Tableof Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

 

**FORM 10-Q**

 

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

 

**Forthe quarterly period ended September 30, 2008**

 

**OR**

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

 

**For thetransition period from                                         to                                         **

 

**CommissionFile Number 001-33253**

 

**FORCEPROTECTION, INC.**

(Exact Name ofRegistrant as Specified in Its Charter)

 

| **Nevada**                                                             | ** ** | **84-1383888**                             |
|------------------------------------------------------------------------|------------|--------------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization)  |       | (I.R.S. Employer  Identification No.) |
|                                                                   |       |                                       |
| **9801  Highway 78, Building No. 1  Ladson, South Carolina** | ** ** | **29456**                                  |
| (Address of  Principal Executive Offices)                              |       | (Zip Code)                                 |

 

**(843)574-7000**

(Registrant’sTelephone Number, Including Area Code)

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.        x   Yes        o  No

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 
| Large accelerated filer  x | Accelerated filer  o | Non-accelerated  filer  o(Do not check if a smaller reporting company) | Smaller reporting  company      o |
|--------------------------------------|--------------------------------|----------------------------------------------------------------------------------|-----------------------------------------------------------------|

 

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

 

The registrant had68,319,162 shares of common stock outstanding as of October 31, 2008.

 

 

 

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TABLE OF CONTENTS

 
| ** **                                                                                               | ** ** | **Page**   | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **                                                                                               |       |       |       |
| **PART I —  FINANCIAL INFORMATION**                                                            |       | 1          |       |
|                                                                                                     |       |       |       |
| Item 1. Financial Statements                                                                        |       | 1          |       |
|                                                                                                     |       |       |       |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |       | 12         |       |
|                                                                                                     |       |       |       |
| Item 3. Quantitative and Qualitative Disclosures  About Market Risk                                 |       | 21         |       |
|                                                                                                     |       |       |       |
| Item 4. Controls and Procedures                                                                     |       | 22         |       |
|                                                                                                     |       |       |       |
| **PART II—OTHER  INFORMATION**                                                                 |       | 24         |       |
| ** **                                                                                               | ** ** | ** ** | ** ** |
| Item  1. Legal Proceedings                                                                          |       | 24         |       |
|                                                                                                     |       |       |       |
| Item  1A. Risk Factors                                                                              |       | 25         |       |
|                                                                                                     |       |       |       |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                |       | 26         |       |
|                                                                                                     |       |       |       |
| Item 3. Defaults Upon Senior Securities                                                             |       | 26         |       |
|                                                                                                     |       |       |       |
| Item 4. Submission of Matters to a Vote of  Security Holders                                        |       | 26         |       |
|                                                                                                     |       |       |       |
| Item  5.  Other Information                                                                         |       | 26         |       |
|                                                                                                     |       |       |       |
| Item  6. Exhibits                                                                                   |       | 26         |       |

 

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**PART I.FINANCIAL INFORMATION**

 

**Item1.**   **Financial Statements**

 

**ForceProtection, Inc. and Subsidiaries**

**Condensed Consolidated Balance Sheets**

**(Unaudited)**

 
| ** **                                           | ** ** | **As of  September 30,  2008** | ** ** | **As of  December 31,  2007** | ** ** |
|------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | **(In Thousands)**                  | ** ** |
| **Assets**                                           |       |                                     |       |                                    |       |
| **Current  assets:**                                 |       |                                     |       |                                    |       |
| Cash and cash  equivalents                           |       | $                                        | 79,398     |                                    | $          | 90,997 |   |
| Accounts  receivable, net                            |       | 196,129                                  |       | 118,794                                 |       |
| Inventories                                          |       | 105,799                                  |       | 140,639                                 |       |
| Advances to  subcontractor                           |       | 6,150                                    |       | 25,106                                  |       |
| Deferred income  tax assets                          |       | 12,780                                   |       | 14,530                                  |       |
| Income taxes  receivable                             |       | —                                   |       | 6,565                                   |       |
| Other current  assets                                |       | 4,178                                    |       | 8,481                                   |       |
| Total current  assets                                |       | 404,434                                  |       | 405,112                                 |       |
| Property and  equipment, net                         |       | 62,897                                   |       | 66,707                                  |       |
| Intangible  assets, net                              |       | 827                                      |       | 1,355                                   |       |
| Deferred income  tax assets                          |       | 1,390                                    |       | 1,496                                   |       |
| **Total  assets**                                    |       | $                                        | 469,548    |                                    | $          | 474,670 |   |
|                                                 |       |                                     |       |                                    |       |
| **Liabilities and Shareholders’ Equity**        | ** ** | ** **                               | ** ** | ** **                              | ** ** |
| **Current  liabilities:**                            | ** ** | ** **                               | ** ** | ** **                              | ** ** |
| Accounts payable                                     |       | $                                        | 125,158    |                                    | $          | 146,515 |   |
| Due to United  States government                     |       | 19,315                                   |       | 18,969                                  |       |
| Other current  liabilities                           |       | 31,948                                   |       | 20,710                                  |       |
| Advance payments  on contracts                       |       | 26,051                                   |       | 56,552                                  |       |
| Total current  liabilities                           |       | 202,472                                  |       | 242,746                                 |       |
|                                                 |       |                                     |       |                                    |       |
| Other long-term  liabilities                         |       | 139                                      |       | 295                                     |       |
|                                                 |       | 202,611                                  |       | 243,041                                 |       |
|                                                 |       |                                     |       |                                    |       |
| Commitments and  contingencies                       |       |                                     |       |                                    |       |
|                                                 |       |                                     |       |                                    |       |
| **Shareholders’  equity:**                      |       |                                     |       |                                    |       |
| Common stock                                         |       | 68                                       |       | 68                                      |       |
| Additional  paid-in capital                          |       | 257,257                                  |       | 257,160                                 |       |
| Retained  earnings (accumulated deficit)             |       | 9,612                                    |       | (25,599                                 | )          |
| Total  shareholders’ equity                     |       | 266,937                                  |       | 231,629                                 |       |
| **Total  liabilities and shareholders’ equity** |       | $                                        | 469,548    |                                    | $          | 474,670 |   |

 

The accompanyingnotes to condensed consolidated financial statementsare an integral part of these balance sheets.

 

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**ForceProtection, Inc. and Subsidiaries**

**Condensed Consolidated Statements ofOperations**

**(Unaudited)**

 
| ** **                                         | ** ** | **For the three months ended  September 30,** | ** ** | **For the nine months ended  September 30,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **2008**                                                               | ** ** | **2007**                                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                         | ** ** | **(In Thousands, Except Per Share Data)**     | ** ** |
| Net sales                                          |       | $                                                                      | 343,309    |                                                                  | $          | 206,794 |   | $ | 1,087,273 |   | $ | 450,278 |   |
| Cost of sales                                      |       | 279,532                                                                |       | 184,260                                                               |       | 947,814 |   | 387,475 |   |
| Gross profit                                       |       | 63,777                                                                 |       | 22,534                                                                |       | 139,459 |   | 62,803 |   |
|                                               |       |                                                                   |       |                                                                  |       |   |   |   |   |
| General and  administrative expenses               |       | 27,817                                                                 |       | 21,708                                                                |       | 73,967 |   | 56,113 |   |
| Research and  development expenses                 |       | 4,306                                                                  |       | 2,344                                                                 |       | 10,205 |   | 10,848 |   |
| Operating income  (loss)                           |       | 31,654                                                                 |       | (1,518                                                                | )          | 55,287 |   | (4,158 | ) |
|                                               |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Other income,  net                                 |       | 440                                                                    |       | 594                                                                   |       | 1,411 |   | 3,488 |   |
| Interest expense                                   |       | (2                                                                     | )          | (55                                                                   | )          | (225 | ) | (86 | ) |
| Income (loss) before  income tax (expense) benefit |       | 32,092                                                                 |       | (979                                                                  | )          | 56,473 |   | (756 | ) |
|                                               |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Income tax  (expense) benefit                      |       | (12,185                                                                | )          | 180                                                                   |       | (21,262 | ) | 140 |   |
| Net income  (loss)                                 |       | $                                                                      | 19,907     |                                                                  | $          | (799 | ) | $ | 35,211 |   | $ | (616 | ) |
| **Earnings  (loss) per common share:**             |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic                                              |       | $                                                                      | 0.29       |                                                                  | $          | (0.01 | ) | $ | 0.52 |   | $ | (0.01 | ) |
| Diluted                                            |       | $                                                                      | 0.29       |                                                                  | $          | (0.01 | ) | $ | 0.51 |   | $ | (0.01 | ) |
| **Weighted  average common shares outstanding:**   |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic                                              |       | 68,318                                                                 |       | 68,208                                                                |       | 68,309 |   | 67,990 |   |
| Diluted                                            |       | 68,381                                                                 |       | 68,208                                                                |       | 68,372 |   | 67,990 |   |

 

The accompanyingnotes to condensed consolidated financial statementsare an integral part of these statements.

 

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**ForceProtection, Inc. and Subsidiaries**

**Condensed Consolidated Statements ofCash Flows**

**(Unaudited)**

 
| ** **                                                                                  | ** ** | **For the nine months ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2008**                                                                  | ** ** | **2007** | ** ** |
| ** **                                                                                  | ** ** | **(In Thousands)**                                                   | ** ** |
| **Cash  flows from operating activities:**                                                  |       |                                                                      |       |   |   |
| Net income  (loss)                                                                          |       | $                                                                         | 35,211     |   | $ | (616 | ) |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities – |       |                                                                      |       |   |   |
| Depreciation and  amortization                                                              |       | 9,426                                                                     |       | 4,018 |   |
| Deferred income  tax provision (benefit)                                                    |       | 1,856                                                                     |       | (3,196 | ) |
| Income tax  benefit realized from stock options exercised                                   |       | —                                                                    |       | (2,276 | ) |
| Stock-based  compensation                                                                   |       | 97                                                                        |       | 2,035 |   |
| Allowance for  doubtful accounts                                                            |       | 531                                                                       |       | (45 | ) |
| Provision for  asset impairment                                                             |       | 4,947                                                                     |       | — |   |
| Provision for  inventory obsolescence                                                       |       | 7,733                                                                     |       | 1,358 |   |
| Warranty reserve                                                                            |       | 2,200                                                                     |       | 1,202 |   |
| Loss on disposal  of property and equipment                                                 |       | 6                                                                         |       | — |   |
| (Increase)  decrease in assets –                                                       |       |                                                                      |       |   |   |
| Accounts  receivable                                                                        |       | (77,866                                                                   | )          | (24,014 | ) |
| Inventories                                                                                 |       | 27,107                                                                    |       | (108,115 | ) |
| Advances to  subcontractor                                                                  |       | 18,956                                                                    |       | (20,740 | ) |
| Income taxes  receivable                                                                    |       | 6,565                                                                     |       | (225 | ) |
| Other current  assets                                                                       |       | 4,303                                                                     |       | (14,667 | ) |
| Increase  (decrease) in liabilities –                                                  |       |                                                                      |       |   |   |
| Accounts payable                                                                            |       | (21,357                                                                   | )          | 64,490 |   |
| Due to United  States government                                                            |       | 346                                                                       |       | 9,728 |   |
| Other current  liabilities                                                                  |       | 9,101                                                                     |       | 8,063 |   |
| Advance payments  on contracts                                                              |       | (30,501                                                                   | )          | 43,113 |   |
| Total  adjustments                                                                          |       | (36,550                                                                   | )          | (39,271 | ) |
| **Net  cash used in operating activities**                                                  |       | (1,339                                                                    | )          | (39,887 | ) |
| **Cash  flows from investing activities:**                                                  |       |                                                                      |       |   |   |
| Capital  expenditures                                                                       |       | (10,041                                                                   | )          | (47,706 | ) |
| **Net  cash used in investing activities**                                                  |       | (10,041                                                                   | )          | (47,706 | ) |
| **Cash  flows from financing activities:**                                                  |       |                                                                      |       |   |   |
| Proceeds from  issuance of common stock                                                     |       | —                                                                    |       | 1,336 |   |
| Income tax  benefit realized from stock options exercised                                   |       | —                                                                    |       | 2,276 |   |
| Net decrease in  long-term liabilities                                                      |       | (219                                                                      | )          | (64 | ) |
| **Net  cash (used in) provided by financing activities**                                    |       | (219                                                                      | )          | 3,548 |   |
| **Decrease  in cash and cash equivalents**                                                  |       | (11,599                                                                   | )          | (84,045 | ) |
| **Cash  and cash equivalents at beginning of period**                                       |       | 90,997                                                                    |       | 156,319 |   |
| **Cash  and cash equivalents at end of period**                                             |       | $                                                                         | 79,398     |   | $ | 72,274 |   |
| **Supplemental  cash flow information**                                                     |       |                                                                      |       |   |   |
| Cash paid during  the period for                                                            |       |                                                                      |       |   |   |
| Interest, net of  amounts capitalized                                                       |       | $                                                                         | 240        |   | $ | 86 |   |
| Income taxes                                                                                |       | $                                                                         | 111        |   | $ | 1,000 |   |
| **Supplemental  schedule of noncash investing and financing activities**                    |       |                                                                      |       |   |   |
| Note payable,  net of discount, issued as consideration for non-compete agreement           |       | $                                                                         | —     |   | $ | 390 |   |

 

The accompanyingnotes to condensed consolidated financial statementsare an integral part of these statements.

 

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**ForceProtection, Inc. and Subsidiaries**

**Notes to Condensed ConsolidatedFinancial Statements**

 

**1.**    **Summary of Significant Accounting Policies**

 

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

 

Force Protection, Inc.,reincorporated under the laws of Nevada in 2005, and its subsidiaries, is animportant provider of blast- and ballistic-protected products used to supportarmed forces and security personnel in harm’s way.  We design,manufacture, test, deliver and support our blast- and ballistic-protectedproducts to increase survivability of the users of the products.  Ourspecialty vehicles, which we believe are the forefront of blast- andballistic-protected technology, are designed to protect their occupants fromlandmines, hostile fire, and improvised explosive devices (“IEDs”).  Ourcustomers include all branches of the United States Department of Defense (“DoD”)and, directly and indirectly through foreign military sales of the DoD,military customers located in the United Kingdom, Iraq, Canada, Italy, andFrance.

 

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

 

***Basis of Presentation and Consolidation***

 

The accompanyingunaudited condensed consolidated financial statements should be read inconjunction with our audited consolidated financial statements included in ourAnnual Report on Form 10-K for the year ended December 31, 2007 filedwith the United States Securities and Exchange Commission (“SEC”) on September 15,2008. These unaudited condensed consolidated financial statements have beenprepared pursuant to Rule 10-01 of Regulation S-X. Certain information andnote disclosures normally included in annual financial statements prepared inaccordance with generally accepted accounting principles in the United Statesof America (“GAAP”) have been condensed or omitted pursuant to those rules andregulations, although we believe that the disclosures made herein are adequateto make the information not misleading.

 

The unaudited results ofoperations for the interim periods shown in these condensed consolidatedfinancial statements are not necessarily indicative of operating results forthe entire year. In our opinion, the accompanying unaudited condensedconsolidated financial statements recognize all adjustments of a normalrecurring nature considered necessary to fairly state the financial position,results of operations, and cash flows for each interim period presented.

 

These unaudited condensedconsolidated financial statements include the assets, liabilities, revenues andexpenses of our two wholly owned subsidiaries, Force Protection Industries, Inc.and Force Protection Technologies, Inc.  We eliminate from ourfinancial results all significant intercompany accounts and transactions.

 

***Recent Accounting Pronouncements***

 

In May 2008, theFinancial Accounting Standards Board (“FASB”) issued FASB Statement No. 162,*The Hierarchy of Generally Accepted AccountingPrinciples*. FASB Statement No. 162 defines the order in whichaccounting principles that are generally accepted should be followed. FASBStatement No. 162 is effective for fiscal years beginning after November 15,2008. We expect that the adoption of FASB Statement No. 162 will not havea material impact on our consolidated financial position, results ofoperations, and cash flows.

 

In April 2008, theFASB issued FASB Staff Position (“FSP”) No. FAS 142-3,*Determination of Useful Life of Intangible Assets,*(FSP FAS 142-3). FSP FAS 142-3 amends the factors that should beconsidered in developing the renewal or extension assumptions used to determinethe useful life of a recognized intangible asset under FASB Statement No. 142,*Goodwill and Other Intangible Assets*. FSPFAS 142-3 also requires expanded disclosure related to the determinationof intangible asset useful lives. FSP FAS 142-3 is effective for fiscalyears beginning after December 15, 2008. Earlier adoption is prohibited.We expect that the adoption of FSP FAS 142-3 will not have a material impact onour consolidated financial position, results of operations, and cash flows.

 

In March 2008, theFASB issued FASB Statement No. 161,*Disclosuresabout Derivative Instruments and Hedging Activities*, an amendment ofFASB Statement No. 133,*Accounting forDerivative 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 No. 133,*Accounting for Derivative Instruments and HedgingActivities,* and its related interpretations and (iii) how

 

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**ForceProtection, Inc. and Subsidiaries**

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

 

derivative instrumentsand related hedged items affect an entity’s financial position, results ofoperations, and cash flows. FASB Statement No. 161 is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008, with early application permitted. FASB Statement No. 161permits, but does not require, comparative disclosures for earlier periods atinitial adoption. As of September 30, 2008, we have not entered into anyderivative or hedging activities and therefore the adoption of this standardwill not impact our consolidated financial position, results of operations,cash flows or disclosures related to derivative instruments and hedgingactivities.

 

In December 2007,the FASB issued FASB Statement No. 141 (revised 2007),*Business Combinations*, which establishesprinciples and requirements for how the acquirer in a business combination (i) recognizesand measures in its financial statements the identifiable assets acquired, theliabilities assumed, and any controlling interest, (ii) recognizes andmeasures the goodwill acquired in the business combination or a gain from abargain purchase, and (iii) determines what information to disclose toenable users of the financial statements to evaluate the nature and financialeffects of the business combination.  FASB Statement No. 141(R) appliesto fiscal years beginning after December 15, 2008, and therefore theadoption of this standard will not impact our previously reported consolidatedfinancial position, results of operations, or cash flows. Earlier adoption isprohibited.

 

In December 2007,the FASB issued FASB Statement No. 160,*Noncontrolling Interests in Consolidated Financial Statements*,which establishes accounting and reporting standards that require (i) theownership interest in subsidiaries held by parties other than the parent to beclearly identified and presented in the consolidated balance sheet withinshareholder’s equity, but separate from the parent’s equity, (ii) theamount of consolidated net income attributable to the parent and thenoncontrolling interest to be clearly identified and presented on the face ofthe consolidated statement of operations, and (iii) changes in a parent’sownership interest while the parent retains its controlling financial interestin its subsidiary to be accounted for consistently. FASB Statement No. 160applies to fiscal years beginning after December 15, 2008. As of September 30,2008, we do not have any subsidiaries within the scope of FASB StatementNo. 160, and therefore the adoption of this standard will not have animpact on our consolidated financial position, results of operations, or cashflows. Earlier adoption is prohibited.

 

We have determined thatall other recently issued accounting pronouncements will not have a materialimpact on our consolidated financial position, results of operations and cashflows, or do not apply to our operations.

 

**2.**    **Accounts Receivable**

 

Accounts receivableconsists of the following (in thousands):

 
| ** **                             | ** ** | **As of September 30,  2008** | ** ** | **As of December 31,  2007** | ** ** |
|----------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| U. S. government             |       | $                                            | 177,030    |                                        | $          | 106,021 |   |
| Other accounts  receivable             |       | 19,953                                       |       | 13,096                                      |       |
|                                   |       | 196,983                                      |       | 119,117                                     |       |
| Less: Allowance  for doubtful accounts |       | (854                                         | )          | (323                                        | )          |
| Accounts  receivable, net              |       | $                                            | 196,129    |                                        | $          | 118,794 |   |

 

Other accounts receivableincludes amounts that relate to non-government entities and the sale of excessraw materials to suppliers.  Any gain or loss on the sale of excess rawmaterials is included in*Other income, net*in the accompanying condensed consolidated statements of operations.  Asof September 30, 2008 and December 31, 2007, our accounts receivableincluded $9.1 million and $8.2 million of earned and unbilled accountsreceivable, respectively.

 

**3.**    **Inventories**

 

Inventories consist ofthe following (in thousands):

 
| ** **                 | ** ** | **As of September 30,  2008** | ** ** | **As of December 31,  2007** | ** ** |
|----------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| Raw material and  supplies |       | $                                            | 68,662     |                                        | $          | 105,313 |   |
| Work in process            |       | 35,397                                       |       | 35,035                                      |       |
| Finished goods             |       | 1,740                                        |       | 291                                         |       |
| Inventories                |       | $                                            | 105,799    |                                        | $          | 140,639 |   |

 

Due to excess andobsolete inventory and to account for our inventory at the lower of cost ormarket, we reduced the cost basis of our raw material and supplies and chargedto*Cost of sales* $3.9 million and$7.7 million during the three- and nine-month periods ended September 30,2008, respectively.

 

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**ForceProtection, Inc. and Subsidiaries**

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

 

**4.**    **Property and Equipment**

 

Property and equipmentconsist of the following (in thousands):

 
| ** **                                            | ** ** | **As of September 30,  2008** | ** ** | **As of December 31,  2007** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| Land                                                  |       | $                                            | 4,419      |                                        | $          | 4,419 |   |
| Buildings                                             |       | 11,683                                       |       | 5,221                                       |       |
| Leasehold  improvements                               |       | 32,442                                       |       | 11,775                                      |       |
| Machinery and  equipment; including tooling and molds |       | 13,006                                       |       | 6,698                                       |       |
| Computer  equipment and software                      |       | 7,730                                        |       | 6,750                                       |       |
| Furniture and  fixtures                               |       | 4,515                                        |       | 4,454                                       |       |
| Demonstration  vehicles                               |       | 1,572                                        |       | 1,531                                       |       |
| Manuals                                               |       | 705                                          |       | 705                                         |       |
| Vehicles                                              |       | 672                                          |       | 576                                         |       |
|                                                  |       | 76,744                                       |       | 42,129                                      |       |
| Less:  Accumulated depreciation                       |       | (15,556                                      | )          | (6,714                                      | )          |
|                                                  |       | 61,188                                       |       | 35,415                                      |       |
| Construction in  progress                             |       | 1,709                                        |       | 31,292                                      |       |
| Property and  equipment, net                          |       | $                                            | 62,897     |                                        | $          | 66,707 |   |

 

In July 2007, wepurchased land and an approximately 430,000 square foot building in Roxboro,North Carolina for $3.5 million in cash, which we originally planned touse as a manufacturing plant.  We allocated approximately $0.8 millionto land and $2.7 million to the building.  In March 2008, wedecided to suspend the construction of the assembly line at our Roxborofacility and began to develop a plan for an alternative use for thefacility.  We now intend to use the Roxboro facility for sustainment andtraining purposes.  As a result, we charged to operations in the firstquarter of 2008, as an asset impairment, $2.1 million in deposits onservices to be provided and $2.8 million in design costs that werepreviously capitalized.

 

**5.**    **Advance Payments on Contracts**

 

Advance payments oncontracts consist of the following (in thousands):

 
| ** **                                                  | ** ** | **As of September 30,  2008** | ** ** | **As of December 31,  2007** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| Mine Resistant  Ambush Protected (“MRAP”) program |       | $                                            | 26,051     |                                        | $          | 53,767 |   |
| Iraqi Light  Armored Vehicles (“ILAV”)            |       | —                                       |       | 2,785                                       |       |
| Advance payments  on contracts                              |       | $                                            | 26,051     |                                        | $          | 56,552 |   |

 

Under some of our U.S.government contracts, we receive performance-based payments based on completionof specific milestones stipulated under the contract (for example, completionof manufacturing fabrication). We report these payments as*Advance payments on contracts* in ourconsolidated balance sheet until the final delivery of the products and formalacceptance by the U.S. government as evidenced by an executed Form DD250.

 

**6.**    **Income Taxes**

 

We provide for incometaxes using the liability method in accordance with FASB Statement No. 109,*Accounting for Income Taxes*. Inaccordance with APB Opinion No. 28,*Interim Financial Reporting*, and FASB Interpretation No. 18,*Accounting for Income Taxes in Interim Periods*,the provision for taxes on income recognizes our estimate of the effective taxrate expected to be applicable for the full year, adjusted for the impact ofany discrete events, which are reported in the period in which they occur. Eachquarter, we re-evaluate our estimated tax expense for the year and makeadjustments for changes in the estimated tax rate. Additionally, we evaluatethe realizability of our deferred tax assets on a quarterly basis. Ourevaluation considers all positive and negative evidence and factors, such asthe scheduled reversal of temporary differences, historical and projectedfuture taxable income or losses, and prudent and feasible tax planningstrategies.

 

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**ForceProtection, Inc. and Subsidiaries**

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

 

The*Income tax expense*for the three and nine months ended September 30, 2008 was based on theestimated effective tax rates applicable for the year ending December 31,2008, after considering items specifically related to the interim periods. The*Income tax benefit* for the three and ninemonths ended September 30, 2007 was based on the estimated effective taxrates applicable for the fiscal year ended December 31, 2007, afterconsidering items specifically related to the interim periods.

 

Force Protection issubject to U.S. federal, state, and local income taxes.*Income (loss) before income tax (expense) benefit*is as follows (in thousands):

 
| ** **                                         | ** ** | **For the three months ended  September 30,** | ** ** | **For the nine months ended  September 30,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **2008**                                                               | ** ** | **2007**                                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Income (loss)  before income tax (expense) benefit |       | $                                                                      | 32,092     |                                                                  | $          | (979 | ) | $ | 56,473 |   | $ | (756 | ) |
|                                                    |            |                                                                        |            |                                                                       |            |  |  |  |  |  |  |  |  |

 

A reconciliation ofstatutory federal income tax expense rate to the effective income tax expenserate is as follows:

 
| ** **                                         | ** ** | **For the three months ended  September 30,** | ** ** | **For the nine months ended  September 30,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **2008**                                                               | ** ** | **2007**                                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Income tax  (expense) benefit 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    |       | (1.73                                                                  | )%         | 4.70                                                                  |  %    | (1.41 | )% | 4.70 |  % |
| Reversal of  other tax accruals no longer required |       | —                                                                 |  %    | (8.21                                                                 | )%         | — |  % | (8.21 | )% |
| Research and  development credit                   |       | —                                                                 |  %    | (11.63                                                                | )%         | — |  % | (11.63 | )% |
| Nondeductible/permanent  items                     |       | (1.24                                                                  | )%         | (1.50                                                                 | )%         | (1.24 | )% | (1.50 | )% |
| Effective income  tax (expense) benefit rate       |       | (37.97                                                                 | )%         | 18.36                                                                 |  %    | (37.65 | )% | 18.36 |  % |

 

The effective income taxrate is the provision for income tax (expense) benefit as a percent of income(loss) before income taxes. The 2008 effective rate is higher than the expectedfederal statutory rate of 35% primarily due to the state income taxes andpermanent differences at statutory rate. As of September 30, 2008, currentincome taxes payable was $12.9 million and is included in *Othercurrent liabilities* in the accompanying condensed consolidatedbalance sheet. The 2007 effective benefit rate is lower than the expectedfederal statutory rate of 35% primarily due to state income taxes, reversal ofother tax accruals no longer required, research and development credits, andcertain nondeductible items at the statutory rate.

 

We adopted FASBInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes*, on January 1, 2007. FASB Interpretation No. 48clarifies the accounting for uncertainty in income taxes recognized in acompany’s financial statements in accordance with FASB Statement No. 109.FASB Statement No. 109 does not prescribe a recognition threshold ormeasurement attribute for the financial statement recognition and measurementof a tax position taken in a tax return. FASB Interpretation No. 48clarifies the application of FASB Statement No. 109 by defining acriterion that an individual tax position must meet for any part of the benefitof that position to be recognized in a company’s financial statements.Additionally, FASB Interpretation No. 48 provides guidance on measurement,derecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. We include interest and penalties relatedto federal and state income taxes, if any, as a component of*Income tax expense* in the accompanyingunaudited condensed consolidated statements of operations.

 

We believe that we haveappropriate support for the income tax positions taken and to be taken on ourincome tax returns and that our income tax receivable and accruals for taxliabilities are adequate for all open years and based on an assessment of manyfactors including past experience and interpretations of tax laws applied tothe facts of each matter. Accordingly, we have not recognized a liability as aresult of applying the guidance in FASB Interpretation No. 48.

 

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**ForceProtection, Inc. and Subsidiaries**

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

 

**7.**    **Earnings Per Common Share**

 

The following table showsthe information used in the calculation of basic and diluted earnings (loss)per common share (in thousands, except number of shares and per share amounts):

 
| ** **                                                 | ** ** | **For the three months ended  September 30,** | ** ** | **For the nine months ended  September 30,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2008**                                                               | ** ** | **2007**                                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Numerator  – Basic and diluted:**                   |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net income  (loss)                                         |       | $                                                                      | 19,907     |                                                                  | $          | (799 | ) | $ | 35,211 |   | $ | (616 | ) |
| **Denominator:**                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Weighted average  common shares outstanding – basic   |       | 68,318,162                                                             |       | 68,207,649                                                            |       | 68,308,921 |   | 67,989,525 |   |
| Add:     Stock  options           |       | 26,288                                                                 |       | Anti-dilutive                                                         |       | 26,513 |   | Anti-dilutive |   |
| Add:     Stock  grants            |       | 36,228                                                                 |       | Anti-dilutive                                                         |       | 36,354 |   | Anti-dilutive |   |
| Weighted average  common shares outstanding – diluted |       | 68,380,678                                                             |       | 68,207,649                                                            |       | 68,371,788 |   | 67,989,525 |   |
| **Basic  earnings (loss) per common share:**               |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net income –  basic                                   |       | $                                                                      | 0.29       |                                                                  | $          | (0.01 | ) | $ | 0.52 |   | $ | (0.01 | ) |
| **Diluted  earnings (loss) per common share:**             |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net income –  diluted                                 |       | $                                                                      | 0.29       |                                                                  | $          | (0.01 | ) | $ | 0.51 |   | $ | (0.01 | ) |

 

The calculation ofearnings (loss) per common share is based on the weighted-average number of ourcommon shares outstanding during the applicable period. The calculation fordiluted (loss) per common share recognizes the effect of all dilutive potentialcommon shares that were outstanding during the respective periods, unless theirimpact would be anti-dilutive.  We use the treasury stock method tocalculate the dilutive effect of stock options and other common stockequivalents (potentially dilutive shares). Diluted earnings per common sharerecognizes the dilution that would occur if securities or other contracts toissue common stock were exercised or converted into common stock. Thesepotentially dilutive shares include stock options and stock grants. We excluded369,006 and 343,296 common stock equivalents for the three and nine monthsended September 30, 2007, respectively, from the calculation of dilutedloss per share because they were anti-dilutive.

 

**8.**    **Commitments and Contingencies**

 

*Financing Commitments– Subsequentevent- Renewal of credit facility*

 

On July 20, 2007, weentered into a revolving credit agreement with Wachovia Bank, NA. Borrowingsunder the original credit agreement bore interest at a floating rate per annumequal to the one-month London Interbank Offered Rate (“LIBOR”) plus 2.0%. Theoriginal amount of the agreement was $50 million and all amounts payable underthis credit agreement were originally due and payable on September 30,2007. We have entered into several modification agreements with the lender toreduce the principal amount, change terms and extend the maturity. As of September 30,2008, the principal amount of the agreement was $30 million at a rate ofone-month LIBOR plus 2.0% with a maturity date of October 31, 2008.

 

On October 31, 2008,we modified the credit agreement to increase the principal amount to a maximumof $40 million, subject to several new covenants, to extend the maturity to April 30,2010, and to modify the interest rate. One of the new covenants is a maximumratio of debt (“Funded Debt”) to net income plus interest expense, incometaxes, depreciation and amortization (“EBITDA”) of 2.0 to 1.0. Another newcovenant is a minimum fixed charge coverage ratio of 1.5 to 1.0.

 

Until March 31,2009, the floating rate interest per annum is reduced to the one-month LIBORplus an additional amount (“Applicable Margin”) of 1.75%. Beginning with thequarter starting April 1, 2009, the Applicable Margin will be determinedquarterly based on the Funded Debt to EBITDA ratio calculated on a rolling fourquarter basis and will vary from 1.75% to 2.75% depending on that ratio.

 

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**Force Protection, Inc. andSubsidiaries**

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

 

Accrued interest is dueand payable on a monthly basis, starting on November 30, 2008, and allprincipal is due and payable on April 30, 2010. Until the expiration date,we may borrow, repay and re-borrow amounts under the terms of the note as longas the total principal balance outstanding does not exceed $40 million.Additionally, in connection with the original credit agreement dated July 20,2007, we granted Wachovia Bank a security interest in all of our personalproperty, as defined in the credit agreement. Since its inception through thedate of this filing, we have not borrowed any amounts under the creditagreement.

 

*Legal Proceedings*

 

We are subject to variousclaims arising in the ordinary course of business, and are a party to variouslegal proceedings that constitute ordinary, routine litigation incidental toour business. The majority of these claims and proceedings relate tocommercial, shareholder and employee matters. In our opinion, apart from theactions set forth below, the disposition of these proceedings and claims, aftertaking into account accruals recorded in our consolidated balance sheets andthe availability and limits of our insurance coverage, will not have a materialadverse effect on the business or our financial position, results ofoperations, or cash flows.

 

Shareholder Class Actionand Derivative Complaints

 

On March 10, 2008,the first of ten related class action lawsuits was filed against us and certainof our former and current board members or officers in the United StatesDistrict Court for the District of South Carolina Charleston Division on behalfof a proposed class of investors who purchased or otherwise acquired oursecurities during the period between August 14, 2006 and February 29,2008. The complaints seek class certification, and the allegations include butare not limited to allegations that the defendants violated the Exchange Actand made false or misleading public statements and/or omissions concerning ourbusiness, internal controls, and financial results. The plaintiffs assert thatas a result of the defendants’ allegedly wrongful acts and omissions, membersof the proposed class have suffered significant losses and damages. Theindividual class action lawsuits were consolidated on June 10, 2008 undercaption ‘In Re Force Protection, Inc. Securities Litigation, Action No. 2:08-cv-845-CWH.’On June 20, 2008, a group of investors were collectively appointed leadplaintiffs. Pursuant to the Court’s consolidation and scheduling order, thedefendants need not respond to the individual complaints, but instead will respondto a consolidated complaint to be filed by the lead plaintiffs.

 

Between March 27,2008 and May 28, 2008, various alleged shareholders filed derivativelawsuits against former and current officers or board members wherein theplaintiff shareholders are seeking damages and other relief for the benefit ofthe Company. 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, but are not limited to, allegations ofbreach of fiduciary duties, abuse of control, gross mismanagement, waste ofcorporate assets, and 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. In August 2008 and September 2008, the defendants havefiled motions to dismiss the derivative lawsuits pending in the Charleston,South Carolina Circuit Court and the Clark County, Nevada District Court. Thosemotions remained pending as of the date of this filing. Defendants’ obligationsto respond to the complaints in the derivative lawsuits pending in the UnitedStates District Court for the District of South Carolina have been suspendedpending a ruling on motions filed by certain plaintiffs seeking consolidationof the lawsuits and appointment of a lead plaintiff.

 

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’s employees (all of whom wereformer employees of Force Protection) in the United States District Court forthe District of South Carolina. In the complaint, we allege that the nameddefendants used our confidential information and trade secrets to create acompeting business. We seek injunctive relief, unspecified damages, attorneys’fees and costs. The defendants have answered our complaint and filedcounterclaims against us. In their answers and counterclaims, the defendantsallege, among other things, that we and several of our current and formerofficers and directors engaged in: certain transactions (including transactionswith Force Protection) in which such officers and directors maintained a financialinterest; backdating and certain other improper acts in connection with certainstock issuances; allegedly wrongful acts with respect to a procurement contractwith a foreign 

 

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**Force Protection, Inc. andSubsidiaries**

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

 

government; and othertransactions involving alleged self-dealing and engaged in certain allegedlyretaliatory acts in connection with defendants’ prior attempts to bring suchactivities to the attention of the Company’s personnel or governmentalagencies. Defendants seek unspecified monetary damages, attorneys’ fees andcosts. On January 18, 2008, the district court entered an order stayingthe 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, and we rehired him on October 13,2008. We have amended the complaint to add the third party as a defendant tothe suit; the defendants have reasserted their counterclaims in response to theamended complaint.

 

From February 2007through October 2008, we received a total of 69 complaints from currentand former employees filed with the United States Equal Employment OpportunityCommission alleging, among other things, race and/or gender discrimination. Wehave responded to the complaints as such responses have become due, and areinvestigating the allegations.

 

In early December 2007,we submitted a voluntary disclosure to the Directorate of Defense TradeControls (“DDTC”) regarding the shipment of technical manuals, Cheetah spareparts, armored vest plates, parts not listed on our license and transfers oftechnical data to and by our vendors without proper authorization oridentification of the appropriate exemption. On January 22, 2008, the DDTCrequested additional information and documentation for each specific shipmentof these items within sixty days. In addition, the DDTC directed us toundertake certain specific measures, including, but not limited to, that wehire a full time senior export control compliance officer, implement certainprocedures, conduct comprehensive International Traffic in Arms Regulations(“ITAR”) training, immediately conduct a comprehensive export compliance audit,and institute a plan to conduct periodic audits of the export complianceprogram. On February 11, 2008, we provided DDTC with the job descriptionfor the Director of Export Controls, draft Export Controls Manual, ITARpresentation provided in new orientation training and the attendance logs forannual ITAR training 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 October 27, 2008,we received a letter from the DDTC advising that this voluntary disclosure hasbeen closed without taking any civil penalties, but reserving the right toreopen if circumstances warrant.

 

On February 8, 2008,a temporary independent contractor whose services we had terminated filed acomplaint with OSHA, which alleges a violation under the employee protectionprovisions 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 submitteda proposed amended complaint which seeks to add additional claims and thecurrent and former chief executive officers as defendants.

 

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

 

On October 14, 2008,we settled a claim for $583,000 by several investors in connection with theconversion of their shares of our preferred stock and other damages relating towarrants the investors allege were granted but never distributed to them.

 

Although we intend todefend ourselves in connection with the foregoing legal proceedings and claims,there can be no assurance that we will ultimately prevail in any of thesematters. Moreover, the defense of these claims and proceedings may result insubstantial legal expenses and diversion of our management, and any settlementor adverse judgment may require us to make substantial payments, any of whichcould have a material adverse effect 

 

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**Force Protection, Inc. andSubsidiaries**

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

 

on our business orfinancial position, results of operations, or cash flows.

 

We are also a party toother litigation which we consider routine and incidental to our business. Wemay be involved from time to time in other litigation that could have amaterial effect on our operations or finances. Other than the litigationdescribed above, we are not aware of any pending or threatened litigationagainst us that could have a material adverse effect on our business orfinancial position, results of operations, or cash flows.

 

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**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

Management’s Discussionand Analysis of Financial Condition and Results of Operations (“MD&A”) isdesigned to provide information that is supplemental to, and should be readtogether with our unaudited condensed consolidated financial statements and theaccompanying notes included in this Quarterly Report on Form 10-Q. Information in this Item 2 is intended to assist the reader in obtaining anunderstanding of our unaudited consolidated financial statements, the changesin certain key items in those financial statements from period to period, theprimary factors that accounted for those changes, and any known trends oruncertainties that we are aware of that may have a material effect on ourfuture performance, as well as how certain accounting principles affect ourunaudited condensed consolidated financial statements. MD&A includes thefollowing sections:

 
| · | Overview                                                                                                                                                                                  |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | ·                                                                                                                                                                                    | Business Model and Key  Concepts |
|   | ·                                                                                                                                                                                    | Key Challenges |
|   | ·                                                                                                                                                                                    | Strategy and Key Trends |
| · | Results of Operations —  an analysis of our consolidated results of operations, for the three- and  nine-month periods presented in our condensed consolidated financial  statements |
| · | Liquidity and Capital  Resources — an analysis of the effect of our operating, financing and  investing activities on our liquidity and capital resources                       |
| · | Off-Balance Sheet  Arrangements — a discussion of such commitments and arrangements                                                                                             |
| · | Contractual Obligations                                                                                                                                                                   |
| · | Critical Accounting  Policies and Estimates                                                                                                                                               |
| · | New Accounting  Pronouncements                                                                                                                                                            |

 

**SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

This Quarterly Report on Form 10-Q,including the information incorporated by reference herein, contain bothhistorical and forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended (‘‘Securities Act’’), and Section 21Eof the United States Securities Exchange Act of 1934, as amended (“Exchange Act”). All statements other than statements of historical fact included in thisQuarterly Report on Form 10-Q and the documents incorporated by referencein this Quarterly Report on Form 10-Q that address activities, events ordevelopments that we expect, believe or anticipate will or may occur in thefuture are forward-looking statements including, in particular, the statementsabout our plans, objectives, strategies and prospects regarding, among otherthings, our financial position, results of operations, cash flows and business.We have identified 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:

 

·                  statementsregarding the growth of the U.S. and world market for blast- andballistic-protected vehicles and survivability solutions;

 

·                  statements withrespect to our expectation regarding our ability to obtain materials,components and supplies necessary to manufacture our vehicles, our ability toimprove cost efficiencies, including, without limitation, as a result of volumepurchasing, improvements in our manufacturing process and possible futurechanges in the efficiencies in our operations;

 

·                  statements regarding any changes inour cost of sales, our general and administrative expenses or our research anddevelopment expenses;

 

·                  statements regarding the revenuesthat may be derived from, and the quantities of vehicles that may be purchasedor ordered pursuant to, existing or possible future contracts or orders byvarious customers, including statements regarding the estimated value of thoseorders and contracts and statements about the amount of vehicles in our backlogand the value of our backlog;

 

·                  statements regarding our ability torebalance our work force to meet the demand for our vehicles, including theeffectiveness of the utilization of partners and subcontractors;

 

·                  statements regarding our plans forthe use of our product development and production facilities; and

 

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·                  statementsregarding the rate at which we and GDLS will produce MRAP vehicles and the dateas of which we will achieve any particular monthly production rate of thesevehicles.

 

When used in thisQuarterly Report on Form 10-Q, except as specifically noted otherwise, theterm “Force Protection, Inc.” refers to Force Protection, Inc. only,and references to the terms “Company,” “we,” “our,” “ours” and “us” refer toForce Protection, Inc. and its consolidated subsidiaries.

 

**Overview**

 

We design, manufacture,test, deliver and support our blast- and ballistic-protected products toincrease survivability of the users of our products. These vehicles requireongoing life cycle support in the areas of spare parts, maintenance, andtraining.  As a consequence, we believe that we have a substantialbusiness opportunity to provide life cycle support to our existing and futurefleet of vehicles.  In addition, as the fleet ages, we have theopportunity to offer upgrades and product improvements for our fleet designedto further enhance the operability and capability of the vehicles.

 

Our specialty vehicles,which we believe are at the forefront of blast- and ballistic-protectedtechnology, are designed to protect their occupants from landmines, hostilefire and improvised explosive devices (“IEDs”). We currently have four vehicletypes aimed at fulfilling different operational or mission requirements: theBuffalo, the Cougar, the Cougar Lightweight / Cougar Restricted Terrain, andthe Cheetah. The Buffalo, which has six wheels, is our largest vehicle and isdesigned primarily for use in conducting mine clearance operations. The Cougaris a medium-sized vehicle and is available in 4-wheeled and 6-wheeled variantsand in a variety of configurations for troop transport, command and control,route reconnaissance, convoy escort and ambulance duty. The Cougar Lightweight/ Cougar Restricted Terrain is a new class of vehicle developed in response toan urgent request to develop vehicles providing enhanced mobility whilemaintaining survivability. Although this new class of vehicle is derived fromour successful Cougar platform, it incorporates significant amounts of designand technology developed as part of the Cheetah platform.  On September 5,2008, the United States Marine Corps made a contract award for five of thesevehicles under the MRAP Competitive Contract, defined below.  The Cheetahis a 4-wheeled vehicle with a curb weight of approximately 8 tons, designedspecifically for reconnaissance, forward command and control and urbanoperations. At present, we have not had any orders for the Cheetah, although onSeptember 15, 2008, we submitted a response to a U.S. Army Tank-Automotiveand Armaments Command (“TACOM”) Request for Information.

 

We are headquartered, andhave manufacturing facilities, in Ladson, South Carolina. In March 2007,we purchased a blast range in Edgefield, South Carolina, and leased a relatedoffice building. We use these facilities for our own research and developmentactivities and may also contract with selected governmental and commercialcustomers to use our facilities. We also purchased, in March 2007, afacility in Summerville, South Carolina, for the intended purpose of expandingresearch and development operations and to facilitate our increased customertraining requirements of products and applications. In July 2007, wepurchased an additional facility in Roxboro, North Carolina. We intend to usethis facility for training and sustainment purposes. In January 2008, weleased a small furnished office space in Sterling Heights, Michigan, for use asan offsite engineering office.

 

*BusinessModel and Key Concepts*

 

On September 10,2007, we entered into a subcontract (the “GDLS Subcontract”) with General DynamicsLand Systems Inc. (“GDLS”) pursuant to which GDLS manufactures approximately50% of the Cougar vehicles to be manufactured under, and performs approximately50% of the life cycle support required by, the January 2007 U.S. MarineCorps competitive contract under the Mine Resistant Ambush Protected (“MRAP”)program for Cougar vehicles (“MRAP Competitive Contract”) based on revenues. Wepreviously entered into a joint venture with GDLS on December 15, 2006(the “Workshare Agreement”) pursuant to which we and GDLS would fulfill theobligations of the MRAP Competitive Contract. We formed a Delaware limitedliability company, Force Dynamics, LLC (“Force Dynamics”), to govern the termsof the joint venture. However, the MRAP Competitive Contract was awarded to usand not to Force Dynamics or GDLS. We have attempted to novate this contract toForce Dynamics, although the U.S. government has not yet agreed to thenovation. If the contract is novated, we and GDLS may be required to guaranteepayment of all liabilities and performance of all obligations that Force Dynamicswill assume under the novated contract.

 

Because this contract wasawarded to Force Protection and has not yet been novated to Force Dynamics, weinclude 100% of the revenues from the MRAP Competitive Contract, includingrevenue from vehicles and spare parts manufactured by GDLS, in*Net sales* in our consolidated statementof operations, and will continue to include them until such time as the MRAPCompetitive Contract is novated from us to Force Dynamics, at which point we

 

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will recognize revenuesonly from vehicles, spare parts and services subcontracted by Force Dynamics tous that we actually manufacture and provide. In addition, during the year endedDecember 31, 2007, we included in*Costof sales*, an amount equal to 100% of revenues from vehicles andspare parts manufactured by GDLS. Activities under the GDLS Subcontract havecontinued to evolve. Beginning in the second quarter of 2008, we have includedin *Cost of sales* the GDLS Subcontract coststo us, which are 100% of the revenue from base vehicles manufactured by GDLSand less than 100% of the revenue from engineering changes, spare parts andservices.

 

To meet the needsof other government contracts, in 2007 we significantly expanded our work forceand invested heavily in additional production facility capacity. However,beginning at the end of the first quarter of 2008, we began to scale back ourwork force to align it with current demand. In the future, we intend to utilizepartners and subcontractors to further expand our capacity and capability tofulfill government contracts. By relying more on partners and subcontractorsrather than an expanded work force, we can more quickly respond should the U.S. government exercises its contractual right to terminate any of itscontracts, in whole or in part, without prior notice, at its convenience or fordefault, usually based on performance. Additionally, if the federal government terminatesa contract with us or if we default due to our failure or the failure of one ofour partners to perform under the contract, at best we would be entitled torecover only our incurred or committed costs, settlement expenses and profit onthe work completed prior to the termination. In addition, we could even beliable for excess costs incurred by the federal government in procuringundelivered items from an alternative source.

 

*KeyChallenges*

 

Our rapid growthhas come with numerous challenges. Coupled with our reliance on the U.S.military for substantially all of our business, we have identified thefollowing key challenges to continued success:

 

·obtaining awards for additional orders or contracts for our vehicles in avolatile marketplace;

·obtaining awards for additional orders or contracts for spare parts and/orsustainment services;

·operating a business in an environment where U.S. military contracts, whichrepresent substantially all of our business, may be terminated in whole or inpart at any time;

·remediating internal control weaknesses over financial reporting anddisclosure;

·controlling general and administrative expenses; and

·rebalancing the business to anticipated contract delivery order requirements.

 

The mainuncertainty about our future operations is whether we will continue to receiveadditional orders or contracts for our vehicles. We estimate that currentorders for our Cougar vehicles will allow us to continue production through thefirst part of 2009 and for our Buffalo vehicles to extend production until2012. It is impossible to predict with certainty whether future orders orcontracts will be placed by new or existing customers for our existingproducts. If we do not receive future orders or contracts for production beyondsuch dates, it is unlikely that our vehicle business will continue and ourbusiness will be materially affected.  If we do not receive future ordersor contracts for spare parts and/or sustainment services, our business may bematerially affected.

 

We derivesubstantially all of our revenue from contracts and subcontracts with the U.S.government and its agencies, primarily the Department of Defense (“DoD”). Weexpect that U.S. government contracts, particularly with the DoD, will continueto be our primary source of revenue for the foreseeable future. Thecontinuation and renewal of our existing government contracts and newgovernment contracts are, among other things, contingent upon the availabilityof adequate funding for various U.S. government agencies, including the DoD.Changes in U.S. government spending could directly affect our operatingperformance and lead to an unexpected loss of revenue. The loss or significantreduction in government funding of a large program in which we participate couldalso result in a material decrease to our future sales, earnings and cashflows.

 

We have identifiedmaterial weaknesses in our internal control over financial reporting and haveconcluded that our disclosure controls were not effective as of December 31,2007. Although we have taken steps to correct our material weaknesses, we maystill be subject to risks. If we are unsuccessful in implementing or followingour remediation plan, or fail to update our internal control over financialreporting as our business evolves, we may be unable to report financialinformation timely and accurately or to maintain effective disclosure controlsand procedures. There can be no assurance that, as a result of theseremediation efforts or otherwise, we will not identify other inaccuracies inour future financial statements that will require amendments and restatementsto those financial statements, which could have a material adverse effect on usand the price of our common stock.

 

We experiencedsubstantial growth in net sales during the first nine months of 2008 and during2007. At the same time, our general and administrative expenses increasedsubstantially to support the increased demand for our vehicles and due to theincreased use of outside legal, accounting, auditing and consulting resourcesto address our 

 

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material weaknesses ininternal controls over financial reporting and the restatements of ourcondensed consolidated financial statements for the first, second and thirdquarters of 2007. We expect that managing general and administrative expenseswill continue to be a challenge. However, we are unable to predict whethergeneral and administrative expenses will decrease.

 

During the firstnine months of 2008, we sought to stabilize our business to match our contractdelivery order requirements. We recognized that our business was changing, andin response, we are attempting to rebalance our workforce and manufacturingcapacity. We may incur costs as a result of our efforts to recalibrate ourbusiness to meet the needs of our customers. In addition, in the past threeyears we had sought to rapidly expand and develop our operations and productioncapacity. We have incurred costs and are continuing to incur significant costsassociated with our rapid expansion. We are still experiencing and may continueto experience certain effects from this rapid growth and our subsequent effortsto realign our growth with the demand for our vehicles, such as payments underseverance arrangements and the costs associated with excess manufacturingcapacity and inventory. This growth had placed significant demands on ourmanagement and our administrative, operating, manufacturing and financialresources. In addition, our accounting and financial systems need to besubstantially improved in order to accommodate our current and projectedproduction levels and to support our government compliance requirements nowthat we are classified as a large business under applicable federal contractingregulations. We continue to face challenges in improving our administrative,operating, managerial, accounting and financial systems to accommodate our currentand projected production levels.

 

*Strategyand Key Trends*

 

Strategy

 

We plan toleverage our investments in product development and production facilities. Toaccomplish this we will:

 

·identify new products and markets to meet evolving customer requirements;

·capitalize on demand for blast- and ballistic-protected vehicles and othersurvivability solutions;

·expand our service and support network;

·focus on core competencies; and

·leverage key relationships to grow our business.

 

Key Trends

 

We expect certainfactors to affect our results of operations as compared to results reportedthrough 2007. Some of these factors include:

 

· stabilizing our growth and expansion tomatch our contract delivery order requirements;

· the GDLS Subcontract, under which during2007 we purchased vehicles produced by GDLS from GDLS at the same sales priceat which we sold the vehicles to the U.S. military, resulting in a zero grossprofit for such sales, and under which beginning in the second quarter of 2008,certain activities performed by GDLS result in a gross profit to us;

· additional partnering to increase ourofferings in designing survivability solutions, gaining insight into customerneeds and shifting away from manufacturing;

· costs of the Roxboro, North Carolinafacility purchased in 2007 initially intended to be used to expand ourmanufacturing capacity that in the first quarter of 2008 was determined to beexcess capacity and for which we began to develop a plan for alternative usefor the facility and for which we incurred an impairment charge of$4.9 million; and

· potential additional business activitiesand full year carrying costs related to our 2007 purchase of a blast range andlease of a facility primarily for research and development activities andcustomer training.

 

**Resultsof Operations**

 

The followingdiscussion and analysis is based on our unaudited condensed consolidatedstatements of operations, which reflect our results of operations for thethree- and nine-month periods ended September 30, 2008 and 2007 asprepared in accordance with generally accepted accounting principles in theUnited States of America (“GAAP”).

 

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The followingtable presents our results of operations for the three- and nine-month periodsended September 30, 2008 and 2007 as well as the percentage change fromyear to year.

 

 
| ** **                                        | ** ** | **For the three months ended September 30,** | ** ** | **For the nine months ended September 30,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(in thousands)**                           | ** ** | **2008**                                                                   | ** ** | **2007**                                                                  | ** ** | **Percentage Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **Percentage Change** | ** ** |
| Net sales                                         |       | $                                                                          | 343,309    |                                                                      | $          | 206,794 |   | 66 |  % | $ | 1,087,273 |   | $ | 450,278 |   | 141 |  % |
| Cost of sales                                     |       | 279,532                                                                    |       | 184,260                                                                   |       | 52 |  % | 947,814 |   | 387,475 |   | 145 |  % |
| Gross profit                                      |       | 63,777                                                                     |       | 22,534                                                                    |       | 183 |  % | 139,459 |   | 62,803 |   | 122 |  % |
| General and administrative expenses          |       | 27,817                                                                     |       | 21,708                                                                    |       | 28 |  % | 73,967 |   | 56,113 |   | 32 |  % |
| Research and development expenses            |       | 4,306                                                                      |       | 2,344                                                                     |       | 84 |  % | 10,205 |   | 10,848 |   | (6 | )% |
| Operating income (loss)                           |       | 31,654                                                                     |       | (1,518                                                                    | )          | n/m |   | 55,287 |   | (4,158 | ) | n/m |   |
| Other income, net                                 |       | 440                                                                        |       | 594                                                                       |       | (26 | )% | 1,411 |   | 3,488 |   | (60 | )% |
| Interest expense                                  |       | (2                                                                         | )          | (55                                                                       | )          | (96 | )% | (225 | ) | (86 | ) | 162 |  % |
| Income (loss) before income tax (expense) benefit |       | 32,092                                                                     |       | (979                                                                      | )          | n/m |   | 56,473 |   | (756 | ) | n/m |   |
| Income tax (expense) benefit                      |       | (12,185                                                                    | )          | 180                                                                       |       | n/m |   | (21,262 | ) | 140 |   | n/m |   |
| Net income (loss)                                 |       | $                                                                          | 19,907     |                                                                      | $          | (799 | ) | n/m |   | $ | 35,211 |   | $ | (616 | ) | n/m |   |

 

----

n/m – not meaningful

 

***Comparison of Results of Operations for the Three and NineMonths Ended September 30, 2008 and 2007***

 

*Unitssold*

 

The followingtable presents our shipments for the three- and nine-month periods ended September 30,2008 and 2007 as well as the percentage change from year to year.

 
| ** **             | ** ** | **For the three months ended September 30,** | ** ** | **For the nine months ended September 30,** | ** ** |
|------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(units sold)**  | ** ** | **2008**                                                                   | ** ** | **2007**                                                                  | ** ** | **Percentage Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **Percentage Change** | ** ** |
| Buffalo                |       | 22                                                                         |       | 21                                                                        |       | 5 | % | 71 |   | 56 |   | 27 | % |
| Cougar (all variants)* |       | 422                                                                        |       | 353                                                                       |       | 20 | % | 1,740 |   | 647 |   | 169 | % |
| Total units sold       |       | 444                                                                        |       | 374                                                                       |       | 19 | % | 1,811 |   | 703 |   | 158 | % |

 

----

     * – Excludes Iraqi Light Armored Vehicles(“ILAV”) for which we act as a subcontractor to primarily provide labor onlyfor a portion of the production of the vehicles. As a result, we have reducedthe previously reported units sold for Cougar (all variants) and total unitssold by zero and 99 units for the three and nine months ended September 30,2007, respectively. Additionally, we have also reduced the previously reportedunits sold for Cougar (all variants) and total units sold by 22 and 5 units forthe three months ended March 31, 2008 and June 30, 2008,respectively. These 2008 reductions are reflected in the amounts reported herefor the nine months ended September 30, 2008.

 

The increase invehicles sold for the three-month comparative periods is primarily due to ahigher number of vehicles sold under foreign military sales programs of theDoD, primarily to the United Kingdom Ministry of Defence.  We expect tocomplete fulfillment of vehicles under the Cougar MRAP competitive contract inthe fourth quarter of 2008, and we expect to continue to provide spare partsand logistics services under the contract. Of the vehicles sold for the threemonths ended September 30, 2008 and 2007, the vehicles sold under the MRAPprogram sole source and competitive contracts represent approximately 71% and98%, respectively, of the total vehicles sold.

 

The increase invehicles sold for the nine-month comparative periods is primarily due tovehicles sold pursuant to the sole source and competitive contracts awarded tous under the MRAP program.  Of the vehicles sold for the nine months endedSeptember 30, 2008 and 2007, the vehicles sold under such contractsrepresent approximately 91% and 82%, respectively, of the total vehicles sold.

 

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*Netsales*

 

The increase innet sales for the comparative periods is attributable to an increase in volumeof vehicle deliveries, spare parts, logistics services (field servicerepresentatives and training), and other services (subcontract labor for aportion of the production of the ILAV). The mix of vehicles delivered and spareparts and logistics sales and the percentage change in the comparative periodsare set forth in the following table:

 
| ** **               | ** ** | **For the three months ended September 30,** | ** ** | **For the nine months ended September 30,** | ** ** |
|--------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **               | ** ** | ** **                                                                 | ** ** | ** **                                                                | ** ** | **Percentage** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| **(in thousands)**  | ** ** | **2008**                                                                   | ** ** | **2007**                                                                  | ** ** | **Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **Change** | ** ** |
| Buffalo                  |       | $                                                                          | 15,612     |                                                                      | $          | 15,676 |   | (— | )% | $ | 49,272 |   | $ | 38,491 |   | 28 | % |
| Cougar (all variants)*   |       | 255,508                                                                    |       | 176,865                                                                   |       | 44 |  % | 882,066 |   | 348,017 |   | 153 | % |
| Spare parts and services |       | 72,189                                                                     |       | 14,253                                                                    |       | 406 |  % | 155,935 |   | 63,770 |   | 145 | % |
|                     |       | $                                                                          | 343,309    |                                                                      | $          | 206,794 |   | 66 |  % | $ | 1,087,273 |   | $ | 450,278 |   | 141 | % |

 

----

     * –Revenue for the ILAV for which we actas a subcontractor to primarily provide labor only for a portion of theproduction of the vehicles is excluded from Cougar (all variants) revenue andincluded in spare parts, upgrades and services revenue. As a result, we havereclassified zero and $13.8 million from Cougar (all variants) to spare partsand services revenue for the three and nine months ended September 30,2007. Additionally, we have reclassified $5.6 million and $468,000 for thethree months ended March 31, 2008 and June 30, 2008, respectively.The 2008 reclassifications are reflected in the amounts reported here for thenine months ended September 30, 2008.

 

*Cost ofsales and Gross profit*

 
| ** **              | ** ** | **For the three months ended September 30,** | ** ** | **For the nine months ended September 30,** | ** ** |
|-------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(in thousands)** | ** ** | **2008**                                                                   | ** ** | **2007**                                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| Cost of sales           |       | $                                                                          | 279,532    |                                                                      | $          | 184,260 |   | $ | 947,814 |   | $ | 387,475 |   |
| Gross margin percentage |       | 18.6                                                                       | %          | 10.9                                                                      | %          | 12.8 | % | 13.9 | % |
|                         |            |                                                                            |            |                                                                           |            |  |  |  |  |  |  |  |  |

 

The gross marginpercentage increased by 7.7 percentage points for the three months ended September 30,2008, over the comparable 2007 period. The increase was primarily a result ofseveral factors: (1) more higher profit margin sales of spare parts,training services and engineering changes versus vehicle sales; (2) higherunit prices on certain vehicle delivery orders as a result of lower quantitiesordered; (3) MRAP Cougar production efficiencies achieved as we near theend of the production cycle versus the learning curve inefficiencies we facedat the beginning of the production cycle; and (4) material and freightcost reduction initiatives. These increases were partially offset by increasedGDLS Subcontract activity, whereby we recognized minimal gross profit in 2008and no gross profit in 2007 on vehicles produced by GDLS. The revenue onvehicles produced by GDLS totaled $106.9 million and $33.3 million for thethree months ended September 30, 2008 and 2007, respectively. We also incurreda $3.9 million write-down of our raw material and supplies to their netrealizable values during the three months ended September 30, 2008 thatwas mostly offset by the use in production of $3.5 million of parts that hadbeen previously written down.

 

The gross marginpercentage decreased by 1.1 percentage points for the nine months ended September 30,2008, from the comparable 2007 period. The decrease was primarily a result ofincreased GDLS Subcontract activity, whereby we recognized minimal gross profitin 2008 and no gross profit in 2007 on vehicles produced by GDLS. The vehiclesproduced by GDLS totaled $446.6 million and $33.3 million for the nine monthsended September 30, 2008 and 2007, respectively. This decrease waspartially offset by several factors: (1) increased higher profit marginsales of spare parts, training services and engineering changes versus vehiclesales; (2) higher unit prices on certain vehicle delivery orders as aresult of lower quantities ordered; (3) MRAP Cougar productionefficiencies achieved as we near the end of the production cycle; and (4) materialand freight cost reduction initiatives. In addition, we incurred a $7.7 millionwrite-down of our raw material and supplies to their net realizable values inthe first nine months of 2008 that was partially offset by the use inproduction of $3.5 million of parts that had been previously written down.

 

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*Generaland administrative expenses*

* *
| ** **                   | ** ** | **For the three months ended September 30,** | ** ** | **For the nine months ended September 30,** | ** ** |
|------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                                                   | ** ** | **2007**                                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                   | ** ** | ** **                                                                 | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| As a percentage of net sales |       | 8.1                                                                        | %          | 10.5                                                                      | %          | 6.8 | % | 12.5 | % |

 

General andadministrative expenses as a percentage of net sales decreased 2.4 percentagepoints and 5.7 percentage points for the three and nine months ended September 30,2008, respectively, from the comparable 2007 periods primarily due to asignificant increase in sales volume. The increase in general andadministrative expenses for the three months ended September 30, 2008compared to the 2007 period was primarily due to higher legal, accounting,auditing, and consulting fees, employee severance and higher depreciationexpense. The nine-month period over period increase is related to a $4.9million charge related to an impairment of certain Roxboro, North Carolinaassets, a $1.5 million one-time contribution to the Medical University of SouthCarolina Foundation for brain trauma research, higher legal, accounting,auditing, and consulting fees, severance and higher depreciation.  Theseincreases were partially offset by the absence of a liquidated damages chargetotaling $830,000 and $7.5 million incurred in the three-and nine-month periodsended September 30, 2007, respectively, resulting from the delayedregistration of a private placement of our equity.

 

*Researchand development expenses*

 
| ** **                   | ** ** | **For the three months ended September 30,** | ** ** | **For the nine months ended September 30,** | ** ** |
|------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                                                   | ** ** | **2007**                                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                   | ** ** | ** **                                                                 | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| As a percentage of net sales |       | 1.3                                                                        | %          | 1.1                                                                       | %          | 0.9 | % | 2.4 | % |

 

Research anddevelopment expenses increased as a percentage of net sales by 0.2 percentagepoints in the three months ended September 30, 2008 over the comparable2007 period. The increase is primarily due to the development of an externalballistic protection module called Force ArmorTM and the Cougar Lightweight / Cougar RestrictedTerrain vehicle.

 

Research and developmentexpenses decreased as a percentage of net sales by 1.5 percentage points in thenine months ended September 30, 2008 from the comparable 2007 period. Thedecrease is primarily due to reduced Cheetah related expenditures and asignificant increase in sales volume. The 2007 Cheetah expenditures includedthe procurement of materials to build a series of vehicles to conduct ongoingtesting.

 

*Otherincome*

 

Other incomedecreased in the three and nine months ended September 30, 2008 from thecomparable 2007 periods due to the lower interest income as a result of thedecreased level of funds available for investing and decreased interest rates.

 

*Interestexpense*

 

Interest expensedecreased for the three months ended September 30, 2008 from thecomparable 2007 period because there were no amendments to our line of creditduring the three months ended September 30, 2008, and therefore no feeswere incurred.

 

Interest expenseincreased for the nine months ended September 30, 2008 over the comparable2007 period as a result of commitment fees related to the line of creditinitially established on July 20, 2007 and amended and renewed during thefirst and second quarters of 2008.

 

*Incometax expense*

 

We recorded incometax expense for the three and nine months ended September 30, 2008 as aresult of our pre-tax income.  The effective income tax expense rate forthe nine months ended September 30, 2008 was approximately 38% compared toapproximately 18% effective income tax benefit rate for the comparable 2007period.  See Note 6,*Income Taxes*,in the accompanying unaudited condensed consolidated financial statements.

 

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*Netincome*

 
| ** **                                               | ** ** | **For the three months ended September 30,** | ** ** | **For the nine months ended September 30,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(in thousands, except per share)** | ** ** | **2008**                                                                   | ** ** | **2007**                                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income (loss)                                        |       | $                                                                          | 19,907     |                                                                      | $          | (799 | ) | $ | 35,211 |   | $ | (616 | ) |
| Diluted earnings (loss) per share                        |       | $                                                                          | 0.29       |                                                                      | $          | (0.01 | ) | $ | 0.51 |   | $ | (0.01 | ) |

 

Net income for thethree and nine months ended September 30, 2008 increased over thecomparable 2007 periods primarily due to a higher amount of gross profit as aresult of a higher volume of sales and a change in mix of revenue, partiallyoffset by higher operating expenses and higher income tax expense.

 

**Backlog**

 

The followingtable sets forth the number of vehicles included in our backlog as of September 30,2008, including vehicles to be manufactured by GDLS under the GDLSSubcontract.  The backlog shown in the following table is “funded”backlog, meaning that it reflects vehicles for which we have received ordersand for which funding has been appropriated and authorized for expenditure bythe applicable agency. We cannot assure you that we will deliver or sell all ofthe vehicles included in our backlog. See Part I, Item 1A, Risk Factors,included in our Annual Report on Form 10-K for the year ended December 31,2007.

** **
| ** **                    | ** ** | **Vehicle Funded Backlog  as of September 30, 2008** | ** ** |
|-------------------------------|------------|------------------------------------------------------------------------------------|------------|
| Buffalo                       |       | 7                                                                                  |       |
| Cougar MRAP Competitive*      |       | 116                                                                                |       |
| Cougar (all other variants)** |       | 212                                                                                |       |
| TOTAL                         |       | 335                                                                                |       |

 

----

     * – Refers to Cougar vehicles manufacturedunder the GDLS Subcontract pursuant to which we and GDLS fulfill the MRAPCompetitive Agreement.

     ** – Excludes the ILAV for which we act asa subcontractor to primarily provide labor only for a portion of the productionof the vehicles.

 

On October 20,2008, TACOM awarded us an undefinitized contract modification for the deliveryof 27 Buffalo vehicles.

 

**Liquidityand Capital Resources**

 

Our liquidity andavailable capital resources are impacted by operating, financing and investingactivities.  Our principal sources of liquidity are cash on hand and cashfrom operations, primarily from the U.S. government.

 

*Sourcesand Uses of Cash*

 

Our primarysources of funding are cash flows from operations. Our funds were usedprimarily to fund working capital requirements and make capital expenditures.The following chart shows the cash flows provided by or used in operating,investing, and financing activities for the nine months ended September 30,2008 and 2007:

 
| ** **                                          | ** ** | **For the nine months ended September 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(in thousands)**                             | ** ** | **2008**                                                                  | ** ** | **2007** | ** ** |
| Net cash used in operating activities               |       | $                                                                         | (1,339     | ) | $ | (39,887 | ) |
| Net cash used in investing activities               |       | (10,041                                                                   | )          | (47,706 | ) |
| Net cash (used in) provided by financing activities |       | (219                                                                      | )          | 3,548 |   |
| Decrease in cash and cash equivalents               |       | $                                                                         | (11,599    | ) | $ | (84,045 | ) |

 

As of September 30,2008 we had $79.4 million of cash and cash equivalents, a decrease from $91.0million as of December 31, 2007, and an increase from $72.3 million at September 30,2007.

 

*CashFlows from Operating Activities*

 

Cash used in operatingactivities decreased by $38.5 million during the first nine months of 2008compared with the first nine months of 2007 primarily due to higher net income.Working capital, excluding cash, increased $51.2 million during the first ninemonths of 2008. Changes in working capital, excluding cash, during the firstnine months of 2008 include: (1) an increase in net accounts receivable of$77.3 million, resulting primarily from the timing 

 

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of vehicle shipments(approximately one-half of total third quarter 2008 shipments occurred in thelast month of the quarter) and a change in sales mix (a higher portion ofvehicles sold in the third quarter of 2008 did not have advance payments); (2) adecrease in inventories of $34.8 million resulting from an increase in vehicle shipments,a decrease in the purchase of raw material and supplies related to the MRAPprogram as its production cycle nears the end, and the write-down of obsoleteinventory; (3) a decrease in accounts payable of $21.4 million, reflectingan increase in payments to suppliers and a reduction in inventory purchases; (4) adecrease in advance payments on contracts of $30.5 million partially offset bya decrease in advances to subcontractor of $19.0 million, resulting from areduction in the number of vehicles under contract for which we receive andmake advance payments; (5) an increase in other current liabilities of$11.2 million, primarily the result of an increase in accrued income taxesresulting from increased earnings in 2008; and (6) a decrease of $13.0million in other working capital components.

 

The cash used inoperating activities during the first nine months of 2007 was primarily due toworking capital usage increases to support the increased MRAP orders, partiallyoffset by the receipt of performance-based payments under the MRAP program.Working capital usage increased $61.6 million (accounts receivable,inventories, and accounts payable) to support increased sale volumes. Advancepayments on contracts increased due to the receipt of performance-basedpayments under the MRAP program.

 

*CashFlows from Investing Activities*

 

Cash used in investingactivities decreased by $37.7 million during the first nine months of 2008compared with the first nine months of 2007. During the first nine months of2008, we expended approximately $10.0 million primarily to substantiallycomplete the expansion of our manufacturing capability and capacity that webegan in 2007 and to upgrade our information technology infrastructure.  The majority of those expenditures were madein the first three months of 2008. We do not expect any major capitalexpenditures for the remainder of 2008.

 

During the firstnine months of 2007, we purchased a research and test facility for $5.5million, expended $4.1 million to acquire a logistics training facility,purchased land and a building in Roxboro, North Carolina that we intend to usefor training and sustainment purposes for $3.5 million, and constructed awarehouse and an additional assembly line at our Ladson, South Carolinafacility.

 

 *Cash Flows from Financing Activities*

 

Cash provided by financing activities decreased by $3.8 million duringthe first nine months of 2008 compared with the first nine months of 2007 dueto no stock option exercises and a decrease in long-term liabilities of$219,000 in 2008.

 

*CurrentLiquidity and Capital Resources*

 

Our cash and cashequivalents as of September 30, 2008 were held for working capitalpurposes and were invested primarily in short-term United States Treasury billsand money market funds. We do not enter into investments for trading orspeculative purposes.

 

During the firstnine months of 2008, we expended approximately $10.0 million primarily tosubstantially complete the expansion of our manufacturing capability andcapacity and to upgrade our information technology infrastructure.  We donot expect any major capital expenditures for the remainder of 2008.

 

The amount ofcapital that we will require depends on several factors, including withoutlimitation, the extent and timing of sales of our products, performance basedpayments, inventory costs, costs of raw materials and components, labor costs,costs of improving our financial and accounting systems, the timing and costsassociated with the expansion of our manufacturing, development, engineeringand customer support capabilities, the timing and cost of our product developmentand enhancement activities and our operating results. We currently estimatethat the cash flow that we anticipate will be generated by our business plusthe $40 million available under our line of credit, which expires on April 30,2010, will be sufficient to meet our presently budgeted capital expendituresand our other presently anticipated cash needs for the year ending December 31,2009.  After that time, we expect that we may need to obtain additionalsources of capital, which may include borrowings or the issuance of debt orequity securities, including common stock, and there can be no assurance thatsuch financing will be available to us when we need it or, if available, thatthe terms of any such financing will be satisfactory to us and not dilutive toour shareholders. Any failure to obtain necessary capital as and when requiredcould have a material adverse effect on our business, prospects, financialposition, results of operations and cash flows.

 

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**Off-BalanceSheet Arrangements**

 

In accordance withthe definition under United States Securities and Exchange Commission (“SEC”) rules andregulations, the following qualify as off-balance sheet arrangements:

 

·                    any obligationunder certain guarantees or contracts;

·                    a retained orcontingent interest in assets transferred to an unconsolidated entity orsimilar entity or similar arrangement that serves as credit, liquidity, ormarket risk support to that entity for such assets;

·                    any obligationunder certain derivative instruments; and

·                    any obligationunder a material variable interest held by the registrant in an unconsolidatedentity that provides financing, liquidity, market risk, or credit risk supportto the registrant, or engages in leasing, hedging, or research and developmentservices with the registrant.

 

The followingdiscussion addresses each of the above items for the Company.

 

As of September 30,2008, we do not have any obligation under certain guarantees or contracts asdefined above.

 

As of September 30,2008, we do not have any retained or contingent interest in assets as definedabove.

 

As of September 30,2008, we do not hold derivative financial instruments, as defined by FASBStatement No. 133,*Accounting forDerivative Instruments and Hedging Activities,* as amended.

 

As part of ourongoing business, we do not participate in transactions that generaterelationships with unconsolidated entities or financial partnerships, such asentities often referred to as structured finance or special purpose entities (“SPEs”),which would have been established for the purpose of facilitating off-balancesheet arrangements or other contractually narrow or limited purposes. As of September 30,2008 and December 31, 2007, we were not involved in any unconsolidated SPEtransactions.

 

**ContractualObligations**

 

We have futureobligations under various contracts relating to debt and interest payments,operating leases, and purchase obligations.  During the nine months ended September 30,2008, there were no significant changes to these obligations as reported in ourAnnual Report on Form 10-K for the year ended December 31, 2007,except that our purchase obligations decreased to $98.4 million as of September 30,2008, from $128.3 million at December 31, 2007. The purchase obligationsat September 30, 2008 were primarily comprised of purchase orders relatedto orders for the MRAP Competitive Contract, and for Cougar Mastiffs andRidgbacks pursuant to the DoD’s Foreign Military Sales United Kingdom contract.

 

**CriticalAccounting Policies and Estimates**

 

For the periodended September 30, 2008, there have been no significant changes incritical accounting policies and estimates from those disclosed in our AnnualReport on Form 10-K for the year ended December 31, 2007 filed withthe SEC on September 15, 2008.

 

**NewAccounting Pronouncements**

 

For the periodended September 30, 2008, there have been no new accounting pronouncementssince those disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2007 filed with the SEC on September 15, 2008.

 

**Item3. Quantitative and Qualitative Disclosures About Market Risk**

 

**CommodityPrices**

 

We are exposed tomarket risk from changes in commodity prices. If the price of steel increasessignificantly, the cost of our products could increase. It is unlikely we willbe able to pass on this cost under our current contracts. As a result, if thecost of our raw materials increases, our profitability, if any, could decrease.

 

**ForeignCurrency**

 

The majority ofour business is denominated in U.S. dollars and, as such, movement in theforeign currency markets will have a minimal direct impact on our business.

 

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**InterestRates**

 

We do not have atrading portfolio and although our current financing is at a variable rate, wedo not have any borrowings under the arrangement.  As a result, we are notcurrently directly at risk of interest rate fluctuations. As our financingneeds change in the future, interest rate risk may become a more significantissue for us.

 

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

 

**Item4. Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

Disclosurecontrols and procedures are controls and other procedures that are designed toprovide reasonable assurance that the information required to be disclosed inreports filed or submitted under the United States Securities Exchange Act of1934, as amended (“Exchange Act”), is (1) recorded, processed, summarizedand reported within the time periods specified in the rules and forms ofthe United States Securities and Exchange Commission (“SEC”) and (2) accumulatedand communicated to management, including the principal executive officer andprincipal financial officer, as appropriate to allow timely decisions regardingrequired disclosure.  Our disclosure controls and procedures were designedto provide reasonable assurance of achieving their control objectives.

 

In connection withthe preparation of this Quarterly Report on Form 10-Q for the period endedSeptember 30, 2008, members of our management, at the direction (and withthe participation) of our chief executive officer and chief financial officer,performed an evaluation of the effectiveness of the design and operation of ourdisclosure controls and procedures (as defined in Rule 13a-15(e) underthe Exchange Act), as of September 30, 2008. Based on that evaluation, thechief executive officer and chief financial officer concluded that ourdisclosure controls and procedures were not effective at a reasonable assurancelevel as of September 30, 2008, because of the material weaknesses in ourinternal control over financial reporting discussed in the Annual Report on Form 10-Kfor the year ended December 31, 2007 filed with the SEC on September 15,2008. Notwithstanding the material weaknesses described in the Annual Report onForm 10-K for the year ended December 31, 2007, our management hasconcluded that our unaudited condensed consolidated financial statementsincluded in this report are fairly stated, in all material respects, inaccordance with generally accepted accounting principles in the United Statesof America (“GAAP”).

 

**Changesin Internal Control Over Financial Reporting**

 

The changes in ourinternal control over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act) during the period covered by this report that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting are discussed below.

 

**Remediationof Material Weaknesses**

 

We have engagedin, and are continuing to engage in, substantial efforts to improve our internalcontrol over financial reporting and disclosure controls and procedures relatedto substantially all areas of our financial statements and disclosures. Theseefforts include the following:

 

*Effortsto strengthen accounting and finance department through additional professionalstaff.*  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.  Effective October 1, 2008, Mr. Mathiswas promoted to Chief Financial Officer. Additionally, in August 2008, wehired Amy Justis as our Vice President of Accounting and Corporate Controller.The development of adequate corporate level accounting and finance oversight isstill ongoing. We are still recruiting accounting and finance personnel and donot yet have permanent resources in place sufficient to close our books withoutsignificant reliance on third-party contractors.

 

*Useof outside consultants and advisors.*  While weultimately intend to reduce our reliance on outside consultants, for the nearterm we have engaged outside consultants and advisors to assist management in 

 

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oversight and preparationof our financial statements, periodic reports filed with the SEC and related matters.We are also using outside consultants to function as our internal auditdepartment and overseeing our Section 404 evaluation of internal controlover financial reporting, which will include evaluating and recommendingimprovements in the existing internal controls at both the corporate andbusiness group level and establishing a mechanism to monitor the effectivenessof internal controls on an ongoing basis. As we strengthen our accounting andfinance department, we intend to transition more of these functions tofull-time staff.

 

*Increasedcommunication internally and with outside advisors.*  Wehave increased communication by and among senior management, external advisorsand other third parties relevant to the disclosure process. Specifically, the chiefexecutive officer meets daily with his management team to review operationaldevelopments. Our board of directors receives timely and regular updates onissues of importance. Our chief executive officer also regularly prepares areport to our board of directors highlighting operational and financial resultswhich is also distributed to his executive team.

 

*Enhancedefforts to identify non-routine transactions.*  We haveinitiated daily meetings with executive leadership to identify non-routinetransactions and their related accounting treatment at an early stage. Certainexpenditure transactions require approval of the chief financial officer.Additionally, we have assigned finance professionals within each of the productlines.

 

*Disclosurecontrols and procedures improvements.*  With respect tothe preparation of periodic reports to be filed with the SEC, we haveinstituted 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 willconsider the design and operating effectiveness of these actions and will makeadditional changes it determines appropriate.

 

The effectivenessof Force Protection’s or any system of disclosure controls and procedures andinternal control over financial reporting is subject to certain limitations,including the exercise of judgment in designing, implementing, and evaluatingthe controls and procedures, the assumptions used in identifying the likelihoodof future events, and the inability to eliminate misconduct completely. As aresult, our disclosure controls and procedures and internal control overfinancial reporting may not prevent all errors or improper acts or ensure thatall material information will be made known to appropriate management in atimely fashion.

 

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**PART II. OTHER INFORMATION**

 

**Item1. Legal Proceedings**

 

*Shareholder**Class Actionand Derivative Complaints*

 

On March 10, 2008,the first of ten related class action lawsuits was filed against us and certainof our former and current board members or officers in the United StatesDistrict Court for the District of South Carolina Charleston Division on behalfof a proposed class of investors who purchased or otherwise acquired oursecurities during the period between August 14, 2006 and February 29,2008. The complaints seek class certification, and the allegations include butare not limited to allegations that the defendants violated the Exchange Actand made false or misleading public statements and/or omissions concerning ourbusiness, internal controls, and financial results. The plaintiffs assert thatas a result of the defendants’ allegedly wrongful acts and omissions, membersof the proposed class have suffered significant losses and damages. Theindividual class action lawsuits were consolidated on June 10, 2008 undercaption ‘In Re Force Protection, Inc. Securities Litigation, Action No. 2:08-cv-845-CWH.’On June 20, 2008 a group of investors were collectively appointed leadplaintiffs. Pursuant to the Court’s consolidation and scheduling order, thedefendants need not respond to the individual complaints, but instead willrespond to a consolidated complaint to be filed by the lead plaintiffs.

 

Between March 27,2008 and May 28, 2008, various alleged shareholders filed derivativelawsuits against former and current officers or board members wherein theplaintiff shareholders are seeking damages and other relief for the benefit ofthe Company. 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, but are not limited to, allegations ofbreach of fiduciary duties, abuse of control, gross mismanagement, waste ofcorporate assets, and 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. In August 2008 and September 2008, the defendants filedmotions to dismiss the derivative lawsuits pending in the Charleston, SouthCarolina Circuit Court and the Clark County, Nevada District Court. Thosemotions remained pending as of the date of this filing. Defendants’ obligationsto respond to the complaints in the derivative lawsuits pending in the UnitedStates District Court for the District of South Carolina have been suspendedpending a ruling on motions filed by certain plaintiffs seeking consolidationof the lawsuits and appointment of a lead plaintiff.

 

*OtherDisputes*

 

On August 21, 2007,we filed suit against Protected Vehicles, Inc. (“PVI”) and Garth Barrett,Thomas Thebes, and Paul Palmer, three of PVI’s employees (all of whom wereformer employees of Force Protection) in the United States District Court forthe District of South Carolina. In the complaint, we allege that the nameddefendants used our confidential information and trade secrets to create acompeting business. We seek injunctive relief, unspecified damages, attorneys’fees and costs. The defendants have answered our complaint and filedcounterclaims against us. In their answers and counterclaims, the defendantsallege, among other things, that we and several of our current and formerofficers and directors engaged in: certain transactions (including transactionswith Force Protection) in which such officers and directors maintained afinancial interest; backdating and certain other improper acts in connectionwith certain stock issuances; allegedly wrongful acts with respect to aprocurement 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. On January 18,2008, the district court entered an order staying the litigation in light of aninvoluntary bankruptcy petition filed on January 15, 2008, in the UnitedStates Bankruptcy Court for the District of South Carolina with respect to PVI.On February 5, 2008, PVI filed a voluntary Chapter 7 petition. On March 28,2008, the Chapter 7 proceeding was converted to a Chapter 11proceeding. On June 20, 2008, the Bankruptcy Court remanded the litigationback to the District Court, and on September 3, 2008, the bulk of PVI’sassets, including certain rights and liabilities with respect to our suit againstit, were sold to a third party. On July 31, 2008, we settled our claimagainst Paul Palmer and we rehired him on October 13, 2008. We haveamended the complaint to add the third party as a defendant to the suit; thedefendants have reasserted their counterclaims in response to the amendedcomplaint.

 

From February 2007through October 2008, we received a total of 69 complaints from currentand former employees filed with the United States Equal Employment OpportunityCommission alleging, among other things, 

 

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race and/or genderdiscrimination. We have responded to the complaints as such responses have becomedue, and are investigating the allegations.

 

In early December 2007,we submitted a voluntary disclosure to the Directorate of Defense TradeControls (“DDTC”) regarding the shipment of technical manuals, Cheetah spareparts, armored vest plates, parts not listed on our license and transfers oftechnical data to and by our vendors without proper authorization oridentification of the appropriate exemption. On January 22, 2008, the DDTCrequested additional information and documentation for each specific shipmentof these items within sixty days. In addition, the DDTC directed us toundertake certain specific measures, including, but not limited to, that wehire a full time senior export control compliance officer, implement certainprocedures, conduct comprehensive International Traffic in Arms Regulations(“ITAR”) training, immediately conduct a comprehensive export compliance audit,and institute a plan to conduct periodic audits of the export complianceprogram. On February 11, 2008, we provided DDTC with the job descriptionfor the Director of Export Controls, draft Export Controls Manual, ITARpresentation provided in new orientation training and the attendance logs forannual ITAR training 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 October 27, 2008,we received a letter from the DDTC advising that this voluntary disclosure hasbeen closed without taking any civil penalties, but reserving the right toreopen if circumstances warrant.

 

On February 8, 2008,a temporary independent contractor whose services we had terminated filed acomplaint with OSHA which alleges a violation under the employee protectionprovisions 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 of claim of lien for the balance oftooling supplied by a vendor to our prime contractor on the Roxboro Facility.We have demanded that the prime contractor resolve this matter with its vendorand indemnify us for this claim of lien.

 

On October 14, 2008,we settled a claim for $583,000 by several investors in connection with theconversion of their shares of our preferred stock and other damages relating towarrants the investors allege were granted but never distributed to them.

 

Although we intend todefend ourselves in connection with the foregoing legal proceedings and claims,there can be no assurance that we will ultimately prevail in any of thesematters. Moreover, the defense of these claims and proceedings may result insubstantial legal expenses and diversion of our management, and any settlementor adverse judgment may require us to make substantial payments, any of whichcould have a material adverse effect on our business or financial position,results of operations, or cash flows.

 

We are also a party toother litigation which we consider routine and incidental to our business. Wemay be involved from time to time in other litigation that could have amaterial effect on our operations or finances. Other than the litigationdescribed above, we are not aware of any pending or threatened litigationagainst us that could have a material adverse effect on our business orfinancial position, results of operations, or cash flows.

 

**Item1A. Risk Factors**

 

In addition to the otherinformation set forth in this Quarterly Report on Form 10-Q, you shouldcarefully consider the risk factors set forth below in conjunction with therisk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Reporton Form 10-K for the year ended December 31, 2007 filed with the SEC onSeptember 15, 2008 (“2007 Form 10-K”), which could materially affect ourbusiness, financial condition, future results of operations, and cash flows.The risks described below and in the 2007 Form 10-K are not the only risksfacing Force Protection. Additional risks and uncertainties not currently knownto us or that we currently deem to be immaterial also may materially adversely affectour business, financial condition, results of operations, or cash flows.

 

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**Our business may be adversely affectedby the recent downturns in the economy.**

 

Recently, there has beena downturn in the economy due to a variety of financial conditions, includingthe sequential effects of the subprime lending crisis, general credit marketcrisis, collateral effects on the finance and banking industries, volatileenergy costs, concerns about inflation, slower economic activity, decreasedconsumer confidence, reduced corporate profits and capital spending, adversebusiness conditions and liquidity concerns. These conditions could have anadverse impact on the automotive industry, particularly automotive suppliersand steel manufacturers. We cannot predict the timing or duration of theeffects of these conditions on our business. These conditions make it difficultfor our vendors and us to accurately forecast, plan and execute certain futurebusiness activities. If these conditions affect the ability of our vendors andsubcontractors to perform, our business, financial condition, results ofoperations or cash flows may be materially adversely affected.

 

**We have started production forcertain of our products for which we have no orders. If we do not receiveorders for those products, we may incur losses.**

 

We are in the process ofprocuring materials and fabricating Buffalo and Cougar vehicles, as well asForceArmorTM kits in our production facility and in subcontractors’facilities in anticipation of future orders. In the event that we do notreceive the anticipated orders, we may have excess inventory and incur losses,and, as a result, our business, financial condition, results of operations, orcash flows may be materially adversely affected.

 

**Item2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

None.

 

**Item3. Defaults Upon Senior Securities**

 

None.

 

**Item4. Submission of Matters to a Vote of Security Holders**

 

None.

 

**Item5. Other Information**

 

None.

 

**Item6. Exhibits**

 

Thefollowing is an index of the exhibits included in this Quarterly Report on Form 10-Q.

 

**EXHIBITINDEX**

 
| **NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                              |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1        |       | Agreement and Plan of  Merger filed as Exhibit 2.1 to 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 to 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 to  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 to the  Company’s Annual Report on 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 to the Company’s Current  Report on Form 8-K filed January 27, 2005, is hereby incorporated  by reference. |

 

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| 4.2    |   | Amended and Restated  Certificate of Designation for Series B Convertible Preferred Stock,  filed as Exhibit 4.1 to 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 to the Company’s Current Report on Form 8-K  filed February 15, 2005, is hereby incorporated by reference. |
|   |   |                                                                                                                                                                                                                                                 |
| 10.1   |   | Contract Modification  under Contract No. M67854-07-D-5031 with the United States Marine Corps  Systems Command, dated July 7, 2008. †*                                                                                               |
|   |   |                                                                                                                                                                                                                                                 |
| 10.2   |   | Contract Modification  under Contract No. M67854-07-D-5031 with the United States Marine Corps  Systems Command, dated July 29, 2008. †*                                                                                                   |
|   |   |                                                                                                                                                                                                                                                 |
| 10.3   |   | Third Extension  Amendment to Leases between Force Protection, Inc. and  Aerospace/Defense, Inc. dated August 27, 2008. †                                                                                                        |
|   |   |                                                                                                                                                                                                                                                 |
| 14.1   |   | Force  Protection, Inc. Restated Code of Ethics dated July 1, 2008, filed  as Exhibit 14.1 to the Company’s Annual Report on Form 10-K filed September 15,  2008, 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. †                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                 |
| 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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(Exhibits marked with a(†) are filed electronically herewith.)

(Exhibits marked with anasterisk (*) have portions of the exhibit omitted pursuant to a confidentialtreatment request. This information has been filed or will be filed separatelywith the SEC.)

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
| ** **                    | **FORCE  PROTECTION, INC.***(Registrant)* |
|-------------------------------|-------------------------------------------|
| ** **                    | ** **                                | ** ** | * * |
| * *                      | * *                                  | * * | * * |
| Date: November 10,  2008 | By:                                       | /s/ MICHAEL MOODY |
|                          | ** **                                | **Name:** | **  Michael Moody** |
|                          | ** **                                | **Title:** | **Chief  Executive Officer and President** |
|                          | ** **                                | ** ** | **(Principal  Executive Officer)** |
|                          | ** **                                | ** ** | ** ** |
| ** **                    | ** **                                | ** ** | ** ** |
| Date: November 10,  2008 | By:                                       | /s/ CHARLES MATHIS |
|                          | ** **                                | **Name:** | **  Charles  Mathis** |
|                          | ** **                                | **Title:** | **Chief  Financial Officer** |
|                          | ** **                                | ** ** | **(Principal  Accounting and Financial Officer)** |

 

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