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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-Q/A**

**(AMENDMENT NO. 2)**

 

(Mark One)

 

| **x**                                                   | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                    | ** ** | ** **                                                                                              |
| **For the  quarterly period ended March 31, 2007** |
| ** **                                              |
| **OR**                                                  |
|                                                    |       | ** **                                                                                              |
| **o**                                                   | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                                         to                                         **

 

**CommissionFile Number 001-33253**

 

**FORCEPROTECTION, INC.**

(Exact Name of Registrant as Specified in ItsCharter)

 

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

 

**(843) 574-7000**

(Registrant’s Telephone Number, Including Area Code)

 

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

 

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

(Check One):

 

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

 

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

 

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

 

 

 

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TABLE OF CONTENTS

 
| **PART I—FINANCIAL INFORMATION**                                                         | 2          |
|----------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** |
| Item 1. Financial Statements                                                                  | 2          |
|                                                                                               |       |
| Item 2.Management’s Discussion and Analysis  of Financial Condition and Results of Operations | 30         |
|                                                                                               |       |
| Item 4. Controls and Procedures                                                               | 42         |
|                                                                                               |       |
| **PART II—OTHER INFORMATION**                                                            | 45         |
| ** **                                                                                         | ** ** |
| Item 6. Exhibits                                                                              | 45         |

 

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**EXPLANATORY NOTE REGARDING RESTATEMENTS**

 

This Quarterly Report on Form 10-Q/Afor the three-month period ended March 31, 2007 includes restatements ofthe previously filed condensed consolidated financial statements and data (andrelated disclosures) for the period ended March 31, 2007. Thesecorrections are discussed in Note 2, *Restatement andReclassification of Previously Issued Condensed Consolidated FinancialStatements,* included in the accompanying condensed consolidatedfinancial statements for the period ended March 31, 2007. Thesecorrections are also discussed in Item 2, Management’s Discussion andAnalysis of Financial Condition and Results of Operations of this QuarterlyReport on Form 10-Q/A and are further discussed in Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations andNote 16, Summarized Quarterly Unaudited Financial Data, to theconsolidated financial statements included in our Annual Report on Form 10-Kfor our fiscal period ended December 31, 2007 filed with the United StatesSecurities and Exchange Commission (“SEC”) on September 15, 2008. Wepreviously announced, in a Form 8-K filed with the SEC on August 28,2008, that we would restate our previously reported condensed consolidatedfinancial statements for the three-month period ended March 31, 2007 andthe three- and six-month periods ended June 30, 2007 as a result of errorsdiscovered by management during its year-end and quarterly review, includingerrors associated with recognizing the value of revenues, certain accruedliabilities, inventory and deferred expenses in the proper quarterlyperiods.  The information contained inthis Quarterly Report on Form 10-Q/A amends only Items 1, 2 and 4 of Part Iand Item 6 of Part II to the originally filed Quarterly Report on Form 10-Qfiled with the SEC on May 15, 2007, as amended by the Quarterly Report on Form 10-Q/Afiled with the SEC on July 19, 2007(the “Original Report”).

 

This Quarterly Report on Form 10-Q/Adoes not reflect all events occurring after the original filing of the OriginalReport or modify or update all the disclosures affected by subsequent events.Information not modified or updated herein reflects the disclosures made at thetime of the filing of the Original Report on July 19, 2007. Accordingly,this Form on 10-Q/A should be read in conjunction with all of our periodicfilings, as amended if applicable, including our Annual Report on Form 10-Kfor the year ended December 31, 2007, filed with the SEC subsequent to thefiling date of the Original Report.

 

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**PART I.FINANCIAL INFORMATION**

 

**Item 1.**           Financial Statements (Unaudited)

 

**ForceProtection, Inc. and Subsidiaries**

**CondensedConsolidated Balance Sheets**

**(Unaudited)**

 
| ** **                                          | ** ** | **As of  March 31, 2007  (Restated)** | ** ** | **As of  December 31, 2006** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                          | ** ** | **(In Thousands)**                         | ** ** |
| **Assets**                                          |       |                                            |       |                                   |       |
| **Current assets:**                                 |       |                                            |       |                                   |       |
| Cash and cash equivalents                           |       | $                                               | 113,441    |                                   | $          | 156,319 |   |
| Accounts receivable, net of allowance               |       | 53,494                                          |       | 42,035                                 |       |
| Inventories                                         |       | 98,218                                          |       | 60,396                                 |       |
| Deferred income tax assets                          |       | 12,693                                          |       | 9,563                                  |       |
| Other current assets                                |       | 2,653                                           |       | 373                                    |       |
| Total current assets                                |       | 280,499                                         |       | 268,686                                |       |
| Property and equipment, net                         |       | 23,590                                          |       | 8,964                                  |       |
| Intangible assets, net                              |       | 1,882                                           |       | —                                 |       |
| Deferred income tax assets                          |       | 2,764                                           |       | 2,764                                  |       |
| **Total assets**                                    |       | $                                               | 308,735    |                                   | $          | 280,414 |   |
| **Liabilities  and Shareholders’ Equity**      |       |                                            |       |                                   |       |
| **Current liabilities:**                            |       |                                            |       |                                   |       |
| Accounts payable                                    |       | $                                               | 62,538     |                                   | $          | 38,654 |   |
| Due to United States government                     |       | 7,007                                           |       | 6,023                                  |       |
| Other current liabilities                           |       | 13,634                                          |       | 4,891                                  |       |
| Advance payments on contracts                       |       | 3,376                                           |       | 12,824                                 |       |
| Total current liabilities                           |       | 86,555                                          |       | 62,392                                 |       |
| Other long-term liabilities                         |       | 446                                             |       | 168                                    |       |
|                                                |       | 87,001                                          |       | 62,560                                 |       |
| Commitments and contingencies                       |       |                                            |       |                                   |       |
| **Shareholders’ equity:**                      |       |                                            |       |                                   |       |
| Common stock                                        |       | 68                                              |       | 67                                     |       |
| Additional paid-in capital                          |       | 255,397                                         |       | 251,038                                |       |
| Accumulated deficit                                 |       | (33,731                                         | )          | (33,251                                | )          |
| Total shareholders’ equity                     |       | 221,734                                         |       | 217,854                                |       |
| **Total liabilities and shareholders’ equity** |       | $                                               | 308,735    |                                   | $          | 280,414 |   |

 

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

 

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**ForceProtection, Inc. and Subsidiaries**

**CondensedConsolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                                 | ** ** | **For the three months ended March 31,**   | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2007  (Restated)**                                           | ** ** | **2006** | ** ** |
| ** **                                                 | ** ** | **(In Thousands,  Except per Share Data)** | ** ** |
| Net sales                                                  |       | $                                                              | 104,825    |   | $ | 34,803 |   |
| Cost of sales                                              |       | 85,125                                                         |       | 28,165 |   |
| Gross profit                                               |       | 19,700                                                         |       | 6,638 |   |
|                                                       |       |                                                           |       |   |   |
| General and administrative expenses                        |       | 17,066                                                         |       | 5,961 |   |
| Research and development expenses                          |       | 5,001                                                          |       | 664 |   |
| Operating income (loss)                                    |       | (2,367                                                         | )          | 13 |   |
| Other income, net                                          |       | 1,788                                                          |       | 27 |   |
| Interest expense                                           |       | (9                                                             | )          | (807 | ) |
| Loss before income tax benefit                             |       | (588                                                           | )          | (767 | ) |
| Income tax benefit                                         |       | 108                                                            |       | — |   |
| Net loss                                                   |       | (480                                                           | )          | (767 | ) |
| Accretion of Series D 6% convertible  preferred stock |       | —                                                         |       | (484 | ) |
| Preferred stock dividend                                   |       | —                                                         |       | (162 | ) |
| Net loss available to common shareholders                  |       | $                                                              | (480       | ) | $ | (1,413 | ) |
| **Loss per common share:**                                 |       |                                                           |       |   |   |
| Basic                                                      |       | $                                                              | (0.01      | ) | $ | (0.04 | ) |
| Diluted                                                    |       | $                                                              | (0.01      | ) | $ | (0.04 | ) |
| **Weighted average common shares outstanding:**            |       |                                                           |       |   |   |
| Basic                                                      |       | 67,632                                                         |       | 37,452 |   |
| Diluted                                                    |       | 67,632                                                         |       | 37,452 |   |

 

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

 

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**ForceProtection, Inc. and Subsidiaries**

**CondensedConsolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                       | ** ** | **For the three months ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2007  (Restated)**                                         | ** ** | **2006** | ** ** |
| ** **                                                                                       | ** ** | **(In Thousands)**                                      | ** ** |
| **Cash flows from operating activities:**                                                        |       |                                                         |       |   |   |
| Net loss                                                                                         |       | $                                                            | (480       | ) | $ | (767 | ) |
| Adjustments to reconcile net loss to net  cash (used in) provided by operating activities – |       |                                                         |       |   |   |
| Depreciation and amortization                                                                    |       | 702                                                          |       | 184 |   |
| Deferred tax benefit                                                                             |       | (3,130                                                       | )          | — |   |
| Income tax benefit realized from stock  options exercised                                        |       | (2,276                                                       | )          | — |   |
| Stock-based compensation                                                                         |       | 1,072                                                        |       | 653 |   |
| Common stock issued for services and other  expenses                                             |       |                                                         |       | — |   |
| Allowance for doubtful accounts                                                                  |       | (45                                                          | )          | — |   |
| Provision for inventory obsolescence                                                             |       | (299                                                         | )          | 150 |   |
| Warranty reserve                                                                                 |       | 703                                                          |       | (33 | ) |
| (Increase) decrease in assets –                                                             |       |                                                         |       |   |   |
| Accounts receivable                                                                              |       | (11,414                                                      | )          | 2,250 |   |
| Inventories                                                                                      |       | (37,523                                                      | )          | (1,250 | ) |
| Other current assets                                                                             |       | (2,280                                                       | )          | (104 | ) |
| Increase (decrease) in liabilities –                                                        |       |                                                         |       |   |   |
| Accounts payable                                                                                 |       | 23,884                                                       |       | 4,862 |   |
| Due to United States government                                                                  |       | 984                                                          |       | — |   |
| Other current liabilities                                                                        |       | 10,194                                                       |       | (141 | ) |
| Advance payments on contracts                                                                    |       | (9,448                                                       | )          | 1,135 |   |
| Total adjustments                                                                                |       | (28,876                                                      | )          | 7,706 |   |
| **Net cash (used in) provided by operating  activities**                                         |       | (29,356                                                      | )          | 6,939 |   |
| **Cash flows from investing activities:**                                                        |       |                                                         |       |   |   |
| Capital expenditures                                                                             |       | (16,820                                                      | )          | (642 | ) |
| **Net cash used in investing activities**                                                        |       | (16,820                                                      | )          | (642 | ) |
| **Cash flows from financing activities:**                                                        |       |                                                         |       |   |   |
| Proceeds from issuance of common stock:                                                          |       |                                                         |       |   |   |
| Other                                                                                            |       | 1,012                                                        |       |   |   |
| Dividends on Series D preferred stock                                                       |       |                                                         |       | (117 | ) |
| Payments on debt                                                                                 |       |                                                         |       | (1,250 | ) |
| Income tax benefit realized from stock  options exercised                                        |       | 2,276                                                        |       | — |   |
| Net increase in long-term liabilities                                                            |       | 10                                                           |       | — |   |
| **Net cash provided by (used in) financing  activities**                                         |       | 3,298                                                        |       | (1,367 | ) |
| **Increase (decrease) in cash and cash  equivalents**                                            |       | (42,878                                                      | )          | 4,930 |   |
| **Cash and cash equivalents at beginning of  period**                                            |       | 156,319                                                      |       | 1,217 |   |
| **Cash and cash equivalents at end of period**                                                   |       | $                                                            | 113,441    |   | $ | 6,147 |   |
| **Supplemental cash flow information:**                                                          |       |                                                         |       |   |   |
| Cash paid during the period for                                                                  |       |                                                         |       |   |   |
| Interest, net of amounts capitalized                                                             |       | $                                                            | 16         |   | $ | 286 |   |
| Income taxes                                                                                     |       | $                                                            | 625        |   | $ | — |   |
| **Supplemental schedule of noncash investing  and financing activities:**                        |       |                                                         |       |   |   |
| Note payable, net of discount, issued as  consideration for non-compete agreement                |       | $                                                            | 390        |   | $ | — |   |

 

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

 

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**ForceProtection, Inc. and Subsidiaries**

**Notesto Condensed Consolidated Financial Statements**

 

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

 

***Organization and Description ofthe Business***

 

ForceProtection, Inc., reincorporated under the laws of Nevada in 2005, and itssubsidiaries, is an important provider of blast- and ballistic-protected productsused to support armed forces and security personnel in harm’s way. We design,manufacture, test, deliver and support our blast- and ballistic-protectedproducts with the purpose to increase survivability of the users of theproducts. Our specialty vehicles, which we believe are at the forefront ofblast- and ballistic-protected technology, are designed to protect theiroccupants from landmines, hostile fire, and improvised explosive devices (“IEDs”).Our primary customer is the United States Department of Defense (“DoD”) wherewe service two principal services, the U. S. Army and U. S. Marine Corps.

 

Referencesherein to “Force Protection,” the “Company,” “we,” “our,” or “us” refer toForce Protection, Inc. and its subsidiaries unless otherwise stated orindicated by context.

 

Commencing in March 2008,in conjunction with the preparation of our consolidated financial statementsfor the year ended December 31, 2007, we undertook a comprehensive reviewof our previously issued unaudited condensed consolidated financial statementsfor the periods ended March 31, 2007, June 30, 2007 and September 30,2007, collectively referred to as the (Quarterly Financial Statements). As aresult of this review, we have determined that the previously issued unauditedQuarterly Financial Statements were not prepared in accordance with generallyaccepted accounting principles in the United States of America (“GAAP”) and wehave restated those previously issued Quarterly Financial Statements. Thecondensed consolidated financial statements for the period ended March 31,2007, include the effects of these restatements. (See Note 2, *Restatement and Reclassification of Previously Issued CondensedConsolidated Financial Statements*).

 

***Basis of Presentation andConsolidation***

 

Theseunaudited condensed consolidated financial statements should be read inconjunction with (i) our audited consolidated financial statementsincluded in our Annual Report on Form 10-K for the year ended December 31,2006 filed with the United States Securities and Exchange Commission (“SEC”) onMarch, 16, 2007, as amended on July 12, 2007 and on October 15, 2007,and (ii) because of the timing of the filing of this amended QuarterlyReport on Form 10-Q/A Amendment No. 2, our audited consolidated financial statementsincluded in our Annual Report on Form 10-K for the year ended December 31,2007, filed with the SEC on September 15, 2008.  These unaudited condensed consolidatedfinancial statements have been prepared pursuant to Rule 10-01 ofRegulation S-X. Certain information and note disclosures normally included inannual financial statements prepared in accordance with GAAP have beencondensed or omitted pursuant to those rules and regulations, although webelieve that the disclosures made herein are adequate to make the informationnot misleading.

 

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

 

Theseunaudited condensed consolidated financial statements include the assets,liabilities, revenues and expenses of our two wholly owned subsidiaries, ForceProtection Industries, Inc. and Force Protection Technologies, Inc.  We eliminate from our financial results allsignificant intercompany accounts and transactions.

 

***Use of Estimates***

 

The preparation of our unauditedcondensed consolidated financial statements in conformity with GAAP requiresthe use of estimates and assumptions that affect the reported amounts of assetsand liabilities, the disclosure of contingent assets and liabilities at thedate of the unaudited condensed consolidated financial statements, and thereported amounts of revenues and expenses during the reporting periods.Significant estimates and assumptions are used for, but are not limited to: (1) revenuerecognition; (2) allowance for doubtful accounts; (3) definitizationand advance payments on contracts; (4) inventory costs and reserves; (5) assetimpairments; (6) depreciable lives of assets; (7) economic lives andfair value of leased assets; (8) income tax reserves and valuationallowances; (9) fair value of stock options;

 

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**ForceProtection, Inc. and Subsidiaries**

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

 

(10) allocation of direct and indirectcost of sales; and (11) contingent liabilities, warranty, and litigationreserves. Future events and their effects cannot be predicted with certainty;accordingly, our accounting estimates require the exercise of judgment. Theaccounting estimates used in the preparation of our unaudited condensed consolidatedfinancial statements will change as new events occur, as more experience isacquired, as additional information is obtained and as our operatingenvironment changes. We evaluate and update our assumptions and estimates on anongoing basis and may employ outside experts to assist in our evaluation, as considerednecessary. Actual results could differ from those estimates.

 

***Risks and Uncertainties***

 

We are exposed to a numberof risks in the normal course of our operations that could potentially affectour financial position, results of operations, and cash flows.

 

*Customer Concentration*

 

Substantially all of ourrevenue comes from our DoD contracts either as a prime contractor or as asubcontractor to another prime contractor to the U.S. government.  Revenue from those contracts approximated 80%and 93% of*Net sales* for thethree months ended March 31, 2007 and 2006, respectively.  Our accounts receivable from the U.S.government as of March 31, 2007 was 92 % of our accounts receivable.

 

*Law and Regulations*

 

Asa result of those DoD contracts, we are required to participate in the U.S.government contracting process, which involves extensive statutes, regulationsand requirements of the U.S. government agencies and entities that govern theseprograms, including award, administration, funding, and performance ofcontracts. These statutes and regulations impose a broad range of requirements,many of which are unique to government contracting, including variousprocurement, import and export, federal national security, contract pricing andcost, funding, contract termination and adjustment, audit requirements, andprotection of classified information. Our failure to comply with theseregulations and requirements could result in reductions of the value ofcontracts, contract modifications or termination, loss of security clearance,and the assessment of civil or criminal penalties and fines, inability to winnew contracts, and lead to suspension or debarment from government contractingor subcontracting for a period of time, any of which could have a material adverseaffect on our financial position, results of operations, and cash flows.

 

Weare also subject to certain unique business risks associated with the defensemarket, including changes in budget appropriations, procurement policies,political developments both domestically and abroad, and other factors. Anymaterial deterioration in the economic and environmental factors that impactthe defense industry could have a material adverse effect on our financialposition, results of operations, and cash flows.

 

Thereare certain federal laws that, while not specifically directed at us as acontractor, may affect our U.S. government contracts. The Anti-Deficiency Actis one of the major laws through which Congress exercises its constitutionalcontrol of the public purse. The Anti-Deficiency Act indirectly regulates howthe agency awards our contracts and pays our invoices. Accounts receivablerelated to DoD contracts approximated 92% of our accounts receivable as of March 31,2007.

 

Ouroperations also are subject to a broad range of environmental, health andsafety laws and regulations in the jurisdictions in which we operate. Theselaws and regulations impose increasingly stringent environmental, health andsafety protection standards and permitting requirements regarding, among otherthings, air emissions, wastewater storage, treatment and discharges, the useand handling of hazardous or toxic materials, waste disposal practices, and theremediation of environmental contamination and working conditions for our employees.Some environmental laws, such as the U.S. Comprehensive Environmental Response,Compensation, and Liability Act, also known as CERCLA or Superfund, andcomparable state laws, impose joint and several liability for the cost ofenvironmental remediation, natural resource damages, third-party claims, andother expenses, without regard to the fault or the legality of the originalconduct, on those persons who contributed to the release of a hazardoussubstance into the environment.

 

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**ForceProtection, Inc. and Subsidiaries**

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

 

Thecosts of complying with these laws and regulations, including participation inassessments and remediation of contaminated sites and installation of pollutioncontrol facilities could be significant. In addition, if we are foundresponsible for any hazardous contamination, we may have to pay expensive finesor penalties or perform costly clean-up. Even if we arecharged, and later found not responsible forsuch contamination and clean-up, the costs of defending the charges could besignificant.

 

*Sources and Supply of Materials*

 

Ourproducts incorporate engines, transmissions, axles and a number of othercomponents that are available only from the source or sources selected by theU.S. military. Identifying additional or replacement suppliers approved by theU.S. military for any of the numerous components used in our products may notbe accomplished quickly or on commercially reasonable terms, if at all. Inaddition to suppliers specified by the U.S. military, we use other suppliersfor certain components of our products, some of which are small businesses thatare not well capitalized. In the event that we are unable to obtain requiredcomponents from our existing suppliers, and if we are unable to mitigate theimpact or find an alternate supplier in a timely manner, it could have a materialadverse effect on our ability to produce our vehicles. Significantinterruptions in the supply of components may occur for a variety of reasons,including capacity constraints at our suppliers, competition for componentswith other manufacturers of vehicles, insolvency of a supplier, work stoppages atsuppliers and transportation interruptions, which could involve significantadditional costs and result in delays in production and product deliveries andcould have a material adverse effect on our results of operations. In addition,the unavailability or scarcity of certain components or raw material couldresult in increased costs, which could have a material adverse effect on ourfinancial position, results of operations, and cash flows.

 

Inaddition, some of our product components are manufactured in and supplied fromforeign countries. If import tariffs or taxes increase for any reason, our costof goods would increase. Our financial performance could be adversely affectedby changes in the political, social and economic environment in these foreigncountries. The role of the central and local governments in the economies ofthese foreign countries may be significant. Policies toward economicliberalization, and laws and policies affecting foreign companies, foreigninvestment, currency exchange rates and other matters could change, resultingin greater restrictions on our ability to do business with suppliers based inother countries. A foreign government could impose surcharges, increase tax rates,or revoke, terminate or suspend operating licenses without compensating us. Inaddition, the U.S. government could impose charges and taxes and could takeother actions that could make it more expensive or costly for us to obtaincomponents from sources in foreign countries or could prevent us from acquiringthose components. Also, other countries, from time to time, experienceinstances of civil unrest and hostilities and confrontations have occurredbetween the military, insurgent forces, and civilians. If for these or anyother reason, we are unable to obtain required components from foreign sourcesas and when required, or at all, it could have a material adverse effect on ourfinancial position, results of operations, and cash flows.

 

***Revenue Recognition***

 

Substantiallyall of our revenues from the U.S. government and certain of our revenues fromothers are earned pursuant to written contractual arrangements to design,develop, manufacture and/or modify blast- and ballistic-protected products andto provide related engineering and technical or other services according to thespecifications of the buyers (customers). These contracts are generallyfixed-price, cost-reimbursable, or time and material based. We recognizerevenues and earnings on fixed-production contracts, whose units are producedand delivered in a continuous or sequential process, based upon the unit’scontract selling price as we deliver it and the customer’s *formalacceptance* of the unit. We charge the actual unit cost to *Cost of sales.*

 

Wedefine *formal acceptance*under the U.S. government contract as takingplace when a representative of the U.S. government signs the United States Form DD250entitled “Material Inspection and Receiving Report.” Under the FederalAcquisition Regulation (“FAR”), a signed Form DD250 signifies contractualinspection and acceptance by the United States of the work performed by ForceProtection. A signed Form DD250 also is the event contractually obligatingthe U.S. government to pay us for the approved goods or services (subject toany “definitization” contractual adjustment(s), as discussed below).

 

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**ForceProtection, Inc. and Subsidiaries**

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

 

Inaccordance with standard industry practice, there is a representative from theUnited States Defense Contract Management Agency (“DCMA”) acting as acontractual representative of the U.S. government present at our facilities.This DCMA representative inspects each vehicle as it is delivered by us, andupon confirmation of the vehicle’s conformity with the contractualspecifications, the inspector or other contractually designated officialsigns the Form DD250 andformally accepts delivery of the vehicle. We only recognize revenues arisingfrom our U.S. government contracts upon execution of the Form DD250 by theDCMA inspector.

 

Undersome of our U.S. government contracts, we receive performance-based paymentsbased on completion of specific milestones stipulated under the contract (forexample, completion of manufacturing fabrication). We report these payments as *Advance payments on contracts* in our condensed consolidatedbalance sheets until the final delivery of the products and formal acceptanceby the U.S. government as evidenced by an executed Form DD250. Asdiscussed above, upon acceptance of the products and the execution of the Form DD250,we recognize the full sale price of the product as revenue.

 

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

 

Wenegotiate contracts with our customers that may include revenue arrangementswith multiple deliverables. We account for each deliverable under a contractseparately. Historically, we negotiate and sign contracts with our customersthat provide a contract amount and specific terms and conditions associatedwith each deliverable.

 

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

 

*Definitization / Due to the United States government*

 

Ourcontracts with the U.S. government are negotiated as either a “sole source” or “opencompetition” bid process. A sole source process is one in which we are the solebidder for the contract. An open competition could involve various bidders.Once a bid is accepted, the U.S. government usually expects work to commenceimmediately. An open competition results in a final agreed-upon contract priceto which the U.S. government has agreed. A sole source process results in anagreed-upon contract with the U.S. government, subject to an adjustment processat a later date, termed the “definitization process.” The definitizationprocess commences upon awarding of a contract, whereby the U.S. governmentundertakes a detailed review of our costs involved in the manufacturing anddelivery process. We then work with the U.S. government to determine anadequate and fair final contract price. We have the right to submit proposedprices, but they are subject to final review and approval by the contractingofficer, who may require that we use different prices. Although both partiesmake an effort to definitize the contract as quickly as possible, the processis time consuming and can take months to complete. In addition, if an agreementis not reached as to price by a specific date, the contracting officer mayunilaterally determine a price. During definitization, we are usually requiredto perform the contract work and make deliveries before the final contractprice has been established. For this reason, as part of the original award, webill the U.S. government at a predetermined price that is used for invoicingand accounting purposes pending final definitization.

 

Asa result of the adjustments related to the definitization process, we recognizea liability, *Due to United**States government*, and reduce gross sales to arrive at netsales. As of March 31, 2007 and December 31, 2006, our liability forcontracts subject to the definitization process has been estimated based uponan expected adjustment percentage.

 

*Sales Returns and Allowance for Doubtful Accounts*

 

Historically, we have notencountered sales returns or significant uncollectible accounts receivable andwe do not anticipate them in the near future. The majority of our accounts receivable are with the U. S. governmentand we do not maintain an allowance for doubtful accounts for those accountsdue to the credit-worthiness of the U. S.

 

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Table of Contents

** **

**Force Protection, Inc. and Subsidiaries**

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

 

government. We do maintain an allowance fordoubtful accounts for our non-governmental customers, which is based uponspecific identification.

 

***Cash and Cash Equivalents***

 

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

 

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

 

***Inventories***

 

We carry our inventories atthe lower of their cost or market value, reduced by reserves for excess andobsolete items. Cost is determined using the first-in, first-out (“FIFO”)method. Market is determined based on net realizable value. Appropriateconsideration is given to obsolescence, excess quantities, and other factors inevaluating net realizable value.

 

***Property and Equipment***

 

We report land, buildings,leasehold improvements, and machinery and equipment, including tooling andpattern equipment, at cost, net of depreciation and asset impairments, ifapplicable. We report assets under capital lease obligations at the lower oftheir fair value or the present value of the aggregate future minimum leasepayments as of the beginning of the lease term. We depreciate our assets usingthe straight-line method over the shorter of the lease term or the estimateduseful lives of the assets.

 

The ranges of estimateduseful lives are as follows:

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

 

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

 

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

 

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

 

9

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Table of Contents

 

**Force Protection, Inc. and Subsidiaries**

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

 

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

 

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

 

***Intangible Assets***

 

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

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

 

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

 

Equitymethod investments are recorded at original cost and adjusted periodically torecognize (i) our proportionate share of the investees’ net income orlosses after the date of investment; (ii) additional contributions madeand dividends or distributions received; and (iii) impairment lossesresulting from adjustments to net realizable value. However, for contracts notyet novated to an equity method investee we continue to recognize the revenuesand expenses from those contracts in our unaudited condensed consolidatedfinancial statements.

 

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

 

*Force Dynamics LLC*

 

Weentered into a joint venture with General Dynamics Land Systems Inc. (“GDLS”)on December 15, 2006 (“Workshare Agreement”) pursuant to which we and GDLSwould fulfill the obligations of the Mine Resistant Ambush Protected (“MRAP”)Competitive Contract (“MRAP Competitive Contract”).               GDLSmanufactures approximately 50% of the Cougar vehicles to be manufactured under,and performs approximately 50% of the life cycle support required by the MRAPCompetitive Contract, based on revenues. We formed a Delaware limited liabilitycompany, Force Dynamics, LLC (“Force Dynamics”), to govern the terms ofthe joint venture. However, the MRAP Competitive Contract was awarded to us andnot 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 ForceDynamics will assume under the novated contract. We will not fund and ForceDynamics will remain inactive until such time the MRAP Competitive Contract isassigned to Force Dynamics.

 

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Tableof Contents

 

**Force Protection, Inc. and Subsidiaries**

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

 

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

 

***Stock-Based Compensation***

 

ForceProtection does not have a formal stock option plan. However, we provided someof our employees stock-based compensation in the form of stock options andshares of our common stock. Prior to July 1, 2005, we accounted for thosestock-based compensation awards using the recognition and measurementprinciples of the intrinsic value method of Accounting Principles Board (“APB”)Opinion No. 25,*Accounting for StockIssued to Employees,* and its related interpretations, and appliedthe disclosure-only provisions of FASB Statement No. 123,*Accounting for Stock-Based Compensation*.Under the intrinsic value method, we recognized compensation expense on thedate of grant only if the current market price of the underlying stock on thegrant date exceeded the exercise price of the stock-based award.

 

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

 

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

 

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

 

***Warranty***

 

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

 

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** **

**Force Protection, Inc. and Subsidiaries**

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

 

***Litigation Reserve***

 

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

 

***Research and development***

 

Weincur costs in connection with research and development programs that areexpected to contribute to future earnings, and charge such costs against incomeas incurred. Research and development costs consist primarily of payroll andpersonnel related costs, contractor fees, infrastructure costs, andadministrative expenses directly related to research and development support.

 

***Income Taxes***

 

Weprovide for income taxes using the asset and liability method. This approachrecognizes the amount of federal, state, and local taxes payable or refundablefor the current year, as well as deferred tax assets and liabilities for thefuture tax consequence of events recognized in the consolidated financialstatements and income tax returns. Deferred income tax assets and liabilitiesare adjusted to recognize the effects of changes in tax laws or enacted taxrates. In addition, we establish reserves for tax contingencies in accordancewith FASB Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes.*

 

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

 

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

 

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

 

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

 

***Recent Accounting Pronouncements***

 

InMay 2008, the FASB issued FASB Statement No. 162, *The Hierarchy of Generally**Accepted Accounting Principles*. FASBStatement No. 162 defines the order in which accounting principles thatare generally accepted should be followed. FASB Statement No. 162 iseffective for fiscal years beginning after November 15, 2008. We have notyet commenced evaluating the potential impact, if any, of the adoption of FASBStatement No. 162 on our consolidated financial position, results ofoperations, and cash flows.

 

InApril 2008, the FASB issued Staff Position (“FSP”) No. FAS 142-3,*Determination of Useful Life of Intangible Assets,*(FSP FAS 142-3). FSP FAS 142-3 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*.FSP FAS 142-3 also requires expanded disclosure related to thedetermination of intangible asset useful lives. FSP FAS 142-3 is effectivefor fiscal years beginning after December 15, 2008. Earlier adoption isprohibited. We have not yet commenced evaluating the potential impact, if any,of the adoption of FSP FAS 142-3 on our consolidated financial position,results of operations and cash flows.

 

InMarch 2008, the FASB issued FASB Statement No. 161, *Disclosures about Derivative**Instruments and Hedging Activities*, an amendmentof FASB Statement No. 133, *Accountingfor Derivative Instruments and Hedging Activities*. FASB Statement No. 161changes the disclosure requirements for derivative instruments and hedgingactivities. Entities are required to provide enhanced disclosures about (i) howand why an entity uses derivative

 

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Table of Contents

 

**Force Protection, Inc. and Subsidiaries**

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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Table of Contents

 

**Force Protection, Inc. and Subsidiaries**

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

 

**2. Restatement andReclassification of Previously Issued Condensed Consolidated FinancialStatements**

 

OnFebruary 29, 2008, we concluded we needed to restate our previously issuedcondensed consolidated financial statements for the third quarter of 2007 anddelay the filing of our Annual Report on Form 10-K for the year ended December 31,2007. On August 26, 2008, we concluded we needed to restate our previouslyissued unaudited condensed consolidated financial statements for the first andsecond quarters of 2007. We have concluded that misstatements in thosepreviously issued financial statements were significant enough to warrant therestatement of the first, second, and third quarters of 2007. The misstatementsprimarily related to the recognition of revenue and liabilities in the properperiods and the determination of deferred incomes taxes. In connection with therestatement, certain presentation reclassifications have been made to conformto the current period presentation.

 

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

** **

**Summaryof increases (decreases) in Net income (unaudited)**

 
| ** **                                                            | ** ** | **March 31,  2007** | ** **                   |
|-----------------------------------------------------------------------|------------|--------------------------|------------------------------|
| **(in thousands, except per share amounts)** | ** ** | ** **               | **Three months  ended** | ** ** |
| Net income, as previously reported                                    |       | $                        | 2,513                        |   |
| Net adjustments                                                       |       |                     |                         |
| Revenue recognition                                                   |       | 4,666                    |                         |
| Liability recognition                                                 |       | (8,779                   | )                            |
| Inventory burden calculation                                          |       | 769                      |                         |
| Stock-based compensation                                              |       | (947                     | )                            |
| Income tax expense                                                    |       | 1,908                    |                         |
| Other                                                                 |       | (610                     | )                            |
| Effect of restatement adjustments                                     |       | (2,993                   | )                            |
| Net loss, restated                                                    |       | $                        | (480                         | ) |
|                                                                  |       |                     |                         |
| **Basic earning (loss) per common share:**                            |       |                     |                         |
| Net income, as previously reported                                    |       | $                        | 0.04                         |   |
| Net adjustments                                                       |       |                     |                         |
| Revenue recognition                                                   |       | 0.07                     |                         |
| Liability recognition                                                 |       | (0.14                    | )                            |
| Inventory burden calculation                                          |       | 0.01                     |                         |
| Stock-based compensation                                              |       | (0.01                    | )                            |
| Income tax expense                                                    |       | 0.03                     |                         |
| Other                                                                 |       | (0.01                    | )                            |
| Effect of restatement adjustments                                     |       | (0.05                    | )                            |
| Net loss, restated                                                    |       | $                        | (0.01                        | ) |
|                                                                  |       |                     |                         |
| **Diluted earning (loss) per common share:**                          |       |                     |                         |
| Net income, as previously reported                                    |       | $                        | 0.04                         |   |
| Net adjustments                                                       |       |                     |                         |
| Revenue recognition                                                   |       | 0.07                     |                         |
| Liability recognition                                                 |       | (0.14                    | )                            |
| Inventory burden calculation                                          |       | 0.01                     |                         |
| Stock based compensation                                              |       | (0.01                    | )                            |
| Income tax expense                                                    |       | 0.03                     |                         |
| Other                                                                 |       | (0.01                    | )                            |
| Effect of restatement adjustments                                     |       | (0.05                    | )                            |
| Net loss, restated                                                    |       | $                        | (0.01                        | ) |
|                                                                       |            |                          |                              |  |  |

 

*Revenuerecognition*

 

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

 

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Table of Contents

 

**Force Protection, Inc. and Subsidiaries**

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

 

*Inventoryburden calculation*

 

Wedid not properly determine our inventory for financial reporting purposes. Weinappropriately included costs that were not part of the production process andwe omitted other costs because they were not properly classified in cost ofsales.

 

*Liabilityrecognition*

 

Wedid not recognize our accounts payable in the appropriate quarters in 2007. Inaddition, we had overstated our warranty liability and understated ourroyalties payable.

 

*Stock-basedcompensation*

 

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

 

*Incometax expense*

 

Asa result of the adjustments, we had to revise our previously calculated incometax expense for each quarter in 2007. We used our annual effective rate of18.4% (See Note 12, *Income Taxes*).

 

*Other*

 

Wedid not properly account for prepaid insurance or the acquisition and dispositionof property and equipment in the appropriate quarter in 2007. In addition, wedid not account for certain of operating lease costs on a straight-line basisin each of the quarters in 2007.

 

***Balance Sheet Impact***

 

The following table sets forth the unauditedcondensed consolidated balance sheet information for the Company, showingpreviously reported amounts, adjustments, reclassifications and restated andreclassified amounts as of March 31, 2007 (in thousands):

*** ***
| ** **                  | ** ** | **As of March 31, 2007** | ** ** |
|-----------------------------|------------|----------------------------------------------|------------|
| ** **                  | ** ** | **As  Previously  Reported**                 | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** | **Reclassifications** | ** ** | **As Restated  and  Reclassified** | ** ** |
| **Assets**                  |       |                                         |       |   |   |   |   |   |   |   |   |
| **Current assets:**         |       |                                         |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents   |       | $                                            | 113,441    |   | $ | — |   | $ | 113,441 |   | $ | — |   | $ | 113,441 |   |
| Accounts receivable, net    |       | 43,791                                       |       | 9,703 |   | 53,494 |   | — |   | 53,494 |   |
| Inventories                 |       | 97,923                                       |       | 295 |   | 98,218 |   | — |   | 98,218 |   |
| Deferred income tax assets  |       | 7,762                                        |       | 4,931 |   | 12,693 |   | — |   | 12,693 |   |
| Other current assets        |       | 2,574                                        |       | 79 |   | 2,653 |   | — |   | 2,653 |   |
| Total current assets        |       | 265,491                                      |       | 15,008 |   | 280,499 |   | — |   | 280,499 |   |
| Property and equipment, net |       | 23,388                                       |       | 202 |   | 23,590 |   | — |   | 23,590 |   |
| Intangible assets, net      |       | 1,962                                        |       | (80 | ) | 1,882 |   | — |   | 1,882 |   |
| Deferred income tax assets  |       | 2,764                                        |       | — |   | 2,764 |   | — |   | 2,764 |   |
| **Total assets**            |       | $                                            | 293,605    |   | $ | 15,130 |   | $ | 308,735 |   | $ | — |   | $ | 308,735 |   |

 

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**Force Protection, Inc. and Subsidiaries**

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

 
| ** **                                          | ** ** | **As of March 31, 2007** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                          | ** ** | **As  Previously  Reported**                 | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** | **Reclassifications** | ** ** | **As Restated  and  Reclassified** | ** ** |
| **Liabilities and Shareholders’ Equity**       |       |                                         |       |   |   |   |   |   |   |   |   |
| **Current liabilities:**                            |       |                                         |       |   |   |   |   |   |   |   |   |
| Accounts payable                                    |       | $                                            | 54,811     |   | $ | 7,727 |   | $ | 62,538 |   | $ | — |   | $ | 62,538 |   |
| Due to United States government (a)                 |       | —                                       |       | 7,007 |   | 7,007 |   | — |   | 7,007 |   |
| Warranty reserve (b)                                |       | 1,850                                        |       | 703 |   | 2,553 |   | (2,553 | ) | — |   |
| Other current liabilities (b)                       |       | —                                       |       | — |   | — |   | 13,634 |   | 13,634 |   |
| Advance payments on contracts                       |       | 5,173                                        |       | (1,797 | ) | 3,376 |   | — |   | 3,376 |   |
| Other accrued liabilities (b)                       |       | 9,284                                        |       | 1,603 |   | 10,887 |   | (10,887 | ) | — |   |
| Current portion of long-term liabilities  (b)       |       | 204                                          |       | (10 | ) | 194 |   | (194 | ) | — |   |
| Total current liabilities                           |       | 71,322                                       |       | 15,233 |   | 86,555 |   | — |   | 86,555 |   |
| Other long-term liabilities                         |       | 463                                          |       | (17 | ) | 446 |   | — |   | 446 |   |
|                                                |       | 71,785                                       |       | 15,216 |   | 87,001 |   | — |   | 87,001 |   |
|                                                |       |                                         |       |   |   |   |   |   |   |   |   |
| **Shareholders’ equity:**                      |       |                                         |       |   |   |   |   |   |   |   |   |
| Common stock                                        |       | 68                                           |       | — |   | 68 |   | — |   | 68 |   |
| Additional paid-in capital                          |       | 250,705                                      |       | 4,692 |   | 255,397 |   | — |   | 255,397 |   |
| Accumulated deficit                                 |       | (28,953                                      | )          | (4,778 | ) | (33,731 | ) | — |   | (33,731 | ) |
| Total shareholders’ equity                     |       | 221,820                                      |       | (86 | ) | 221,734 |   | — |   | 221,734 |   |
| **Total liabilities and shareholders’ equity** |       | $                                            | 293,605    |   | $ | 15,130 |   | $ | 308,735 |   | $ | — |   | $ | 308,735 |   |

 

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(a) Adjustments related to thedefinitization process, which were previously reported as part of the allowancefor doubtful accounts, have been reclassified to report them as a liability, *Due to United States government.*

(b) Other accrued liabilities, warrantyreserve, and current portion of long-term liabilities have been reclassified to*Other current liabilities.*

 

***Statement of Operations Impact***

 

Thefollowing table presents unaudited condensed consolidated statement ofoperations information for the Company showing previously reported amounts,adjustments and restated amounts for the three months ended March 31, 2007(in thousands, except share data):

 
| ** **                                         | ** ** | **For the three months ended March 31, 2007** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **As previously  reported**                                                 | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| Net sales                                          |       | $                                                                                | 100,159    |   | $ | 4,666 |   | $ | 104,825 |   |
| Cost of sales                                      |       | 78,404                                                                           |       | 6,721 |   | 85,125 |   |
| Gross profit                                       |       | 21,755                                                                           |       | (2,055 | ) | 19,700 |   |
|                                               |       |                                                                             |       |   |   |   |   |
| General and administrative expenses                |       | 14,379                                                                           |       | 2,687 |   | 17,066 |   |
| Research and development expenses                  |       | 4,842                                                                            |       | 159 |   | 5,001 |   |
| Operating income (loss)                            |       | 2,534                                                                            |       | (4,901 | ) | (2,367 | ) |
|                                               |       |                                                                             |       |   |   |   |   |
| Other income, net                                  |       | 1,788                                                                            |       |   |   | 1,788 |   |
| Interest expense                                   |       | (9                                                                               | )          |   |   | (9 | ) |
| Income (loss) before income tax (expense)  benefit |       | 4,313                                                                            |       | (4,901 | ) | (588 | ) |
| Income tax (expense) benefit                       |       | (1,800                                                                           | )          | 1,908 |   | 108 |   |
| Net income (loss)                                  |       | $                                                                                | 2,513      |   | (2,993 | ) | (480 | ) |
| **Earnings (loss) per common share:**              |       |                                                                             |       |   |   |   |   |
| Basic                                              |       | $                                                                                | 0.04       |   | $ | (0.05 | ) | $ | (0.01 | ) |
| Diluted                                            |       | $                                                                                | 0.04       |   | $ | (0.05 | ) | $ | (0.01 | ) |

 

16

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Table of Contents

 

**Force Protection, Inc. and Subsidiaries**

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

 
| ** **                                      | ** ** | **For the three months ended March 31, 2007** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **As previously  reported**                                                 | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| **Weighted average common shares outstanding:** |       |                                                                             |       |   |   |   |   |
| Basic                                           |       | 67,636                                                                           |       |   |   | 67,632 |   |
| Diluted                                         |       | 68,005                                                                           |       |   |   | 67,632 |   |

 

***Statement of Cash Flows Impact***

 

Thefollowing table presents selected unaudited condensed consolidated statement ofcash flows information for the Company showing previously reported cash flows,adjustments and restated cash flows for the three months ended March 31,2007 (in thousands):

** **
| ** **                                        | ** ** | **For the three months ended March 31, 2007** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                        | ** ** | **As  previously  reported**                                                     | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
|                                              |       |                                                                             |       |   |   |   |   |
| Net cash used in operating activities             |       | $                                                                                | (27,169    | ) | $ | (2,187 | ) | $ | (29,356 | ) |
| Net cash used in investing activities             |       | (16,698                                                                          | )          | (122 | ) | (16,820 | ) |
| Net cash provided by financing activities         |       | 989                                                                              |       | 2,309 |   | 3,298 |   |
| Increase (decrease) in cash and cash  equivalents |       | (42,878                                                                          | )          | — |   | (42,878 | ) |
| Cash and cash equivalents at beginning of  year   |       | 156,319                                                                          |       | — |   | 156,319 |   |
| Cash and cash equivalents at end of period        |       | $                                                                                | 113,441    |   | $ | — |   | $ | 113,441 |   |

 

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

 

Accounts receivable consistsof the following (in thousands):

 
| ** **                            | ** ** | **As of  March 31, 2007  (Restated)** | ** ** | **As of  December 31,  2006** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|------------------------------------|------------|
| U. S. government                      |       | $                                               | 49,124     |                               | $          | 39,770 |   |
| Other accounts receivable             |       | 4,370                                           |       | 2,310                              |       |
|                                  |       | 53,494                                          |       | 42,080                             |       |
| Less: Allowance for doubtful accounts |       | —                                          |       | (45                                | )          |
| Accounts receivable, net              |       | $                                               | 53,494     |                               | $          | 42,035 |   |

 

Otheraccounts receivable primarily relate to the sale of excess raw materials tosuppliers and others. Any gain or loss on these sales is included in *Other income, net* in the accompanying consolidated statementof operations. As of March 31, 2007, our accounts receivable from the U.S.government includes $3.0 million of earned and unbilled accounts receivable.

 

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

 

Inventoriesconsist of the following (in thousands):

 
| ** **                | ** ** | **As of  March 31, 2007  (Restated)** | ** ** | **As of  December 31,  2006** | ** ** |
|---------------------------|------------|-------------------------------------------------|------------|------------------------------------|------------|
| Raw material and supplies |       | $                                               | 82,935     |                               | $          | 36,418 |   |
| Work in process           |       | 15,283                                          |       | 23,978                             |       |
| Inventories               |       | $                                               | 98,218     |                               | $          | 60,396 |   |

 

17

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Table of Contents

 

**Force Protection, Inc. and Subsidiaries**

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

 

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

 

Propertyand equipment consist of the following (in thousands):

 
| ** **                                            | ** ** | **As of  March 31, 2007  (Restated)** | ** ** | **As of  December 31,  2006** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------|------------|
| Land                                                  |       | $                                               | 3,420      |                               | $          | — |   |
| Building                                              |       | 2,502                                           |       | —                             |       |
| Leasehold improvements                                |       | 4,070                                           |       | 1,534                              |       |
| Machinery and equipment; including tooling  and molds |       | 5,155                                           |       | 3,795                              |       |
| Computer equipment and software                       |       | 3,540                                           |       | 2,757                              |       |
| Furniture and fixtures                                |       | 2,922                                           |       | 1,023                              |       |
| Demonstration vehicles                                |       | 1,096                                           |       | 1,096                              |       |
| Manuals                                               |       | 705                                             |       | 105                                |       |
| Vehicles                                              |       | 394                                             |       | 143                                |       |
|                                                  |       | 23,804                                          |       | 10,453                             |       |
| Less: Accumulated depreciation                        |       | (2,133                                          | )          | (1,489                             | )          |
|                                                  |       | 21,671                                          |       | 8,964                              |       |
| Construction in progress                              |       | 1,919                                           |       | —                             |       |
| Property and equipment, net                           |       | $                                               | 23,590     |                               | $          | 8,964 |   |

 

Depreciation expense for the three monthsended March 31, 2007 and March 31, 2006 was $0.6 million and $0.2million, respectively.

 

***SignificantAsset Acquisitions***

 

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

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

 

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

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

 

18

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Table ofContents

 

**Force Protection, Inc. and Subsidiaries**

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

** **

***Leases***

 

We lease certainbuildings under non-cancelable operating leases expiring on June 30, 2009;with four separate five-year renewal options which must be exercised six monthsprior to the expiration of the lease term. Our other operating leases generallyhave 3- to 5-year terms, with one or more renewal options, with terms to benegotiated at the time of renewal. Contingent rents are included in rentexpense in the year incurred. The excess of cumulative rent expense (recognizedon the straight-line basis) over cumulative rent payments made on leases with fixedescalation terms is recognized as straight-line rental accrual and is includedin *Othercurrent  liabilities* in theaccompanying condensed consolidated balance sheets, as follows (in thousands):

 
| ** **                   | ** ** | **As of**                                | ** ** | **As of**                   | ** ** |
|------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|
| ** **                   | ** ** | **March 31, 2007  (Restated)** | ** ** | **December 31,  2006** | ** ** |
| Straight-line rental accrual |       | $                                        | 316        |                        | $          | — |   |
|                              |            |                                          |            |                             |            |  |  |

 

***Construction in Progress***

 

Amounts in constructionin progress as of March 31, 2007 relate primarily to the construction ofan assembly line at our Ladson, South Carolina manufacturing plant.

 

**6.     IntangibleAssets**

 

Intangibleassets consist of the following as of March 31, 2007 (in thousands):

 
| ** **            | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization  (Restated)** | ** ** | **Net  (Restated)** | ** ** |
|-----------------------|------------|-----------------------------|------------|-------------------------------------------|------------|---------------------|------------|
| Licenses              |       | $                           | 800        |                                      | $          | 22                  |       | $ | 778 |   |
| Non-compete agreement |       | 540                         |       | 11                                        |       | 529                 |       |
| Customer base         |       | 200                         |       | 8                                         |       | 192                 |       |
| Special expertise     |       | 400                         |       | 17                                        |       | 383                 |       |
| Total                 |       | $                           | 1,940      |                                      | $          | 58                  |       | $ | 1,882 |   |

 

As discussed in Note 5, *Property and Equipment,* we acquired the above intangibleassets in March 2007 in connection with the purchase of a research and developmenttesting facility located in Edgefield, South Carolina.

 

Amortization expense forintangible assets for the three months ended March 31, 2007 was $0.1million.

 

**7.     OtherCurrent Liabilities**

 

Othercurrent liabilities consist of the following (in thousands):

 
| ** **                                     | ** ** | **As of**                            | ** ** | ** **                          | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                     | ** ** | **March 31,  2007  (Restated)** | ** ** | **As of   December 31,  2006** | ** ** |
| Current portion of other long-term liabilities |       | $                                    | 194        |                                | $          | 72 |   |
| Compensation and benefits                      |       | 3,995                                |       | 1,223                               |       |
| Warranty reserves                              |       | 2,553                                |       | 1,850                               |       |
| Income tax payable                             |       | 122                                  |       | —                              |       |
| Vehicle fee payable                            |       | 1,578                                |       | 1,139                               |       |
| Liquidated damages settlement                  |       | 4,876                                |       | 607                                 |       |
| Straight-line rent accrual                     |       | 316                                  |       | —                              |       |
| Other current liabilities                      |       | $                                    | 13,634     |                                | $          | 4,891 |   |

 

19

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Table ofContents

 

**Force Protection, Inc. and Subsidiaries**

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

 

***Compensation and Benefits — Gain Share Program***

 

The compensation andbenefits accrued liabilities account balance includes wages and benefits thatwere earned at the end of the applicable quarter, and not yet paid.Additionally, the compensation and benefits account balance may include anaccrued liability amount attributable to our Gain Sharing Program for quartersin which gain sharing was approved but not paid. The Gain Sharing Program wasauthorized by the Board of Directors on March 1, 2007 and provides foradditional compensation that is paid quarterly to employees during periods in whichwe earn net income. Under the gain share program, we distribute ten percent ofeach quarter’s net income equally to all employees.

 

***Warranty Reserves***

 

Warrantyreserves consist of the following (in thousands):

 
| ** **                      | ** ** | **As of**                            | ** ** | ** **                          | ** ** |
|---------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                      | ** ** | **March  31, 2007  (Restated)** | ** ** | **As of   December 31,  2006** | ** ** |
| Balance at beginning of year    |       | $                                    | 1,850      |                                | $          | 1,686 |   |
| Charges to expense              |       | 733                                  |       | 164                                 |       |
| Costs paid or otherwise settled |       | (30                                  | )          | —                              |       |
| Balance at end of period        |       | $                                    | 2,553      |                                | $          | 1,850 |   |

 

***Vehicle Fee Payable***

 

We are party to twolong-term intellectual property agreements pursuant to which we have the rightto use certain intellectual property technology relating to blast andballistic-protected vehicles. One agreement is with the CSIR Defencetek (“CSIR”),a division of the Council for Scientific and Industrial Research, a statutorycouncil established in accordance with the Laws of the Republic of SouthAfrica. The other is with Mechem, a division of Denel Pty Ltd, a companyestablished under the Laws of the Republic of South Africa. Under theseagreements, we pay a per-vehicle royalty fee in exchange for the exclusivetransfer to us of certain technology.

 

The agreement with CSIRprovides for the license, on an exclusive basis, by CSIR to us of certaintechnical, scientific and commercial intellectual property rights pertaining tothe development of our Cougar and Buffalo vehicles.  Under our agreementwith CSIR, we pay CSIR a fee for each vehicle sold and/or manufactured by ususing the licensed intellectual property during the term of the agreement,including vehicles manufactured by our subcontractors.  We are not obligated to pay a fee in respectof our Cheetah vehicle, and the manufacture of the Cheetah vehicles is notdependent upon the technology granted to us under the agreement.  The initial term of the agreement was March 8,2002 through March 7, 2007, and the term of the renewed agreement is March 8,2007 through March 7, 2012. We have no right to extend the agreement afterMarch 2012 and, if the agreement expires without renewal, after such dateCSIR may grant a license to the licensed intellectual property  to other parties.  However, even upon expiration of theagreement we will have the ability to manufacture and deliver the Cougar andBuffalo vehicles.

 

The agreement with Mechemprovides for the provision, on an exclusive basis, by Mechem to us of certaintechnical, scientific and commercial intellectual property rights pertaining tothe development of our Cougar and Buffalo vehicles. Under our agreementwith Mechem, we pay Mechem a fee for each vehicle sold and/or manufactured byus using the licensed intellectual property during the term of the agreement,including vehicles manufactured by our subcontractors.  We are not obligated to pay a fee withrespect to our Cheetah vehicle, and the manufacture of the Cheetah vehicle isnot dependent upon the technology granted to us under the agreement withMechem. Our original agreement with Mechem was effective October 15, 2001and expired October 15, 2006.  Ourcurrent agreement with Mechem, which we entered into on September 13,2006, expires on September 12, 2011. We have no right to extend the agreement after September 2011 and,if the agreement expires without renewal, after such date Mechem may licensethe licensed intellectual property to other parties.  However, even upon expiration of theagreement, we will have the ability to manufacture and deliver the Cougar andBuffalo vehicles.

 

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Tableof Contents

 

**Force Protection, Inc. and Subsidiaries**

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

 

***Liquidated Damages Settlement***

 

On December 20,2006, we completed a private placement of 13 million shares of our common stockto institutional investors at $11.75 per share, resulting in gross proceeds of$152.8 million. The proceeds, net of commissions, were $146.6 million. Per theSecurities Purchase Agreement, we agreed to file a registration statement toregister all 13 million shares of common stock for resale and distributionunder the Securities Act of 1933, as amended, within 30 calendar daysthereafter (January 19, 2007) and cause the registration statement to bedeclared effective by the SEC no later than 120 calendar days thereafter (April 19,2007). If the registration statement registering these shares was not declaredeffective on or before the applicable date, then we were required to deliver toeach purchaser, as liquidated damages, an amount equal to one and one thirdpercent (1 1/3%) for each 30 days (or such lesser pro-rata amount for anyperiod of less than 30 days) of the total purchase price of the securitiespurchased and still held by such purchaser pursuant to the Securities PurchaseAgreement on the first day of each 30 day or shorter period for whichliquidated damages were calculable. The registration statement for the sharesissued became effective July 26, 2007. On October 15, 2007, we fileda prospectus supplement with respect to the registration statement.  Liquidated damage expense for the threemonths ended March 31, 2007 was $4.9 million and is included in *General and administrative expenses* in the accompanying unauditedcondensed consolidated statements of operations.

 

**8.     Advancepayments on contracts**

 

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

 
| ** **                                              | ** ** | **As of   March 31,  2007  (Restated)** | ** ** | **As of  December 31,  2006** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------|------------|
|                                                    |       |                                         |       |                               |       |
| Iraqi Light Armored Vehicles (“ILAV”)         |       | $                                            | 3,242      |                               | 4,260      |   |
| Mastiff Protected Patrol Vehicles (“Mastiff”) |       | 134                                          |       | 7,488                              |       |
| Other                                                   |       | —                                       |       | 1,076                              |       |
| Advance payments on contracts                           |       | $                                            | 3,376      |                               | $          | 12,824 |   |
|                                                         |            |                                              |            |                                    |            |  |  |

 

**9.     OtherLong-term Liabilities**

 

Otherlong-term liabilities consist of the follow items (in thousands):

 
| ** **                                                      | ** ** | **As of   March 31,  2007  (Restated)** | ** ** | **As of  December 31,  2006** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------|------------|
| Non-compete agreement                                           |       | $                                            | 417        |                               | $          | — |   |
| Equipment note payable                                          |       | 223                                          |       | 240                                |       |
|                                                            |       | 640                                          |       | 240                                |       |
| Less:**Current portion (included in*Other current liabilities*) |       | (194                                         | )          | (72                                | )          |
| Other long-term liabilities                                     |       | $                                            | 446        |                               | $          | 168 |   |

 

As discussed above in Note5, *Property and Equipment,* we purchased theresearch and developmental testing facility of NEWTEC Services Group, Inc.,located near Edgefield, South Carolina, for $5,500,000 ($5,050,000 in cash and$450,000 note payable).  We discountedthe note using an implied interest rate of 7.25%.  The note is payable in annual of installmentsof $150,000 on January 1, 2008, 2009, and 2010.

 

In October 2006, weacquired capital equipment valued at $234,875 using a note with impliedinterest of 11.25% from the supplier with a repayment based on usage ofmaterials used with the equipment. It is expected that based on usage estimatesthe note payments in 2008 and 2009 will be $92,608 and $13,838, respectively.

 

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Table ofContents

 

**Force Protection, Inc. and Subsidiaries**

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

 

In April 2007, weacquired capital equipment valued at $52,893 at an interest rate of 8.15% fromthe supplier with repayments based on a 36 month term.

 

**10.  Shareholders’Equity**

 

***Authorization of Shares***

 

We have the authority toissue 310 million shares, in aggregate, consisting of 300 million shares ofcommon stock and 10 million shares of preferred stock, of which 1,600 have beendesignated “Series A,” 25 of which have been designated as “Series B,”150 of which have been designated as “Series C” and 20,000 of which havebeen designated as “Series D.” By shareholder’s resolution effective January 1,2005, all classes of stock were declared to have a par value of $0.001 pershare.

 

***Common Stock Transactions***

 

During the three monthsended March 31, 2007, employees exercised stock options to purchase1,198,681 shares of our common stock valued at $1.0 million. We also issued4,348 shares of our common stock related to 2006 employee stock optionexercises that were identified as shares to be issued in shareholders’ equityas of December 31, 2006.

 

We cancelled 27,700 sharesrelating to the December 2006 Private Investment in Public Equity (“PIPE”)offering.

 

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

 

We issued 50,000 sharesof common stock granted in June 2006 to an employee which vested and wereissued on January 1, 2007.

 

**11.  StockBased Compensation**

 

*StockOptions*

 

On July 1, 2005, weadopted FASB Statement No. 123(R) using the modified prospectivemethod. The modified prospective method requires companies to recordcompensation cost beginning with the effective date based on the requirementsof FASB Statement No. 123(R) for all share-based payments grantedafter the effective date. All awards granted to employees prior to theeffective date of FASB Statement No. 123(R) that remain unvested atthe adoption date will continue to be expensed over the remaining serviceperiod.

 

We did not grant stockoptions during the three months ended March 31, 2007.  We used the Black-Scholes valuation model todetermine the fair value options granted during the year ended December 31,2006. The Black-Scholes option-pricing model was developed for use inestimating the fair value of traded options which have no vesting restrictionsand are fully transferable. In addition, option-pricing models require theinput of highly subjective assumptions, including the expected stock pricevolatility. Because our trading history is shorter than the expected life ofthe options, we used historical stock price volatility data from comparablecompanies to supplement our own historical volatility to determine expectedvolatility assumptions. We do not pay a dividend, and we do not include adividend payment as part of our pricing model. Risk-free interest rates arebased on U.S. Treasury Strip yields, compounded daily, consistent with theexpected lives of the options. Because we do not have a sufficient history ofoption exercise or cancellation, we estimated the expected life of the optionsto be two years, which for a majority of the options was the midway point.  Under the Black-Scholes option-pricing model,the weighted- average fair value per share of employee stock options grantedduring the year ended December 31, 2006 was $0.03, the last year optionswere granted.

 

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Tableof Contents

 

**Force Protection, Inc. and Subsidiaries**

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

 

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

 
| ** **                                            | ** ** | **For the three months ended March 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2007  (Restated)**                                                   | ** ** | **2006** | ** ** |
| Expected volatility                                   |       | —                                                                 |       | 45.82%  - 70.31% |   |
| Risk-free interest rate                               |       | —                                                                 |       | 4.40%  - 4.97% |   |
| Expected forfeiture rate                              |       | —                                                                 |       | 5.00% |   |
| Dividend yield                                        |       | —                                                                 |       | —% |   |
| Stock price on date of grants                         |       | —                                                                 |       | $0.77-$7.48 |   |
| Expected option terms (in years)                      |       | —                                                                 |       | 2 |   |
| Expected duration from grant to expiration (in years) |       | —                                                                 |       | 4  and 5 |   |
| Option vesting term (in years)                        |       | —                                                                 |       | 5 |   |

 

The following summarizes stock option activity for the three monthsended March 31, 2007:

 
| ** **                                             | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|--------------------------------------------------------|------------|------------|------------|--------------------------------------------|------------|
| Options outstanding at December 31, 2006          |       | 1,959,665  |       | $                                          | 2.63       |   |
| Granted                                                |       | —     |       | —                                     |       |
| Exercised                                              |       | (1,194,333 | )          | $                                          | 0.85       |   |
| Forfeited/expired                                      |       | —     |       | —                                     |       |
| Options outstanding at March 31, 2007             |       | 765,332    |       | $                                          | 5.42       |   |
| Options exercisable at March 31, 2007             |       | $          | 390,107    |                                       | $          | 3.43 |   |
| Options available for grant at March 31, 2007 (a) |       | —     |       | —                                     |       |
|                                                        |            |            |            |                                            |            |  |  |

 

----

(a) Force Protection did not have aformal stock option plan as of March 31, 2007.

 

The followingtable summarizes information about stock options outstanding and exercisable atMarch 31, 2007.

 
| **Options Outstanding**            | ** ** | **Options Exercisable** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Number  Outstanding**      | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $1.50-$7.48                             |       | 765,332                      |       | 3.4 |   | $ | 5.42 |   | 390,107 |   | $ | 3.43 |   |
|                                         |            |                              |            |  |  |  |  |  |  |  |  |  |  |

 

*StockGrants*

 

The following tablesummarizes supplemental information about non-vested stock grants activity forthe three months ended March 31, 2007.

 
| ** **                               | ** ** | **Number of  Shares** | ** ** | **Weighted  average per  share grant  price** | ** ** |
|------------------------------------------|------------|----------------------------|------------|---------------------------------------------------------|------------|
| Outstanding as of December 31, 2006 |       | 191,026                    |       | $                                                       | 5.48       |   |
| Shares granted                           |       | —                     |       | —                                                  |       |
| Shares vested                            |       | (50,000                    | )          | $                                                       | 6.45       |   |
| Outstanding as of March 31, 2007    |       | 141,026                    |       | $                                                       | 5.14       |   |

 

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Tableof Contents

 

**Force Protection, Inc. and Subsidiaries**

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

 

*Stock-basedcompensation*

 

Stock-based compensationincludes the expense associated with both stock options granted to employeesand stock grants issued to employees and is recognized in *General andadministrative expense*s in the condensed  consolidated statement of operations asfollows (in thousands):

 
| ** **                     | ** ** | **For the three months ended   March 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2007  (Restated)**                                                     | ** ** | **2006** | ** ** |
| Stock options                  |       | $                                                                        | 971        |   | $ | 102 |   |
| Stock grants                   |       | 101                                                                      |       | 0 |   |
| Total stock based compensation |       | $                                                                        | 1,072      |   | $ | 102 |   |

 

**12.  IncomeTaxes**

 

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 fiscal year, adjusted for theimpact of any discrete events, which are reported in the period in which theyoccur. Each quarter, we re-evaluate our estimated tax expense for the year andmake adjustments for changes in the estimated tax rate. Additionally, weevaluate the 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.

 

The*Income tax benefit* for the three ended March 31,2007 was based on the estimated effective tax rates applicable for the fiscalyear ended December 31, 2007, after considering items specifically relatedto the interim period. The *Income taxbenefit*for the three-month period ended March 31, 2006 wasbased on the estimated effective tax rates applicable for the fiscal year endedDecember 31, 2006, after considering items specifically related to theinterim period.

 

Force Protection is subjectto U.S. federal, state, and local income taxes. *Loss before income tax benefit*is as follows (in thousands):

 
| ** **                     | ** ** | **For the three months ended  March 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2007  (Restated)**                                               | ** ** | **2006** | ** ** |
| Loss before income tax benefit |       | $                                                                  | (588       | ) | $ | (767 | ) |
|                                |            |                                                                    |            |  |  |  |  |

 

A reconciliation ofstatutory federal income tax benefit rate to the actual income tax benefit rateis as follows:

 
| ** **                                        | ** ** | **For the three months ended  March 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                        | ** ** | **2007  (Restated)**                                               | ** ** | **2006** | ** ** |
| Income tax benefit at statutory rate              |       | 35.00                                                              |  %    | 35.00 |  % |
| (Increase) decrease in tax rate resulting from:   |       |                                                               |       |   |   |
| State income taxes, net of federal tax benefit    |       | 4.70                                                               |  %    | 3.25 |  % |
| (Increase) decrease in valuation allowance        |       | —                                                             |  %    | (38.25 | )% |
| Reversal of other tax accruals no longer required |       | (8.21                                                              | )%         | — |  % |
| Research and development credit                   |       | (11.63                                                             | )%         | — |  % |
| Other                                             |       | (2.55                                                              | )%         | — |  % |
| Nondeductible items                               |       | 1.05                                                               |  %    | — |  % |
| Effective income tax benefit rate                 |       | 18.36                                                              |  %    | — |  % |

 

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**Force Protection, Inc. and Subsidiaries**

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

 

The effective tax rate isthe provision for income taxes as a percent of income before income taxes.  The 2007 effective rate is lower than theexpected federal statutory rate of 35 % primarily due to the state incometaxes, reversal of other tax accruals no longer required, research anddevelopment credits, and certain nondeductible items at the statutory rate.

 

As a result of theadoption of FASB Statement No. 123(R), our deferred tax assets at March 31,2007 and December 31, 2006 do not include excess tax benefits from stockoption exercises. Shareholders’ equity will be increased if these excess taxbenefits are ultimately realized.

 

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

 

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 a result of applying the guidance in FASBInterpretation No. 48.

 

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

 

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

 
| ** **                                                          | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2007  (Restated)**                                 | ** ** | **2006** | ** ** |
| **Numerator – Basic and Diluted:**                             |       |                                                 |       |   |   |
| Net loss                                                            |       | $                                                    | (480       | ) | $ | (767 | ) |
| Less: Accretion of Series D 6% convertible preferred stock     |       | —                                               |       | (484 | ) |
| Less: Preferred dividends                                           |       | —                                               |       | (162 | ) |
| Loss available for common shareholders – basic and diluted:    |       | $                                                    | (480       | ) | $ | (1,413 | ) |
| **Denominator:**                                                    |       |                                                 |       |   |   |
| Weighted average common shares outstanding – basic and diluted |       | 67,631,600                                           |       | 37,451,698 |   |
| **Basic and diluted loss per common share:**                        |       |                                                 |       |   |   |
| Loss available for common shareholders – basic and diluted     |       | $                                                    | (0.01      | ) | $ | (0.04 | ) |

 

The calculation of basicloss per common share is based on the weighted-average number of our commonshares outstanding during the applicable period. The calculation for dilutedloss per common share recognizes the effect of all dilutive potential commonshares that were outstanding during the respective periods, unless their impactwould be antidilutive.  We use thetreasury stock method to calculate the dilutive effect of stock options andother common stock equivalents (potentially dilutive shares). Diluted earningsper common share recognizes the dilution that would occur if securities orother contracts to issue common stock were exercised or converted into commonstock. These potentially dilutive shares include: (1) Series D 6%Convertible Preferred Stock, (2) warrants, 

 

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** **

**Force Protection, Inc. and Subsidiaries**

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

 

(3) stock options,and (4) stock grants. We excluded 468,390 and 9,229,931 common stockequivalents for the three months ended March 31, 2007 and 2006,respectively, from the calculation of diluted loss per share because they wereanti-dilutive.

 

**14.  RelatedParty Transactions**

 

Our former ChiefExecutive Officer, Mr. Gordon McGilton, was a principal of APT Leadership,a consulting firm we hired to provide various business consulting services,training seminars and certain business software. APT Leadership billed ForceProtection $0.2 million and $0.1 million for the three months ended March 31,2007 and 2006, respectively.  Mr. McGiltondisclosed to the board of directors each year that he did not receive anydividends, distributions or other compensation from APT Leadership at any timewhile an employee of the Company.  Further, Mr. McGilton disclosed that as of December 31,2007 he transferred his interest in APT Leadership to the other owner for $1 inconsideration.  In addition, as part ofthe process to determine our income tax expense for the year ended December 31,2007, we discovered in August 2008, that we did not withhold the properamount of federal income taxes for Mr. McGilton in connection with hisexercise of stock options in January 2007 and, as a result, Mr. McGiltoneffectively owed us $315,085 as of March 31, 2007, which is included in *Other current assets* in the accompanying unaudited condensedconsolidated balance sheets. Mr. McGilton repaid this amount on September 11,2008.

 

On February 18,2006, we entered into a Modification and Assignment Agreement with LongviewFund , LP and Longview Equity Fund, LP (collectively, “Longview”) pursuant towhich we paid $1.3 million against the principal balance of the securedpromissory notes (“Notes”) and extended the maturity date of the Notes for anadditional 60 days. In addition, we consented to the assignment of $2.5 millionof the Notes to Fort Ashford Funds LLC (“Fort Ashford”). Mr. FrankKavanaugh, a former director of Force Protection, is the principal owner ofFort Ashford and at such time was a substantial shareholder of our commonstock. Mr. Kavanaugh’s relationship to Fort Ashford Funds LLC was fully disclosedto us and Mr. Kavanaugh did not participate in the negotiations ordecision process with respect to the Modification and Assignment Agreement. Wepaid $87,510 to Longview and $50,000 to Fort Ashford in cash as compensationfor the extension of the maturity dates of the Notes.

 

On April 20, 2006,we paid $1.0 million against the principal balance of the Notes and extendedthe maturity date on the Notes and the Note with Fort Ashford for an additional60 days, through June 20, 2006. We paid $55,000 to Longview and $50,000 toFort Ashford in cash as compensation for this extension.

 

On June 20, 2006, wepaid off the principal balance and all applicable accrued interest under theNotes. Additionally, we extended the maturity date of the Ashford Note for anadditional 30 days, through July 20, 2006. We paid $50,000 to FortAshford in cash as compensation for the extension of the Ashford Note.

 

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

 

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

 

***Financing Commitments-Credit Facility***

 

On July 20,2007, we entered into a revolving credit agreement with Wachovia Bank.Borrowings under the credit agreement bear interest at a floating rate per annumequal to the one-month London Interbank Offered Rate (“LIBOR”) market indexplus 2.0%. The original amount of the agreement was $50 million and allamounts payable under this 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 to $30 million and to extend the maturity ofthe credit agreement to October 31, 2008. Until October 31, 2008, wemay borrow, repay, and re-borrow amounts under the terms of the note as long asthe total principal balance outstanding does not to exceed $30 million.Amounts payable under the credit agreement are secured by a pledge of all ofour personal property and fixtures. There are no assurances that Wachovia willextend the terms of this financing agreement beyond October 31, 2008.

 

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** **

**Force Protection, Inc. and Subsidiaries**

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

 

***Legal Proceedings***

 

We are subject tovarious claims arising in the ordinary course of business, and are parties tovarious legal proceedings that constitute ordinary, routine litigation incidentalto our 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 andcertain of our former and current board members or officers in the UnitedStates District Court for the District of South Carolina Charleston Division onbehalf of 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 SecuritiesExchange Act of 1934 and made false or misleading public statements and/oromissions concerning our business, internal controls, and financial results.The plaintiffs assert that as a result of the defendants’ allegedly wrongfulacts and omissions, members of the proposed class have suffered significantlosses and damages. The individual class action lawsuits were consolidated on June 10,2008 under caption ‘In Re Force Protection, Inc. Securities Litigation,Action No. 2: 08-cv-845-CWH.’ On June 20, 2008, a group ofinvestors consisting of the Laborers’ Annuity and Benefit System of Chicago,Gary Trautman, David J. Jagar, Bhadra Shah, Panteli Poulikakos, GeorgePoulikakos, and Niki Poulikakos was appointed lead plaintiff.

 

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 for the Company. The Company hasbeen named a nominal defendant in each derivative lawsuit. Four (4) derivativelawsuits are pending in the United States District Court for the District ofSouth Carolina Charleston Division; two (2) derivative lawsuits arepending in Charleston, South Carolina Circuit Court; and one (1) derivativelawsuit is pending in Clark County, Nevada District Court. The plaintiffshareholders’ allegations include and are not limited to allegations of breachof fiduciary duties, abuse of control, gross mismanagement, and waste ofcorporate assets, unjust enrichment in connection with the Company’s publicstatements regarding its operations and financial results, internal controls,compensation of certain defendants, and alleged insider stock sales by certaindefendants.

 

Other disputes

 

On August 21,2007, we filed suit against Protected Vehicles, Inc. (“PVI”) and GarthBarrett, Thomas Thebes, and Paul Palmer, three of PVI’s employees (all of whomwere former employees of Force Protection) in the United States District Courtfor the 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. Defendants filedan amended counterclaim withdrawing three (3) of their causes of action,and have recently indicated they intend to file a second amendedcounterclaim. On January 18, 2008, the district court entered an orderstaying the litigation in light of an involuntary bankruptcy petition filed on January 15,2008, in the United States Bankruptcy Court for the District of South Carolinawith respect to PVI. On February 5, 2008, PVI filed a voluntaryChapter 7 petition. On March 28, 2008, the Chapter 7 proceedingwas converted to a Chapter 11 proceeding. On June 20, 2008, theBankruptcy Court remanded the litigation back to the District Court, and on September 3,2008, the bulk of PVI’s assets, including certain rights and liabilities withrespect to our suit against it, 

 

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**Force Protection, Inc. and Subsidiaries**

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

 

were sold to a third party. On July 31, 2008, wesettled our claim against Paul Palmer. Our claims against PVI and the thirdparty (who has now been added as a defendant in the suit) are currently set tobe tried in early 2009; the counterclaims against us have not been set fortrial.

 

From February 2007through April 2008, we received a total of 68 complaints from current andformer 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.

 

We are subject toa number of claims relating to our common shares. In one, certain investorshave issued to Force Protection a demand for 481,492 shares of our common stockin connection with the investors’ conversion of their shares of our preferredstock and other damages relating to warrants the investors allege were grantedbut never distributed to them. In addition, on November 13, 2007, we wereserved with a lawsuit filed by former senior employee Murray Hammick againstForce Protection Industries, Inc. and former Force Protection officersGordon McGilton, Scott Ervin, and Frank Kavanaugh. The complaint, filed in theCharleston (South Carolina) County Court of Common Pleas, alleges, among otherthings, that Mr. Hammick is owed options to acquire approximately 83,000shares of our common stock and certain back wages and sets forth claims for, *inter alia*, breach of contract, violation of the SouthCarolina Payment of Wages Act, retaliatory wrongful discharge, and defamation.We answered the complaint on January 25, 2008.

 

During the periodfrom August 1, 2007 to November 23, 2007, Force Protection Industries, Inc.entered into three IT hosting and consulting agreements. A series of disputesarose from these contracts. Force Protection, Inc. has entered intosettlement agreements for these claims totaling $2,275,362.

 

In early November 2007,the Department of State, Directorate of Defense Trade Controls (“DDTC”) advisedus of a site visit planned for December 2007. In advance of that sitevisit, the DDTC requested, and we provided, certain documents and materialsrelating to our policies and procedures concerning company activity regulatedby the International Traffic in Arms Regulations (“ITAR”). The site visit tookplace in mid-December 2007 and included a meeting with certain of ourofficers and interviews of certain of our employees involved with security,training, business development, human resources, information technology,empowered officials, engineering, contracts, manufacturing, program management,shipping, supply chain integrated logistics support and quality. Following thesite visit, we received a letter from the DDTC regarding certain weaknesses itidentified in our compliance program with respect to training, treatment offoreign visitors, overseas travel by personnel, export manuals, identifyingdata regarding ITAR hardware and services, and license tracking and requestingcertain specific measures be undertaken. We are in the process of addressingthose specific measures.

 

In early December 2007,we submitted a voluntary disclosure to DDTC regarding the shipment of technicalmanuals, Cheetah spare parts, armored vest plates, parts not listed on ourlicense and transfers of technical data to and by our vendors without properauthorization or identification of the appropriate exemption. On January 22,2008, the DDTC requested additional information and documentation for eachspecific shipment of these items within sixty days. In addition, the DDTCdirected us to undertake certain specific measures, including, but not limitedto, that we hire a full time senior export control compliance officer,implement certain procedures, conduct comprehensive ITAR training, immediatelyconduct a comprehensive export compliance audit, and institute a plan toconduct periodic audits of the export compliance program. On February 11,2008, we provided DDTC with the job description for the Director of ExportControls, draft Export Controls Manual, ITAR presentation provided in neworientation training and the attendance logs for annual ITAR training providedto executives and other employees having ITAR responsibilities. On March 11,2008, we provided DDTC with our draft audit plan and on June 2, 2008, weprovide the final audit report. On July 14, 2008, we provided DDTC withsupplemental information to our previous voluntary disclosure and otherinformation identified in the audit. We have developed and implemented anExport Control Policies and Procedures Manual and ITAR Product ClassificationGuide, established an Export Control Council, and revised our TechnologyControl Plan and Code of Conduct and Ethics. As a result of the exportcompliance 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.

 

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** **

**Force Protection, Inc. and Subsidiaries**

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

 

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

 

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

 

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

 

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

 

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

 

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

 

Management’s Discussion and Analysis of Financial Condition and Resultsof Operations (“MD&A”) has been restated to reflect certain adjustments toour unaudited condensed consolidated financial information previously reportedin our Quarterly Report on Form 10-Q/A for the period ended March 31,2007, filed with the SEC on May 15, 2007, as amended July 19,2007.  See “Restatement” below foradditional information.  MD&A isdesigned to provide information that is supplemental to, and should be readtogether with, our unaudited condensed consolidated financial statements andthe accompanying notes contained in this Quarterly Report on Form 10-Q/AAmendment No. 2 and because of the timing of the filing of this QuarterlyReport on Form 10-Q/A Amendment No. 2, the Annual Report on Form 10-Kfor the year ended December 31, 2007 filed on September 15, 2008,which included restated 2007 quarterly information.

 

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

 

·                  Highlights and Executive Summary

 

·                  Overview

 

·                  Restatement

 

·                  Results of Operations—an analysis of ourunaudited condensed consolidated results of operations for the three monthsended March 31, 2007 and 2006

 

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

 

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

 

·                  Dividends—our dividend history

 

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

 

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

 

**SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

ThisQuarterly Report on Form 10-Q/A Amendment No. 2 contains bothhistorical and forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended (“Securities Act”), and Section 21Eof the Securities Exchange Act of 1934, as amended (“Exchange Act”). Allstatements other than statements of historical fact included in this QuarterlyReport on Form 10-Q/A Amendment No. 2 that address activities, eventsor developments 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:

 

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

 

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

 

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

 

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

 

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

 

These forward-looking statements were based on expectations aboutfuture events at the time they were made and are subject to numerousuncertainties and factors, all of which are difficult to predict and many ofwhich are beyond our control. Many factors mentioned in our discussion in thisQuarterly Report on Form 10-Q/A Amendment No. 2 will be important indetermining future results. We do not know whether the expectations reflectedin these forward-looking statements will prove correct. They can be affected byinaccurate assumptions we might make or by known or unknown risks anduncertainties, including those described under “Risk Factors” in our otherperiodic reports we file with the SEC.

 

In addition, this Quarterly Report on Form 10-Q/A Amendment No. 2contains historical information, forecasts and estimates regarding defenseexpenditures by the U.S. federal government, actual and anticipated procurementof armored vehicles and similar matters. This historical data and theseforecasts and estimates have been obtained from publicly available information,industry publications, trade associations and data compiled by independentmarket research firms. However, we have not independently verified thisinformation and we cannot assure you that it is accurate or that theseforecasts and estimates will prove correct.

 

When used in this Quarterly Report on Form 10-Q/A Amendment No. 2,except as specifically noted otherwise, the term “Force Protection, Inc.”refers to Force Protection, Inc. only, and the terms “Company,” “we,” “our,”“ours” and “us” refer to Force Protection, Inc. and its consolidatedsubsidiaries.

 

**Highlights and Executive Summary**

 

We are an important provider of blast- and ballistic-protected productsused to support armed forces and security personnel in harm’s way. We design,manufacture, test, deliver and support our blast- and ballistic-protected productswith the purpose to increase survivability of the users of the products. Ourspecialty vehicles, which we believe are at the forefront of blast- andballistic-protected technology, are designed to protect their occupants fromlandmines, hostile fire, and improvised explosive devices (“IEDs”). We are animportant provider of vehicles for the U.S. military’s Mine Resistant AmbushProtected (“MRAP”) vehicle program, which is currently one of the highestpriority acquisition programs for the U.S. Department of Defense (“DoD”),according to a memorandum from Secretary of Defense Robert Gates dated May 2,2007.

 

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Through an acquisition in 2002, we began shifting our principal focusfrom our then existing recreational watercraft production business to theproduction of mine clearing and armored vehicles. Our business began to growexponentially when we were awarded contracts by the U.S. military in 2005 andeach year after that. By 2007, substantially all of our net sales were derivedfrom work performed directly or indirectly under U.S. government contracts. Forthe three months ended March 31, 2007 and 2006, our net sales totaled$104.8 million and $34.8 million, respectively, and our net loss available tocommon shareholders totaled $(480,000) and $(1.4) million, respectively.

 

**Overview**

 

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

 

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

 

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

 

**Restatement**

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operations setforth in this Item 2 has been restated to reflect certain adjustments to ourunaudited condensed consolidated financial information previously reported inour quarterly report on Form 10-Q/A for the period ended March 31,2007, filed with the SEC on May 15, 2007, as amended July 19,2007.  On February 29, 2008, we concludedwe needed to restate our previously issued unaudited condensed consolidated financial statements for the thirdquarter of 2007 and delay the filing of our Annual Report on Form 10-K forthe year ended December 31, 2007. On August 26, 2008, we concluded weneeded to restate our previously issued unaudited condensed consolidatedfinancial statements for the first and second quarters of 2007. We haveconcluded that misstatements in those previously issued financial statementswere significant enough to warrant the restatement of the first, second, andthird quarters of 2007. The misstatements primarily related to the recognitionof revenue and liabilities in the proper periods and the determination ofdeferred incomes taxes. In connection with the restatement, certainpresentation reclassifications have been made to conform to the current periodpresentation.  See Note 2, *Restatement and Reclassification of Previously Issued CondensedConsolidated Financial Statements*, in the accompanying unauditedcondensed financial statements for additional information.

 

**Results of Operations**

 

The following discussion and analysis is based on our unauditedcondensed consolidated statements of operations, which reflect our results ofoperations for the three months ended March 31, 2007 and 2006, as preparedin accordance with GAAP.

 

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The following tables present our vehicle sales and our results ofoperations for the three months ended March 31, 2007 and 2006, as well asthe percentage changes from period to period:

 
| ** **            | ** ** | **For the  three months  ended  March 31,** | ** **           | ** ** | ** ** |
|-----------------------|------------|------------------------------------------------------------|----------------------|------------|------------|
| **Units Sold**   | ** ** | ** **                                                 | **2007  (Restated)** | ** ** | **2006**   | ** ** | **Percentage  Change** | ** ** |
| Buffalo               |       | 18                                                         |                 | 3          |       | 500 | % |
| Cougar (all variants) |       | 181                                                        |                 | 45         |       | 302 | % |
| Cheetah               |       | —                                                     |                 | —     |       | — |   |
| Total units sold      |       | 199                                                        |                 | 48         |       | 315 | % |
|                       |            |                                                            |                      |            |            |  |  |  |

 
| ** **                                                 | ** ** | **For the three months ended  March 31,** | ** **           | ** ** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------|----------------------|------------|------------|
| **(in thousands)**                                    | ** ** | ** **                                                         | **2007  (Restated)** | ** ** | **2006**   | ** ** | **Percentage  Change** | ** ** |
|                                                       |       |                                                               |                 |       |       |   |   |
| Net sales                                                  |       | $                                                                  | 104,825              |       | $          | 34,803 |   | 201 |  % |
| Cost of sales                                              |       | 85,125                                                             |                 | 28,165     |       | 202 |  % |
| Gross profit                                               |       | 19,700                                                             |                 | 6,638      |       | 197 |  % |
|                                                       |       |                                                               |                 |       |       |   |   |
| General and administrative expenses                        |       | 17,066                                                             |                 | 5,961      |       | 186 |  % |
| Research and development expenses                          |       | 5,001                                                              |                 | 664        |       | 653 |  % |
| Operating income (loss)                                    |       | (2,367                                                             | )                    | 13         |       | n/m |   |
| Other income, net                                          |       | 1,788                                                              |                 | 27         |       | n/m |   |
| Interest expense                                           |       | (9                                                                 | )                    | (807       | )          | (99 | )% |
| Loss before income tax benefit                             |       | (588                                                               | )                    | (767       | )          | (23 | )% |
| Income tax benefit                                         |       | 108                                                                |                 | —     |       | n/m |   |
| Net loss                                                   |       | (480                                                               | )                    | (767       | )          | (37 | )% |
| Accretion of Series D 6% convertible  preferred stock |       | —                                                             |                 | (484       | )          | n/m |   |
| Preferred stock dividend                                   |       | —                                                             |                 | (162       | )          | n/m |   |
| Loss available to common shareholders                      |       | $                                                                  | (480                 | )          | $          | (1,413 | ) | (66 | )% |
|                                                            |            |                                                                    |                      |            |            |  |  |  |  |  |

 

----

n/m– not meaningful

 

***Three Months Ended March 31,2007, as Restated***

 

*Comparison of Results of Operations for the ThreeMonths Ended March 31, 2007 and 2006*

 

*Units sold*

 

The increase in vehicles sold in the comparative periods is primarilydue to an increase in Iraqi Light Armored Vehicles (“ILAV”) vehicles sold andthe vehicles sold pursuant to the MRAP program. The vehicles sold under suchprogram, which started shipping in the first quarter of 2007, representapproximately 17% of the vehicles sold in the three months ended March 31,2007.

 

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*Net sales*

 

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

 
| ** **                | ** ** | **For the three months  ended March 31,** | ** **           | ** ** | ** ** |
|---------------------------|------------|--------------------------------------------------------------------|----------------------|------------|------------|
| **(in thousands)**   | ** ** | ** **                                                         | **2007  (Restated)** | ** ** | **2006**   | ** ** | **Percentage  Change** | ** ** |
| Buffalo                   |       | $                                                                  | 10,996               |       | $          | 1,489 |   | 638 | % |
| Cougar (all variants)     |       | 74,947                                                             |                 | 32,098     |       | 133 | % |
| Spare parts and logistics |       | 18,882                                                             |                 | 1,216      |       | 1,453 | % |
|                      |       | $                                                                  | 104,825              |       | $          | 34,803 |   | 201 | % |
|                           |            |                                                                    |                      |            |            |  |  |  |  |  |

 

*Cost of sales and Gross profit*

 
| ** **              | ** ** | **For the three months  ended March 31,** | ** **           |
|-------------------------|------------|--------------------------------------------------------------------|----------------------|
| **(in thousands)** | ** ** | ** **                                                         | **2007  (Restated)** | ** ** | **2006** | ** ** |
| Cost of sales           |       | $                                                                  | 85,125               |   | $ | 28,165 |   |
| Gross margin percentage |       | 18.8                                                               | %                    | 19.1 | % |
|                         |            |                                                                    |                      |  |  |  |  |  |

 

Gross margins decreased by .3 percentage points for the threemonths ended March 31, 2007 compared with the three months ended March 31,2006. The decrease was primarily due to operating inefficiencies. We define thegross margin percentage as net sales less cost of sales divided by net sales.

 

*General and administrative expenses*

 
| ** **                   | ** ** | **For the three months  ended March 31,** | ** ** |
|------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                   | ** ** | **2007  (Restated)**                                               | ** ** | **2006** | ** ** |
| As a percentage of net sales |       | 16.3                                                               | %          | 17.1 | % |

 

General and administrative expenses as a percentage of net salesdecreased .8 percentage points for the three months ended March 31,2007 compared with the three months ended March 31, 2006. The decrease wasprimarily due to leveraging selling and administrative support functions overan increasing business base, partially offset by a liquidated damage charge of$4.9 million resulting from the delayed registration of a privateplacement of public equity. See Note 7, *OtherCurrent Liabilities,* in the accompanying unaudited condensedconsolidated financial statements.

 

*Research and development expenses*

 
| ** **                   | ** ** | **For the three months  ended March 31,** | ** ** |
|------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                   | ** ** | **2007  (Restated)**                                               | ** ** | **2006** | ** ** |
| As a percentage of net sales |       | 4.8                                                                | %          | 1.9 | % |

 

Research and development expenses increased by approximately$4.3 million primarily due to increased expenditures related to thedevelopment of the Cheetah vehicle.

 

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*Other income*

 

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

 

*Interest expense*

 

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

 

*Income tax benefit*

 

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

 

*Series D convertible preferred stock dividendsand accretion*

 

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

 

*Net income (loss) available to common shareholders*

 
| ** **                                               | ** ** | **For the three months ended  March 31,** | ** **           |
|----------------------------------------------------------|------------|---------------------------------------------------------------|----------------------|
| **(in thousands, except per share)** | ** ** | ** **                                                    | **2007  (Restated)** | ** ** | **2006** | ** ** |
| Net (loss) available to common shareholders              |       | $                                                             | (480                 | ) | $ | (1,413 | ) |
| Diluted (loss) per common share                          |       | $                                                             | (0.01                | ) | $ | (0.04 | ) |
|                                                          |            |                                                               |                      |  |  |  |  |  |

 

Net loss available to common shareholders for the 2007 period decreasedover the comparable period in 2006 due to decreased interest expense anddecreased preferred stock dividends and accretion, partially offset by lowergross margins.

 

**Liquidity and Capital Resources**

 

Our liquidity and available capital resources are impacted byoperating, financing and investing activities. Our principal sources ofliquidity are cash on hand and cash from operations, primarily from the U.S.government.

 

*Sources and Uses of Cash*

 

Our primary sources of funding are cash flows from operations and fromfinancing activities. Our funds were used primarily to fund working capitalrequirements and to make capital expenditures. The following chart shows thecash flows provided by or used in operating, investing, and financingactivities for the three months ended March 31, 2007 and 2006 (inthousands):

 
| ** **                                           | ** ** | **For the three months  ended March 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                                           | ** ** | **2006** | ** ** |
| Net cash (used in) provided by operating  activities |       | $                                                                  | (29,356    | ) | $ | 6,939 |   |
| Net cash used in investing activities                |       | (16,820                                                            | )          | (642 | ) |
| Net cash provided by (used in) financing  activities |       | 3,298                                                              |       | (1,367 | ) |
| Increase (decrease) in cash and cash  equivalents    |       | $                                                                  | (42,878    | ) | $ | 4,930 |   |

 

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At March 31, 2007, we had $113.4 million of cash and cashequivalents, a decrease from $156.3 million at the end of 2006.

 

*Cash Flow from Operating Activities*

 

Cash used in operating activities increased by $36.3 million during thethree months ended March 31, 2007 compared to the three months ended March 31,2006. This change was primarily due to an increase in working capital usage anda decrease in advance payments on contracts in the 2007 period. Working capitalusage increased $30.9 million (accounts receivable, inventories, and accountspayable) to support increased sale volumes. Advance payments on contracts decreased primarily due to delays in thereceipt of performance payments.

 

*Cash Flow from Investing Activities*

 

As our business has grown, we have made several significantacquisitions and expanded our manufacturing capacity and infrastructure. In March 2007,we purchased the research and developmental testing facility of NEWTEC ServicesGroup, Inc., located near Edgefield, South Carolina, for$5.5 million, $5.1 million of which was in cash. In March 2007,we purchased real and personal property located in Summerville, South Carolina,for $4.1 million in cash to use as a product development and logisticservices training center.  During thefirst quarter of 2007, we began to construct a warehouse and an additionalassembly line at our Ladson facility. Construction in progress at March 31,2007 totaled $1.9 million.

 

*Cash Flow from Financing Activities*

 

During the three months ended March 31, 2007, we issued commonstock primarily for exercised employee options. During the three months ended March 31,2006, we paid down $1.3 million of short-term debt.

 

*Current Liquidity and Capital Resources*

 

Dueto the timing of the issuance of this amended Quarterly Report on Form 10-Q/AAmendment No. 2 we have disclosed certain information that was included in ourAnnual Report on Form 10-K for the year ended December 31, 2007,filed with the SEC on September 15, 2008.

 

Duringthe first six months of 2008, we expended approximately $9 million tocomplete the expansion of our manufacturing capability and capacity and toupgrade our information technology infrastructure. We will continue to expendcapital for research and development and business development activities.

 

The amount of capital that we will require depends on several factors,including without limitation, the extent and timing of sales of our products,inventory costs, costs of raw material and components, labor costs, costs ofimproving our financial and accounting systems, the timing and costs associatedwith the expansion of our manufacturing, development, engineering and customersupport capabilities, the timing and cost of our product development andenhancement activities and our operating results. We currently estimate thatthe cash flow that we anticipate will be generated by our business plus the$30 million available under our line of credit and our expected renewal ofit will be sufficient to meet our presently budgeted capital expenditures andour other presently anticipated cash needs for the year ending December 31,2008. We expect that we may require additional sources of capital after thattime. We may therefore be required to obtain additional sources of capital,which may include borrowings or the issuance of debt or equity securities,including common stock, and there can be no assurance that such financing willbe available to us when we need it or, if available, that the terms of any suchfinancing will be satisfactory to us and not dilutive to our shareholders. Anyfailure to obtain necessary capital as and when required could have a materialadverse effect on our business, prospects, financial position, results ofoperations, and cash flows.

 

**Off-Balance Sheet Arrangements**

 

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

 

·                  any obligation under certain guarantees orcontracts;

 

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

 

·                  any obligation under certain derivativeinstruments; and

 

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

 

The following discussion addresses each of the above items for theCompany.

 

As of March 31, 2007, we do not have any obligation under certainguarantees or contracts as defined above.

 

As of March 31, 2007, we do not have any retained or contingentinterest in assets as defined above.

 

As of March 31, 2007, we do not hold derivative financialinstruments, as defined by FASB Statement No. 133, *Accounting for Derivative Instruments and HedgingActivities,* as amended.

 

As part of our ongoing business, we do not participate in transactionsthat generate relationships with unconsolidated entities or financialpartnerships, such as entities often referred to as structured finance orspecial purpose entities (“SPEs”), which would have been established for thepurpose of facilitating off-balance sheet arrangements or other contractuallynarrow or limited purposes. As of March 31, 2007, we were not involved inany unconsolidated SPE transactions.

 

**Dividends**

 

We have never paid or declared any cash dividends on our common stock.We currently intend to retain earnings, if any, to finance the growth anddevelopment of our business, and we do not expect to pay any cash dividends onour common stock in the foreseeable future. Payment of future dividends, ifany, will be at the discretion of the board of directors and will depend on ourfinancial condition, results of operations, capital requirements, restrictionscontained in current or future financing instruments, and other factors theboard deems relevant.

 

**Critical Accounting Policies and Estimates**

 

Our discussion and analysis of our results of operations and liquidityand capital resources are based on our unaudited condensed consolidatedfinancial statements, which have been prepared in accordance with GAAP. Inconnection with the preparation of our unaudited condensed consolidatedfinancial statements, we are required to make assumptions and estimates aboutfuture events, and apply judgments that affect the reported amounts of assets,liabilities, revenue, expenses, and the related disclosures. We base ourassumptions, estimates and judgments on historical experience, current trendsand other factors we believe to be relevant at the time we prepared ourunaudited condensed consolidated financial statements. On a regular basis, wereview the accounting policies, assumptions, estimates and judgments to ensurethat our unaudited condensed consolidated financial statements are presentedfairly and in accordance with GAAP. However, because future events and theireffects cannot be determined with certainty, actual results could differ fromour assumptions and estimates, and such differences could be material.

 

The preparation of our unaudited condensed consolidated financialstatements in conformity with GAAP requires us to make estimates andassumptions. These estimates and assumptions affect the reported amounts ofassets and liabilities and the disclosures of contingent assets and liabilitiesas of the date of the financial statements, and the reported amounts ofrevenues and expenses during the reporting periods. Significant estimates andassumptions are used for, but are not limited to: (1) revenue recognition;(2) allowance for doubtful accounts; (3) definitization and advancepayments on contracts; (4) inventory costs and reserves; (5) assetimpairments (6) depreciable lives of assets; (7) economic lives andfair value of leased assets; (8) income tax reserves and valuationallowances; (9) fair value of stock options; (10) allocation ofdirect and indirect cost of sales; and (11) litigation reserves. Futureevents and their effects cannot be predicted with certainty, and accordingly,our 

 

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accounting estimates requirethe exercise of judgment. The accounting estimates used in the preparation ofour unaudited condensed consolidated financial statements will change as newevents occur, as more experience is acquired, as additional information isobtained and as our operating environment changes. We evaluate and update ourassumptions and estimates on an ongoing basis and may employ outside experts toassist in our evaluations. Actual results could differ from the estimates wehave used.

 

Our significant accounting policies are discussed in Note 1, *Summary of Significant Accounting Policies,*to our accompanying unaudited condensed consolidated financial statements. Webelieve the following accounting policies are the most critical to aid in fullyunderstanding and evaluating our reported financial results, as they requiremanagement to make difficult, subjective or complex judgments, and to makeestimates about the effect of matters that are inherently uncertain. We havereviewed these critical accounting policies and related disclosures with theAudit Committee of our board of directors.

 

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

 

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| **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **Judgments and Uncertainties**                                                                                                                                                                                                                                                                                                                                                                                                             | ** ** | **Effect if Actual Results  Differ from Assumptions**                                                                                                                                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| respective  tax bases. Deferred tax assets are also recorded with respect to net  operating losses and other tax attribute carryforwards. Deferred tax assets  and liabilities are measured using enacted tax rates in effect for the years  in which temporary differences are expected to be recovered or settled.  Valuation allowances are established when it is more likely than not that  deferred tax assets will not be realized. The effect on deferred tax assets  and liabilities of a change in tax rates is recognized in the income of the  period that includes the enactment date. |       | Contingent  tax liabilities are based on our assessment of the likelihood that we have  incurred a liability. Such liabilities are reviewed based on recent changes  in tax laws and regulations, including judicial rulings.                                                                                                                                                                                                                         |       |                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                                                                                                                                                                                                        |
| In  addition, we establish reserves for tax contingencies in accordance with FASB  Interpretation No. 48, *Accounting for  Uncertainty in Income Taxes.*                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                                                                                                                                                                                                        |
| **Assessment of Loss Contingencies**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                                                                                                                                                                                                        |
| We  have legal and other contingencies, including product warranties, which could  result in significant losses upon the ultimate resolution of such contingencies.                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | We  have provided for losses in situations where we have concluded that it is  probable that a loss has been or will be incurred and the amount of the loss  is reasonably estimable. A significant amount of judgment is involved in  determining whether a loss is probable and reasonably estimable due to the  uncertainty involved in determining the likelihood of future events and  estimating the financial statement impact of such events. |       | If  further developments or resolution of a contingent matter are not consistent  with our assumptions and judgments, we may need to recognize a significant  charge in a future period related to an existing contingency. |

 

**New Accounting Pronouncements**

 

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

 

InApril 2008, the FASB issued Staff Position (“FSP”) No. FAS 142-3,*Determination of Useful Life of IntangibleAssets* (FSP FAS 142-3). FSP FAS 142-3 amends the factorsthat should be considered in developing the renewal or extension assumptionsused to determine the useful life of a recognized intangible asset under FASBStatement No. 142, *Goodwill and OtherIntangible Assets*. FSP FAS 142-3 also requires expandeddisclosure related to the determination of intangible asset useful lives. FSPFAS 142-3 is effective for fiscal years beginning after 

 

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December 15, 2008.Earlier adoption is prohibited. We have not yet commenced evaluating thepotential impact, if any, of the adoption of FSP FAS 142-3 on ourconsolidated financial position, results of operations, and cash flows.

 

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

 

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

 

In December 2007, the FASB issued FASB Statement No. 160, *Noncontrolling Interests in Consolidated FinancialStatements*, which establishes accounting and reporting standardsthat require (i) the ownership interest in subsidiaries held by partiesother than the parent to be clearly identified and presented in theconsolidated balance sheet within shareholder’s equity, but separate from theparent’s equity, (ii) the amount of consolidated net income attributableto the parent and the noncontrolling interest to be clearly identified andpresented on the face of the consolidated statement of operations, and (iii) changesin a parent’s ownership interest while the parent retains its controllingfinancial interest in its subsidiary to be accounted for consistently. FASBStatement No. 160 applies to fiscal years beginning after December 15,2008. Earlier adoption is prohibited.

 

In February 2007, the FASB issued FASB Statement No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities*, which provides companies with an option toreport selected financial assets and liabilities at fair value. FASB Statement No. 159establishes presentation and disclosure requirements designed to facilitatecomparisons between companies that choose different measurement attributes forsimilar types of assets and liabilities and requires companies to provideadditional information that will help investors and other users of financialstatements to more easily understand the effect of a company’s choice to usefair value on its earnings. FASB Statement No. 159 also requires entitiesto display the fair value of those assets and liabilities for which the companyhas chosen to use fair value on the face of the balance sheet. FASB Statement No. 159does not eliminate disclosure requirements included in other accountingstandards, including requirements for disclosures about fair value measurementsincluded in FASB Statements No. 157, *FairValue Measurements*, and No. 107, *Disclosures about Fair Value of Financial Instruments.* FASBStatement No. 159 is effective as of the beginning of an entity’s firstfiscal year beginning after November 15, 2007. We adopted FASB Statement No. 159and we did not elect the fair value option for any other financial instrumentsor certain other financial assets and liabilities that were not previouslyrequired to be measured at fair value.

 

In September 2006, the FASB issued FASB Statement No. 157, *Fair Value Measurements*, which definesfair value, establishes a framework for measuring fair value under GAAP andexpands disclosures about fair value measurements. FASB Statement No. 157applies to other accounting pronouncements that require or permit fair valuemeasurements. The new guidance is effective for financial statements issued forfiscal years beginning after November 15, 2007, and for interim periodswithin those fiscal years. We adopted FASB Statement No. 157 on January 1,2008 and it did not have an impact on our consolidated financial position,results of operations, and cash flows.

 

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We have determined that all other recently issued accountingpronouncements will not have a material impact on our consolidated financialposition, results of operations, and cash flows, or do not apply to ouroperations.

 

**Item 4. *Control and Procedures***

 

**Evaluation of 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 SEC and (2) accumulated and communicated to management, including theprincipal executive officer and principal financial officer, as appropriate toallow timely decisions regarding required disclosure. Our disclosure controlsand procedures were designed to provide reasonable assurance of achieving theircontrol objectives.

 

Inconnection with the preparation of this amended Quarterly Report on Form 10-Q/Afor the period ended March 31, 2007, members of our new management, at thedirection (and with the participation) of our chief executive officer andinterim chief financial officer, performed an evaluation of the effectivenessof the design and operation of our disclosure controls and procedures (asdefined in Rule 13a-15(e) under the Exchange Act), as of March 31,2007. Based on that evaluation, the chief executive officer and interim chieffinancial officer, concluded that our disclosure controls and procedures werenot effective at a reasonable assurance level as of March 31, 2007,because of the material weaknesses in our internal control over financialreporting that existed during the period covered by this report.Notwithstanding these material weaknesses, that existed during the periodcovered by this report, our new management has concluded that our unauditedcondensed consolidated financial statements included in this report are fairlystated, in all material respects, in accordance with generally acceptedaccounting principles in the United States of America  (GAAP).

 

**Changes in Internal Control Over Financial Reporting**

 

OnFebruary 29, 2008, we concluded we needed to restate our previously issuedconsolidated financial statements for the third quarter of 2007 and delay thefiling of our Annual Report on Form 10-K for the year ended December 31,2007. On August 26, 2008, we concluded we needed to restate our previouslyissued consolidated financial statements for the first and second quarters of2007. We have concluded that misstatements in those previously issued financialstatements were significant enough to warrant the restatement of the first,second, and third quarters of 2007.

 

Atthe conclusion of our restatement efforts, our new management identified thefollowing material weaknesses in our internal control over financial reportingas of March 31, 2007.

 

*Financial Statements Closing Process.*  Welacked a sufficient complement of personnel with a level of financial reportingexpertise commensurate with our financial reporting requirements, whichresulted in our not maintaining effective controls over the financialstatements closing and reporting process. Specifically, we lacked sufficientresources to perform properly the quarterly and year-end consolidated financialstatement close processes, including the review of certain accountreconciliations, recognition of certain liabilities in the proper period andconsolidated financial statement preparation and disclosures. We also did notmaintain physical control over property and equipment. We also did not maintainsufficient written policies and procedures, and support, particularly withrespect to the accounting for the reserve for excess and obsolete inventory;however, this specific item only resulted in material adjustments to our costof goods sold in the fourth quarter of 2007. The other control deficiencies in this section contributed to thematerial weaknesses discussed below and resulted in restatement of ourquarterly condensed consolidated financial statements for the period ended March 31,2007.

 

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

 

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maintain effective controlsover the accurate and timely recording of inventory receipts and shipments,including the recognition of accounts payable. Furthermore, we did not maintaineffective controls over the accuracy and completeness of perpetual counts ofour inventory quantities. This control deficiency contributed to the materialweaknesses discussed below and resulted in restatement of our quarterly unauditedcondensed consolidated financial statements for the period ended March 31,2007.

 

*Accounting for revenue recognition.*  Wedid not maintain effective controls over the completeness and accuracy ofrevenue, accounts receivable, and advance payments on contracts. Specifically,we failed to recognize revenue in the appropriate quarter and effectivecontrols were not designed and in place to ensure that sales orders werecomplete, accurate and recorded on a timely basis. This control deficiencycontributed to the material weaknesses discussed below and resulted inrestatement of our quarterly unaudited condensed consolidated financialstatements for the period ended March 31, 2007.

 

*Accounting for income taxes.*  Wedid not maintain effective controls over the completeness, accuracy, presentationand disclosure of our accounting for income taxes, including the determinationof income tax expense, income taxes payable and deferred income tax assets andliabilities. This control deficiency contributed to the material weaknessesdiscussed below and resulted in restatement of our quarterly unaudited condensedconsolidated financial statements for the period ended March 31, 2007.

 

*Inadequate monitoring of non-routine andnon-systematic transactions.*  We did not have effectivecontrols in place to monitor and accurately record non-routine andnon-systematic transactions. This primarily related to our accounting for theexercise of stock options in the first quarter of 2007. This control deficiencycontributed to the material weaknesses discussed below and resulted inrestatement of our quarterly unaudited condensed consolidated financialstatements for the period ended March 31, 2007.

 

*Information Technology Controls.*  Wedid not maintain effective segregation of duties over automated and manualtransaction processes. Specifically, we did not maintain effective controlsover the granting, maintenance and monitoring of access to financial systemsand data. Certain information technology and finance department personnel hadunrestricted access to financial applications, programs and data beyond thatneeded to perform their individual job responsibilities and without anyindependent monitoring. This control deficiency affects substantially allfinancial statement accounts. This control deficiency did not result inadjustments to our unaudited condensed consolidated financial statements forthe period ended March 31, 2007.

 

There were no material changes in our internal control over financialreporting (as defined in Rule 13a-15(f) under the Exchange Act) forthe period covered by this report that materially affected, or were reasonablylikely to materially affect, our internal control over financial reporting. Wedid, however, identify the material weaknesses described above with respect toour internal controls.

 

**Remediation of Material Weaknesses**

 

We have engaged in, and are continuing to engage in, substantialefforts to improve our internal control over financial reporting and disclosurecontrols and procedures related to substantially all areas of our financialstatements and disclosures. These efforts include the following:

 

*Efforts to strengthen accounting and financedepartment through additional professional staff.*  Wehave hired a number of additional professional staff over the past several monthswith the skills and experience needed for a public company of our size andcomplexity, including an individual with expertise in and responsibility forgovernment contract compliance. We will continue to seek to strengthen ouraccounting and finance department and strive to appropriately balance theallocation of full-time staff and consultants. As previously announced, in thesecond quarter of 2008 we hired Charles Mathis as our new Executive VicePresident of Finance. The development of adequate corporate level accountingand finance oversight is still ongoing. We are still recruiting accounting and 

 

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finance personnel and do notyet have permanent resources in place sufficient to close our books withoutsignificant reliance on third-party contractors.

 

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

 

*Increased communication internally and with outsideadvisors.*  We have increased communication by and amongsenior management, external advisors and other third parties relevant to thedisclosure process. Specifically, the chief executive officer meets daily withhis management team to review operational developments. Our board of directorsreceives timely and regular updates on issues of importance. Our chiefexecutive officer also regularly prepares a report to our board of directorshighlighting operational and financial results which is also distributed to hisexecutive team.

 

*Enhanced efforts to identify non-routinetransactions.*  We have initiated daily meetings withexecutive leadership to identify non-routine transactions and their relatedaccounting treatment at an early stage. Certain expenditure transactionsrequire approval of the interim chief financial officer. Additionally, we arein the process of assigning finance professionals within each of the operatingdepartments.

 

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

 

Management will consider the design and operating effectiveness ofthese actions and will make additional changes it determines appropriate.

 

The effectiveness of Force Protection’s or any system of disclosurecontrols and procedures and internal control over financial reporting issubject to certain limitations, including the exercise of judgment indesigning, implementing, and evaluating the controls and procedures, theassumptions used in identifying the likelihood of future events, and theinability to eliminate misconduct completely. As a result, our disclosurecontrols and procedures and internal control over financial reporting may notprevent all errors or improper acts or ensure that all material informationwill be made known to appropriate management in a timely fashion.

 

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**PART II**

 

**OTHER INFORMATION**

 

**ITEM 6. EXHIBITS**

 

**EXHIBIT INDEX**

 
| **Number** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                                                 |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                      |
| 2.1        |       | Agreement and Plan of Merger filed as  Exhibit 2.1 in the Company’s Annual Report on Form 10-K filed  September 15, 2008, is hereby incorporated by reference.                                                                                                                                                                              |
|       |       |                                                                                                                                                                                                                                                                                                                                                            |
| 3.1        |       | Articles of Incorporation filed as  Exhibit 3.1 in the Company’s Annual Report on Form 10-K filed  September 15, 2008, is hereby incorporated by reference.                                                                                                                                                                                 |
|       |       |                                                                                                                                                                                                                                                                                                                                                            |
| 3.2        |       | First Amended and Restated By-Laws of Force  Protection, Inc., filed as Exhibit 3.1 on the Company’s Current  Report on Form 8-K filed February 26, 2008, is hereby incorporated  by reference.                                                                                                                                        |
|       |       |                                                                                                                                                                                                                                                                                                                                                            |
| 3.3        |       | Certificate of Amendment to Articles of  Incorporation filed as Exhibit 3.3 on the Company’s Annual Report in  Form 10-K filed September 15, 2008, is hereby incorporated by  reference.                                                                                                                                                    |
|       |       |                                                                                                                                                                                                                                                                                                                                                            |
| 4.1        |       | Certificate of Designation for Series D  Convertible Preferred Stock, dated January 19, 2005, filed as  Exhibit 4.1 on the Company’s Current Report on Form 8-K filed  January 27, 2005, is hereby incorporated by reference.                                                                                                     |
|       |       |                                                                                                                                                                                                                                                                                                                                                            |
| 4.2        |       | Amended and Restated Certificate of Designation  for Series B Convertible Preferred Stock, filed as Exhibit 4.1 on  the Company’s Current Report on Form 8-K filed February 15, 2005,  is hereby incorporated by reference.                                                                                                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                            |
| 4.3        |       | Amended and Restated Certificate of Designation  for Series C Convertible Preferred Stock, filed as Exhibit 4.2 on  the Company’s Current Report on Form 8-K filed February 15, 2005,  is hereby incorporated by reference.                                                                                                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                            |
| 10.1       |       | Certificate of the Company’s Corporate Secretary,  dated January 10, 2007, filed as Exhibit 10.2 to the Company’s  Registration Statement on Form S-8 filed January 12, 2007, is  hereby incorporated by reference.                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                                                                                                            |
| 10.2       |       | Letter Contract issued to Force  Protection, Inc. by the United States Marine Corps Systems Command,  dated January 11, 2007, filed as Exhibit 10.1 to the Company’s  Current Report on Form 8-K filed January 18, 2007, is hereby  incorporated by reference.                                                                    |
|       |       |                                                                                                                                                                                                                                                                                                                                                            |
| 10.3       |       | Employment Agreement between Force  Protection, Inc. and Michael Durski, dated January 18, 2007, filed  as Exhibit 10.1 to the Company’s Current Report on Form 8-K, is  hereby incorporated by reference.                                                                                                                             |
|       |       |                                                                                                                                                                                                                                                                                                                                                            |
| 10.4       |       | Letter Contract issued to the Company by the  United States Marine Corps Systems Command, dated January 25, 2007,  filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed February 5, 2007, is hereby incorporated by reference.                                                                                     |
|       |       |                                                                                                                                                                                                                                                                                                                                                            |
| 10.5       |       | Ground Lease among Force Protection, Inc.,  Force Protection Industries, Inc., and Aerospace/Defense, Inc.,  dated February 1, 2007, filed as Exhibit 10.6 to the Company’s  Quarterly Report on Form 10-Q filed November 13, 2007, is hereby  incorporated by reference.                                               |
|       |       |                                                                                                                                                                                                                                                                                                                                                            |
| 10.6       |       | Second Amendment to Building No. 2 Industrial  Lease among Force Protection, Inc., Force Protection  Industries, Inc., and Aerospace/Defense, Inc., dated  February 1, 2007, filed as Exhibit 10.16 to the Company’s Quarterly  Report on Form 10-Q filed November 13, 2007, is hereby incorporated  by reference. |

 

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| 10.7   |   | Letter Contract issued to Force  Protection, Inc. by the United States Marine Corps Systems Command,  dated February 14, 2007, filed as Exhibit 10.1 to the Company’s  Current Report on Form 8-K filed February 20, 2007, is hereby incorporated  by reference. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.8   |   | Letter Contract issued to Force  Protection, Inc. by the United States Marine Corps Systems Command,  dated March 9, 2007, filed as Exhibit 10.1 to the Company’s Current  Report on Form 8-K filed March 15, 2007, is hereby incorporated by reference.         |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.9   |   | Purchase and Sale Agreement between Force  Protection, Inc. and NEWTEC Services Group, Inc., dated  March 9, 2007, filed as Exhibit 10.2 to the Company’s Current  Report on Form 8-K filed March 15, 2007, is hereby incorporated by  reference.           |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.10  |   | Asset Purchase Agreement between Force Protection  Technologies, Inc. and Lati USA, Inc., dated March 22, 2007,  filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed March 28, 2007, is hereby incorporated by reference.              |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.11  |   | Assignment and Assumption Agreement between Force  Protection Technologies, Inc. and Lati USA, Inc., dated  March 22, 2007, filed as Exhibit 10.2 to the Company’s Current  Report on Form 8-K filed March 28, 2007, is hereby incorporated by  reference.  |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.12  |   | Lease Agreement between Dorchester County, South  Carolina and Lati Industries, Inc. dated December 7, 1998, filed as  Exhibit 10.1 on the Company’s Annual Report on Form 10-K filed  September 15, 2008, is hereby incorporated by reference.                  |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.13  |   | Post Closing Memorandum between Force Protection  Technologies, Inc. and Lati USA, Inc., dated March 22, 2007,  filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K  filed March 28, 2007, is herby 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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(Exhibitsmarked with a †are filed electronically herewith.)

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

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

 

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