such lesser pro-rata amount for anyperiod of less than 30 days) of the total purchase price of the securitiespurchased and still held by such purchaser pursuant to the Securities PurchaseAgreement on the first day of each 30 day or shorter period for whichliquidated damages were calculable. The registration statement for the sharesissued became effective July 26, 2007. On October 15, 2007, we fileda prospectus supplement with respect to the registration statement.  Liquidated damage expense for the six monthsended June 30, 2007 was $6.7 million and is included in *General and administrative expenses* in the accompanying unauditedcondensed consolidated statements of operations.

 

**8.****    ****Advance payments on contracts**

 

Advancepayments on contracts consist of the following (in thousands):

 
| ** **                                               | ** ** | **As of  June 30,  2007  (Restated)** | ** ** | **As of  December 31,  2006** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------|------------|
| Iraqi Light Armored Vehicles (“ILAV”)          |       | 2,800                                      |       | 4,260                              |       |
| Mastiff Protected Patrol Vehicles  (“Mastiff”) |       | —                                     |       | 7,488                              |       |
| Other                                                    |       | —                                     |       | 1,076                              |       |
| Advance payments on contracts                            |       | $                                          | 2,800      |                               | $          | 12,824 |   |
|                                                          |            |                                            |            |                                    |            |  |  |

 

**9.****    ****Other Long-term Liabilities**

 

Otherlong-term liabilities consist of the follow items.

 
| ** **                                                        | ** ** | **As of   June 30,  2007  (Restated)** | ** ** | **As of  December 31,  2006** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------|------------|
| Non-compete agreement                                             |       | $                                                | 417        |                               | $          | — |   |
| Equipment note payable                                            |       | 234                                              |       | 240                                |       |
|                                                              |       | 651                                              |       | 240                                |       |
| Less: Current portion *(*included  in*Other current liabilities)* |       | (239                                             | )          | (72                                | )          |
| Other long-term liabilities                                       |       | $                                                | 412        |                               | $          | 168 |   |

 

Asdiscussed above in Note 5, *Property and Equipment,*we purchased the research and developmental testing facility of NEWTEC ServicesGroup, Inc., located near Edgefield, South Carolina, for $5,500,000($5,050,000 in cash and $450,000 note payable). We discounted the note using an implied interest rate of 7.25%.  The note is payable in annual of installmentsof $150,000 on January 1, 2008, 2009, and 2010.

 

InOctober 2006, we acquired capital equipment valued at $234,875 using anote with implied interest of 11.25% from the supplier with a repayment basedon usage of materials used with the equipment. It is expected that based onusage estimates the note payments in 2008 and 2009 will be $92,608 and $13,838,respectively.

 

InApril 2007, we acquired capital equipment valued at $52,893 at an interestrate of 8.15% from the supplier with repayments based on a 36 month term.

 

**10.****  ****Shareholders’ Equity**

 

***Authorization of Shares***

 

Wehave the authority to issue 310 million shares, in aggregate, consisting of 300million shares of common stock and 10 million shares of preferred stock, ofwhich 1,600 have been designated “Series A,” 25 of which have been designatedas “Series B,” 150 of which have been designated as “Series C” and20,000 of which have been 

 

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**Force Protection, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)**

 

designatedas “Series D.” By shareholder’s resolution effective January 1, 2005,all classes of stock were declared to have a par value of $0.001 per share.

 

***Common Stock Transactions***

 

Duringthe six months ended June 30, 2007, employees exercised stock options topurchase 1,371,133 shares of our common stock valued at $1.3 million. We alsoissued 4,348 shares of our common stock related to 2006 employee stock optionexercises that were identified as shares to be issued in shareholders’ equityas of December 31, 2006.

 

Wecancelled 27,700 shares relating to the December 2006 Private Investmentin Public Equity (“PIPE”) offering.

 

Weissued 26,789 shares of common stock to members of the board of directors as2006 compensation, which were identified as shares to be issued in shareholders’equity as of December 31, 2006.

 

Weissued 50,000 shares of common stock granted in June 2006 to an employeewhich vested and were issued on January 1, 2007.

 

**11.****  ****Stock Based Compensation**

 

*Stock Options*

 

OnJuly 1, 2005, we adopted FASB Statement No. 123(R) using themodified prospective method. The modified prospective method requires companiesto record compensation cost beginning with the effective date based on therequirements of FASB Statement No. 123(R) for all share-basedpayments granted after the effective date. All awards granted to employeesprior to the effective date of FASB Statement No. 123(R) that remainunvested at the adoption date will continue to be expensed over the remainingservice period.

 

Wedid not grant stock options during the six months ended June 30,2007.  We used the Black-Scholesvaluation model to determine the fair value options granted during the yearended December 31, 2006. The Black-Scholes option-pricing model wasdeveloped for use in estimating the fair value of traded options which have novesting restrictions and are fully transferable. In addition, option-pricingmodels require the input of highly subjective assumptions, including theexpected stock price volatility. Because our trading history is shorter thanthe expected life of the options, we used historical stock price volatilitydata from comparable companies to supplement our own historical volatility todetermine expected volatility assumptions. We do not pay a dividend, and we donot include a dividend payment as part of our pricing model. Risk-free interestrates are based on U.S. Treasury Strip yields, compounded daily, consistentwith the expected lives of the options. Because we do not have a sufficienthistory of option exercise or cancellation, we estimated the expected life ofthe options to be two years, which for a majority of the options was the midwaypoint.  Under the Black-Scholesoption-pricing model, the weighted- average fair value per share of employeestock options granted during the year ended December 31, 2006 was $0.03,the last year options were granted.

 

Thefair value of our options was estimated using the following assumptions:

 
| ** **                                             | ** ** | **For the six months ended June 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2007  (Restated)**                                                | ** ** | **2006** | ** ** |
| Expected volatility                                    |       | —                                                              |       | 45.82% - 70.31% |   |
| Risk-free interest rate                                |       | —                                                              |       | 4.40% - 4.97% |   |
| Expected forfeiture rate                               |       | —                                                              |       | 5.00% |   |
| Dividend yield                                         |       | —                                                              |       | —% |   |
| Stock price on date of grants                          |       | —                                                              |       | $0.77-$7.48 |   |
| Expected option terms (in years)                       |       | —                                                              |       | 2 |   |
| Expected duration from grant to expiration  (in years) |       | —                                                              |       | 4 and 5 |   |
| Option vesting term (in years)                         |       | —                                                              |       | 1 |   |

 

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**Force Protection, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)**

 

The followingsummarizes stock option activity for the six months ended June 30, 2007:

 
| ** **                                             | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|--------------------------------------------------------|------------|------------|------------|--------------------------------------------|------------|
| Options outstanding at December 31,  2006         |       | 1,959,665  |       | $                                          | 2.63       |   |
| Granted                                                |       | —     |       | —                                     |       |
| Exercised                                              |       | (1,371,133 | )          | 0.93                                       |       |
| Forfeited/expired                                      |       | —     |       | —                                     |       |
| Options outstanding at June 30, 2007              |       | 588,532    |       | $                                          | 6.59       |   |
| Options exercisable at June 30, 2007              |       | 338,529    |       | $                                          | 5.95       |   |
| Options available for grant at  June 30, 2007 (a) |       | —     |       | —                                     |       |

 

----

(a) Force Protection did not have aformal stock option plan as of June 30, 2007.

 

The following table summarizes informationabout stock options outstanding and exercisable at June 30, 2007.

 
| **Options Outstanding**                  | ** ** | **Options Exercisable** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|
| **Range of   Exercise Prices** | ** ** | **Number  Outstanding**      | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $1.50-$7.48                                   |       | 588,532                      |       | 3.10 |   | $ | 6.59 |   | 338,529 |   | $ | 5.95 |   |
|                                               |            |                              |            |  |  |  |  |  |  |  |  |  |  |

 

*Stock Grants*

 

Thefollowing table summarizes supplemental information about non-vested stockgrants activity for the three months ended June 30, 2007.

 
| ** **                               | ** ** | **Number of   Shares** | ** ** | **Weighted   average per  share grant  price** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|---------------------------------------------------------------|------------|
| Outstanding as of December 31, 2006 |       | 191,026                          |       | $                                                             | 5.48       |   |
| Shares granted                           |       | —                           |       | —                                                        |       |
| Shares vested                            |       | (70,513                          | )          | $                                                             | 5.14       |   |
| Outstanding as of June 30, 2007     |       | 120,513                          |       | $                                                             | 5.68       |   |

 

*Stock-based compensation*

 

Stock-basedcompensation includes the expense associated with both stock options granted toemployees and stock grants issued to employees and is recognized in *General and administrative expense*s in the condensed consolidatedstatement of operations as follows (in thousands):

 
| ** **                     | ** ** | **Three Months Ended   June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|--------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                     | ** ** | **2007  (Restated)**                                  | ** ** | **2006**                                            | ** ** | **2007  (Restated)** | ** ** | **2006** | ** ** |
|                           |       |                                                  |       |                                                |       |   |   |   |   |
| Stock options                  |       | $                                                     | 390        |                                                | $          | 246 |   | $ | 1,361 |   | $ | 348 |   |
| Stock grants                   |       | 91                                                    |       | 15                                                  |       | 192 |   | 15 |   |
| Total stock based compensation |       | $                                                     | 481        |                                                | $          | 261 |   | $ | 1,553 |   | $ | 363 |   |

 

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**Force Protection, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)**

 

**12.****  ****Income Taxes**

 

Weprovide for income taxes using the liability method in accordance with FASBStatement No. 109,*Accounting forIncome Taxes*. In accordance with APB Opinion No. 28,*Interim Financial Reporting*, and FASBInterpretation No. 18,*Accounting forIncome Taxes in Interim Periods*, the provision for taxes on incomerecognizes our estimate of the effective tax rate expected to be applicable forthe full fiscal year, adjusted for the impact of any discrete events, which arereported in the period in which they occur. Each quarter, we re-evaluate ourestimated tax expense for the year and make adjustments for changes in theestimated tax rate. Additionally, we evaluate the realizability of our deferredtax assets on a quarterly basis. Our evaluation considers all positive andnegative evidence and factors, such as the scheduled reversal of temporarydifferences, historical and projected future taxable income or losses, andprudent and feasible tax planning strategies.

 

The*Income tax expense* for the three and sixmonths ended June 30, 2007, was based on the estimated effective tax ratesapplicable for the fiscal year ending December 31, 2007, after consideringitems specifically related to the interim period. The *Income tax expense*for the three-and six-monthperiods ended June 30, 2006, was based on the estimated effective taxrates applicable for the fiscal year ended December 31, 2006, afterconsidering items specifically related to the interim period.

 

ForceProtection is subject to U.S. federal, state, and local income taxes. *Income before incometax expense* is as follows (in thousands):

 
| ** **                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                       | ** ** | **2007  (Restated)**                            | ** ** | **2006**                                      | ** ** | **2007  (Restated)** | ** ** | **2006** | ** ** |
| ** **                       |       |                                            |       |                                          |       | **In  Thousands,** |   |
| Income before income tax expense |       | $                                               | 811        |                                          | $          | 973 |   | $ | 223 |   | $ | 206 |   |
|                                  |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

 

Areconciliation of statutory federal income tax expense rate to the actualincome tax expense rate is as follows:

 
| ** **                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                         | ** ** | **2007  (Restated)**                            | ** ** | **2006**                                      | ** ** | **2007  (Restated)** | ** ** | **2006** | ** ** |
| Income tax expense at statutory rate               |       | (35.00                                          | )%         | (35.00                                        | )%         | (35.00 | )% | (35.00 | )% |
| (Increase) decrease in tax rate resulting  from:   |       |                                            |       |                                          |       |   |   |   |   |
| State income taxes, net of federal tax  benefit    |       | (4.70                                           | )%         | (3.25                                         | )%         | (4.70 | )% | (3.25 | )% |
| (Increase) decrease in valuation allowance         |       | —                                          | %          | 38.25                                         | %          | — | % | 38.25 | % |
| Reversal of other tax accruals no longer  required |       | 8.21                                            | %          | —                                        | %          | 8.21 | % | — | % |
| Research and development credit                    |       | 11.63                                           | %          | —                                        | %          | 11.63 | % | — | % |
| Other                                              |       | 2.55                                            | %          | —                                        | %          | 2.55 | % | — | % |
| Nondeductible items                                |       | (1.05                                           | )%         | —                                        | %          | (1.05 | )% | — | % |
| Effective income tax expense rate                  |       | (18.36                                          | )%         | —                                        | %          | (18.36 | )% | — | % |

 

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**Force Protection, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)**

 

Theeffective tax rate is the provision for income taxes as a percent of incomebefore income taxes.  The 2007 effectiverate is lower than the expected federal statutory rate of 35 % primarily due tothe state income taxes, reversal of other tax accruals no longer required,research and development credits, and certain nondeductible items at thestatutory rate.

 

Asa result of the adoption of FASB Statement No. 123(R), our deferred taxassets at June 30, 2007 and December 31, 2007 do not include excesstax benefits from stock option exercises. Shareholders’ equity will beincreased if these excess tax benefits are ultimately realized.

 

Weadopted FASB Interpretation No. 48, on January 1, 2007.  FASB Interpretation No. 48 clarifies theaccounting for uncertainty in income taxes recognized in a company’s financialstatements in accordance with FASB Statement No. 109, *Accountingfor Income Taxes*. FASB Statement No. 109 does not prescribe arecognition threshold or measurement attribute for the financial statementrecognition and measurement of a tax position taken in a tax return. FASBInterpretation No. 48 clarifies the application of FASB Statement No. 109by defining a criterion that an individual tax position must meet for any partof the benefit of that position to be recognized in a company’s financialstatements. Additionally, FASB Interpretation No. 48 provides guidance onmeasurement, derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition.

 

Webelieve that we have appropriate support for the income tax positions taken andto be taken on our income tax returns and that our income tax receivable andaccruals for tax liabilities are adequate for all open years and based on anassessment of many factors including past experience and interpretations of taxlaws applied to the facts of each matter. Accordingly, we have not recognized a liability as a result of applyingthe guidance in FASB Interpretation No. 48.

 

**13.****  ****Earnings (Loss) Per Common Share**

 

Thefollowing table shows the information used in the calculation of basic anddiluted earnings (loss) per common share (in thousands, except number of sharesand per share amounts):

 
| ** **                                                      | ** **                                                 | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|-----------------------------------------------------------------|------------------------------------------------------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                      | ** **                                                 | **2007  (Restated)**                                  | ** ** | **2006**                                            | ** ** | **2007  (Restated)** | ** ** | **2006** | ** ** |
| **Numerator – Basic:**                                     |                                                       |                                                  |       |                                                |       |   |   |   |   |
| Net income                                                      |                                                       | $                                                     | 663        |                                                | $          | 973 |   | $ | 183 |   | $ | 206 |   |
| Less:                                                           | Accretion of  Series D 6% convertible preferred stock |                                                  | —     |                                                | (100       | ) | — |   | (261 | ) |
| Less:                                                           | Preferred  dividends                                       |                                                  | —     |                                                | (449       | ) | — |   | (934 | ) |
| Income (loss) available for common  shareholders – basic   |                                                       | $                                                     | 663        |                                                | $          | 424 |   | $ | 183 |   | $ | (989 | ) |
| **Numerator – Diluted:**                                   |                                                       |                                                  |       |                                                |       |   |   |   |   |
| Income available for common shareholders –  basic          |                                                       | $                                                     | 663        |                                                | $          | 973 |   | $ | 183 |   | $ | 206 |   |
| Add:                                                            | Accretion of  Series D 6% convertible preferred stock |                                                  | —     |                                                | (100       | ) | — |   | (261 | ) |
| Add:                                                            | Preferred  dividends                                       |                                                  | —     |                                                | (449       | ) | — |   | (934 | ) |
| Income (loss) available for common  shareholders – diluted |                                                       | $                                                     | 663        |                                                | $          | 424 |   | $ | 183 |   | $ | (989 | ) |
| **Denominator:**                                                |                                                       |                                                  |       |                                                |       |   |   |   |   |
| Weighted average common shares outstanding –  basic        |                                                       | 68,122,995                                            |       | 39,511,931                                          |       | 67,878,655 |   | 38,487,506 |   |
| Add:                                                            | Stock  options                                             |                                                  | 334,878    |                                                | —     |   | 280,621 |   | Anti-dilutive |   |
|                                                                 |                                                            |                                                       |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |

 

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**Force Protection, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)**

 
| ** **                                                      | ** **   | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|-----------------------------------------------------------------|--------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                      | ** **   | **2007  (Restated)**                                  | ** ** | **2006**                                            | ** ** | **2007  (Restated)** | ** ** | **2006** | ** ** |
| Add:                                                            | Stock grants |                                                  | 97,300     |                                                | —     |   | 88,959 |   | Anti-dilutive |   |
| Weighted average common shares outstanding –  diluted      |         | 68,555,173                                            |       | 39,511,931                                          |       | 68,248,235 |   | 38,487,506 |   |
| **Basic earnings (loss) per common share:**                     |         |                                                  |       |                                                |       |   |   |   |   |
| Income (loss) available for common  shareholders – basic   |         | $                                                     | 0.01       |                                                | $          | 0.01 |   | $ | 0.00 |   | $ | (0.03 | ) |
| **Diluted earnings (loss) per common share:**                   |         |                                                  |       |                                                |       |   |   |   |   |
| Income (loss) available for common  shareholders – diluted |         | $                                                     | 0.01       |                                                | $          | 0.01 |   | $ | 0.00 |   | $ | (0.03 | ) |
|                                                                 |              |                                                       |            |                                                     |            |  |  |  |  |  |  |  |  |  |

 

Thecalculation of earnings (loss) per common share is based on theweighted-average number of our common shares outstanding during the applicableperiod. The calculation for diluted loss per common share recognizes the effectof all dilutive potential common shares that were outstanding during therespective periods, unless their impact would be antidilutive.  We use the treasury stock method to calculatethe dilutive effect of stock options and other common stock equivalents (potentiallydilutive shares). Diluted earnings per common share recognizes the dilutionthat would occur if securities or other contracts to issue common stock wereexercised or converted into common stock. These potentially dilutive sharesinclude: (1) Series D 6% Convertible Preferred Stock, (2) warrants,(3) stock options, and (4) stock grants.  We excluded 6,460,315 and 7,817,420 commonstock equivalents for the three and six months ended June 30, 2006,respectively, from the calculation of diluted loss per share because they wereanti-dilutive.

 

**14.****  ****Related Party Transactions**

 

Ourformer Chief Executive Officer, Mr. Gordon McGilton, was a principal ofAPT Leadership, a consulting firm we hired to provide various businessconsulting services, training seminars and certain business software. APT Leadershipbilled Force Protection $0.3 million and $0.2 million for the six months ended June 30,2007 and 2006, respectively.  Mr. McGiltondisclosed to the board of directors each year that he did not receive anydividends, distributions or other compensation from APT Leadership at any timewhile an employee of the Company.  Further, Mr. McGilton disclosedthat as of December 31, 2007 he transferred his interest in APT Leadershipto the other owner for $1 in consideration. In addition, as part of the process to determine our income tax expensefor the year ended December 31, 2007, we discovered in August 2008,that we did not withhold the proper amount of federal income taxes for Mr. McGiltonin connection with his exercise of stock options in January 2007 and, as aresult, Mr. McGilton effectively owed us $315,085 as of June 30,2007, which is included in *Other current assets*in the accompanying unaudited condensed consolidated balance sheets.  Mr. McGilton repaid this amount on September 11,2008.

 

OnFebruary 18, 2006, we entered into a Modification and Assignment Agreementwith Longview Fund, LP and Longview Equity Fund, LP (collectively “Longview”)pursuant to which we paid $1.3 million against the principal balance of thesecured promissory notes (“Notes”) and extended the maturity date of the Notesfor an additional 60 days. In addition, we consented to the assignment of $2.5million of the Notes to Fort Ashford Funds LLC (“Fort Ashford”). Mr. FrankKavanaugh, a former director of Force Protection, is the principal owner ofFort Ashford and at such time was a substantial shareholder of our commonstock. Mr. Kavanaugh’s relationship to Fort Ashford Funds LLC was fullydisclosed to us and Mr. Kavanaugh did not participate in the negotiationsor decision process with respect to the Modification and Assignment Agreement.We paid $87,510 to Longview and $50,000 to Fort Ashford in cash as compensationfor the extension of the maturity dates of the Notes.

 

OnApril 20, 2006, we paid $1.0 million against the principal balance of theNotes and extended the maturity date on the Notes and the Note with FortAshford for an additional 60 days, through June 20, 2006. We paid $55,000to Longview and $50,000 to Fort Ashford in cash as compensation for thisextension.

 

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**Force Protection, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)**

 

OnJune 20, 2006, we paid off the principal balance and all applicableaccrued interest under the Notes. Additionally, we extended the maturity dateof the Ashford Note for an additional 30 days, through July 20, 2006.We paid $50,000 to Fort Ashford in cash as compensation for the extension ofthe Ashford Note.

 

OnAugust 9, 2006, we paid off the principal balance of the Ashford Note, andall applicable accrued interest under the Ashford Note.

 

**15.****  ****Commitments and Contingencies**

 

***Financing Commitments-Credit Facility***

 

On July 20, 2007, we entered into a revolving credit agreementwith Wachovia Bank. Borrowings under the credit agreement bear interest at afloating rate per annum equal to the one-month London Interbank Offered Rate (“LIBOR”)market index plus 2.0%. The original amount of the agreement was$50 million and all amounts payable under this credit agreement wereoriginally due and payable on September 30, 2007. We have entered intoseveral modification agreements with the lender to reduce the principal amountto $30 million and to extend the maturity of the credit agreement to October 31,2008. Until October 31, 2008, we may borrow, repay, and re-borrow amountsunder the terms of the note as long as the total principal balance outstandingdoes not to exceed $30 million. Amounts payable under the credit agreementare secured by a pledge of all of our personal property and fixtures.  There are no assurances that Wachovia willextend the terms of this financing agreement beyond October 31, 2008.

 

***Legal Proceedings***

 

We are subject to various claims arising in the ordinary course ofbusiness, and are parties to various legal proceedings that constituteordinary, routine litigation incidental to our business. The majority of theseclaims and proceedings relate to commercial, shareholder and employee matters.In our opinion, apart from the actions set forth below, the disposition ofthese proceedings and claims, after taking into account accruals recorded inour consolidated balance sheets and the availability and limits of ourinsurance coverage, will not have a material adverse effect on the business orour financial position, results of operations, or cash flows.

 

Shareholder Class Actionand Derivative Complaints

 

On March 10, 2008, the first of ten related class action lawsuitswas filed against us and certain of our former and current board members orofficers in the United States District Court for the District of South CarolinaCharleston Division on behalf of a proposed class of investors who purchased orotherwise acquired our securities during the period between August 14,2006 and February 29, 2008. The complaints seek class certification, andthe allegations include but are not limited to allegations that the defendantsviolated the Securities Exchange Act of 1934 and made false or misleadingpublic statements and/or omissions concerning our business, internal controls,and financial results. The plaintiffs assert that as a result of the defendants’allegedly wrongful acts and omissions, members of the proposed class havesuffered significant losses and damages. The individual class action lawsuitswere consolidated on June 10, 2008 under caption ‘In Re Force Protection, Inc.Securities Litigation, Action No. 2: 08-cv-845-CWH.’ On June 20,2008, a group of investors consisting of the Laborers’ Annuity and BenefitSystem of Chicago, Gary Trautman, David J. Jagar, Bhadra Shah, PanteliPoulikakos, George Poulikakos, and Niki Poulikakos was appointed leadplaintiff.

 

Between March 27, 2008 and May 28, 2008, various allegedshareholders filed derivative lawsuits against former and current officers orboard members wherein the plaintiff shareholders are seeking damages for theCompany. The Company has been named a nominal defendant in each derivativelawsuit. Four (4) derivative lawsuits are pending in the United StatesDistrict Court for the District of South Carolina Charleston Division; two (2) derivativelawsuits are pending in Charleston, South Carolina Circuit Court; and one (1) derivativelawsuit is pending in Clark County, Nevada District Court. The plaintiffshareholders’ allegations include and are not limited to allegations of breachof fiduciary duties, abuse of control, gross mismanagement, and waste ofcorporate assets, unjust enrichment in connection with the Company’s publicstatements regarding its operations and financial results, internal controls,compensation of certain defendants, and alleged insider stock sales by certaindefendants.

 

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**Force Protection, Inc. and SubsidiariesNotes to Condensed Consolidated Financial Statements (Continued)**

 

Other disputes

 

On August 21, 2007, we filed suit against Protected Vehicles, Inc.(“PVI”) and Garth Barrett, Thomas Thebes, and Paul Palmer, three of PVI’semployees (all of whom were former employees of Force Protection) in the UnitedStates District Court for the District of South Carolina. In the complaint, weallege that the named defendants used our confidential information and tradesecrets to create a competing business. We seek injunctive relief, unspecifieddamages, attorneys’ fees and costs. The defendants have answered our complaintand filed counterclaims against us. In their answers and counterclaims, thedefendants allege, among other things, that we and several of our current andformer officers and directors engaged in: certain transactions (includingtransactions with Force Protection) in which such officers and directorsmaintained a financial interest; backdating and certain other improper acts inconnection with certain stock issuances; allegedly wrongful acts with respectto a procurement contract with a foreign government; and other transactionsinvolving alleged self-dealing and engaged in certain allegedly retaliatoryacts in connection with defendants’ prior attempts to bring such activities tothe attention of the Company’s personnel or governmental agencies. Defendantsseek unspecified monetary damages, attorneys’ fees and costs. Defendants filedan amended counterclaim withdrawing three (3) of their causes of action,and have recently indicated they intend to file a second amendedcounterclaim. On January 18, 2008, the district court entered an orderstaying the litigation in light of an involuntary bankruptcy petition filed on January 15,2008, in the United States Bankruptcy Court for the District of South Carolinawith respect to PVI. On February 5, 2008, PVI filed a voluntaryChapter 7 petition. On March 28, 2008, the Chapter 7 proceedingwas converted to a Chapter 11 proceeding. On June 20, 2008, theBankruptcy Court remanded the litigation back to the District Court, and on September 3,2008, the bulk of PVI’s assets, including certain rights and liabilities withrespect to our suit against it, were sold to a third party. On July 31,2008, we settled our claim against Paul Palmer. Our claims against PVI and thethird party (who has now been added as a defendant in the suit) are currentlyset to be tried in early 2009; the counterclaims against us have not been setfor trial.

 

From February 2007 through April 2008, we received a total of68 complaints from current and former employees filed with the United StatesEqual Employment Opportunity Commission alleging, among other things, raceand/or gender discrimination. We have responded to the complaints as suchresponses have become due, and are investigating the allegations.

 

We are subject to a number of claims relating to our common shares. Inone, certain investors have issued to Force Protection a demand for 481,492shares of our common stock in connection with the investors’ conversion oftheir shares of our preferred stock and other damages relating to warrants theinvestors allege were granted but never distributed to them. In addition, on November 13,2007, we were served with a lawsuit filed by former senior employee MurrayHammick against Force Protection Industries, Inc. and former ForceProtection officers Gordon McGilton, Scott Ervin, and Frank Kavanaugh. Thecomplaint, filed in the Charleston (South Carolina) County Court of CommonPleas, alleges, among other things, that Mr. Hammick is owed options toacquire approximately 83,000 shares of our common stock and certain back wagesand sets forth claims for, *inter alia,*breach of contract, violation of the South Carolina Payment of Wages Act,retaliatory wrongful discharge, and defamation. We answered the complaint on January 25,2008.

 

During the period from August 1, 2007 to November 23, 2007,Force Protection Industries, Inc. entered into three IT hosting andconsulting agreements. A series of disputes arose from these contracts. ForceProtection, Inc. has entered into settlement agreements for these claimstotaling $2,275,362.

 

In early November 2007, the Department of State, Directorate ofDefense Trade Controls (“DDTC”) advised us of a site visit planned for December 2007.In advance of that site visit, the DDTC requested, and we provided, certaindocuments and materials relating to our policies and procedures concerningcompany activity regulated by the International Traffic in Arms Regulations (“ITAR”).The site visit took place in mid-December 2007 and included a meeting withcertain of our officers and interviews of certain of our employees involvedwith security, training, business development, human resources, informationtechnology, empowered officials, engineering, contracts, manufacturing, programmanagement, shipping, supply chain integrated logistics support and quality.Following the site visit, we received a letter from the DDTC regarding certainweaknesses it identified in our compliance program with respect to training,treatment of foreign visitors, overseas travel by personnel, export manuals,identifying data regarding ITAR hardware and services, and license tracking andrequesting certain specific measures be undertaken. We are in the process ofaddressing those specific measures.

 

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**Force Protection, Inc. and SubsidiariesNotes to Condensed Consolidated Financial Statements (Continued)**

 

In early December 2007, we submitted a voluntary disclosure toDDTC regarding the shipment of technical manuals, Cheetah spare parts, armoredvest plates, parts not listed on our license and transfers of technical data toand by our vendors without proper authorization or identification of theappropriate exemption. On January 22, 2008, the DDTC requested additionalinformation and documentation for each specific shipment of these items withinsixty days. In addition, the DDTC directed us to undertake certain specificmeasures, including, but not limited to, that we hire a full time senior exportcontrol compliance officer, implement certain procedures, conduct comprehensiveITAR training, immediately conduct a comprehensive export compliance audit, andinstitute a plan to conduct periodic audits of the export compliance program.On February 11, 2008, we provided DDTC with the job description for theDirector of Export Controls, draft Export Controls Manual, ITAR presentationprovided in new orientation training and the attendance logs for annual ITARtraining provided to executives and other employees having ITARresponsibilities. On March 11, 2008, we provided DDTC with our draft auditplan and on June 2, 2008, we provide the final audit report. On July 14,2008, we provided DDTC with supplemental information to our previous voluntarydisclosure and other information identified in the audit. We have developed andimplemented an Export Control Policies and Procedures Manual and ITAR ProductClassification Guide, established an Export Control Council, and revised ourTechnology Control Plan and Code of Conduct and Ethics. As a result of theexport compliance audit, we have identified additional unauthorized transfersinternally at our facility and in support of U.S. operations in Iraq andAfghanistan as well as issues associated with the execution of our licenses andagreements. We have reported these matters to DDTC.

 

On February 8, 2008, a temporary independent contractor whoseservices we had terminated filed a complaint with the Occupational Safety andHealth Administration (“OSHA”) which alleges a violation under the employeeprotection provisions of Section 806 of the Corporate and Criminal FraudAccountability Act of 2002, Title VIII of the Sarbanes-Oxley Act of 2002, 18U.S.C. §1514A. The former independent contractor alleges that we terminated hisengagement in retaliation for his allegation of certain corporate governance,government contracting, accounting and other irregularities. On April 18,2008, we responded to the allegations, and are awaiting a recommendation andreport from the OSHA investigator. In August 2008 the claimant submitted aproposed amended complaint which seeks to add additional claims and the currentand former chief executive officers as defendants.

 

On August 15, 2008, we received a $1.1 million notice ofclaim of lien for the balance of tooling supplied by a vendor to our primecontractor on the Roxboro Facility. We have demanded that the prime contractorresolve this matter with its vendor and indemnify us for this claim of lien.

 

Although we intend to defend ourselves in connection with the foregoinglegal proceedings and claims, there can be no assurance that we will ultimatelyprevail in any of these matters. Moreover, the defense of these claims andproceedings may result in substantial legal expenses and diversion of ourmanagement, and any settlement or adverse judgment may require us to makesubstantial payments, any of which could have a material adverse effect on ourbusiness or financial position, results of operations, or cash flows.

 

In addition, compliance with the directives of the DDTC discussed abovemay result in substantial expenses and diversion of management. Any failure toadequately address the directives of DDTC could result in civil fines and/orsuspension or loss of our export privileges, any of which could have a materialadverse effect on our business or financial position, results of operations, orcash flows.

 

We are also a party to other litigation which we consider routine andincidental to our business. We may be involved from time to time in otherlitigation that could have a material effect on our operations or finances.Other than the litigation described above, we are not aware of any pending orthreatened litigation against us that could have a material adverse effect onour business or financial position, results of operations, or cash flows.

 

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**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

Management’s Discussion and Analysis of Financial Condition and Resultsof Operations (“MD&A”) has been restated to reflect certain adjustments toour unaudited condensed consolidated financial information previously reportedin our Quarterly Report on Form 10-Q for the period ended June 30,2007, filed with the SEC on August 9, 2007.  See “Restatement” below for additionalinformation.  MD&A is designed toprovide information that is supplemental to, and should be read together with,our unaudited condensed consolidated financial statements and the accompanyingnotes contained in this Quarterly Report on Form 10-Q/A and because of thetiming of the filing of this Quarterly Report on Form 10-Q/A, the Annual Reporton Form 10-K for the year ended December 31, 2007 filed on September 15,2008, which included restated 2007 quarterly information.

 

Information in this MD&A is intended to assist the reader inobtaining an understanding of our unaudited condensed consolidated financialstatements, the changes in certain key items in those financial statements fromperiod to period, the primary factors that accounted for those changes, and anyknown trends or uncertainties that we are aware of that may have a materialeffect on our future performance, as well as how certain accounting principlesaffect our unaudited condensed consolidated financial statements. MD&Aincludes the following sections:

 

·                  Highlights and Executive Summary

 

·                  Overview

 

·                  Restatement

 

·                  Results of Operations—an analysis of ourunaudited condensed consolidated results of operations for the three and sixmonths ended June 30, 2007 and 2006

 

·                  Liquidity and Capital Resources—an analysisof the effect of our operating, financing and investing activities on ourliquidity and capital resources

 

·                  Off-Balance Sheet Arrangements—a discussionof such commitments and arrangements

 

·                  Dividends—our dividend history

 

·                  Critical Accounting Policies and Estimates—adiscussion of accounting policies that require significant judgments andestimates

 

·                  New Accounting Pronouncements—a summary anddiscussion of our plans for the adoption of new accounting standards relevantto us

 

**SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

This Quarterly Report on Form 10-Q/A contains both historical andforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended (“Securities Act”), and Section 21E ofthe Securities Exchange Act of 1934, as amended (“Exchange Act”). Allstatements other than statements of historical fact included in this QuarterlyReport on Form 10-Q/A that address activities, events or developments thatwe expect, believe or anticipate will or may occur in the future areforward-looking statements including, in particular, the statements about ourplans, objectives, strategies and prospects regarding, among other things, ourfinancial position, results of operations, cash flows and business. We haveidentified some of these forward-looking statements with words like “believe,” “may,”“will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate”or “continue” and other words and terms of similar meaning. Theseforward-looking statements include, among other things:

 

·                  statements regarding the growth of the U.S.and world market for blast- and ballistic-protected vehicles and survivabilitysolutions;

 

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·                  statements with respect to our expectationsregarding our ability to obtain materials, components and supplies necessary tomanufacture our vehicles, our ability to improve cost efficiencies, including,without limitation, as a result of volume purchasing, improvements in ourmanufacturing process and possible future changes in the efficiencies in ouroperations;

 

·                  statements regarding any changes in our costof sales, our general and administrative expenses or our research and developmentexpenses as a percentage of net sales;

 

·                  statements regarding our ability to utilizenet operating loss carry-forwards for income tax purposes; and

 

·                  statements regarding the rate at which we andGDLS will produce MRAP vehicles and the date as of which we will achieve anyparticular monthly production rate of these vehicles.

 

These forward-looking statements were based on expectations aboutfuture events at the time they were made and are subject to numerousuncertainties and factors, all of which are difficult to predict and many ofwhich are beyond our control. Many factors mentioned in our discussion in thisQuarterly Report on Form 10-Q/A will be important in determining futureresults. We do not know whether the expectations reflected in theseforward-looking statements will prove correct. They can be affected byinaccurate assumptions we might make or by known or unknown risks anduncertainties, including those described under “Risk Factors” in other periodicreports we file with the SEC.

 

In addition, this Quarterly Report on Form 10-Q/A containshistorical information, forecasts and estimates regarding defense expendituresby the U.S. federal government, actual and anticipated procurement of armoredvehicles and similar matters. This historical data and these forecasts andestimates have been obtained from publicly available information, industrypublications, trade associations and data compiled by independent marketresearch firms. However, we have not independently verified this informationand we cannot assure you that it is accurate or that these forecasts andestimates will prove correct.

 

When used in this Quarterly Report on Form 10-Q/A, except asspecifically noted otherwise, the term “Force Protection, Inc.” refers toForce Protection, Inc. only, and the terms “Company,” “we,” “our,” “ours”and “us” refer to Force Protection, Inc. and its consolidatedsubsidiaries.

 

**Highlights and Executive Summary**

 

We are an important provider of blast- and ballistic-protected productsused to support armed forces and security personnel in harm’s way. We design,manufacture, test, deliver and support our blast- and ballistic-protectedproducts with the purpose to increase survivability of the users of theproducts. Our specialty vehicles, which we believe are at the forefront ofblast- and ballistic-protected technology, are designed to protect theiroccupants from landmines, hostile fire, and improvised explosive devices (“IEDs”).We are an important provider of vehicles for the U.S. military’s Mine ResistantAmbush Protected (“MRAP”) vehicle program, which is currently one of thehighest priority acquisition programs for the U.S. Department of Defense (“DoD”),according to a memorandum from Secretary of Defense Robert Gates dated May 2,2007.

 

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Through an acquisition in 2002, we began shifting our principal focusfrom our then existing recreational watercraft production business to theproduction of mine clearing and armored vehicles. Our business began to growexponentially when we were awarded contracts by the U.S. military in 2005 andeach year after that. By 2007, substantially all of our net sales were derivedfrom work performed directly or indirectly under U.S. government contracts. Forthe three months ended June 30, 2007 and June 30, 2006, our net salestotaled $138.7 million and $56.1 million, respectively, and our net incomeavailable to common shareholders totaled $663,000 and $424,000,respectively.  For the six months ended June 30,2007 and June 30, 2006, our net sales totaled $243.5 million and $90.9million, respectively, and our net income (loss) available to commonshareholders totaled $183,000 and $(989,000), respectively.

 

**Overview**

 

We design, manufacture, test, deliver and support our blast- andballistic-protected products to increase survivability of the users of theproducts. These vehicles require ongoing life cycle support in the areas ofspare parts, maintenance, and training. As a consequence, we believe that wehave a substantial business opportunity to provide life cycle support to ourexisting and future fleet of vehicles. In addition, as the fleet ages, we havethe opportunity to offer upgrades and product improvements for our fleetdesigned to further enhance the operability and capability of the vehicles.

 

Our specialty vehicles, which we believe are at the forefront of blast-and ballistic-protected technology, are designed to protect their occupantsfrom landmines, hostile fire and IEDs. We currently have three vehicle typesaimed at fulfilling different operational or mission requirements: the Buffalo,the Cougar and the Cheetah. The Buffalo has six wheels, is our largest vehicleand is designed primarily for use in conducting mine clearance operations. TheCougar is a medium-sized vehicle and is available in 4-wheeled and 6-wheeledvariants and in a variety of configurations for troop transport, command andcontrol, route reconnaissance, convoy escort and ambulance duty. The Cheetahhas four wheels and is designed specifically for reconnaissance, forwardcommand and control and urban operations. At present, we have not sold anyCheetah vehicles.

 

We are headquartered, and have manufacturing facilities, in Ladson,South Carolina. In March 2007, we purchased a blast range in Edgefield,South Carolina, and leased a related office building. We use these facilitiesfor our own research and development activities and may also contract withselected governmental and commercial customers to use our facilities. We alsopurchased, in March 2007, a facility in Summerville, South Carolina, forthe intended purpose of expanding research and development operations and tofacilitate our increased customer training requirements of products andapplications. In July 2007, we purchased an additional facility inRoxboro, North Carolina. We intend to use this facility for training andsustainment purposes.

 

**Restatement**

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operations setforth in this Item 2 has been restated to reflect certain adjustments to ourunaudited condensed consolidated financial information previously reported inour quarterly report on Form 10-Q for the period ended June 30, 2007,filed with the SEC on August 9, 2007. On February 29, 2008, we concluded we needed to restate ourpreviously issued unaudited condensed consolidated financial statements for thethird quarter of 2007 and delay the filing of our Annual Report on Form 10-Kfor the year ended December 31, 2007. On August 26, 2008, weconcluded we needed to restate our previously issued unaudited condensedconsolidated financial statements for the first and second quarters of 2007. Wehave concluded that misstatements in those previously issued financialstatements were significant enough to warrant the restatement of the first,second, and third quarters of 2007. The misstatements primarily related to therecognition of revenue and liabilities in the proper periods and thedetermination of deferred incomes taxes. In connection with the restatement,certain presentation reclassifications have been made to conform to the currentperiod presentation.  See Note 2, *Restatement and Reclassification of Previously Issued CondensedConsolidated Financial Statements*, in the accompanying unauditedcondensed consolidated financial statements for additional information.

 

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**Results of Operations**

 

The following discussion and analysis is based on our unauditedcondensed consolidated statements of operations, which reflect our results ofoperations for the three and six months ended June 30, 2007 and 2006, asprepared in accordance with GAAP.

 

The following tables present our vehicle sales and our results ofoperations for the three and six months ended June 30, 2007 and 2006, aswell as the percentage changes from period to period:

 
| ** **            | ** ** | **For the three months  ended June 30,** | ** **           | ** ** | ** ** |
|-----------------------|------------|---------------------------------------------------------|----------------------|------------|------------|
| **Units Sold**   | ** ** | ** **                                              | **2007  (Restated)** | ** ** | **2006**   | ** ** | **Percentage  Change** | ** ** |
| Buffalo               |       | 17                                                      |                 | 5          |       | 240 |  % |
| Cougar (all variants) |       | 212                                                     |                 | 59         |       | 259 |  % |
| Cheetah               |       | —                                                  |                 | —     |       | — |   |
| Total units sold      |       | 229                                                     |                 | 64         |       | 258 |  % |
|                       |            |                                                         |                      |            |            |  |  |  |

 
| ** **            | ** ** | **For the  six months ended  June 30,** | ** **           | ** ** | ** ** |
|-----------------------|------------|--------------------------------------------------------|----------------------|------------|------------|
| **Units Sold**   | ** ** | ** **                                             | **2007  (Restated)** | ** ** | **2006**   | ** ** | **Percentage  Change** | ** ** |
| Buffalo               |       | 35                                                     |                 | 8          |       | 338 |  % |
| Cougar (all variants) |       | 393                                                    |                 | 104        |       | 278 |  % |
| Cheetah               |       | —                                                 |                 | —     |       | — |   |
| Total units sold      |       | 428                                                    |                 | 112        |       | 282 |  % |
|                       |            |                                                        |                      |            |            |  |  |  |

 
| ** **                                                 | ** ** | **For the three months ended  June 30,** | ** **           | ** ** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------|----------------------|------------|------------|
| **(in thousands)**                                    | ** ** | ** **                                                   | **2007  (Restated)** | ** ** | **2006**   | ** ** | **Percentage  Change** | ** ** |
|                                                       |       |                                                         |                 |       |       |   |   |
| Net sales                                                  |       | $                                                            | 138,659              |       | $          | 56,075 |   | 147 |  % |
| Cost of sales                                              |       | 118,090                                                      |                 | 45,918     |       | 157 |  % |
| Gross profit                                               |       | 20,569                                                       |                 | 10,157     |       | 103 |  % |
|                                                       |       |                                                         |                 |       |       |   |   |
| General and administrative expenses                        |       | 17,339                                                       |                 | 7,745      |       | 124 |  % |
| Research and development expenses                          |       | 3,503                                                        |                 | 641        |       | 446 |  % |
| Operating income (loss)                                    |       | (273                                                         | )                    | 1,771      |       | (115 | )% |
| Other income, net                                          |       | 1,106                                                        |                 | 21         |       | n/m |   |
| Interest expense                                           |       | (22                                                          | )                    | (819       | )          | (97 | )% |
| Income before income tax expense                           |       | 811                                                          |                 | 973        |       | (17 | )% |
| Income tax expense                                         |       | (148                                                         | )                    | —     |       | n/m |   |
| Net income                                                 |       | 663                                                          |                 | 973        |       | (32 | )% |
| Accretion of Series D 6% convertible  preferred stock |       | —                                                       |                 | (100       | )          | n/m |   |
| Preferred stock dividend                                   |       | —                                                       |                 | (449       | )          | n/m |   |
| Net income (loss) available to common  shareholders        |       | $                                                            | 663                  |       | $          | 424 |   | 56 |  % |
|                                                            |            |                                                              |                      |            |            |  |  |  |  |  |

 

----

n/m–not meaningful

 

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| ** **                                                 | ** ** | **For the six months ended  June 30,** | ** **           | ** ** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------------|----------------------|------------|------------|
| **(in thousands)**                                    | ** ** | ** **                                                      | **2007  (Restated)** | ** ** | **2006**   | ** ** | **Percentage  Change** | ** ** |
|                                                       |       |                                                            |                 |       |       |   |   |
| Net sales                                                  |       | $                                                               | 243,484              |       | $          | 90,877 |   | 168 |  % |
| Cost of sales                                              |       | 203,215                                                         |                 | 74,082     |       | 174 |  % |
| Gross profit                                               |       | 40,269                                                          |                 | 16,795     |       | 140 |  % |
|                                                       |       |                                                            |                 |       |       |   |   |
| General and administrative expenses                        |       | 34,405                                                          |                 | 13,706     |       | 151 |  % |
| Research and development expenses                          |       | 8,504                                                           |                 | 1,305      |       | 552 |  % |
| Operating income (loss)                                    |       | (2,640                                                          | )                    | 1,784      |       | (248 | )% |
| Other income, net                                          |       | 2,894                                                           |                 | 48         |       | n/m |   |
| Interest expense                                           |       | (31                                                             | )                    | (1,626     | )          | (98 | )% |
| Income before income tax expense                           |       | 223                                                             |                 | 206        |       | 8 |  % |
| Income tax expense                                         |       | (40                                                             | )                    | —     |       | n/m |   |
| Net income                                                 |       | 183                                                             |                 | 206        |       | (11 | )% |
| Accretion of Series D 6% convertible  preferred stock |       | —                                                          |                 | (261       | )          | n/m |   |
| Preferred stock dividend                                   |       | —                                                          |                 | (934       | )          | n/m |   |
| Net income (loss) available to common  shareholders        |       | $                                                               | 183                  |       | $          | (989 | ) | 119 |  % |
|                                                            |            |                                                                 |                      |            |            |  |  |  |  |  |

 

***Three Months Ended June 30,2007, as Restated***

 

*Comparison of Results of Operations for the ThreeMonths Ended June 30, 2007 and 2006*

 

*Units sold*

 

The increase in vehicles sold in the comparative periods is primarilydue to the vehicles sold pursuant to the MRAP program. The vehicles sold undersuch program, which started shipping in the first quarter of 2007, representapproximately 76% of the vehicles sold in the three months ended June 30,2007.

 

*Net sales*

 

The increase in net sales for the comparative periods is attributableto an increase in volume of vehicle deliveries, spare parts, and logisticsservices (field service representatives and technical publications). The mix ofvehicles delivered and spares parts and logistics sales and the percentagechange in the comparative periods are set forth in the following tables:

 
| ** **                | ** ** | **For the three months ended  June 30,** | ** **           | ** ** | ** ** |
|---------------------------|------------|-------------------------------------------------------------------|----------------------|------------|------------|
| **(in thousands)**   | ** ** | ** **                                                        | **2007  (Restated)** | ** ** | **2006**   | ** ** | **Percentage  Change** | ** ** |
| Buffalo                   |       | $                                                                 | 11,820               |       | $          | 9,561 |   | 24 | % |
| Cougar (all variants)     |       | 109,989                                                           |                 | 38,071     |       | 189 | % |
| Spare parts and logistics |       | 16,850                                                            |                 | 8,443      |       | 100 | % |
|                      |       | $                                                                 | 138,659              |       | $          | 56,075 |   | 147 | % |
|                           |            |                                                                   |                      |            |            |  |  |  |  |  |

 

*Cost of sales and Gross profit*

 
| ** **              | ** ** | **For the three months  ended June 30,** | ** **           |
|-------------------------|------------|-------------------------------------------------------------------|----------------------|
| **(in thousands)** | ** ** | ** **                                                        | **2007  (Restated)** | ** ** | **2006** | ** ** |
| Cost of sales           |       | $                                                                 | 118,090              |   | $ | 45,918 |   |
| Gross margin percentage |       | 14.8                                                              | %                    | 18.1 | % |
|                         |            |                                                                   |                      |  |  |  |  |  |

 

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Gross margins decreased by 3.3 percentage points for the threemonths ended June 30, 2007 compared with the three months ended June 30,2006. The decrease was primarily due to operating inefficiencies. We define thegross margin percentage as net sales less cost of sales divided by net sales.

 

*General and administrative expenses*

 
| ** **                   | ** ** | **For the three months  ended June 30,** | ** ** |
|------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                   | ** ** | **2007  (Restated)**                                              | ** ** | **2006** | ** ** |
| As a percentage of net sales |       | 12.5                                                              | %          | 13.8 | % |

 

General and administrative expenses as a percentage of net salesdecreased 1.3 percentage points for the three months ended June 30,2007 compared with the three months ended June 30, 2006. The decrease wasprimarily due to leveraging selling and administrative support functions overan increasing business base, partially offset by a liquidated damage charge of$1.8 million. See Note 7, *Other currentliabilities,* in the accompanying unaudited condensed consolidatedfinancial statements.

 

*Research and development expenses*

 
| ** **                   | ** ** | **For the three months  ended June 30,** | ** ** |
|------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                   | ** ** | **2007  (As restated)**                                      | ** ** | **2006** | ** ** |
| As a percentage of net sales |       | 2.5                                                               | %          | 1.1 | % |

 

Research and development expenses increased by approximately$2.9 million primarily due to increased expenditures related to thedevelopment of the Cheetah vehicle.

 

*Other income*

 

Other income increased for the 2007 period as compared with the similarperiod in 2006 due to the interest income earned on investment of the fundsreceived from our December 2006 private placement of common stock.

 

*Interest expense*

 

Interest expense decreased for the 2007 period due to the repayment ofa short-term loan in August 2006 and the termination of an accountsreceivable factoring agreement in June 2006. Termination of theseshort-term financing arrangements was facilitated by the sale of common stockthrough private placements.

 

*Income tax expense*

 

We recorded income tax expense for the 2007 period as a result of ourpre-tax income. The effective income tax rate for the 2007 period was approximately18%. No income tax expense was recorded as a result of pre-tax income for thecomparable 2006 period. See Note 12, *IncomeTaxes,* in the accompanying unaudited condensed consolidatedfinancial statements.

 

*Series D convertible preferred stock dividendsand accretion*

 

There were no preferred stock dividends or accretion of preferred stockin the 2007 period since all preferred stock was converted to common stock in2006.

 

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*Net income (loss) available to common shareholders*

 
| ** **                                               | ** ** | **For the three months  ended June 30,** | ** **           |
|----------------------------------------------------------|------------|-------------------------------------------------------------------|----------------------|
| **(in thousands, except per share)** | ** ** | ** **                                                        | **2007  (Restated)** | ** ** | **2006** | ** ** |
| Net income available to common shareholders              |       | $                                                                 | 663                  |   | $ | 424 |   |
| Diluted earnings per common share                        |       | $                                                                 | 0.01                 |   | $ | 0.01 |   |
|                                                          |            |                                                                   |                      |  |  |  |  |  |

 

We realized higher net income available to common shareholders for the2007 period compared to net income available to common shareholders for thecomparable period in 2006 due to decreased interest expense and decreasedpreferred stock dividends and accretion, partially offset by lower grossmargins.

 

***Six Months Ended June 30, 2007,as Restated***

 

*Comparison of Results of Operations for the SixMonths Ended June 30, 2007 and 2006*

 

*Units sold*

 

The increase in vehicles sold in the comparative periods is primarilydue to the vehicles sold pursuant to the MRAP program. The vehicles sold undersuch program, which started shipping in the first quarter of 2007, representapproximately 48% of the vehicles sold in the six months ended June 30,2007.

 

*Net sales*

 

The increase in net sales for the comparative periods is attributableto an increase in volume of vehicle deliveries, spare parts, and logisticsservices (field service representatives and technical publications). The mix ofvehicles delivered and spares parts and logistics sales and the percentagechange in the comparative periods are set forth in the following tables:

 
| ** **                | ** ** | **For the six months ended  June 30,** | ** **           | ** ** | ** ** |
|---------------------------|------------|-----------------------------------------------------------------|----------------------|------------|------------|
| **(in thousands)**   | ** ** | ** **                                                      | **2007  (Restated)** | ** ** | **2006**   | ** ** | **Percentage  Change** | ** ** |
| Buffalo                   |       | $                                                               | 22,816               |       | $          | 11,050 |   | 106 | % |
| Cougar (all variants)     |       | 184,935                                                         |                 | 70,169     |       | 164 | % |
| Spare parts and logistics |       | 35,733                                                          |                 | 9,658      |       | 270 | % |
|                      |       | $                                                               | 243,484              |       | $          | 90,877 |   | 168 | % |
|                           |            |                                                                 |                      |            |            |  |  |  |  |  |

 

*Cost of sales and Gross profit*

 
| ** **              | ** ** | **For the six months ended  June 30,** | ** **           |
|-------------------------|------------|------------------------------------------------------------|----------------------|
| **(in thousands)** | ** ** | ** **                                                 | **2007  (Restated)** | ** ** | **2006** | ** ** |
| Cost of sales           |       | $                                                          | 203,215              |   | $ | 74,082 |   |
| Gross margin percentage |       | 16.5                                                       | %                    | 18.5 | % |
|                         |            |                                                            |                      |  |  |  |  |  |

 

Gross margins decreased by 2.0 percentage points for the six monthsended June 30, 2007 compared with the six months ended June 30, 2006.The decrease was primarily due to operating inefficiencies. We define the grossmargin percentage as net sales less cost of sales divided by net sales.

 

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*General and administrative expenses*

 
| ** **                   | ** ** | **For the six months  ended June 30,** | ** ** |
|------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                   | ** ** | **2007  (Restated)**                                            | ** ** | **2006** | ** ** |
| As a percentage of net sales |       | 14.1                                                            | %          | 15.1 | % |

 

General and administrative expenses as a percentage of net salesdecreased 1.0 percentage points for the six months ended June 30,2007 compared with the six months ended June 30, 2006. The decrease wasprimarily due to leveraging selling and administrative support functions overan increasing business base, partially offset by a liquidated damage charge of$6.7 million. See Note 7, *Other currentliabilities,* in the accompanying unaudited condensed consolidatedfinancial statements.

 

*Research and development expenses*

 
| ** **                   | ** ** | **For the six months  ended June 30,** | ** ** |
|------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                   | ** ** | **2007  (Restated)**                                            | ** ** | **2006** | ** ** |
| As a percentage of net sales |       | 3.5                                                             | %          | 1.4 | % |

 

Research and development expenses increased by approximately$7.2 million primarily due to increased expenditures related to thedevelopment of the Cheetah vehicle.

 

*Other income*

 

Other income increased for the 2007 period as compared with the similarperiod in 2006 due to the interest income earned on investment of the fundsreceived from our December 2006 private placement of common stock.

 

*Interest expense*

 

Interest expense decreased for the 2007 period due to the repayment ofa short-term loan in August 2006 and the termination of an accountsreceivable factoring agreement in June 2006. Termination of theseshort-term financing arrangements was facilitated by the sale of common stockthrough private placements.

 

*Income tax expense*

 

We recorded income tax expense for the 2007 period as a result of ourpre-tax income. The effective income tax rate for the 2007 period was approximately18%. No income tax expense was recorded as a result of pre-tax income for thecomparable 2006 period. See Note 12, *IncomeTaxes,* in the accompanying unaudited condensed consolidatedfinancial statements.

 

*Series D convertible preferred stock dividendsand accretion*

 

There were no preferred stock dividends or accretion of preferred stockin the 2007 period since all preferred stock was converted to common stock in2006.

 

*Net income (loss) available to common shareholders*

 
| ** **                                               | ** ** | **For the six months ended  June 30,** | ** **           |
|----------------------------------------------------------|------------|------------------------------------------------------------|----------------------|
| **(in thousands, except per share)** | ** ** | ** **                                                 | **2007  (Restated)** | ** ** | **2006** | ** ** |
| Net income (loss) available to common  shareholders      |       | $                                                          | 183                  |   | $ | (989 | ) |
| Diluted earnings per common share                        |       | $                                                          | 0.00                 |   | $ | (0.03 | ) |
|                                                          |            |                                                            |                      |  |  |  |  |  |

 

We realized net income available to common shareholders for the 2007period compared to a net loss available to common shareholders for thecomparable period in 2006 due to decreased interest expense and decreasedpreferred stock dividends and accretion, partially offset by lower grossmargins.

 

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**Liquidity and Capital Resources**

 

Our liquidity and available capital resources areimpacted by operating, financing and investing activities. Our principal sourcesof liquidity are cash on hand and cash from operations, primarily from the U.S.government.

 

*Sources and Uses of Cash*

 

Our primary sources of funding are cash flows fromoperations and from financing activities. Our funds were used primarily to fundworking capital requirements and to make capital expenditures. The followingchart shows the cash flows provided by or used in operating, investing, andfinancing activities for the six months ended June 30, 2007 and 2006 (inthousands):

 
| ** **                                           | ** ** | **For the six months  ended June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                                        | ** ** | **2006** | ** ** |
| Net cash (used in) provided by operating  activities |       | $                                                               | (96,480    | ) | $ | 5,152 |   |
| Net cash used in investing activities                |       | (25,538                                                         | )          | (2,348 | ) |
| Net cash provided by financing activities            |       | 3,573                                                           |       | 593 |   |
| Increase (decrease) in cash and cash  equivalents    |       | $                                                               | (118,445   | ) | $ | 3,397 |   |

 

At June 30, 2007 we had $37.9 million ofcash and cash equivalents, a decrease from $156.3 million at the end of2006.

 

*Cash Flow from Operating Activities*

 

Cash used in operating activities increased by$101.6 million during the six months ended June 30, 2007 compared to thesix months ended June 30, 2006. This change was primarily due to anincrease in working capital usage in the 2007 period. Working capital usageincreased $105.2 million (accounts receivable, inventories, and accountspayable) to support increased sale volumes.

 

*Cash Flow from Investing Activities*

 

As our business has grown, we have made severalsignificant acquisitions and expanded our manufacturing capacity andinfrastructure. In March 2007, we purchased the research and developmentaltesting facility of NEWTEC Services Group, Inc., located near Edgefield,South Carolina, for $5.5 million, $5.1 million of which was in cash.In March 2007, we purchased real and personal property located in Summerville,South Carolina, for $4.1 million in cash to use as a product developmentand logistic services training center. During the first half of 2007, we beganto construct a warehouse and an additional assembly line at our Ladsonfacility. Construction in progress at June 30, 2007 totaled $7.0 million.

 

*Cash Flow from Financing Activities*

 

During the six months ended June 30, 2007, weissued common stock primarily for exercised employee options. During the sixmonths ended June 30, 2006, the proceeds of common stock issued forexercised employee options and exercised common stock warrants were offset bythe retirement of $5.0 million of short-term debt.

 

*Current Liquidity and Capital Resources*

 

Due to the timing of the issuance of this amendedQuarterly Report on Form 10-Q/A we have disclosed certain information thatwas included in our Annual Report on Form 10-K for the year ended December 31,2007, filed with the SEC on September 15, 2008.

 

During the first six months of 2008, we expendedapproximately $9 million to complete the expansion of our manufacturingcapability and capacity and to upgrade our information technologyinfrastructure. We will continue to expend capital for research and developmentand business development activities.

 

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The amount of capital that we will require dependson several factors, including without limitation, the extent and timing ofsales of our products, inventory costs, costs of raw material and components,labor costs, costs of improving our financial and accounting systems, thetiming and costs associated with the expansion of our manufacturing,development, engineering and customer support capabilities, the timing and costof our product development and enhancement activities and our operatingresults. We currently estimate that the cash flow that we anticipate will begenerated by our business plus the $30 million available under our line ofcredit and our expected renewal of it will be sufficient to meet our presentlybudgeted capital expenditures and our other presently anticipated cash needsfor the year ending December 31, 2008. We expect that we may requireadditional sources of capital after that time. We may therefore be required toobtain additional sources of capital, which may include borrowings or theissuance of debt or equity securities, including common stock, and there can beno assurance that such financing will be available to us when we need it or, ifavailable, that the terms of any such financing will be satisfactory to us andnot dilutive to our shareholders. Any failure to obtain necessary capital asand when required could have a material adverse effect on our business,prospects, financial position, results of operations, and cash flows.

 

**Off-Balance Sheet Arrangements**

 

In accordance with the definition under SEC rules,the following qualify as off-balance sheet arrangements:

 

·                  any obligation under certain guarantees orcontracts;

 

·                  a retained or contingent interest in assetstransferred to an unconsolidated entity or similar entity or similararrangement that serves as credit, liquidity, or market risk support to thatentity for such assets;

 

·                  any obligation under certain derivativeinstruments; and

 

·                  any obligation under a material variableinterest held by the registrant in an unconsolidated entity that providesfinancing, liquidity, market risk, or credit risk support to the registrant, orengages in leasing, hedging, or research and development services with theregistrant.

 

The following discussion addresses each of the aboveitems for the Company.

 

As of June 30, 2007, we do not have anyobligation under certain guarantees or contracts as defined above.

 

As of June 30, 2007, we do not have anyretained or contingent interest in assets as defined above.

 

As of June 30, 2007, we do not hold derivativefinancial instruments, as defined by FASB Statement No. 133, *Accounting for Derivative Instruments and HedgingActivities,* as amended.

 

As part of our ongoing business, we do notparticipate in transactions that generate relationships with unconsolidatedentities or financial partnerships, such as entities often referred to asstructured finance or special purpose entities (“SPEs”), which would have beenestablished for the purpose of facilitating off-balance sheet arrangements orother contractually narrow or limited purposes. As of June 30, 2007, wewere not involved in any unconsolidated SPE transactions.

 

**Dividends**

 

We have never paid or declared any cash dividends onour common stock. We currently intend to retain earnings, if any, to financethe growth and development of our business, and we do not expect to pay anycash dividends on our common stock in the foreseeable future. Payment of futuredividends, if any, will be at the discretion of the board of directors and willdepend on our financial condition, results of operations, capital requirements,restrictions contained in current or future financing instruments, and otherfactors the board deems relevant.

 

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**Critical Accounting Policies and Estimates**

 

Our discussion and analysis of our results ofoperations and liquidity and capital resources are based on our unauditedcondensed consolidated financial statements, which have been prepared inaccordance with GAAP. In connection with the preparation of our unauditedcondensed consolidated financial statements, we are required to makeassumptions and estimates about future events, and apply judgments that affectthe reported amounts of assets, liabilities, revenue, expenses, and the relateddisclosures. We base our assumptions, estimates and judgments on historicalexperience, current trends and other factors we believe to be relevant at thetime we prepared our unaudited condensed consolidated financial statements. Ona regular basis, we review the accounting policies, assumptions, estimates andjudgments to ensure that our unaudited condensed consolidated financialstatements are presented fairly and in accordance with GAAP. However, becausefuture events and their effects cannot be determined with certainty, actualresults could differ from our assumptions and estimates, and such differencescould be material.

 

The preparation of our unaudited condensedconsolidated financial statements in conformity with GAAP requires us to makeestimates and assumptions. These estimates and assumptions affect the reportedamounts of assets and liabilities and the disclosures of contingent assets andliabilities as of the date of the financial statements, and the reportedamounts of revenues and expenses during the reporting periods. Significantestimates and assumptions are used for, but are not limited to: (1) revenuerecognition; (2) allowance for doubtful accounts; (3) definitizationand advance payments on contracts; (4) inventory costs and reserves; (5) assetimpairments (6) depreciable lives of assets; (7) economic lives andfair value of leased assets; (8) income tax reserves and valuationallowances; (9) fair value of stock options; (10) allocation ofdirect and indirect cost of sales; and (11) litigation reserves. Future eventsand their effects cannot be predicted with certainty, and accordingly, ouraccounting estimates require the exercise of judgment. The accounting estimatesused in the preparation of our unaudited condensed consolidated financialstatements will change as new events occur, as more experience is acquired, asadditional information is obtained and as our operating environment changes. Weevaluate and update our assumptions and estimates on an ongoing basis and mayemploy outside experts to assist in our evaluations. Actual results coulddiffer from the estimates we have used.

 

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Our significant accounting policies are discussed inNote 1, *Summary of SignificantAccounting Policies,* to our accompanying unaudited condensed consolidatedfinancial statements. We believe the following accounting policies are the mostcritical to aid in fully understanding and evaluating our reported financialresults, as they require management to make difficult, subjective or complexjudgments, and to make estimates about the effect of matters that areinherently uncertain. We have reviewed these critical accounting policies andrelated disclosures with the Audit Committee of our board of directors.

 
| ** **                                                                                                                                                                                                                                                                                                     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **Effect if  Actual Results**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Description**                                                                                                                                                                                                                                                                                                | ** ** | **Judgments  and Uncertainties**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | **Differ  from Assumptions**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Inventories**                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| We state our inventories at the lower of cost or market value and net  of the cost of excess and obsolete items.                                                                                                                                                                                               |       | The determination of inventory valuation reserves requires management  to make estimates and judgments on the future salability of inventories.  Valuation reserves for excess, obsolete, and slow-moving inventory are  estimated by comparing the inventory levels of individual parts to both  future sales forecasts or production requirements and historical usage rates  in order to identify inventory for which the resale value or replacement  value is less than the inventoriable cost. Other factors that management  considers in determining these reserves include whether individual inventory  parts meet current specifications and can be substituted for a part currently  being sold or used as a service part, overall market conditions, and other  inventory management initiatives. |       | Our estimates of future product demand may prove to be inaccurate, in  which case we may have understated or overstated the provision required for  excess and obsolete inventories. In the future, if our inventories are  determined to be overvalued, we would be required to recognize such costs in  our cost of sales at the time of such determination. Likewise, if our  inventories are determined to be undervalued, we may have over-reported our  costs of sales in previous periods and would be required to recognize such  additional operating income at the time of sale. |
| **Income  taxes**                                                                                                                                                                                                                                                                                              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| We account for income taxes using the asset and liability method.  Under this method, deferred tax assets and liabilities are recognized for the  estimated future tax consequences attributable to differences between the  financial statement carrying values of existing assets and liabilities and  their |       | A high degree of judgment is required to determine if, and the extent  to which, valuation allowances should be recorded against deferred tax  assets. Since December 31, 2006, we have not had a valuation allowance  recorded against our deferred tax asset.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | Although we believe that our approach to estimates and judgments as  described herein is reasonable, actual results could differ and we may be  exposed to increases or decreases in income taxes that could be material.                                                                                                                                                                                                                                                                                                                                                                  |

 

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| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                           | ** ** | **Effect if  Actual Results**                                                                                                                                                                                              |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | **Judgments  and Uncertainties**                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **Differ  from Assumptions**                                                                                                                                                                                               |
| respective tax bases. Deferred tax assets are also recorded with  respect to net operating losses and other tax attribute carryforwards.  Deferred tax assets and liabilities are measured using enacted tax rates in  effect for the years in which temporary differences are expected to be  recovered or settled. Valuation allowances are established when it is more  likely than not that deferred tax assets will not be realized. The effect on  deferred tax assets and liabilities of a change in tax rates is recognized in  the income of the period that includes the enactment date.

 

In addition, we establish reserves for tax contingencies in  accordance with FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes.* |       | Contingent tax liabilities are based on our assessment of the  likelihood that we have incurred a liability. Such liabilities are reviewed  based on recent changes in tax laws and regulations, including judicial  rulings.                                                                                                                                                                                                                        |       |                                                                                                                                                                                                                       |
| **Assessment  of Loss Contingencies**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                                                                                       |
| We have legal and other contingencies, including product warranties,  which could result in significant losses upon the ultimate resolution of such  contingencies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | We have provided for losses in situations where we have concluded  that it is probable that a loss has been or will be incurred and the amount  of the loss is reasonably estimable. A significant amount of judgment is  involved in determining whether a loss is probable and reasonably estimable  due to the uncertainty involved in determining the likelihood of future  events and estimating the financial statement impact of such events. |       | If further developments or resolution of a contingent matter are not  consistent with our assumptions and judgments, we may need to recognize a  significant charge in a future period related to an existing contingency. |

 

**New Accounting Pronouncements**

 

In May 2008, the FASB issued FASB Statement No. 162,*The Hierarchy of Generally**Accepted Accounting Principles*. FASB StatementNo. 162 defines the order in which accounting principles that aregenerally accepted should be followed. FASB Statement No. 162 is effectivefor fiscal years beginning after November 15, 2008. We have not yetcommenced evaluating the potential impact, if any, of the adoption of FASBStatement No. 162 on our consolidated financial position, results ofoperations, and cash flows.

 

In April 2008, the FASB issued Staff Position (“FSP”)No. FAS 142-3, *Determination ofUseful Life of Intangible Assets* (FSP FAS 142-3). FSPFAS 142-3 amends the factors that should be considered in developing therenewal or extension assumptions used to determine the useful life of arecognized intangible asset under FASB

 

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StatementNo. 142, *Goodwill and Other IntangibleAssets*. FSP FAS 142-3 also requires expanded disclosure relatedto the determination of intangible asset useful lives. FSP FAS 142-3 iseffective for fiscal years beginning after December 15, 2008. Earlieradoption is prohibited. We have not yet commenced evaluating the potentialimpact, if any, of the adoption of FSP FAS 142-3 on our consolidatedfinancial position, results of operations, and cash flows.

 

In March 2008, the FASB issued FASB Statement No. 161,*Disclosures about Derivative Instruments andHedging Activities*, an amendment of FASB Statement No. 133, *Accounting for Derivative Instruments and HedgingActivities*. FASB Statement No. 161 changes the disclosurerequirements for derivative instruments and hedging activities. Entities arerequired to provide enhanced disclosures about (i) how and why an entityuses derivative instruments, (ii) how derivative instruments and relatedhedged items are accounted for under FASB Statement No. 133, *Accounting for Derivative Instruments and HedgingActivities,* and its related interpretations and (iii) howderivative instruments and related hedged items affect an entity’s financialposition, results of operations, and cash flows. FASB Statement No. 161 iseffective for financial statements issued for fiscal years and interim periodsbeginning after November 15, 2008, with early application permitted. FASBStatement No. 161 permits, but does not require, comparative disclosuresfor earlier periods at initial adoption. We have not yet commenced evaluatingthe potential impact, if any, of the adoption of FASB Statement No. 161 onour consolidated financial position, results of operations, cash flows ordisclosures related to derivative instruments and hedging activities.

 

In December 2007, the FASB issued FASBStatement No. 141 (revised 2007), *BusinessCombinations*, which establishes principles and requirements for howthe acquirer in a business combination (i) recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,and any controlling interest, (ii) recognizes and measures the goodwillacquired in the business combination or a gain from a bargain purchase, and (iii) determineswhat information to disclose to enable users of the financial statements toevaluate the nature and financial effects of the business combination. FASBStatement No. 141(R) applies to fiscal years beginning after December 15,2008. Earlier adoption is prohibited.

 

In December 2007, the FASB issued FASBStatement No. 160, *NoncontrollingInterests in Consolidated Financial Statements*, which establishesaccounting and reporting standards that require (i) the ownership interestin subsidiaries held by parties other than the parent to be clearly identifiedand presented in the consolidated balance sheet within shareholder’s equity,but separate from the parent’s equity, (ii) the amount of consolidated netincome attributable to the parent and the noncontrolling interest to be clearlyidentified and presented on the face of the consolidated statement ofoperations, and (iii) changes in a parent’s ownership interest while theparent retains its controlling financial interest in its subsidiary to beaccounted for consistently. FASB Statement No. 160 applies to fiscal yearsbeginning after December 15, 2008. Earlier adoption is prohibited.

 

In February 2007, the FASB issued FASBStatement No. 159, *The Fair Value Optionfor Financial Assets and Financial Liabilities*, which providescompanies with an option to report selected financial assets and liabilities atfair value. FASB Statement No. 159 establishes presentation and disclosurerequirements designed to facilitate comparisons between companies that choosedifferent measurement attributes for similar types of assets and liabilitiesand requires companies to provide additional information that will helpinvestors and other users of financial statements to more easily understand theeffect of a company’s choice to use fair value on its earnings. FASB Statement No. 159also requires entities to display the fair value of those assets andliabilities for which the company has chosen to use fair value on the face ofthe balance sheet. FASB Statement No. 159 does not eliminate disclosurerequirements included in other accounting standards, including requirements fordisclosures about fair value measurements included in FASB Statements No. 157,*Fair Value Measurements*, and No. 107,*Disclosures about Fair Value of FinancialInstruments.* FASB Statement No. 159 is effective as of thebeginning of an entity’s first fiscal year beginning after November 15,2007. We adopted FASB Statement No. 159 and we did not elect the fairvalue option for any other financial instruments or certain other financialassets and liabilities that were not previously required to be measured at fairvalue.

 

In September 2006, the FASB issued FASBStatement No. 157, *Fair ValueMeasurements*, which defines fair value, establishes a framework formeasuring fair value under GAAP and expands disclosures about fair valuemeasurements. FASB Statement No. 157 applies to other accountingpronouncements that require or permit fair value measurements. The new guidanceis effective for financial statements issued for fiscal years beginning after November 15,2007, and for interim periods within those fiscal years. We adopted FASBStatement No. 157 on January 1, 2008 and it did not have an impact onour consolidated financial position, results of operations, and cash flows.

 

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We have determined that all other recently issuedaccounting pronouncements will not have a material impact on our consolidatedfinancial position, results of operations, and cash flows, or do not apply toour operations.

 

**Item 4. Control and Procedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

Disclosure controls and procedures are controls andother procedures that are designed to provide reasonable assurance that theinformation required to be disclosed in reports filed or submitted under theUnited States Securities Exchange Act of 1934, as amended (“Exchange Act”), is (1) recorded,processed, summarized and reported within the time periods specified in the rules andforms of the SEC and (2) accumulated and communicated to management,including the principal executive officer and principal financial officer, asappropriate to allow timely decisions regarding required disclosure. Ourdisclosure controls and procedures were designed to provide reasonableassurance of achieving their control objectives.

 

In connection with the preparation of this amendedQuarterly Report on Form 10-Q/A for the period ended June 30, 2007,members of our new management, at the direction (and with the participation) ofour chief executive officer and interim chief financial officer, performed anevaluation of the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) under theExchange Act), as of June 30, 2007. Based on that evaluation, the chiefexecutive officer and interim chief financial officer, concluded that ourdisclosure controls and procedures were not effective at a reasonable assurancelevel as of June 30, 2007, because of the material weaknesses in ourinternal control over financial reporting that existed during the periodcovered by this report. Notwithstanding these material weaknesses that existedduring the period covered by this report, our new management has concluded thatour unaudited condensed consolidated financial statements included in thisreport are fairly stated, in all material respects, in accordance withgenerally accepted accounting principles in the United States of America(GAAP).

 

**Changes in Internal Control Over Financial Reporting**

 

On February 29, 2008, we concluded we needed torestate our previously issued consolidated financial statements for the thirdquarter of 2007 and delay the filing of our Annual Report on Form 10-K forthe year ended December 31, 2007. On August 26, 2008, we concluded weneeded to restate our previously issued consolidated financial statements forthe first and second quarters of 2007. We have concluded that misstatements inthose previously issued financial statements were significant enough to warrantthe restatement of the first, second, and third quarters of 2007.

 

At the conclusion of our restatement efforts, ournew management identified the following material weaknesses in our internalcontrol over financial reporting as of June 30, 2007.

 

*Financial Statements ClosingProcess.*We lacked asufficient complement of personnel with a level of financial reportingexpertise commensurate with our financial reporting requirements, whichresulted in our not maintaining effective controls over the financialstatements closing and reporting process. Specifically, we lacked sufficientresources to perform properly the quarterly and year-end consolidated financialstatement close processes, including the review of certain accountreconciliations, recognition of certain liabilities in the proper period andconsolidated financial statement preparation and disclosures. We also did notmaintain physical control over property and equipment. We also did not maintainsufficient written policies and procedures, and support, particularly withrespect to the accounting for the reserve for excess and obsolete inventory;however, this specific item only resulted in material adjustments to our costof goods sold in the fourth quarter of 2007. The other control deficiencies inthis section contributed to the material weaknesses discussed below andresulted in restatement of our quarterly condensed consolidated financialstatements for the period ended June 30, 2007.

 

*Accounting for Inventory andrelated accounts.*Wedid not maintain effective controls over the completeness, accuracy, valuationand existence of our inventory, accounts payable, and related cost of salesaccounts. Specifically, our controls with respect to the accuracy of productcosting, work order closeout, accounting for cost accumulation on long-termcontracts and certain inventory management processes, including obsolete andslow-moving inventory identification, and net-realizable inventory valuationwere not effective. Also, we did not maintain effective controls over theaccurate and timely recording of inventory receipts and shipments, includingthe

 

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recognitionof accounts payable. Furthermore, we did not maintain effective controls overthe accuracy and completeness of perpetual counts of our inventory quantities.This control deficiency contributed to the material weaknesses discussed belowand resulted in restatement of our quarterly unaudited condensed consolidatedfinancial statements for the period ended June 30, 2007.

 

*Accounting for revenue recognition.*We did not maintaineffective controls over the completeness and accuracy of revenue, accountsreceivable, and advance payments on contracts. Specifically, we failed torecognize revenue in the appropriate quarter and effective controls were notdesigned and in place to ensure that sales orders were complete, accurate andrecorded on a timely basis. This control deficiency contributed to the materialweaknesses discussed below and resulted in restatement of our quarterly unauditedcondensed consolidated financial statements for the period ended June 30,2007.

 

*Accounting for income taxes.*We did not maintain effective controls overthe completeness, accuracy, presentation and disclosure of our accounting forincome taxes, including the determination of income tax expense, income taxespayable and deferred income tax assets and liabilities. This control deficiencycontributed to the material weaknesses discussed below and resulted inrestatement of our quarterly unaudited condensed consolidated financialstatements for the period ended June 30, 2007.

 

*Inadequate monitoring ofnon-routine and non-systematic transactions.*We did not have effective controls in placeto monitor and accurately record non-routine and non-systematic transactions.This primarily related to our accounting for inventory relating to terminatingan agreement with a supplier in the second quarter of 2007. This controldeficiency contributed to the material weaknesses discussed below and resultedin restatement of our quarterly unaudited condensed consolidated financialstatements for the period ended June 30, 2007.

 

*Information Technology Controls.*We did not maintain effective segregation ofduties over automated and manual transaction processes. Specifically, we didnot maintain effective controls over the granting, maintenance and monitoringof access to financial systems and data. Certain information technology andfinance department personnel had unrestricted access to financial applications,programs and data beyond that needed to perform their individual jobresponsibilities and without any independent monitoring. This controldeficiency affects substantially all financial statement accounts. This controldeficiency did not result in adjustments to our unaudited condensedconsolidated financial statements for the period ended June 30, 2007.

 

There were no material changes in our internalcontrol over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act) for the period covered by this report that materiallyaffected, or were reasonably likely to materially affect, our internal controlover financial reporting. We did, however, identify the material weaknessesdescribed above with respect to our internal controls.

 

**Remediation of Material Weaknesses**

 

We have engaged in, and are continuing to engage in,substantial efforts to improve our internal control over financial reportingand disclosure controls and procedures related to substantially all areas ofour financial statements and disclosures. These efforts include the following:

 

*Efforts to strengthen accountingand finance department through additional professional staff.*We have hired a number of additionalprofessional staff over the past several months with the skills and experienceneeded for a public company of our size and complexity, including an individualwith expertise in and responsibility for government contract compliance. Wewill continue to seek to strengthen our accounting and finance department andstrive to appropriately balance the allocation of full-time staff andconsultants. As previously announced, in the second quarter of 2008 we hiredCharles Mathis as our new Executive Vice President of Finance. The developmentof adequate corporate level accounting and finance oversight is still ongoing.We are still recruiting accounting and finance personnel and do not yet havepermanent resources in place sufficient to close our books without significantreliance on third-party contractors.

 

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*Use of outside consultants andadvisors.*While weultimately intend to reduce our reliance on outside consultants, for the nearterm we have engaged additional outside consultants and advisors to assistmanagement in oversight and preparation of our financial statements, periodicreports filed with the SEC and related matters. We are also using outsideconsultants to function as our internal audit department and overseeing our Section 404evaluation of internal control over financial reporting, which will includeevaluating and recommending improvements in the existing internal controls atboth the corporate and business group level and establishing a mechanism tomonitor the effectiveness of internal controls on an ongoing basis. As westrengthen our accounting and finance department, we intend to transition moreof these functions to full-time staff.

 

*Increased communication internallyand with outside advisors.*We have increased communication by and among senior management,external advisors and other third parties relevant to the disclosure process.Specifically, the chief executive officer meets daily with his management teamto review operational developments. Our board of directors receives timely andregular updates on issues of importance. Our chief executive officer alsoregularly prepares a report to our board of directors highlighting operationaland financial results which is also distributed to his executive team.

 

*Enhanced efforts to identifynon-routine transactions.*We have initiated daily meetings with executive leadership to identifynon-routine transactions and their related accounting treatment at an earlystage. Certain expenditure transactions require approval of the interim chieffinancial officer. Additionally, we are in the process of assigning financeprofessionals within each of the operating departments.

 

*Disclosure controls and proceduresimprovements.*Withrespect to the preparation of periodic reports to be filed with the SEC, wehave instituted formal meetings of key personnel involved in the process anddeveloped detailed checklists and timetables with appropriate responsibilitiesand structural processes. In addition, we are utilizing a system of uniformdocument management (e.g., numbering, dating, and red-lining drafts) andimproved coordination of the drafting process with respect to our earningsreleases and periodic reports.

 

Management will consider the design and operatingeffectiveness of these actions and will make additional changes it determinesappropriate.

 

The effectiveness of Force Protection’s or anysystem of disclosure controls and procedures and internal control overfinancial reporting is subject to certain limitations, including the exerciseof judgment in designing, implementing, and evaluating the controls andprocedures, the assumptions used in identifying the likelihood of futureevents, and the inability to eliminate misconduct completely. As a result, ourdisclosure controls and procedures and internal control over financialreporting may not prevent all errors or improper acts or ensure that allmaterial information will be made known to appropriate management in a timelyfashion.

 

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**PART II**

 

**OTHERINFORMATION**

 

**Item 6. Exhibits**

 

**EXHIBITINDEX**

 
| **Number** | ** ** | **DESCRIPTION** |
|------------|------------|-----------------|
| ** ** | ** ** | ** **      |
| 2.1        |       |            | Agreement and Plan of  Merger filed as Exhibit 2.1 in the Company’s Annual Report on  Form 10-K filed September 15, 2008, is hereby incorporated by  reference. |
|       |       |            |   |
| 3.1        |       |            | Articles of Incorporation  filed as Exhibit 3.1 in the Company’s Annual Report on Form 10-K  filed September 15, 2008, is hereby incorporated by reference. |
|       |       |            |   |
| 3.2        |       |            | First Amended and Restated  By-Laws of Force Protection, Inc., filed as Exhibit 3.1 on the  Company’s Current Report on Form 8-K filed February 26, 2008, is  hereby incorporated by reference. |
|       |       |            |   |
| 3.3        |       |            | Certificate of Amendment  to Articles of Incorporation filed as Exhibit 3.3 on the Company’s  Annual Report in Form 10-K filed September 15, 2008, is hereby  incorporated by reference. |
|       |       |            |   |
| 4.1        |       |            | Certificate of Designation  for Series D Convertible Preferred Stock, dated January 19, 2005,  filed as Exhibit 4.1 on the Company’s Current Report on Form 8-K  filed January 27, 2005, is hereby incorporated by reference. |
|       |       |            |   |
| 4.2        |       |            | Amended and Restated  Certificate of Designation for Series B Convertible Preferred Stock, filed  as Exhibit 4.1 on the Company’s Current Report on Form 8-K filed  February 15, 2005, is hereby incorporated by reference. |
|       |       |            |   |
| 4.3        |       |            | Amended and Restated  Certificate of Designation for Series C Convertible Preferred Stock,  filed as Exhibit 4.2 on the Company’s Current Report on Form 8-K  filed February 15, 2005, is hereby incorporated by reference. |
|       |       |            |   |
| 10.1       |       |            | Technology and License  Agreement among Force Protection, Inc., General Dynamics Land  Systems Inc. and Force Dynamics LLC, dated April 3, 2007, filed  as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q  filed November 13, 2007, is hereby incorporated by reference. |
|       |       |            |   |
| 10.2       |       |            | Modification of Contract  Agreement with the United States Marine Corps, dated April 17, 2007,  filed as Exhibit 10.5 to the Company’s Quarterly Report on  Form 10-Q filed August 9, 2007, is hereby incorporated by  reference. |
|       |       |            |   |
| 10.3       |       |            | Delivery Order under  Contract No. M67854-07-D-5031 with the United States Marine Corps  Systems Command, dated April 23, 2007, filed as Exhibit 10.6 to the  Company’s Quarterly Report on Form 10-Q filed August 9, 2007, is  hereby incorporated by reference. |
|       |       |            |   |
| 10.4       |       |            | Employment Letter between  Force Protection Industries, Inc. and Denise Speaks, dated May 24,  2007 filed as Exhibit 10.40 on the Company’s Annual Report on  Form 10-K filed September 15, 2008, is hereby incorporated by  reference. |
|       |       |            |   |
| 10.5       |       |            | Delivery Order under  Contract No. M67854-07-D-5031 with the United States Marine Corps  Systems Command, dated June 19, 2007, filed as Exhibit 10.7 to the  Company’s Quarterly Report on Form 10-Q filed August 9, 2007, is  hereby incorporated by reference. |
|       |       |            |   |
| 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.† |

 

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| 32.1 |   |   | Certification of Officers  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.† |
|------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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(Exhibitsmarked with a † are filed electronically herewith.)

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| ** **                    | **FORCE PROTECTION, INC.***(Registrant)* |
|-------------------------------|------------------------------------------|
|                          |                                     |   |
| Date: September 30, 2008 | By:                                      | /s/ MICHAEL MOODY |
|                          | ** **                               | **Name: Michael Moody****Title: Chief Executive  Officer and President  (Principal Executive Officer)** |
|                          | ** **                               | ** ** |
|                          | ** **                               | ** ** |
|                               |                                     |   |
| Date: September 30, 2008 | By:                                      | /s/ FRANCIS E. SCHEUERELL, JR. |
|                          | ** **                               | **Name: Francis E. Scheuerell, Jr.****Title: Interim  Chief Financial Officer  (Principal Accounting and Financial Officer)** |

 

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