Use these links to rapidly review the documentTABLE OF CONTENTS ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549



FORM 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2008oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                                to


Commission file number 001-33253

FORCE PROTECTION, INC.(Exact name of Registrant as Specified in Its Charter)

Nevada(State or Other Jurisdiction of
Incorporation or Organization)

84-1383888(I.R.S. Employer
Identification No.)9801 Highway 78, Building No. 1
Ladson, South Carolina(Address of registrant's principal executive offices)

29456(Zip Code)


Registrant's
telephone number, including area code:(843) 574-7000

Securities
registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, $0.001 par value

The NASDAQ Stock Market LLC


Securities
registered pursuant to Section 12(g) of the Act: None

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


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

The aggregate market value of the common equity held by non-affiliates of the registrant on June 30, 2008, computed by reference to the closing
price for such stock on the Nasdaq Capital Market on such date, was approximately $146,570,000.

The
number of shares outstanding of the registrant's common stock as of March 20, 2009 was 69,289,762 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement relating to its 2009 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.



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TABLE OF CONTENTS



PART IITEM 1.

BUSINESS

2ITEM 1A.

RISK FACTORS

28ITEM 1B.

UNRESOLVED STAFF COMMENTS

45ITEM 2.

PROPERTIES

45ITEM 3.

LEGAL PROCEEDINGS

46ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

49PART IIITEM 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

50ITEM 6.

SELECTED FINANCIAL DATA

53ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

54ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK

73ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA

75ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

120ITEM 9A.

CONTROLS AND PROCEDURES

120ITEM 9B.

OTHER INFORMATION

122PART IIIITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE

122ITEM 11.

EXECUTIVE COMPENSATION

122ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS

122ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE

122ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

123PART IVITEM 15.

EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES

123


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PART I

ITEM 1.    BUSINESS

Force Protection, Inc. ("Force Protection", the "Company", "we", "our", or "us") is in the business of providing survivability
solutions to support armed forces and security personnel in harm's way. We design, manufacture, test, deliver and support our blast- and ballistic-protected products to increase survivability of the
users of our products. Our specialty vehicles, which we believe are at the forefront of blast- and ballistic-protected technology, are designed to protect their occupants from landmines, hostile fire,
and improvised explosive devices ("IEDs"). In addition, we develop, manufacture, test, deliver and support products aimed at further enhancing the survivability of vehicles against additional threats.
Our patented ForceArmor is designed to provide protection against explosively formed projectiles ("EFPs"). We are a key provider of the U.S. military's Mine Resistant Ambush Protected
("MRAP") vehicle program and have sold over 3,000 vehicles under
this program. We also provide our Cougar Mastiff, Cougar Ridgback, Cougar Wolfhound, and Buffalo mine-protected vehicles to the United Kingdom Ministry of Defence. In total, across all vehicle
programs we have sold approximately 4,000 vehicles.

For
the year ended December 31, 2008, we reported net sales of approximately $1.3 billion, up 49% from our net sales of approximately $891 million reported for the
year ended December 31, 2007. During the period January 1, 2008 through December 31, 2008, we received orders for 474 vehicles. During this same period we delivered 2,067 vehicles
under the MRAP and other blast- and ballistic-protected vehicle programs, including vehicles manufactured pursuant to the terms of our arrangement with General Dynamics Land Systems Inc.
("GDLS") (described further in this Item 1,Major Contractsbelow, under "MRAP Competitive Contract.") During the period January 1, 2007
through December 31, 2007, we delivered 1,558 vehicles under blast- and ballistic-protected vehicle programs. During the period January 1, 2008 through December 31, 2008, we
delivered approximately $198 million in spare parts and approximately $56 million in training and field service support. In December 2008, we initiated our first deliveries of our
ForceArmor kits.

Our Products

All of our products are aimed at offering improved protection to personnel operating in areas posing threats of blast- or ballistic-
attack. Since the early stages of Operation Iraqi Freedom and Operation Enduring Freedom, the U.S. military has sought a wheeled vehicle approach that balances three potentially competing operational
or mission dynamics: (i) protection, which refers to the level of crew survivability against blast- and ballistic-attack; (ii) payload, which refers to the load that the vehicles can
carry on board the platform, measured in units, such as crew members and cargo; and (iii) performance, which refers to a vehicle's automotive mobility, its ability to provide technological
solutions to mission requirements, and its suitability for transportation in existing military aircraft and ships.

We
also currently offer ForceArmor as an external bolt-on solution, which provides state-of-the-art protection against attack
by EFPs. ForceArmor is designed from commercially available materials that, when combined and packaged into a kit, offer lightweight solutions that can be tailored to bolt on to the
outside of any military vehicle platform. It is a modular solution that enables unit commanders to rapidly install or remove the kit depending on the threat they face.

We
currently offer the following vehicle types aimed at fulfilling different operational or mission requirements:



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The Buffalo.The Buffalo Mine Protected Clearance Vehicle ("MPCV"), with a gross vehicle weight of approximately 40 tons, is our
largest vehicle and
is designed primarily for use in conducting route clearance operations. During these operations, friendly forces patrol areas and routes of likely enemy IEDs and landmine activity searching for
concealed explosive devices. The Buffalo has six wheels and is equipped with a hydraulic arm used to interrogate suspect devices while allowing the crew to disable or destroy the device from within
the vehicle. The vehicle's capsule is blast-resistant, and the bottom of its passenger compartment is V-shaped (which we refer to as a "V-shaped hull") and is designed to
deflect and dissipate the explosive blast from a landmine or IED away from the passenger compartment, thus helping protect the occupants from harm. With the Buffalo, we have been designated by the
U.S. Marine Corps and U.S. Army as the sole-source supplier of vehicles for explosive ordnance disposal ("EOD"), including EOD vehicles that satisfy the Category III (as described
inIndustry Overview and Force Protection Market Opportunityin this Annual Report on Form 10-K) requirements of the MRAP
program and the Ground Standoff Mine Detection System ("GSTAMIDS") program. In addition to producing Buffalos for the U.S. military, we have delivered Buffalos to the following foreign customers
through the Foreign Military Sales ("FMS") program of the United States Department of Defense ("DoD"): United Kingdom, France, and Italy. On February 21, 2008, we were awarded a contract
through the DoD's FMS program to produce four Buffalos for the Italian military. On November 13, 2008, the Canadian military awarded us a contract for 14 vehicles, October 31, 2008, the
United Kingdom Military of Defence awarded us a contract for 14 vehicles and on July 11, 2008, the French military awarded us a contract for five vehicles. In total, in 2008 we delivered 81
Buffalos to the U.S. Marine Corps, U.S. Army, French, Italian and United Kingdom customers for mine clearance in Iraq and Afghanistan.

The Cougar.The Cougar is a family of medium-sized blast- and ballistic-protected vehicles that can be supplied in 4-wheeled and
6-wheeled variants and in a variety of configurations for the wide range of missions performed by our customers. With a gross vehicle weight that ranges from 11 tons to 26 tons, depending
on the variant, the operational applications of the Cougar include troop transport, command and control, route reconnaissance, convoy escort, and
casualty evacuation capabilities. Similar to the Buffalo, the Cougar employs a V-shaped hull designed to deflect blast energy, along with a blast- and ballistic-protected steel passenger
compartment. The Cougar family of vehicles offers our customers the ability to enhance the protection and payload offered to wheeled vehicle platforms, while still offering acceptable levels of
performance. In comparison, armored combat platforms, such as main battle tanks and infantry fighting vehicles, offer substantial levels of protection but lesser relative levels of payload and
performance. Light unarmored wheeled vehicles (e.g., utility vehicles such as the High Mobility Multi-Purpose Wheeled Vehicle ("HMMWV"), and other non-tactical wheeled vehicles used
for supply and support functions which provide less protection) offer higher levels of performance but lower relative levels of protection. In addition to producing Cougars for the U.S. military, we
manufacture several variants for U.S. foreign military allies, including the Canadian military, the Italian military, the United Kingdom Ministry of Defence and the Iraqi National Army.



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The Cheetah.The Cheetah is a 4-wheeled vehicle with a curb weight of approximately eight tons, designed specifically for
reconnaissance,
forward command and control, and urban operations. The Cheetah provides performance levels similar to that of a light-wheeled vehicle, while providing protection levels similar to that of our heavier
Cougar fleet and payload levels substantially higher than that of the wheeled vehicle fleet currently available to the military. For example, the Cheetah offers mobility comparable to the HMMWV, and
is transportable in any transport aircraft in the military inventory, including the C-130 (a four engine turboprop transport aircraft), as well as externally by a variety of helicopters.
We believe the Cheetah represents a significant evolution in blast- and ballistic-protected vehicles that may fill a void in vehicle platforms currently available to, and fielded by, the

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military,
specifically the gap between light unarmored or even lightly armored wheeled vehicles and the fleet of MRAP vehicles. At present, we have not had any orders for the Cheetah, although on
September 15, 2008, we submitted a response to the U.S. Army Tank-Automotive and Armaments Command ("TACOM") request for information seeking a lightweight vehicle providing MRAP
levels of survivability with HMMWV levels of mobility.



We
also offer products and solutions which are aimed at enhancing the survivability of vehicles against further attacks, such as our Life Cycle Support and Armor Kit /
ForceArmor.

Life Cycle Support.The tenets of our Total Life Cycle Support business are to emphasize an early focus on ensuring a "design for
support to support
the design" approach is used for all of our vehicle platforms and includes spare parts, technical manuals and vehicle field service support. This translates into operational system effectiveness for
our vehicles as we focus on managing the ten elements of logistics throughout our platform life cycles. These elements include: maintenance planning, manpower/personnel, supply support, support
equipment, technical data, training/training support, packaging/handling/storage/transportation, facilities, computer resources support, and design interface. We have established a systems approach
within the company to put equal emphasis not just on cost, schedule, and performance, but also on supportability. Our management philosophy ensures that processes and activities are in place to
develop, produce, field, sustain, and recycle our vehicles, in accordance with our customer's life cycle model. Our goals are to ensure we provide effective, available, reliable, supportable, and
maintainable vehicles, while minimizing life cycle cost.

We
offer ongoing life cycle support services in three areas: logistics engineering, acquisition logistics and operational logistics. That translates into spare parts, documentation,
training, and maintenance for our fleet of vehicles. Based on current customer needs, we believe that we have a substantial business opportunity to provide life cycle support services to our existing
and future fleet of vehicles. In addition, as the fleet ages, we have the opportunity to offer upgrades and system improvements for our fleet that are designed to further enhance the ease of use as
well as the longevity of the vehicles. We believe this will continue to provide us with an ongoing market to sustain and improve our fleet through contractor logistical support, remanufacturing, data
reporting, and retrofitting. We expect that our vehicles will remain in service for an extended life cycle during which, we intend to ensure supportability of the fleet. As of December 31,
2008, we had delivered support, via a deployed base of approximately 245 field trainers and service representatives, to an aggregate of approximately 4,000 vehicles across all of our programs.

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Armor Kit / ForceArmor.We offer an external ballistic protection module ("EBPM"), identified as ForceArmor, that provides
protection from EFPs. The EBPM package design has been tested and validated through the U.S. Army Aberdeen test center. The EBPM package can be readily installed and removed in the field allowing
users to "scale" protection levels in response to likely enemy threats. As a result of its modularity, the EBPM package can also be retrofitted to our previously deployed vehicles as well as to
wheeled vehicles manufactured by other companies. We
provided ForceArmor kits for eight vehicles in 2008 and currently have orders for an additional 257 ForceArmor kits to be deployed on our 4x4 and 6x6 Cougar vehicles.

Vehicle Deliveries and Backlog

The following tables set forth the number of vehicles delivered for the respective periods shown below and the total number of vehicles
included in our backlog as of December 31, 2008, including vehicles manufactured or to be manufactured, as appropriate, by GDLS under the GDLS Subcontract. The backlog shown in the following
table is "funded" backlog, meaning that it reflects vehicles for which we have received orders and for which funding has been appropriated and authorized for expenditure by the applicable agency. We
cannot assure you that we will deliver or sell any of the vehicles included in our backlog. See Item 1A,Risk Factorsin Part I of this
Annual Report on Form 10-K for a discussion of the risk associated with backlog.

Vehicle Deliveries2008

2007Buffalo


81


85Cougar MRAP (Competitive)*


1,724


1,165Cougar (all other variants)


262


308
(a)TOTAL


2,067


1,558
(a)




Vehicle Funded BacklogAs of December 31, 2008Buffalo


69Cougar MRAP (Competitive)*


5Cougar Mastiff


24Cougar Ridgback


83Cougar (Canadian)


26Cougar (other)


2TOTAL


209






Industry Overview and Force Protection Market Opportunity

General.We believe the world market for blast- and ballistic-protected military vehicles and other survivability solutions continues
to grow. The
global war on terrorism, especially in Iraq and Afghanistan, has confirmed that IEDs, roadside bombs and landmines pose a significant threat to military personnel and civilians. Landmines and IEDs
have been used extensively by terrorists and insurgent groups in Iraq and other areas because of their highly effective nature and relatively low cost.

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As
vehicles are fielded with a specific level of protection, insurgent forces attempt to find alternative ways to conduct attacks. This will further evolve as better vehicular protection is designed
and leads to potentially new threats (e.g., anti-personnel weapons, hand held EFPs) which will generate the need for an ever expanding field of survivability solutions.

According
to a Government Accountability Office ("GAO") report dated July 15, 2008, over 75% of the casualties suffered by U.S. forces in Operations Iraqi Freedom and Enduring
Freedom in Afghanistan have been caused by IEDs. Vehicles that move troops or ordnance while providing significant protection against blast and ballistic threats, landmine hazards and IEDs, or that
are capable of mine clearance operations, are critical in these situations. Missions for these vehicles range from troop transport in and around unexploded ordnance or mine threat areas to route
clearance, convoy escort, reconnaissance, command and control, ambulance operations, EOD operations, general utility, and humanitarian de-mining.

In
late 2004, the U.S. military began acquiring modern blast- and ballistic-resistant wheeled vehicles in order to counter the effect of IED attacks on friendly forces conducting
missions in Iraq and Afghanistan. These missions have often involved the use of lightweight wheeled utility vehicles, including the HMMWV. The HMMWV, however, was not designed to sustain high powered
explosive blasts and is vulnerable to enemy fire. In response to the increasing number of casualties from IEDs and other explosive devices sustained during Operation Enduring Freedom in Afghanistan
and Operation Iraqi Freedom, the U.S. military sought to increase the armor and blast protection of many of its wheeled vehicles, including the HMMWV, by retrofitting them with heavy armor. However,
retrofitting heavy armor onto the bodies of these normally lightly armored vehicles is costly, and the added weight both increases mechanical wear and reduces the payload of the vehicles. We developed
and delivered Buffalos and Cougars in response to the U.S. military demand.

MRAP Vehicle Program.In 2006, the U.S. effort to acquire blast- and ballistic-protected vehicles evolved into the establishment of the
MRAP Program.
The DoD accelerated the pace of contract awards under this program in early 2007, and on May 2, 2007, the Secretary of Defense, Robert Gates, directed that the MRAP program be considered the
highest priority DoD acquisition program. In June 2007, Secretary of Defense Gates provided the MRAP program with the highest priority access to components and materials among all defense acquisition
programs and assigned the MRAP program a DX rating, which is the highest priority rating under the DoD Priorities and Allocation System. On
June 9, 2008, a Congressional Research Service report on the MRAP program identified that the Joint Requirements Oversight Council ("JROC") in September 2007 had approved the procurement of a
total of 15,374 MRAP vehicles. This same report noted, however, that the JROC "suggested that these numbers could change, based on assessment of commanders." According to a report dated
July 15, 2008, from the GAO, the DoD had placed orders for 14,173 MRAP Category I and Category II vehicles with five suppliers, of which we received orders for 2,894 vehicles. As
a result, we estimate that as of December 31, 2008, the U.S. military would have been permitted to order approximately 1,200 additional vehicles under the MRAP program. According to that same
GAO report, the DoD has appropriated more than $22 billion to acquire MRAP vehicles. As a result and based on expanded operations into the Afghanistan theater of operations, we believe there is
potential for additional MRAP vehicles to be approved for procurement by the U.S. Military under the MRAP program. The U.S. Marine Corps has fielded over 3,000 Cougars under the MRAP program. This
represents an opportunity to incorporate valued technology and capability updates while resetting the vehicle's service life. As a further extension of the MRAP program, on December 8, 2008,
the U.S. government issued a full-and-open competition solicitation for an M-ATV calling for up to 10,000 vehicles providing MRAP levels of survivability and HMMWV
levels of mobility (see the M-ATV program discussion below).

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The U.S. Marine Corps established a Joint Program Office in 2007 to manage the MRAP program for all branches of the U.S. military and, as part of that program,
continues to procure wheeled vehicles that offer more effective blast protection for the military personnel of the U.S. armed forces. The MRAP program specifies three categories of vehicles, as
outlined in the table below. The table also indicates which of our vehicles satisfy the criteria for each of these categories.

Vehicle Type

Description

Force Protection VehicleCategory I

Transports no less than six persons and must be suitable for urban operations

Cougar (4-wheeled variant)Category II

Transports no less than ten persons and has multi-mission purposes including troop transport, command and control and route reconnaissance

Cougar Lightweight / Cougar Restricted Terrain Cougar (6-wheeled variant)Category III

Transports no less than six persons and is designed to conduct EOD and route clearance missions

Buffalo


We
have received two contracts under the MRAP program. In November 2006, the U.S. Marine Corps awarded a sole-source contract to us for Category II Cougar 6x6 vehicles
and Category III Buffalo vehicles, which as of December 31, 2008, were for an aggregate of 200 Cougars and 91 Buffalos. In January 2007, the U.S. Marine Corps awarded us a competitive
contract for Category I and Category II vehicles. This contract allows the U.S. government to acquire up to 20,500 vehicles over a 5-year period. As of December 31,
2008, the U.S. Marine Corps, under this competitive contract placed with us 10 delivery orders for a total of 2,009 Category I vehicles and 885 Category II vehicles.

M-ATV Program.On December 8, 2008, the MRAP Joint Program Office issued a competitive Request for Proposal ("RFP"), named the
M-ATV through which the U.S. government is seeking a vehicle solution that provides MRAP levels of survivability with HMMWV-style mobility. On January 12, 2009, Force
Dynamics, LLC, our joint venture with GDLS, submitted a proposal to this RFP offering the Cheetah M-ATV as a solution. On February 23, 2009, in accordance with the terms of
the solicitation, we delivered two production representative vehicles to Aberdeen Proving Grounds, Maryland, for the U.S. Army evaluation and testing under the M-ATV program. Subsequently,
on March 11, 2009, we received a $1 million contract award for the purchase of these two production representative vehicles signaling our continued consideration in the M-ATV
program competition.

Our
proposed M-ATV vehicle solution incorporates ForceArmor in response to requested EFP protection. Further, we believe that two M-ATV vehicle
proposals by our competitors also incorporated ForceArmor in their response to the same requirement.

Joint Light Tactical Vehicle Program.Under the Joint Light Tactical Vehicle ("JLTV") program, the U.S. military is seeking a family of
vehicles that
fulfill mission role gaps identified from the current HMMWV program. The JLTV program specifies three categories of vehicles based on payload. The performance, protection and physical characteristics
of these vehicle categories are tailored to fulfill the specified mission roles these vehicles will be required to execute. On July 9, 2008, a briefing by the Army staff on the U.S. Army and
U.S. Marine Corps Tactical Wheeled Vehicle fleet strategy indicated that the demand for new light tactical vehicles is approximately 160,000 vehicles between the U.S. Army and the U.S. Marine Corps.
The U.S. Army's 2007 light tactical wheeled vehicle budget states that following further development and testing, the DoD intends to replace portions of the HMMWV fleet with a new fleet of vehicles
under the JLTV program. The JLTV program is expected to require vehicles to balance increased levels of protection and survivability with mobility and transportability requirements. This same briefing
indicates that the U.S. Army will spend an estimated $1 to $6 billion

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per
year on the JLTV program. On February 5, 2008, we entered into an exclusive teaming agreement with DRS Technologies, Inc. ("DRS"), whereby DRS will serve as prime contractor and we
will serve as a subcontractor for awards under the JLTV program. On April 14, 2008, we submitted the Cheetah for consideration under the JLTV program as subcontractor to DRS. On
August 14, 2008, we were informed that we were no longer in consideration for the JLTV program Milestone A (Technology Demonstration Phase). We will continue to pursue opportunities on the JLTV
program by working with Milestone A vendors to determine whether there are potential fits for Force Protection technology (e.g., ForceArmor). In addition, we will continue to
monitor the JLTV program as it transitions from Milestone A to Milestone B (System Development Phase) in fiscal years 2010 to 2011 with a view to reentering the competition.

GSTAMIDS Program.The GSTAMIDS program is aimed at fielding newly established "Route Clearance Companies" for the purposes of
conducting IED clearing
operations to eliminate IED threats to friendly force mobility. With the Buffalo, we have been designated by the U.S. Army and U.S. Marine Corps as the sole-source supplier of vehicles for
EOD, including EOD vehicles that satisfy the Category III requirements of the MRAP program, for the Joint Program Officer of MARSYSCOM, and the Route Clearance vehicles requirements under the
GSTAMIDS for TACOM.

FMS Program.The DoD established the FMS program to manage government-to-government purchases of weapons and other defense
articles, defense services, and military training. A foreign military buying weapons through the FMS program does not contract directly with the company that makes them. Instead, the DoD serves as an
intermediary, usually handling procurement, logistics and delivery. In 2006, we entered into a subcontract with BAE Systems to provide Cougar ILAV vehicles for the Iraqi National Army. In 2007
and 2008, we entered into contracts with the DoD to provide Buffalo and Cougar vehicles to the Canadian Ministry of Defence through the FMS program. In 2008, we entered into contracts with the DoD to
provide Buffalo and Cougar vehicles to the Italian Ministry of Defence, and Cougar Mastiff
and Ridgbacks, as well as Buffalo vehicles, to the United Kingdom Ministry of Defence and French military through the FMS program. A May 2008 briefing by United Kingdom Ministry of Defence indicated
that it is considering making its Cougar Mastiff and Cougar Ridgback fleets a long-term component in the United Kingdom Ministry of Defence. The original vision for the Cougar Mastiffs had
been a stopgap program under which the vehicles were likely to be disposed of at the end of the combat deployments in Iraq and Afghanistan. As a result of the successful performance the United Kingdom
experienced in combat, it decided to retain the vehicles and expand its fleet in order to maintain this capability within the United Kingdom Ministry of Defence for a longer term. It is our belief
this decision will provide ongoing opportunities for sustainment and upgrade of the Cougar fleet in the United Kingdom.

Other Opportunities.Many countries have buried landmines as a result of their use as a defensive tactic in areas of enemy egress
during the Cold War
and in third-world civil- and international-warfare during the 1980's and 1990's. More recently, it is armed groups that place mines in more countries than government forces, and insurgent and rebel
groups are using IEDs in increasing numbers. According to the 2008 Landmine Monitor Report, at least 70 countries and six areas not internationally recognized are believed to be landmine-affected.
Additionally, in 2007 and 2008, clearance operations indicated that at least 25 states and three areas not internationally recognized have submunitions on their territory. As a result, humanitarian
de-mining operations may become a potential market for our products in order to enable nations to safely clear their land of buried landmines.

Business Strengths

Survivability Performance.Our Buffalo and Cougar blast- and ballistic-protected vehicles have been deployed with the U.S. and allied
forces in Iraq
and Afghanistan since 2004. We believe our vehicles are the most survivable and sustainable wheeled vehicles on the battlefield. According to our

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internal
data, as of December 31, 2008, our vehicles have logged in excess of 600,000 days in combat operations and sustained in excess of 3,000 IED and landmine blasts during the course
of their active duty. The advanced design and engineering incorporated into our vehicles increases the survivability rate of vehicle occupants in conflict with a hostile force. In addition, the
structural integrity of the passenger compartment and our use of readily-available automotive parts help our vehicles to be quickly repaired and returned to duty after sustaining damage from an
attack. As a result, our field data indicates over 99% of our vehicles delivered since 2004 are still in operation, and the U.S. military reports operational availability for those vehicles in excess
of 90%.

Scalable Manufacturing Capabilities.We have developed a process-driven, scalable manufacturing operation that enables us to design and
build
vehicles with increased efficiency. Together with key partner and subcontractor relationships, we are able to rapidly expand our production capabilities to meet customer demands. This approach enables
us to expand production capacity while reducing our capital investment requirements.

Sustainability.Our Buffalo and Cougar vehicles are designed to be sustainable. Ease of maintenance is a hallmark of the design such
that the vehicle
can endure a blast event and be repaired quickly to be ready to serve once again. Repairs are made using common tools with little need for any specialized tooling. On-board diagnostics aid the
maintainer in making quick repairs. Storage and payload capacity for both the Buffalo and Cougar vehicles facilitate field repairs when needed. Our vehicles are constructed using common parts and off
the shelf products to promote availability of spare parts. Additionally, the parts and material selected for these vehicles have a proven history of reliability and availability over the vehicle life
cycle. Technical documentation is fully illustrated and easy to follow, which simplifies the operation and maintenance training. Thoughtful design of man-machine interfaces has minimized complexity
for both the operator and the maintainer. We continuously refine our support services for our customers' training, field support, and parts distribution needs.

Proprietary Technology and Commitment to Research and Development.Our proprietary designs are derived from concepts that were
initially developed
outside the United States over 30 years ago to protect vehicle occupants against the threat of landmines and unexploded ordnance. We have continuously improved upon our proprietary designs
through internally funded research, development and testing. For example, ForceArmor was developed in response to a need to counter EFP attacks experienced in Iraq and Afghanistan. We
actively seek to protect our designs through our intellectual property rights. We believe our focus in these areas enables us to remain flexible in our design processes and improve our vehicle
sustainability and performance.

Demonstrated Ability to Anticipate Customer Requirements.As one of the first U.S.-based manufacturers of the current generation of
blast- and
ballistic-protected vehicles, we believe we are a leader in technological innovation in this industry. Our expertise enables us to produce a range of vehicles that serve a variety of missions, and are
capable of withstanding increasingly violent attacks from a constantly evolving threat. We believe we will continue to be able to proactively anticipate the needs of our customers and manufacture
vehicles that exceed their operational requirements. For example, we initiated the design and testing of our Cheetah vehicle in 2005, two years prior to the official request by the U.S. military for a
higher-mobility blast-resistant wheeled vehicle under the MRAP II solicitation in July 2007. In addition, we started the development of the ForceArmor/EFP program in 2006, two years prior
to the official request by the U.S. Marine Corps for an exterior armor kit to be added to the MRAP vehicles.

Strong Customer Relationships.We have generated substantially all of our revenue from sales to the DoD. As a result, we have developed
strong
relationships with the U.S. Marine Corps, the United Kingdom Ministry of Defence, and other U.S. military branches and foreign military allies of the U.S. We believe that these relationships and the
performance of our vehicles in the conflicts in Iraq and Afghanistan will provide us with a significant advantage as we compete for future government

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contracts.
In addition, our Buffalo has been designated as a U.S. Army "Program of Record." In an effort to further enhance our customer relationships, we have located business development
representatives near TACOM and the U.S. Marine Corps Systems Command facilities to service their requirements.

Experienced Management Team.Our success is due in large part to the broad experience and knowledge of our management team and key
personnel. Our
executive management team has expertise in automotive engineering, manufacturing and government contracting, and brings to the organization extensive knowledge of our customers. In order to keep pace
with the growth of our business, we have recently strengthened our management team through the addition of several key personnel in the areas of finance, export compliance, engineering and total life
cycle support and we will continue to add personnel in key positions based on our business needs.

Business Strategy

Our business strategy is built around three main imperatives: first, constant focus on innovation and the introduction of new
survivability products and solutions; second, expand our customer base; and third, procure contracts for sustainment services of our fleet of vehicles across all customers. Specific components of the
strategy include the following:

Identify New Products and Markets to Meet Evolving Customer Requirements.We plan to continue to maintain a strong emphasis on the
development of new
products and improved technology and believe that our ongoing commitment to research and development will better position us to anticipate the future needs of our customers.

Capitalize on Demand for Blast- and Ballistic-Protected Vehicles and other Survivability Solutions.The ongoing military operations in
Iraq and
Afghanistan against an innovative enemy have been the primary factor driving demand for our vehicles. Our marketing efforts focus on the sale of vehicles to the U.S. military and, with authorization
from the U.S. government, to foreign allies of the United States. We also intend to expand our vehicle offerings by designing new variants and implementing model changes within the current fleet as we
seek to anticipate evolving customer requirements.

Expand Our Total Life Cycle Support Footprint.We are experiencing an increase in the portion of our revenues generated by the sale of
aftermarket
and support services, such as spare parts, field service, technical documentation, and training, for our growing fleet of deployed vehicles. Due to the nature of their mission, we expect a significant
number of our vehicles will need to be supported, serviced or repaired either in the field, at a depot, or upon return from combat operations. We intend to continue to increase our life cycle support
footprint domestically and globally.

Focus on Core Competencies.We are making investments in mainstream and "newstream" innovation capabilities. Mainstream refers to our
ability to
maintain, improve and evolve our current vehicle platforms with a focus on survivability, sustainability and availability. Mainstream also refers to our ability to understand our current customer's
evolving operational needs and to provide whole-system solutions beyond standard vehicle platforms to meet these requirements. "Newstream" refers to our ability to innovate new survivability solutions
outside our core vehicle platform base. Our new ForceArmor EFP protection is an example of this effort.

Leverage Key Relationships to Grow our Business.We have developed strong relationships with the U.S. Marine Corps, the United Kingdom
Ministry of
Defence, domestic and certain other foreign military customers. We hired a full-time representative at TACOM to further improve upon our relationship with the U.S. Army. In addition, we
placed a full-time representative at Marine Corps Base Quantico, Virginia to ensure we maintain our close relationship with the Marine Corps. We believe that these relationships and the
performance of our vehicles in the conflicts in Iraq and Afghanistan will

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give
us an advantage as we compete for future government contracts. In addition, we have established business relationships with several large companies in the defense industry, including GDLS,
BAE Systems, Raytheon Technical Services Company, DRS, and Oshkosh Truck Corporation. We believe that these commercial relationships will provide us with an advantage by enabling us to pursue
opportunities maximizing our core expertise and skills in a complementary fashion with our partners.

Develop and Expand Strategic Partnerships.We believe that combining our strengths and products with the strengths of other strategic
partners will
enable us to realize greater and manageable growth in our markets. We plan on developing new ventures and expanding existing partnerships to develop our vehicles. In addition, in furtherance of our
relationship with GDLS, in December 2008, our Cheetah was submitted in response to the U.S. Army's M-ATV solicitation by Force Dynamics, LLC.

Customer Activity

Our primary customer is the DoD through which we directly and indirectly service U.S. military branches (primarily, the U.S. Army and
the U.S. Marine Corps) and indirectly service foreign military allies of the U.S. through the DoD's FMS program. In 2008, our sales to the DoD's FMS program represented approximately 9.9% of all of
our sales. We have field service representatives deployed in Iraq, Afghanistan and the United Kingdom to provide customer support of our direct and indirect DoD arrangements.

The
following table sets forth the number of vehicles we sold in the respective periods shown below, including Cougar MRAP (Competitive) vehicles manufactured by GDLS under our GDLS
Subcontract.

Vehicle

2008

2007

2006Buffalo


81


85


28Cougar JERRV





25


169Cougar MRAP (Sole Source)





200


Cougar MRAP (Competitive)


1,724


1,165


Cougar Italy


6





Cougar Mastiff (United Kingdom Ministry of Defence)


174


78


30Cougar (United Kingdom Ministry of Defence)


6





Cougar Ridgback (United Kingdom Ministry of Defence)


68





Cougar Canada


8


5


Total


2,067


1,558


227


In
addition, we sold 102 Cougar ILAVs in the year ended December 31, 2008, 99 Cougar ILAV's in the year ended December 31, 2007 and 58 Cougar ILAVs in the year ended
December 31, 2006 pursuant to
our subcontract with BAE Systems, for which we primarily provide only labor for a portion of the production of the vehicles.

Competitive Positioning

We are subject to significant competition from companies that market and manufacture armored vehicles, as well as other companies that
supply spare parts for armored vehicles and sustainment. This competition could harm our ability to win business and increase the price pressure on our products. The companies we compete against
include large, multinational vehicle, defense and aerospace firms such as BAE Systems Land & Armaments, L.P. , Textron Inc., Navistar Defense (formerly known as International
Military and Government) LLC, a subsidiary of Navistar International Corporation, Oshkosh Corporation, Mantech Services (UK) Ltd., Raytheon Company, NP Aerospace and GDLS. Most of our
competitors have considerably greater financial, marketing and technological resources

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than
we do, which may make it difficult for us to win new contracts, and we may not be able to compete successfully. Certain competitors operate fabrication facilities and have longer operating
histories and presence in key markets, greater name recognition, larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other
resources. As a result, these competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. They may also be able to devote greater resources to
the promotion, manufacturing and sale of their products.

We
believe our competitive advantages include:



We
believe our products are superior to many other wheeled vehicles currently in use by the U.S. military in terms of mine- and blast- protection because of its survivability
and repairability. Existing U.S. wheeled military vehicles include HMMWV and other non-armored utility support vehicles. U.S. military tracked vehicles (meaning that they have treads
instead of wheels) include heavyweight troop transport and offensive armor such as the Bradley Fighting Vehicle ("Bradley"), and the M1A1 Abrams Tank ("Abrams"). The lightly armored and
un-armored HMMWV and other wheeled vehicles can be subject to attacks and efforts to "up-armor" these vehicles have not been completely successful due to the costs associated
with retrofitting armor onto the bodies of the vehicles and the increased mechanical wear caused by the weight of the armor. Conventional tracked armored vehicles such as the Bradley and the Abrams
offer protection from blast- and ballistic- threats, but are expensive, require substantial resources to maintain, are large and can be difficult to maneuver in urban environments and may not be
well-suited to peace-keeping missions due to their intimidating offensive weapon systems.

Company History

We were organized under the laws of the State of Colorado in November 1996 as Boulder Capital Opportunities III, Inc., a blank
check corporation. In 1998, we acquired Sonic Jet Performance, LLC, a California limited liability company engaged in the business of producing and marketing recreational boats, jet boats,
trailers, and related accessories. In November 1998, we changed our name to Sonic Jet Performance, Inc. In 2000 and 2001, we emphasized building recreational boats
and, in 2002, we relocated our corporate headquarters, assembly, and prototyping facility to Stanton, California and shifted our focus to the design and production of fire and rescue boats.

In
June 2002, we acquired a 90% interest in Technical Solutions Group, Inc., a development stage manufacturer of blast- and ballistic-protected vehicles based in Charleston, South
Carolina. Technical Solutions Group, Inc. was originally formed in 1997 as a Nevada corporation. We subsequently increased our ownership interest in Technical Solutions Group, Inc. to
100%.

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The acquisition of Technical Solutions Group, Inc. shifted our principal focus from our then existing watercraft business to the production of mine
clearing and armored vehicles. We sold the assets of our watercraft business in 2003, and we moved our corporate headquarters to South Carolina to utilize the office and manufacturing space previously
used by Technical Solutions Group, Inc. on the grounds of the former Navy Shipyard in Charleston, South Carolina. On October 15, 2003, we moved our headquarters to our current location
in Ladson, South Carolina. In September 2003, we changed our name to "Force Protection, Inc." to reflect our primary focus on producing and manufacturing protected and armored vehicles. In
January 2005, we reincorporated from the State of Colorado to the State of Nevada. We became listed on the Nasdaq Capital Market in January 2007.

Major Contracts

Since January 1, 2006, we have secured over $2.5 billion of orders in the global military market. The major military
contracts that we have secured since January 1, 2006 include the following, which are further described below:



MRAP Competitive Contract.This is our largest contract for our Cougar vehicles which was competitively bid and awarded to us in
January of 2007. It
is an ID/IQ contract that allows the U.S. government to order up to a maximum of 4,100 MRAP vehicles per year over a five-year period. We fulfill this contract with GDLS through the GDLS
Subcontract described below.

During
2007 and 2008, we delivered 1,165 and 1,724 vehicles, respectively, under the MRAP Competitive Contract. As of December 31, 2008, we had outstanding orders for five
vehicles. The total awarded value of this contract from inception through December 31, 2008, is approximately $1.9 billion (a portion of which is subject to price definitization (see the
discussion under the headingGovernment Contracts and Regulationsbelow for a further description of price definitization)) of which approximately
$957 million of the work has been or will be provided by GDLS under the terms of the Workshare Agreement described below.

On
September 10, 2007, we entered into a subcontract with GDLS (the "GDLS Subcontract") pursuant to which GDLS performs approximately 50% of the work under the MRAP Competitive
Contract for vehicle manufacturing and life cycle support based on revenues. We previously entered into a joint venture with GDLS on December 15, 2006 ("Workshare Agreement") pursuant to which
we and GDLS would fulfill the obligations of the MRAP Competitive Contract. We formed a Delaware limited
liability company, Force Dynamics, LLC ("Force Dynamics"), to govern the terms of the joint venture. However, the MRAP Competitive Contract was awarded to us and not to Force Dynamics or GDLS.
We have attempted to transfer this contract to Force Dynamics, although the U.S. government has not yet agreed to the transfer.

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FMS UK Contracts.On February 21, 2008, we received an order from the United Kingdom Ministry of Defence for the purchase of 174
Cougar
Explosive Ordnance Disposal Vehicles, known as Mastiff Protected Patrol Vehicles ("Cougar Mastiffs"), a Cougar 6x6 variant through the DoD's FMS program. During 2008, this order was further modified
to add 24 more Cougar Mastiffs. On May 2, 2008, the order was modified to add the purchase of 151 Cougar 4x4 Ridgback variants through the DoD FMS program. On October 31, 2008,
the order was further modified to add the purchase of 14 Buffalo vehicles under the United Kingdom Talisman project. All of the United Kingdom Ministry of Defence orders include associated spare
parts, technical manuals and field service support.

During
2008, we delivered 174 Cougar Mastiffs, 68 Cougar Ridgbacks, six Cougar 4x4 variants and two Buffalos under the FMS UK Contract. As of December 31, 2008, we had outstanding
orders for 119 vehicles. This contract is administered by the U.S. Marine Corps Systems Command and some of the 2008 orders are subject to price definitization. The total awarded value of this
contract from inception to December 31, 2008, is approximately $307 million.

BAE Subcontract.On May 30, 2006, TACOM awarded BAE Systems a delivery order in the amount of $180.5 million as part of
a
fixed-price contract for the production and delivery of 378 ILAVs to the Iraqi National Army ("BAE Agreement"). On August 8, 2006, we entered into a subcontract with BAE pursuant to which we
serve as BAE Systems' principal subcontractor to provide the manpower and other resources needed to produce 50% of the vehicles and 100% of the life cycle support.

On
June 30, 2008, the BAE Subcontract was amended to allow for the purchase of up to 1,602 vehicles and life cycle support services through June 30, 2010. The total value
of orders awarded to us by BAE Systems under this subcontract from inception to December 31, 2008, is approximately $75.1 million.

ForceArmor Contract.In December 2008, the U.S. Marine Corps awarded us several
orders for our EBPM products, also known as our ForceArmor. These undefinitized contract modifications have an aggregate value of approximately $40.5 million, with a funding
limitation and current expenditure authorization not to exceed approximately $30.5 million.

Production

The key components of our manufacturing process are the following:



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Sales and Marketing

Our employees, including senior management and our vice presidents of marketing and business development conduct our primary sales and
marketing efforts. Apart from our senior management, our primary sales staff consists of employees or agents, who reside in South Carolina, Michigan, Virginia and Connecticut. We also have consultants
and representatives in South Africa, United Kingdom, Turkey, Japan, Poland, Colombia, Hungary, the Kingdom of Saudi Arabia, Kuwait, the United Arab Emirates, Australia and Greece. These
representatives facilitate our business development activities in their respective countries and serve as local subject matter experts in helping us to better understand local requirements and
practices in our efforts to establish markets overseas.

We
actively participate in trade shows involving countermine operations and technology, military vehicles, law enforcement technology and military force protection, including the
Association of the U.S. Army Annual Meeting and Winter Symposium; Modern Marine Expo; and Tactical Wheeled Vehicle conferences. In addition we participate in overseas shows in France; the United Arab
Emirates and England.

Sales to the U.S. Government

For each of 2008, 2007 and 2006, substantially all of our net sales were derived from work performed directly or indirectly under U.S.
government contracts.

Government Contracts and Regulation

We are a DoD contractor that delivers products and services to the U.S. military. The U.S. government contracting process differs in
many ways from commercial contracting, and involves a high degree of federal government regulation and oversight of the programs in which we participate. As a result, we are subject to extensive
regulations and requirements of the U.S. government agencies and entities that govern these programs, including award, administration and performance of contracts. We are also subject to certain
unique business risks associated with the U.S. government program funding and appropriations and government contracts.

U.S.
government contracts generally are subject to the Federal Acquisition Regulation ("FAR"), which sets forth policies, procedures, and requirements for the acquisition of goods and
services by the U.S. government; agency-specific regulations that implement or supplement the FAR, such as the DoD Federal Acquisition Regulation Supplement ("DFARS"); and other applicable laws and
regulations. These statutes and regulations impose a broad range of requirements, many of which are unique to government contracting, including various procurement, import and export, security,
contract pricing and cost, contract termination and adjustment, compliance, disclosure, and audit requirements. A contractor's failure to comply with these regulations and requirements could result in
reductions of the value of contracts, contract modifications or termination, and the assessment of civil or criminal penalties and fines and could lead to suspension or debarment from government
contracting or subcontracting for a period of time.

In
addition, U.S. government contractors that perform military programs are also subject to audits and investigations by U.S. government agencies such as the Defense Contract Audit
Agency ("DCAA"), the DoD Inspector General, and other government entities. U.S. government agencies review a contractor's performance under its contracts, cost structure and compliance with applicable
laws, regulations and standards. These entities also review the adequacy of compliance with internal control

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systems
and policies, including the contractor's purchasing, property, estimating, compensation and management information systems, as well as possible instances of fraud, waste, and abuse.
Additionally, each fiscal year, we must submit final cost data to the federal government indicating our actual costs incurred for the prior year, exclusive of certain costs that are not recoverable by
federal government contractors. Once audited, the U.S. government may adjust the amounts of reimbursable costs under certain contracts, based upon established guidance, which may affect recovery of
our costs. These audits may also result in, among other things, price reductions, assessment of penalties, interest costs, or even potential debarment from participation in the federal procurement
system. The DCAA recently audited our financial condition and capability and, in March 2009 advised us that we had an "acceptable rating." This rating means that the DCAA has determined that we
currently, and for the near-term, have adequate financial resources to perform U.S. government contracts. Previously, the DCAA had expressed an opinion that Force Protection could not
provide adequate financial data to determine whether we had adequate financial resources to perform on government contracts. See Item 1A,Risk
Factorsin Part I of this Annual Report on Form 10-K, for a
discussion of certain additional risks associated with U.S. government contract regulations and requirements compliance.

Generally,
Congress appropriates funds on a fiscal year basis even though a program may extend across several fiscal years. Consequently, programs are often only partially funded
initially and additional funds are committed only as Congress makes further appropriations and agencies determine a continued need for the specific program. The contracts under a program generally are
subject to termination or adjustment if appropriations for such programs are not available or change or the applicable agency's budgeting priorities change. Additionally, the U.S. government is
required to equitably adjust a contract price for additions or reductions in scope or other changes directed by the applicable agency. See Item 1A,Risk
Factorsin Part I of this Annual Report on Form 10-K, for a discussion of additional risks associated with program funding and appropriations.

In
most federal procurements, interested contractors submit information indicating their desire to provide the required goods. The agency then solicits competitive proposals or bids from
qualified contractors by the publication of a formal request for proposal ("RFP"). The RFP typically describes the desired goods, terms and conditions, and evaluation criteria that the agency will
use. Then, the interested contractors, called offerors, submit proposals in response to an RFP, and the agency evaluates the proposals and makes the award determination. The amount of time for a
procurement to be completed (from notification of the RFP to award) can range from several months to a year or more.

The
government contracts for which we compete typically have multiple year terms, including option years, and if we are unable to win a particular contract, we generally will be excluded
from competing again for that contract until its expiration several years later. In addition, upon the expiration of a contract, if the customer requires further services of the type provided by the
contract, there is frequently a competitive re-procurement process.

Many
of our contracts are issued as orders on a sole-source basis and/or a not to exceed amount and then become fixed-price contracts. Under fixed-price contracts, the contractor agrees
to perform a specific scope of work for a fixed price. As a result, the contractor benefits from any cost savings but suffers from any losses from any cost overruns. See Item 1A, Risk Factorsin
Part I of this Annual Report on Form 10-K for a discussion of certain risks associated with fixed-price
contracts.

Many
of our contracts are and have been subject to "definitization," meaning that the contract price is not agreed upon at contract inception. Instead, following award of the contract,
we and the U.S. government seek to agree upon a contract price based upon our cost of performing the contract. During the definitization process, we are required to perform the contract work, make
deliveries and receive payments from the U.S. military before the final contract price has been established. For this reason, as part of the original award, we agree to a not to exceed ("NTE") price
to be used for

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invoicing
and accounting purposes pending definitization. As a result, at the completion of the contract, we may have received overpayments during the course of the contract and will be required to
return any overpayments to the U.S. military. See Item 1A,Risk Factorsin Part I of this Annual Report on Form 10-K
for a discussion of certain risks associated with contracts that are subject to price definitization.

Following
an award of these orders, performance of the work commences while we and the government negotiate a final contract price for the scope of the work to be completed subject to
the NTE amount. During this definitization process, we are obligated to perform up to the funding limitation for the order, make deliveries and receive payment before the final contract price has been
established. Once the definitization is completed, we execute a modification to complete the order for a fixed price.

In
addition, we also hold ID/IQ contracts. Essentially, the ID/IQ contracts are umbrella contracts setting forth the basic terms and conditions under which the agency may order goods
from a contractor, and in some cases, multiple contractors. Contractors undergo a competitive preselection process to become eligible to receive orders under ID/IQ contracts. Many orders under these
ID/IQ contracts are also subject to the definitization process. In addition, ID/IQ contracts do not obligate the federal government to purchase goods above the minimum levels set forth in the
contract. See Item 1A,Risk Factorsin Part I of this Annual Report on Form 10-K for a discussion of the risk
associated with ID/IQ contracts.

U.S.
government contracts generally permit the government to terminate the contract, in whole or in part, without prior notice, at the government's convenience, where the government no
longer has a need for the service, or for default, usually based on deficiencies in performance. Generally, if a contract is terminated for convenience, the contractor is entitled to payments for some
or all of its allowable costs incurred in performing the work that was terminated and may receive some allowance for profit on the work performed. If a contract is terminated for default, the
contractor is generally entitled to payments for its work that has been accepted by the government. See Item 1A,Risk Factorsin Part I of
this Annual Report on Form 10-K for a discussion of certain additional risks associated with the U.S. government's right to terminate its contracts.

Certain Laws and Regulations Affecting Our Business

There are certain federal laws that, while not specifically directed at us as a contractor, may affect our U.S. government contracts.
The Anti-Deficiency Act is a collection of laws through which Congress exercises its constitutional control of the public purse. The central provision, codified at 13 U.S.C.
§1341, prohibits making or authorizing an expenditure from, or creating or authorizing an obligation under, any appropriation or fund in excess of the amount available in the appropriation
or fund unless authorized by law. The Anti-Deficiency Act also prohibits involving the government in any obligation to pay money before funds have been appropriated for that purpose,
unless otherwise allowed by law. Generally, therefore, agencies cannot fund our contracts unless there has been a full appropriation of the necessary funds. Congress appropriates the majority of an
agency's funds on a fiscal year basis, and the agencies, in turn, fund and award our projects. Agencies do not receive all funds for a given year at the outset of that year; rather they receive
allocations and allotments in accordance with the Office of Management and Budget guidelines and internal agency policies. Therefore, the Anti-Deficiency Act indirectly regulates how the
agency awards our contracts and pays our invoices.

There
are also numerous provisions within the FAR that affect the procurement process and administration of our contracts. With respect to conducting a procurement, the FAR provides
guidance on how the agency is to conduct the evaluation of an RFP. The FAR also provides a mechanism through which disappointed bidders and contractors excluded from competing for government contracts
and task or delivery orders may submit an objection, called a "bid protest," in accordance with the

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relevant
rules and regulations, to an agency contracting officer, the Government Accountability Office, or the U.S. Court of Federal Claims. Performance under a contract being protested may be
suspended while the protest is pending, and in cases where the contract is found to have been improperly awarded, the contract may be terminated, or other corrective action may be taken.

Some
contracts may be subject to the Truth in Negotiations Act ("TINA"), Cost Accounting Standards ("CAS") and Contract Cost Principles and Procedures ("Cost Principles"). Generally,
TINA requires us to provide cost or pricing data and to certify that those data are current, accurate and complete, in connection with the negotiation of certain types of contracts, modifications or
orders, but there are some exceptions to TINA, including contracts that are based on adequate price competition. As described under Item 1A,Risk
Factorsin Part I of this Annual Report on Form 10-K, we were previously categorized as a "small business" under federal procurement regulations, but
due to our growth we no longer qualify as a "small business." As a result, CAS applies to contracts awarded to the Company after May 19, 2008. The Cost Principles set forth the rules regarding
the allocability and allowability of costs incurred in connection with federal government contracts.

Another
area covered by the FAR is an organizational conflict of interest ("OCI"). These regulations establish rules for avoiding, mitigating and neutralizing conflicts of interest in
the issuance and performance of contracts by the federal government. Both contractors and contracting officers bear the burden of identifying and reporting OCIs. An OCI may arise because the nature of
the work to be performed by a contractor has the potential, absent some restriction on future activities, to result in an unfair competitive advantage to the contractor or impair the contractor's
objectivity in performing the contract or providing assistance or advice to the federal government. The government contracting officer is responsible for resolving any significant potential OCIs
before a contract award is made or as soon as the OCI is identified.

Our
conduct and performance is also subject to the False Claims Act and other anti-fraud statutes. The False Claims Act, 31 U.S.C. §3729, prohibits contractors
from knowingly submitting false or fraudulent claims for money (e.g.,a false or fraudulent invoice) to the federal government. Any claim of
violation of the False Claims Act may be a criminal and/or civil violation, which carries significant monetary penalties. Agencies may take administrative actions, such as suspension and debarment, in
the event of a False Claims Act finding or conviction.

Laws and Regulations Affecting International Activities

Federal laws affect our ability to sell our products abroad and grant access to our technology to foreign nationals in the U.S. We are
obligated to comply with a variety of federal, state and local regulations, both domestically and abroad, governing certain aspects of our international sales and support, including regulations
promulgated by, among others, the U.S. Departments of Commerce, Defense, State and Justice and the Bureau of Alcohol, Tobacco, Firearms and Explosives.

For
products and technology exported from the U.S. or otherwise subject to U.S. jurisdiction, we are subject to U.S. laws and regulations governing international trade and exports,
including, but not limited to the International Traffic in Arms Regulations ("ITAR"), the Export Administration Regulations ("EAR"), the DoD's FMS program and trade sanctions against embargoed
countries and destinations administered by the Office of Foreign Assets Control ("OFAC") of the U.S. Department of the Treasury. We are also obligated to fulfill requirements under the U.S. Munitions
Import List for certain parts and components imported into the U.S. for our products. These laws and regulations impose compliance and licensing obligations to obtain U.S. government authorization for
transfers outside the U.S. and to persons in the U.S. other than U.S. citizens and U.S. permanent residents.

The
Foreign Corrupt Practices Act ("FCPA") and equivalent laws and regulations in foreign jurisdictions prohibit improper payments to foreign governments and their officials by U.S. and
other business entities. The FCPA has two principal parts: anti-bribery and record keeping provisions. The

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U.S.
Department of Justice enforces the anti-bribery provisions; the Securities and Exchange Commission ("SEC") also has jurisdiction over civil enforcement of the anti-bribery
provisions. The record keeping requirement, applicable only to companies registered on U.S. stock exchanges, obligates companies to maintain accurate books and records and internal financial controls
regarding all transactions. The SEC oversees enforcement of these provisions.

Research and Development

We continually seek to improve our technological leadership position through internal research, product development, licensing, and
acquisitions of complementary technologies. We also seek to expand our research capability through partnerships with commercial, research, and educational institutions. For example, in August 2008,
Force Protection and the Medical University of South Carolina jointly inaugurated the Force Protection Center for Brain Research at the Medical University of South Carolina. This program is anchored
by a state of the art MRI research scanner operated by leading traumatic brain research physicians from the United States and the United Kingdom. Working in conjunction with the blast research
capabilities of Force Protection, this team is well on the way to achieving a better understanding of the phenomenon of traumatic brain injury suffered by so many veterans of the Iraq and Afghanistan
wars with the aim of introducing improved products and treatments. In addition, we regularly investigate new ways to manufacture our various products to reduce variation, improve manufacturing cycle
times, and reduce overall manufacturing costs.

As
of December 31, 2008, we had approximately 40 employees engaged in research and development. We continually work to enhance the survivability and reliability of our existing
products and to develop and introduce innovative new products to satisfy the evolving needs of our customers domestically and internationally. To supplement our research activities, in 2007 we
purchased a blast and ballistics range which gives us a technological advantage enabling rapid prototyping, confirmation testing, and analysis.

For
the years ended December 31, 2008, 2007 and 2006, we spent $14.3 million or 1.1% of net sales, $14.1 million or 1.6% of net sales, and $3.2 million or
1.6% of net sales, respectively, on research and development. None of our research and development costs were customer-sponsored.

We
are committed to product development and expect to continue our investment in this area. We believe that the continual development or acquisition of innovative new products and
service will be critical to our future success. Failure to develop, or introduce on a timely basis, new products, services or product enhancements that achieve market acceptance could have a material
adverse effect on our business, operating results or financial condition. See Item 1A,Risk Factorsin Part I of this Annual Report on
Form 10-K for a discussion of the risk associated with product development.

Engineering

To effectively and efficiently develop reliable, high quality, manufacturable products and provide best value total life cycle costs,
we are dependent upon our ability to manage, direct, and design advanced vehicle structures and systems utilizing internal and external engineering resources. We have established key engineering
practices, procedures and tools along with a core design engineering team that utilizes appropriate standards and validation/verification methodologies to insure we meet our various customer
requirements for both vehicle performance and survivability. We continue to explore ways to continuously improve engineering effectiveness through training, tools used for designing, testing, modeling
and simulation along with establishing and leveraging strategic external resources that compliment our capabilities and are available during peak cyclical demand. These external resources have become
increasingly important and during 2008 we undertook actions to better align our engineering organization and infrastructure to develop our capability to quickly integrate external engineering
resources when required. During 2008, we leased a 10,000 square foot facility in Sterling

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Heights,
Michigan, a suburb of Detroit, close to one of our key customer constituent TACOM and partner GDLS to establish an engineering technical center. We have hired both direct and contract
technical center engineering resources to supplement our core engineering team located in Ladson, South Carolina. The new engineering facilities and the supporting management team, infrastructure,
tools and engineering processes have created a strategic capability that can rapidly scale and integrate technical resources to meet customer needs.

Raw Material and Supplies

We depend on suppliers and subcontractors for raw material and supplies. The cost of our raw material and supplies may fluctuate
substantially and some of our raw material and supplies may be in short supply, may be available from only one or a limited number of suppliers, or may only be available from foreign suppliers.
Increased costs or difficulties in obtaining supplies and raw material in the requisite quantities, or at all, could have a material adverse effect on our results of operations. The credit crisis and
rapidly escalating steel, fuel and other raw material costs in fiscal 2008
created additional risks for our supplier base. We believe that some suppliers may discontinue business due to tight credit conditions or the inability to either absorb cost increases or pass them on
to their customers. In 2009, additional suppliers could face financial difficulties as a result of the global economic downturn. We actively monitor our suppliers' financial conditions, but to date
have no knowledge of significant concerns with the financial stability of any of our major suppliers. See Item 1A,Risk Factorsin Part I
of this Annual Report on Form 10-K for a discussion of our raw materials.

We
are highly dependent on the availability of essential materials, parts and sub-assemblies from our suppliers and subcontractors. The most important raw materials required
for our products are armored steel, milled steel, major automotive components, and ballistic glass. Several major automotive components are procured or subcontracted on a sole-source, or
limited source, basis with a number of domestic and non-U.S. companies. The most important raw material we purchase is steel, accounting for approximately 15.6% of our total vehicle
material costs.

We
are dependent upon the ability of our suppliers and subcontractors to meet our specifications, standards and delivery schedules at anticipated costs. While we maintain a qualification
and performance surveillance system to control risk associated with such reliance on third parties, failure of suppliers or subcontractors to meet commitments could adversely affect production
schedules and contract profitability, while jeopardizing our ability to fulfill commitments to our customers. See Item 1A,Risk Factorsin
Part I of this Annual Report on Form 10-K for a discussion of our suppliers.

No
material portion of our business is considered to be seasonal. Various factors could affect the distribution of our sales between accounting periods, including the timing of
government awards, the availability of government funding, product deliveries and customer acceptance.

Intellectual Property

Intellectual property rights, which apply to various Force Protection products and technologies, include patents, copyrights, trade
secrets and trademarks. We seek to remain competitive in the market by placing emphasis on research and development and are committed to capturing, protecting and enforcing our intellectual property
rights. We continue to review our practices and procedures to ensure the protection of our intellectual property.

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

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The agreement with CSIR provides for the provision, on an exclusive basis, by CSIR to us of certain technical, scientific and commercial intellectual property
rights pertaining to the development of our Cougar and Buffalo vehicles. Under our agreement with CSIR, we pay CSIR a fee for each vehicle sold and/or manufactured by us 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 in respect of our Cheetah vehicle, and the manufacture
of the Cheetah vehicles is not dependent 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 after March 2012, and if the agreement expires without renewal, after such date
CSIR may grant a license to the licensed intellectual property to other parties. However, even upon expiration of the agreement we will have the ability to manufacture and deliver the Cougar and
Buffalo vehicles.

The
agreement with Mechem provides for the provision, on an exclusive basis, by Mechem to us of certain technical, scientific and commercial intellectual property rights pertaining to
the development of our Cougar and Buffalo vehicles. Under our agreement with Mechem, we pay Mechem a fee for each vehicle sold and/or manufactured by us 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 with respect to our Cheetah vehicle, and the manufacture of the Cheetah vehicle is
not dependent upon the technology granted to us under the agreement with Mechem. Our original agreement with Mechem was effective October 15, 2001, and expired October 14, 2006. Our
current agreement with Mechem, which we entered into on September 13, 2006, expires on September 12, 2011. We have no right to extend the agreement after September 2011 and, if the
agreement expires without renewal, after such date Mechem may license the licensed intellectual property to other parties. However, even
upon expiration of the agreement, we will have the ability to manufacture and deliver the Cougar and Buffalo vehicles.

In
connection with our subcontract with BAE Systems, we entered into a production license agreement with BAE Systems, dated June 13, 2006, pursuant to which we license to BAE
Systems the use of our Cougar vehicle as the basis for the ILAV vehicle design, and act as BAE Systems' principal subcontractor to provide the manpower and other resources needed to produce 50% of the
vehicles in Ladson, South Carolina. Pursuant to the terms of the agreement, we receive a license fee for each ILAV vehicle manufactured by BAE Systems under the agreement. The production license
agreement will remain in effect until the earlier of (i) completion of all the work under the BAE Agreement, (ii) termination of the agreement by us in the event of default by BAE
Systems, or (iii) termination of the subcontract for convenience. We own all the intellectual property associated with the ILAV design, including improvements.

In
connection with our Workshare Agreement with GDLS, we entered into a technology license agreement with Force Dynamics and GDLS, dated December 15, 2006. The agreement provides
that we grant Force Dynamics and GDLS a non-exclusive license without the right to sublicense to manufacture the Cougar utilizing our background intellectual property for the MRAP
Competitive Contract. Force Dynamics and GDLS pay us a fee per each vehicle manufactured by them using the licensed intellectual property, which fee we use to pay our license fees under the CSIR and
Mechem agreements described above. The term of this technology license agreement is the later of completion or complete termination of the MRAP program or the Workshare Agreement.

We
are a party to another license agreement with CSIR, pursuant to which we received two separate licenses. The first is a fully paid up internal license to perform research and
development to verify, test and develop certain technology (the protection of wheeled and tracked vehicles against landmines and IEDs as disclosed in its patent) and assess the market for products
through the parties written agreement of Proof of Concept (quantification and demonstration of the protection level and operation) in consideration of investing $500,000 since January 1, 2005.

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By
August 16, 2008, the Proof of Concept was obtained, and we are required to pay a $200,000 exclusivity fee to CSIR that is deferred but paid through any sales of wheels and
tracks for the second license. This second license also includes an exclusive, non-sublicensable license to exploit, including the manufacture, marketing, sale and use, the licensed
technology in the United States, Canada, the United Kingdom, France, Israel, Germany and nonexclusively in South Africa. However, we must also pay CSIR a minimum royalty fee every year for each
product that uses the technology or CSIR will have the right to rescind our exclusivity rights or terminate the agreement. The minimum royalty for the first year term, from August 16, 2008, to
August 15, 2009, was $150,000 and has been paid. All patent rights exist solely with CSIR, and CSIR will also have the right of first refusal to
patent any improvements that are made by us to the licensed technology. In return, CSIR will grant to us a royalty free license to use the patented technology in the defined territory. We may cancel
this agreement for any reason upon providing CSIR sixty (60) days notice.

Personnel

As of December 31, 2008, we had a total of approximately 1,170 employees, including approximately 250 field service
representatives. Of our total employees, approximately 470 were hourly employees and approximately 700 were salaried employees. Sharp reductions in company and contract employees throughout 2008 are
attributable to improvements in processes and productivity, as well as our successful fulfillment of major aspects of the MRAP contract. We are not a party to any collective bargaining agreement,
although we are subject to the risk that labor unions may seek to unionize certain of our employees. We believe our relations with employees are good.

Environmental Matters

We are subject to federal, state and local laws and regulations regarding the protection of the environment, including air, water and
soil. Our manufacturing business involves the use, handling, storage and contracting for the recycling or disposal of, hazardous or toxic substances or wastes, including environmentally sensitive
materials, such as batteries, solvents, lubricants, degreasing agents, gasoline and resin. We must comply with certain requirements for the use, management, handling and disposal of these materials.
We maintain limited pollution liability insurance for our Ladson, South Carolina facility, where we manufacture the Cougar and Buffalo vehicles, our Summerville, South Carolina facility, our Roxboro,
North Carolina facility, and our Edgefield, South Carolina facility, where we conduct some of our blast range activities and some of our research and development activities. If we are found
responsible for any hazardous contamination, we may have to pay expensive fines or penalties or perform costly clean-up. Even if we are charged, and later found not responsible for such
contamination and clean-up, the costs of defending the charges could be high.

Other Regulatory Matters

In addition to the laws and regulations discussed above under "Government Contracts and Regulation" "Certain
Laws and Regulations Affecting Our Business" and "Environmental Matters" above, our
operations and products are subject to regulation, supervision, and licensing under various other federal, state, local and foreign laws and regulations. Certain governmental agencies such as the
Occupational Safety and Health Administration ("OSHA") monitor our compliance with their regulations, require us to file periodic reports, inspect our facilities and products, and may impose
substantial penalties for violations of the regulations. There can be no assurance we will be successful in complying with these laws and regulations, or that any failure to comply with these laws and
regulations will not have a material adverse effect on our business, financial position, results of operations, and cash flows.

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Management

The following table sets forth certain information about our directors and executive officers as of March 12, 2009.

Name

Age

PositionMichael Moody


62

Chief Executive Officer, President, ChairmanCharles Mathis


49

Chief Financial OfficerLenna Ruth Macdonald


46

Chief Strategy Officer, General Counsel and Corporate SecretaryDaniel Busher


45

Executive Vice President, OperationsMark Edwards


47

Executive Vice President, DevelopmentDamon Walsh


47

Executive Vice President, M-ATV Program DirectorMGen. Jack A. Davis


62

DirectorLTG. Roger G. Thompson, Jr.


64

DirectorJohn S. Day


59

DirectorJohn W. Paxton, Sr.


72

Director


Michael Moody.Mr. Moody was appointed President of Force Protection, Inc. in September 2007, the Interim Chief Executive
Officer on
January 30, 2008 and the Chief Executive Officer on February 29, 2008. Mr. Moody has more than 30 years of senior management experience in operational management,
reorganizations, acquisitions and business transformations. From 2005-2007 he provided business and financial advisory services to privately held businesses. Mr. Moody was the Chief
Operating Officer at the London American General Agency and Senior Vice President of Corporate Development for Magna Carta Companies, a mutual insurance company, where he also served on the Board of
Directors. Mr. Moody received the designation of Certified Practicing Accountant (Australia) and became an associate with the Australian Society of Accountants. Mr. Moody holds a
Bachelor of Arts in Economics from Macquarie University in Sydney, Australia.

Charles Mathis.Mr. Mathis joined Force Protection, Inc. in June 2008 as Executive Vice President and was appointed Chief
Financial
Officer effective October 1, 2008. Mr. Mathis has over 20 years of experience in strategic finance and accounting for a number of manufacturing companies including two major
defense contractors. Prior to joining Force Protection, Mr. Mathis was Chief Financial Officer of EFW, Inc. a U.S. segment of Elbit Systems Ltd., a public Israeli defense
conglomerate. At Elbit, Mr. Mathis was responsible for all areas of finance, contract accounting, government compliance, Sarbanes Oxley compliance, tax and the development of joint venture
agreements. Prior to Elbit, Mr. Mathis was Vice President, Finance and IT, with Fairbank Morse Engine, a supplier of medium speed diesel engines to the U.S. Navy and the engine segment of EnPro
Industries. Mr. Mathis received his Master of Business Administration from the University of Chicago Graduate School of Business and completed his undergraduate studies at Wake Forest
University. Mr. Mathis is a certified public accountant. He also served as a Lieutenant in the U.S. Marine Corps.

Lenna Ruth Macdonald.Ms. Macdonald joined Force Protection, Inc. in November 2007 with over 19 years legal experience
as
in-house counsel and in private practice. She was promoted to her current position from Co-General Counsel and Corporate Secretary in 2008. Ms. Macdonald has specialized
experience in corporate governance, compliance, securities and transactional matters. Prior to joining the Company, she served as Vice President, General Counsel & Secretary of Commonwealth
Industries, Inc. (a Nasdaq listed leading aluminum sheet manufacturer), as in-house counsel for Banc One Corporation and as Assistant General Counsel and Group Leader at BONHAM, a
Banc One subsidiary. Ms. Macdonald was also an associate with the international law firm McDermott, Will & Emery based in its Boston, Massachusetts office. Ms. Macdonald holds a
Juris Doctor from Emory University School of Law, attended the M.Sc. Program at the London School of Economics and Political Science, and received her A.B. from Brown University.

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Daniel Busher.Mr. Busher has been the Executive Vice President, Operations, of Force Protection, Inc. since March 2008.
Bringing more
than 20 years of international business experience in the automotive industry, Mr. Busher joined Force Protection, Inc. in October 2006. Previously, he was director of materials
for North American Automotive Operations within Alcoa, maintaining responsibilities in the United States, Mexico and Honduras. In addition, he held numerous senior location Plant and Operations
Management roles throughout Alcoa. Mr. Busher began his career as a member of the GM Saturn Corporation start-up team that implemented revolutionary new labor agreements and lean
manufacturing methods from early concept to full production. Mr. Busher earned his Bachelor of Science degree in Mechanical Engineering from the University of Wisconsin. He also holds an
Executive Master of Business Administration, Beta Gamma Sigma honors, from the Owen School at Vanderbilt University.

Mark Edwards.Mr. Edwards has been with Force Protection, Inc. since November 2004. Mr. Edwards has more than
18 years
experience in both automotive and military transport equipment industries. Prior to joining Force Protection, Mr. Edwards was Vice President, Operations for Ducommun Aerostructures, where he
was responsible for all aerostructure manufacturing for the Boeing C-17 and Chinook programs, as well as Sikorsky's BlackHawk/NavalHawk program. Mr. Edwards earned a Bachelor's
degree in Mathematics and Chemistry from Wright State University, and a Masters of Business Administration from Pepperdine University.

Damon Walsh.Mr. Walsh joined Force Protection, Inc. in July 2005. Before joining Force Protection, Mr. Walsh was a
career
officer in the U.S. Army serving in a wide variety of staff and command positions including operational assignments as an airborne Infantry officer and Special Forces officer. Mr. Walsh also
served for over a decade in the Army Acquisition Corps. This culminated in his assignment as the Commanding Officer of the Joint Systems Manufacturing Center at Lima, Ohio overseeing the manufacture
of Abrams Main Battle Tanks, Stryker vehicles, and Marine Corps Expeditionary Fighting Vehicles. Retiring as a Lieutenant Colonel, Mr. Walsh is a Level III Certified Acquisition
Professional as well as a Certified Professional Contracts Manager and has over 25 years experience in both the operational Army and the Acquisition community. Mr. Walsh holds a Master
in Management from the U.S. Naval Postgraduate School and is a graduate of the Army Command & General Staff College. He is also a veteran of Operations Desert Shield/Desert Storm, Provide
Comfort, Uphold Democracy, and Iraqi Freedom.

Major General Jack A. Davis, USMC (RET.).MGen. Davis has been a director of Force Protection, Inc. since March 2006 and has a
diverse
background of senior level management and leadership positions in business, law enforcement and the military. With over 40 years experience, he is highly regarded in each of these fields. MGen.
Davis served in the U.S. Marine Corps, both active and reserve, from 1968 to 2005 where he held the rank of Major General. MGen. Davis' career included command at every level from platoon to division
in addition to numerous staff assignments. MGen. Davis attended numerous high level schools both here and abroad. MGen. Davis' law enforcement career included both federal and state agencies where he
retired in 1999 with 30 years of distinguished service. MGen. Davis is also the founder of J.A. Davis and Associates, a security and leadership training company. In addition to his service with
Force Protection, MGen. Davis currently serves on the board of directors of one privately held company and the boards of advisors of three mutually held companies. MGen. Davis holds undergraduate and
masters degrees from Indiana State University and a Master of Urban Administration from University of North Carolina, Charlotte.

Lieutenant General Roger G. Thompson, Jr., USA (RET.).LTG. Thompson has been a director of Force Protection, Inc. since December
2006. LTG.
Thompson is Vice President of the Association of the United States Army where he is responsible for all operational events including symposia, the largest landpower exhibition and conference in North
America and four exhibitions in four overseas trade shows. Additionally, he provides executive leadership of 124 AUSA Chapters worldwide and management of membership programs totaling over 5,300
major, midsize and small defense oriented

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companies.
He currently serves on the Board of Advisors of a privately held company. A veteran with 34 years of experience on active duty, LTG. Thompson commanded at all levels of the Army,
including field artillery and transportation units. While with the Department of Army Staff, LTG. Thompson served as Deputy Assistant Secretary of the Army, Financial Management and Comptroller
(Director of the Army Budget). LTG. Thompson completed his military career as the Deputy Commander in Chief, United States Transportation Command. In this position he was responsible for the daily
operations supporting all military and commercial transportation for the entire DoD. LTG. Thompson holds a Bachelor of Science from the United States Military Academy, a Master of Business
Administration from Syracuse University, and a Master's degree in National Security and Strategic Studies from the Naval War College. He is a graduate of the Army's Command and General Staff College
and the Naval War College.

John S. Day.Mr. Day has been a director of Force Protection, Inc. since September 2007. Mr. Day has over 30 years
of
experience in the accounting profession serving a broad range of publicly and privately owned clients. Mr. Day joined Arthur Andersen LLP in 1976 and was admitted as an audit partner in
1986. In 2002, he joined Deloitte & Touche LLP in Atlanta as a Director. Mr. Day retired from Deloitte in December 2005. Mr. Day was appointed to the board of Lenbrook
Square Foundation, Inc., a non-profit organization, effective July 1, 2007 where he serves as chairman of the governance committee and a member of the finance committee.
Mr. Day holds a Bachelor of Arts in Economics from the University of North Carolina and a Master of Business Administration from Harvard Graduate School of Business.

John W. Paxton, Sr.Mr. Paxton has been a director of Force Protection, Inc. since February 2008. He has over 30 years
of
experience in the aerospace, wireless voice and data, logistics and manufacturing industries. Currently, Mr. Paxton is the Chairman of Pro Mach, Inc., an integrated packaging solutions
provider, and is Chairman of Intellicheck/Mobilisa, Inc., a publicly held provider of wireless internet solutions to the DoD. From 2002 until March 2008, Mr. Paxton has been the Chairman
of IntelliCheck Mobilisa, Inc. From 1998 until 2002, Mr. Paxton was the Chairman and Chief Executive Officer of Telxon Corporation. Mr. Paxton served on the Board of Directors of
TransDigm, Inc., a supplier of proprietary aerospace components used in commercial and military aircraft. Mr. Paxton holds a Bachelor of Science and Master of Science in business
administration from LaSalle University, and is a registered professional engineer.

Our Board of Directors and Committees

Our board of directors is divided into three classes, with each class of directors serving a staggered three-year term.
Messrs. Day and Paxton are in the class of directors whose term expires in 2011; Mr. Moody and LTG. Thompson are in the class of directors whose term expires 2010; and MGen. Davis is in
the class of directors whose term expires 2009.

We
have an audit committee and a compensation committee, each of which is composed entirely of directors meeting the applicable independence standards of the Nasdaq Capital Market and
the rules and regulations of the Securities Exchange Act of 1934 ("Exchange Act"). Generals Davis and Thompson and Messrs. Day and Paxton are the members of our audit committee. Our board of
directors has determined that Mr. Day is an "audit committee financial expert" defined by applicable Securities and Exchange Commission rules. Our compensation committee is comprised of
Mr. Paxton and Generals Davis and Thompson.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

Our principal executive offices are located at 9801 Highway 78, Building No. 1, Ladson, South Carolina 29456, and our telephone
number is (843) 574-7000. We are subject to the information reporting requirements of the Exchange Act, and, in accordance with these requirements, we file annual, quarterly and
other reports, proxy statements and other information with the SEC relating to

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our
business, financial results and other matters. The reports, proxy statements and other information we file may be inspected and copied at prescribed rates at the SEC's Public Reference Room and
via the SEC's website (see below for more information).

You
may inspect a copy of the reports, proxy statements and other information we file with the SEC, without charge, at the SEC's Public Reference Room, 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549, and you may obtain copies of the reports, proxy statements and other information we file with the SEC, from those offices for a fee. You may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our filings are available to the public at the SEC's website at
http://www.sec.gov.

Our
website address iswww.forceprotection.net. Through a link on the Investor Relations section of our website, we make available the
following filings after they are electronically filed with or furnished to the SEC: our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act. All such filings are available free of
charge.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, including the information incorporated by reference herein, contain both historical
and forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Exchange Act. All statements other
than statements of historical fact included in this Annual Report on Form 10-K and the documents incorporated by reference in this Annual Report on Form 10-K that
address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements including, in particular, the statements about our
plans, objectives, strategies and prospects regarding, among other things, 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. These
forward-looking statements include, among other things:



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These
forward-looking statements were based on expectations about future events at the time they were made and are subject to numerous uncertainties and factors, all of which are
difficult to predict and many of which are beyond our control. Many factors mentioned in our discussion in this Annual Report on Form 10-K and the documents incorporated by or
deemed to be incorporated
by reference in this Annual Report on Form 10-K, including the risks outlined under Item 1A,Risk Factors, will be important
in determining future results. We do not know whether the expectations reflected in these forward-looking statements will prove correct. They can be affected by inaccurate assumptions we might make or
by known or unknown risks and uncertainties, including those described under "Risk Factors" and those discussed in other documents we file with the SEC, which are incorporated or deemed to be
incorporated by reference in this Annual Report on Form 10-K.

In
addition, this Annual Report on Form 10-K and the documents incorporated by reference herein contain historical information, forecasts and estimates regarding
defense expenditures by the U.S. government, actual and anticipated procurement of armored vehicles and similar matters. This historical data and these forecasts and estimates have been obtained from
publicly available information, industry publications, trade associations and data compiled by independent market research firms. However, we have not independently verified this information and we
cannot assure you that it is accurate or that these forecasts and estimates will prove correct.

When
used in this Annual Report on Form 10-K, 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 consolidated subsidiaries.

ITEM 1A.    RISK FACTORS

The following risk factors and other information included in this Annual Report on Form 10-K
should be carefully considered. Please also see "Special Note Regarding Forward-Looking Statements" on page 27.

If we are unable to obtain future orders for our vehicles, our financial position, results of operations, and cash flows would be adversely affected and our business may
fail.

Substantially all of our revenue comes from our U.S. government contracts either as a prime contractor or as a subcontractor to another
prime contractor to the U.S. government. We received and fulfilled substantial vehicle orders from the U.S. military under the MRAP program, which accounted for substantially all of the increase in
our net sales during the year ended December 31, 2008. These orders have resulted, in significant part, from the particular combat situations encountered by the U.S. military in Iraq and
Afghanistan, especially the use of IEDs by enemy combatants. We cannot be certain, therefore, to what degree the U.S. military will continue placing orders, and these orders may decrease significantly
or cease.

The
main uncertainty about our future operations is whether we will continue to receive additional orders or contracts for our vehicles or our survivability solutions. We have no further
substantial MRAP vehicle orders to fulfill at this time. Orders for our Cougar variant vehicles will allow us to continue production through the second quarter of 2009 and for our Buffalo vehicles to
extend production until the fourth quarter of 2009. It is impossible to predict with certainty whether such future orders or contracts will be placed by existing or new customers. If we do not receive
future orders or contracts for production beyond such dates, it is unlikely that our vehicle business will continue and our business

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will
be materially affected. Even if we are successful in obtaining contracts, the length of the contract cycle, from testing, pre-production to the delivery of the order when revenue is
recognized, may span several months to years. The longer the contract cycle, the greater the opportunity for the customer to cancel the order before we receive payment.

Our
largest contract in 2008, in terms of value, was awarded to us by the United Kingdom Ministry of Defence under the FMS program. The FMS UK Contract is for 198 Cougar Mastiffs, a
Cougar 6x6 variant, six 4x4 Cougars, and 151 Cougar Ridgbacks, a Cougar 4x4 variant. The FMS UK Contract is administered by the Marine Corps Systems Command and is subject to price definitization.

Our
largest contract in 2007, in terms of value, was awarded to us in January 2007 by the U.S. Marine Corps under the MRAP program competitive bidding process. The MRAP Competitive
Contract is an ID/IQ contract that allows the U.S. government to order a maximum of 4,100 Cougar vehicles per year for a five-year period. However, the U.S. government is not required to
issue any vehicle orders under the MRAP Competitive Contract, and existing orders can be terminated at the convenience of the government before completion. We fulfill the MRAP Competitive Contract
with GDLS through the GDLS Subcontract.

Our
largest contract in 2006, in terms of value, was awarded to us on a sole source basis in November 2006 by the U.S. Marine Corps under the MRAP Program (the "MRAP
Sole-Source Contract"). The MRAP Sole-Source Contract was for our Cougar and Buffalo vehicles and was substantially performed in 2007.

We rely on sales to the U.S. government, and a failure to obtain new contracts or a reduction of sales under existing contracts with the U.S. government could adversely
affect our operating performance and our ability to generate cash flow to fund our operations. The continuation and renewal of contracts with the U.S. government are contingent upon the availability
of governmental funding, which may be unpredictable.

Presently, we derive substantially all of our revenue from contracts and subcontracts with the U.S. government and its agencies,
primarily the DoD. We expect that U.S. government contracts, particularly with the DoD, will continue to be our primary source of revenue for the foreseeable future. The continuation and renewal of
our existing government contracts and new government contracts are, among other things, contingent upon the availability of adequate funding for various U.S. government agencies, including the DoD.
Changes in U.S. government spending could directly affect our operating performance and lead to an unexpected loss of revenue. The loss or significant reduction in government funding of a large
program in which we participate could also result in a material decrease to our future sales, earnings and cash flows. U.S. government contracts are also conditioned upon the continuing approval by
Congress of the amount of necessary spending. Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contract periods of performance may extend
over many years. Consequently, at the beginning of a major program, the contract is usually partially funded, and additional monies are normally committed to the contract by the procuring agency only
as appropriations are made by Congress for future fiscal years. Among the factors that could impact U.S. government spending and reduce our federal government contracting business
include:



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These
or other factors could cause U.S. government agencies to reduce their purchases under our contracts, to exercise their right to terminate our contracts in whole or in part, to
issue temporary stop-work orders, or decline to exercise options to renew, our contracts. The loss or significant curtailment of our material government contracts, or our failure to renew
existing contracts or enter into new contracts could adversely affect our operating performance and lead to an unexpected loss of revenue.

Our business may be adversely affected by the severe and rapid downturn in the economy.

Recently, there has been a severe and rapid downturn in the economy due to a variety of financial conditions, including the sequential
effects of the subprime lending crisis, general credit market crisis, collateral effects on the finance and banking industries, volatile energy costs, concerns about inflation, slower economic
activity, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns. These conditions could have an adverse impact on the
automotive industry, particularly automotive suppliers and steel manufacturers. We cannot predict the timing or duration of the effects of these conditions on our business. These conditions make it
difficult for our vendors and us to accurately forecast, plan and execute certain future business activities. If these conditions affect the ability of our vendors and
subcontractors to perform, our business, financial condition, results of operations or cash flows may be materially adversely affected.

Additionally,
due to the recent credit crisis and volatility of the U.S. dollar against other currencies in the second half of 2008, our products may become more expensive for customers
whose purchases are denominated in U.S. dollars, which may further disadvantage us relative to our competitors or negatively impact our margins.

We identified material weaknesses in our internal control over financial reporting, which have in the past and in the future could adversely affect our ability to report our
financial condition and results of operations accurately or on a timely basis. We concluded that our internal control over financial reporting and our disclosure controls and procedures were not
effective as of December 31, 2008 and 2007. As a result, current and potential shareholders could lose confidence in our financial reporting, which could harm our business and the trading price
of our stock.

As discussed inControls and Proceduresin Item 9A of this Annual Report on
Form 10-K, in the years ended December 31, 2008, 2007 and 2006, we identified material weaknesses in our internal control over financial reporting. As a result, in part because of these
material weaknesses, we also concluded that our disclosure controls and procedures were not effective as of December 31, 2008, December 31, 2007 and December 31, 2006.

Each
of our material weaknesses results in more than a remote likelihood that a material misstatement of the annual or interim financial statements that we prepare will not be prevented
or detected. As a result, we must perform extensive additional work to obtain reasonable assurance

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regarding
the reliability of our financial statements. Even with this additional work, there is a risk of additional errors not being prevented or detected, which could result in additional
restatements. Moreover, other material weaknesses may be identified.

Material
weaknesses in our internal control over financial reporting could adversely impact our ability to provide timely and accurate financial information. If we are unsuccessful in
implementing or following our remediation plan, or fail to update our internal control over financial reporting as our business evolves, we may be unable to report financial information timely and
accurately or to maintain effective disclosure controls and procedures. Any such failure in the future could also adversely affect the results of periodic management evaluations and annual auditor
attestation reports regarding the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated
thereunder and periodic management evaluation of our disclosure controls and procedures. If we are unable to report financial information in a timely and
accurate manner or to maintain effective disclosure controls and procedures, we could be subject to, among other things, regulatory or enforcement actions by the SEC and Nasdaq, including a delisting
from the Nasdaq Capital Market, securities litigation, and a general loss of investor confidence, any one of which could adversely affect our business prospects and the market value of our common
stock.

We
also have substantial work remaining to remedy the identified material weaknesses in our internal control over financial reporting and our disclosure controls and procedures and this
work will continue during 2009. There can be no assurance as to when all of the material weaknesses will be remedied. Until our remedial efforts are completed, management will continue to devote
significant time and attention to these efforts, and we will continue to incur expenses associated with the additional procedures and resources required to prepare our financial statements and to
remediate these weaknesses. Certain of our remedial actions will be ongoing and will result in our incurring substantial additional costs even after our material weaknesses are remedied. In addition,
there can be no assurance that, as a result of these remediation efforts or otherwise, we will not identify other inaccuracies in either our previous or future financial statements that will require
amendments and restatements to those financial statements, which also could have a material adverse effect on us and on the price of our common stock.

Although
we have taken steps to correct our material weaknesses, we may still be subject to risks. For a more detailed discussion of our material weaknesses, see Item 9A, Controls and Procedures,in this
Annual Report on Form 10-K.

We have started the manufacture and production of certain of our products for which we have no orders. If we do not receive orders for those products, we may incur losses.

At times, if we believe that there is a probability of selling certain of our vehicles or products, we may commence the manufacture and
production of such items without orders. Presently, we are in the process of procuring materials and fabricating approximately 50 Cheetah vehicles in our production facility and in subcontractors'
facilities in anticipation of receiving future orders. In the event that we do not receive such orders, we may have excess inventory and incur losses, and, as a result, our business, financial
condition, results of operations, or cash flows may be materially adversely affected.

Moreover,
we are seeking to sell our Cheetah vehicles to the U.S. military and our future results of operations will depend to a large degree on our ability to sell significant
quantities of Cheetah vehicles. Because we have commenced the manufacture and production of our Cheetah vehicles, we have incurred expenses for components, raw material, and other expenses without any
orders from customers to purchase the vehicles we manufacture. We may experience difficulties, expenses and delays in starting up production, as we have no prior experience in manufacturing the
Cheetah vehicle in commercial quantities and it may take a substantial period of time for us and our employees to achieve requisite efficiencies in producing the Cheetah. To the extent that we do not
receive orders for

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the
Cheetah in significant quantities, or if we incur delays or unforeseen expenses in connection with outfitting and equipping this facility, our business, prospects, results of operations and
financial condition may be materially adversely affected. If these events occur, they could have a material adverse effect on our business, results of operations, financial position and cash flows. In
addition, if we are not able to sell the Cheetah in significant quantities or at all, we may not be able to sustain the growth of our business, our net sales may decline and our business may be
materially adversely affected.

Many of the orders for our vehicles are subject to the competitive bidding process, which may cause us to incur substantial costs that we may not be able to recoup.

We have received contract awards through the competitive bidding process, including the MRAP Competitive Contract, and may continue to
do so in the future. The competitive bidding process presents a number of risks, including the following:



In 2008, we restated our condensed consolidated financial statements and other financial information for the periods ended March 31, 2007, June 30, 2007, and
September 30, 2007 and filed separate amended Quarterly Reports on Form 10-Q to reflect the restated condensed consolidated financial statements for such periods. Continued
amendments and restatements to our financial statements may result in potential and current shareholders losing confidence in our financial reporting, which could harm our business and the trading
price of our stock.

In addition to the restatement of our financial statements for the quarterly periods in 2007, we previously amended our consolidated
financial statements and certain other financial information appearing in our Annual Report on Form 10-K for the year ended December 31, 2006, and restated our consolidated
financial statements and certain other financial information appearing in our Annual Report on Form 10-K for the year ended December 31, 2005, and in our Quarterly Report on
Form 10-Q for the quarter ended September 30, 2006.

Continued
and repeated restatements and amendments to our consolidated financial statements and periodic reports may cause shareholders to lose confidence in our financial reporting, and
such loss of confidence could cause the trading price of our stock to become volatile or to decrease.

We are subject to and may continue to be subject to lawsuits alleging false or misleading public statements and/or omissions concerning our business, internal controls and
financial results.

We are aware that at least ten shareholder class action lawsuits have been initiated seeking damages to recompense those who purchased
or otherwise acquired our securities between August 14, 2006, and February 29, 2008, because of a loss in the trading value of our stock. The allegations include, but are not limited to,
allegations that certain former and current members of management and the board of directors violated the Exchange Act and made false or misleading public statements or omissions concerning our
business, internal controls, and financial results. Shareholders have filed at least seven derivative lawsuits against former and current officers and board members seeking damages

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and
other relief; and we have been the subject of other suits, described in more detail in Item 3,Legal Proceedings, stemming from weaknesses in
our control over financial reporting or from our managerial and compliance processes. It is possible that other litigants may institute additional lawsuits against us as a result of these deficiencies
seeking the payment of damages. These lawsuits are likely to be costly to defend and could involve the substantial diversion of management time and resources and have other adverse effects, and we may
be required to make substantial payments to settle any such lawsuits or to satisfy any judgments that may be rendered against us.

Our
rapid growth placed a great strain on the managerial and compliance processes in place at that time; that, along with the material weaknesses in our internal control over financial
reporting, has subjected the Company to increased risk of regulatory enforcement proceedings and private litigation.

Our business may be materially affected if we are unable to anticipate the demand for and develop acceptable next generation vehicles and other survivability solutions to
meet the demands of our customers, or if we are unable to sell next generation vehicles or other survivability solutions in the quantities that we anticipate.

The future of our business depends on our ability to anticipate threats to the survivability of friendly forces and to develop, test,
and be able to produce solutions to counter these threats in a manner that satisfies the cost, performance, and schedule demands of our customers. To the extent that our customers seek additional
survivability solutions, we expect to face substantial competition from other companies, many of which have significantly greater financial and other resources than we do, in competing for these
orders. Accordingly, if we are unable to develop and design acceptable vehicles and solutions in time to meet the demands of our customers, our net sales may decline in the future. Additionally, if we
are unable to sell the next generation of vehicles in the quantities that we anticipate, our inventory and prior capital investments may not be fully utilized and our business may be materially
affected.

Our configuration management process for our fielded fleet is still immature and may result in inadequate delivery of service and repair parts and may decrease our ability
to generate life cycle revenue, which could negatively affect our business, financial condition, results of operations, and cash flows.

As a result of the rapid deployment and demand required by the U.S. military in Iraq and Afghanistan, we have not been able to
thoroughly establish our service parts documentation and configuration control; and at times this process is immature and weak. As a result, we may not be above to adequately handle some aftermarket
part orders, such as spare parts, and training and field service support, and we could be late or delayed in accepting and delivering aftermarket orders. We are still implementing our service
documentation processes and delivery methodologies which could result in increased service costs and a loss of service revenue.

The DCAA has issued audit reports that have been highly critical of our accounting and price estimating systems, and have questioned our ability to track and report our
government contract costs appropriately. As a result, the DCAA could question or disallow our proposed costs under some of our government contracts, and our profits may be adversely affected. In
addition, other governmental agencies may audit or issue reports about the status of our contracts.

U.S. government agencies, generally through the DCAA, routinely audit and investigate government contracts and government contractors'
administrative processes and systems. The audits may review the costs we incur on our U.S. government contracts, including allocated indirect costs. The auditor may also review our compliance with
applicable laws, government regulations, policies and standards as they relate to cost issues and the adequacy of our internal control systems and policies. An adverse finding under a DCAA audit could
result in the disallowance of our costs under a U.S.

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government
contract, termination of U.S. government contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government. If any
audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of
payments, fines and suspension or prohibition from doing business with the U.S. government. In addition, responding to governmental audits may involve significant expense and divert management
attention.

Moreover,
if any of our administrative processes and systems are found not to comply with the applicable requirements, we may be subjected to increased government scrutiny or required to
obtain additional governmental approvals that could delay or otherwise adversely affect our ability to compete
for or perform contracts. Therefore, an unfavorable outcome to an audit by the DCAA or another government agency, could materially adversely affect our competitive position, effect our ability to
obtain the maximum price for our products and services, and result in a substantial reduction of our revenues.

The
DCAA issued at least 15 audit reports on our operations and contracts from May of 2004 through February 2009. Certain of these reports have generally been highly critical of the
areas covered by the audits, including our job cost accounting and price estimating systems. As a result, the DCAA could question or disallow our proposed costs under some of our government contracts,
and our profits may be adversely affected. In addition, other governmental agencies may audit or issue reports about the status of our contracts.

Presently, all of our contracts are on a fixed-price basis, which could subject us to losses if there are cost overruns.

Under a fixed-price contract, we receive only the amount indicated in the contract, regardless of the actual cost to produce the goods.
While firm fixed-price contracts allow us to benefit from potential cost savings, they also expose us to the risk of cost overruns. If the initial estimates that we use to calculate the contract price
and the cost to perform the work prove to be incorrect, we could incur losses. This risk is enhanced because of the deficiencies in our accounting systems described above. In addition, some of our
contracts have specific provisions relating to cost, scheduling, and performance. If we fail to meet the terms specified in those contracts, then our cost to perform the work could increase or our
price could be reduced, which would adversely affect our financial position and results of operations. We may incur losses on fixed-price contracts that we had expected to be profitable, or such
contracts may be less profitable than expected, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Our results of operations may be adversely affected by the "definitization" of our contracts if we are unable to reserve adequately for payments on these contracts and if we
do not maintain accounting systems effective enough to capture all costs incurred under these contracts.

Many of the contracts we have previously received from the U.S. military have been sole source with a "not to exceed" amount. This type
of contract is subject to "definitization," meaning that the contract price is not agreed upon at contract inception. Instead, following award of the contract, we and the U.S. government seek to agree
upon a contract price based upon our cost of performing the contract. During the definitization process, we are required to perform the contract work, make deliveries and receive payments from the
U.S. military before the final contract price has been established. For this reason, as part of the original award, we provide a NTE price to be used for invoicing and accounting purposes pending
definitization. As a result, at the completion of the contract, we may have received overpayments during the course of the contract and will be required to return any overpayments to the U.S.
military.

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As result of the potential adjustments related to the definitization process, we maintain a separate account for payments received for contracts that may be
subject to definitization. The definitization process can be time-consuming and completion can take extensive periods of time. Although we work diligently with our customers to proceed
with significant work when we have a fully definitized task order, we cannot assure you that there will not be withholdings on future task orders.

Accordingly,
there can be no assurance that the actual prices we receive under contracts subject to definitization will not be substantially less than our estimates, which would
adversely affect our operating results and could result in losses. At the end of 2007, we had definitized all outstanding contracts. However, as of December 31, 2008, we had nine delivery
orders that were still subject to the definitization process and may continue to be subject to the definitization process.

We rely on subcontractors to manufacture or perform some of the assembly of our vehicles and the loss of any critical subcontractors could delay our manufacturing
operations, which could affect our ability to meet our contract delivery requirements to our customers; in addition subcontractors may attempt to increase the amounts they charge us, adversely
affecting our operating results.

Some of the major work processes performed in our vehicle manufacturing are done by subcontractors. For example, a portion of the
capsules of our Cougars are shipped to Spartan Chassis, Inc. ("Spartan") in Charlotte, Michigan, which supplies and installs the engine, transmission, transfer case, drive shafts,
differentials, axle assemblies, tires, fuel tank, steering, and associated mechanical and electrical hardware. Additionally, under our GDLS Subcontract, GDLS and Spartan (as a subcontractor to GDLS)
perform the final assembly of a portion of these vehicles (windows, doors, external appurtenances, hatches, seats, fenders, lights, paint, and other final assembly hardware). If these, or any other
critical subcontractor, cease doing business with us (whether voluntarily or due to other events), we would be required to locate a substitute subcontractor or perform the work ourselves. Further, any
inability of these subcontractors to perform these services in a timely manner may result in a delay in deliveries to our customers.

The
amounts we pay to some of these subcontractors represent a very significant portion of the overall costs of our Cougar vehicles. However, certain of our subcontractors have not
entered into subcontracts with us to provide these services, although in some cases we do have purchase orders covering basic terms such as price or quantities but other terms and conditions have yet
to be agreed upon. This means that we may have issues regarding some terms and conditions, any of which could have a material adverse affect on our business and results of operations.

Changes in the pace of operations in Iraq or Afghanistan or the duration of involvement by the U.S. military and foreign militaries in areas of conflict could have an impact
on contracts for our spare parts and sustainment services.

Any changes in the pace of operations in theater or the length of the duration of the U.S. military and foreign military involvement in
areas of conflict will have a direct impact on the usage of our vehicles and products, and subsequently the support required to sustain these vehicles. Political pressure, the success of the current
operations, changes in tactics of the insurgency, and other factors make it difficult to ascertain the required sustaining services our customers will require from Force Protection.

Additionally,
the United States recently elected a new President and other government legislators. The economic, defense spending and taxing policies of the new government may have an
adverse impact on our future business, prospects and results of operations. Until the new legislative agenda is finalized and enacted, it is not possible to determine the impact of such changes, if
any.

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We may require additional capital to provide for our working capital needs.

We may require substantial additional capital to provide for our working capital and other cash needs. See Item 7, Management's Discussion and Analysis of
Financial Condition and Results of OperationsLiquidity and Capital Resources, contained elsewhere
herein. We may seek to obtain this additional capital through, among other things, borrowings or the issuance of debt or equity securities. There can be no assurance that we will be able to obtain any
such additional capital on acceptable terms or at all. Presently, the credit markets and the financial services industry have been experiencing a period of unprecedented turmoil characterized by the
bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the federal government. While the ultimate outcome of these events cannot be
predicted, such events may have a material adverse effect on our ability to obtain additional capital. Any inability to obtain additional capital as and when required could have a material adverse
effect on our business, prospects and results of operations.

We
currently have a $40 million credit facility with Wachovia Bank that expires on April 30, 2010, that provides us with the ability to obtain capital if cash available
from other sources is insufficient to meet our needs. The current global financial crisis could adversely affect our ability to access the funds available under this credit facility.

In
the event that we are not able to renew this credit facility or obtain another credit facility, we will not have the ability to make revolving credit borrowings to finance our
business, which could have a material adverse effect on our financial position, results of operations, and cash flows. To date, we have not borrowed any funds under this credit facility.

Borrowings
under our existing credit facility bear interest at variable rates, and borrowings we incur in the future may also bear interest at variable rates, which exposes us to the
risk of increased interest rates. In addition, our existing credit facility is secured by an interest in all of our personal property and fixtures, and any debt instruments we enter into in the future
may also be secured by our assets, which may make it more difficult for us to obtain additional debt financing.

We may experience supply interruptions for certain components used in the manufacture and sustainment of our products, which could cause delays in production, product
deliveries and the sustainment of our vehicles.

In the event that we are unable to obtain required components from our existing suppliers, and if we are unable to mitigate the impact
or find an alternate supplier in a timely manner, it could have a material adverse effect on our ability to produce our vehicles and provide sustainment. Significant interruptions in the supply of
components may occur for a variety of reasons, including capacity constraints at our suppliers, competition for components with other manufacturers of vehicles, insolvency of a supplier, work
stoppages at suppliers and transportation interruptions, which could involve significant additional costs and result in delays in production, product deliveries and sustainment and could have a
material adverse effect on our results of operations. In addition, the unavailability or scarcity of certain components or raw material could result in increased costs, which could adversely affect
our results of operations.

In
addition, the economic distress of suppliers, particularly suppliers in the automotive industry, due to the current economic climate may in the future require us to provide financial
support or take other measures to ensure our receipt of components or materials. We may experience commodity cost pressures and the effects of overcapacity in the automobile industry. These factors
have also increased pressure on the industry's supply base, as suppliers cope with higher commodity costs, lower production volumes and other challenges. As a result, suppliers may be less able to
absorb commodity cost increases or to achieve productivity improvements, and, therefore, less willing to reduce prices to us.

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Our ability to operate effectively could be impaired if we were to lose the services of our key personnel, or if we are unable to recruit qualified managers and key
personnel in the future. Moreover, a number of our officers and other key employees have joined our Company recently, and therefore have only limited experience with our business.

Our success depends on the continued service of our management team and certain key personnel in our engineering department. If one or
more of these individuals were unable to continue working due to health reasons, or were to resign or otherwise terminate their employment with us, we could experience a loss of sales, delays in new
product development and diversion of management resources, and we may have difficulty replacing any of these individuals. We do not have key person insurance on any of our executive employees.
Competition for qualified managers and key personnel is intense and we may not be able to recruit and retain such personnel. If we are unable to retain our existing managers and employees or hire and
integrate new personnel, we may experience operating inefficiencies, production delays and reduced profitability or losses.

In
addition, a number of our officers and key employees have joined our company recently, and therefore have limited experience with our business, personnel, and administrative systems.
The ability of new management to articulate and implement their strategic vision, and to integrate effectively into our business, personnel, and administrative systems, is critical to our success.

Our U.S. government contracts may be terminated or adversely modified prior to completion, which could adversely affect our business.

Congress funds the vast majority of the federal budget on an annual basis, and Congress often does not provide agencies with all the
money requested in their budget. Many of our contracts cover multiple years and, as such, are not fully funded at contract award. If Congress or one of our agency customers chooses to spend money on
other programs, our contracts may be terminated. Federal laws, collectively called the Anti-Deficiency Act, prohibit involving the government in any obligation to pay money before funds
have been appropriated for that purpose, unless otherwise allowed by law. Therefore, the Anti-Deficiency Act indirectly regulates how the agencies award our contracts and pays our
invoices.

Federal
government contracts generally contain provisions, and are subject to laws and regulations, that provide the federal government rights and remedies not typically found in
commercial contracts, including provisions permitting the federal government to, among other provisions: terminate our existing contracts for convenience; unilaterally modify some of the terms and
conditions in our existing contracts; subject the award to protest or challenge by competitors; suspend work under existing multiple year contracts and related delivery orders; and claim rights in
technologies and systems invented, developed or produced by us.

The
federal government may terminate a contract with us either "for convenience" (for instance, due to a change in its perceived needs) or if we default due to our failure or the failure
of a workshare partner or subcontractor to perform under the contract. If the federal government terminates a contract with us for convenience, we generally would be entitled to recover only our
incurred or committed costs, settlement expenses and profit on the work completed prior to termination. However, under certain circumstances, our recovery costs upon termination for convenience of
such a contract may be limited. If the federal government terminates a contract with us based upon our default, we generally would be denied any recovery for undelivered work, and instead may be
liable for excess costs incurred by the federal government in procuring undelivered items from an alternative source. As is common with government contractors, we have experienced and continue to
experience occasional performance issues under some of our contracts. We have in the past received and may in the future receive show-cause or cure notices under contracts that, if not
addressed to the federal government's

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satisfaction,
could give the government the right to terminate those contracts for default or to cease procuring our services under those contracts.

U.S.
government contracts and subcontracts typically involve long purchase and payment cycles, competitive bidding, qualification requirements, delays or changes in funding, extensive
specification development, price negotiations and milestone requirements. In addition, the proposed transition in the United States to fund military and defense operations from emergency supplemental
spending bills to the regular defense budget may have unknown consequences on military spending. Each U.S. government agency often also maintains its own rules and regulations with which we must
comply and which can vary significantly among agencies.

Our backlog is subject to uncertainties, and we may not sell or receive payment for all of the vehicles we have included in backlog, which would reduce our revenue in future
periods.

Our backlog reflects the number of vehicles for which we have received orders, but have not yet delivered, as of a specified date. Our
backlog is subject to uncertainties, and there can be no assurance that we will deliver or receive payment for the vehicles we have included in our backlog. As a result, there is no certainty about
our future revenues because the timing of any of these vehicles sales and revenues is subject to various contingencies, such as production difficulties, raw material shortages and quality acceptance.
If we fail to sell vehicles included in our backlog, our revenues and operating results could be materially adversely affected.

We must comply with numerous miscellaneous federal national security laws, regulations, and procedures, as well as the rules and regulations of foreign jurisdictions, and
our failure to comply could adversely affect our business.

We must observe laws and regulations relating to the formation, administration and performance of federal government contracts that
affect how we do business with our clients and impose added costs on our business. For example, the FAR and the industrial security regulations of the DoD and related laws include provisions
that:



We
are subject to industrial security regulations of the DoD and other federal agencies that are designed to safeguard against foreigners' access to classified information. As we expand
our operations internationally, we will also become subject to the rules and regulations of foreign jurisdictions. If we were to come under foreign ownership, control or influence, we could lose our
facility security clearances, which could result in our federal government customers terminating or deciding not to renew our contracts, and could impair our ability to obtain new contracts.

Our
failure to comply with applicable laws, regulations or procedures, including federal regulations regarding the protection of classified information, could result in contract
termination, loss of security clearances, suspension or prohibition from contracting with the federal government, civil fines and damages and criminal prosecution and penalties, any of which would
materially adversely affect our business.

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If we do not receive additional orders, we may have excess manufacturing capacity. If demand for our vehicles declines, we may have additional inefficient or under-utilized
capacity, and our gross margins and cash flows may suffer and we may incur losses.

In response to the increased demand for our blast- and ballistic-protected vehicles, we added significant manufacturing capacity during
each of the past several years. Demand for our vehicles may not remain at levels sufficient to utilize our present manufacturing capacity. Much of our manufacturing facilities and production equipment
are special purpose in nature and cannot be adapted easily to make other products. If the demand for mine-protected vehicles does not increase or declines substantially from current
levels, we may have significant under-utilized capacity. Therefore, a substantial decline in demand for our blast- and ballistic-protected vehicles could result in significant additional excess
manufacturing capacity, which would adversely affect our results of operations and could result in losses.

We are currently under directives to improve our compliance policies and procedures concerning activity regulated by the International Traffic in Arms Regulations.

In December 2007, we submitted a voluntary disclosure to the DDTC regarding the shipment of technical manuals, Cheetah spare parts,
armored vest plates, parts not listed on our license and transfers of technical data to and by our vendors without proper authorization or identification of the appropriate exemption. In January,
2008, the DDTC requested additional information and documentation for each specific shipment of these items within sixty days. In addition, the DDTC directed us to undertake certain specific measures,
including, but not limited to, that we hire a full time senior export control compliance officer, implement certain procedures, conduct comprehensive ITAR training, immediately conduct a comprehensive
export compliance audit, and institute a plan to conduct periodic audits of the export compliance program. On February 11, 2008, we provided DDTC with the job description for the Director of
Export Controls, draft Export Controls Manual, ITAR presentation provided in new orientation training and the attendance logs for annual ITAR training provided to executives and other employees having
ITAR responsibilities. On March 11, 2008, we provided DDTC with our draft audit plan and on June 2, 2008, we provided the final audit report. On July 14, 2008, we provided DDTC
with supplemental information to our previous voluntary disclosure and other information identified in the audit. We have developed and implemented an Export Control Policies and Procedures Manual and
ITAR Product Classification Guide, established an Export Control Council, and revised our Technology Control Plan and Code of Conduct and Ethics. As a result of the export compliance audit, we have
identified additional unauthorized transfers internally at our facility and in support of U.S. operations in Iraq and Afghanistan as well as issues associated with the execution of our licenses and
agreements. We have reported these matters to DDTC. On October 27, 2008, we received a letter from the DDTC advising that, following our voluntary disclosure, this matter has been closed
without taking any civil penalties, but reserving the right to reopen if circumstances warrant. We have also identified additional export compliance matters that may warrant disclosure to DDTC.
Although we are in the process of addressing these measures, we cannot assure you that we will be able to correct the weakness in our compliance program.

Compliance
with the directives of the DDTC may result in substantial expenses and diversion of management. Any failure to adequately address the directives of DDTC could result civil
fines or suspension or loss of our export privileges, any of which could have a material adverse effect on our business or financial position, results of operations, or cash flows.

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We are now a large business under applicable U.S. government regulations and may be precluded from being awarded new contracts with the U.S. government unless our accounting
and estimating systems are improved sufficiently to meet government standards.

In order to enter into certain contracts with the U.S. military, a contractor's accounting and estimating systems must generally meet
the standards established by the FAR, and, with regard to certain types of contracts, CAS. Compliance is usually reviewed by the DCAA, an arm of the DoD. Contractors who do not meet these standards
generally are not eligible to win certain new contracts from the U.S. government.

Because
we previously were a small business within the meaning of applicable federal regulations, we were not required to comply with the accounting and estimating requirements in order
to enter into contracts with the U.S. military. However, as a result of the growth of our business, as of November 14, 2007, we are no longer considered a small business and we therefore are
required to meet these additional accounting and estimating standards to the extent that they apply to new contracts that we are awarded after November 14, 2007. We have been advised by the
DCAA that our accounting and estimating systems do not meet these requirements and, although we have been seeking to improve these systems, we have extensive work remaining in order to meet these
standards. There can be no assurance as to when we will be able to meet these standards and, until we are able to do so, we may not be eligible for new contract awards by the U.S. military.
Accordingly, any failure to meet these standards will likely have a material adverse effect on our business. In that regard, we continue to enhance our accounting system; however, there is some
uncertainty as to whether our system will be capable of generating the data necessary to comply with these standards. If our accounting system is inadequate for these purposes, we could incur
substantial delays and additional expenses through efforts to remedy those deficiencies or acquire and implement a new accounting system.

CAS
requires us to maintain detailed accounting records. Given the material weaknesses in our internal control over financial reporting and other deficiencies in our accounting system
described below under Item 9A,Controls and Procedures, there can be no assurance that we will be successful in complying with CAS.

CAS
is designed to achieve uniformity and consistency in the measurement, assignment, and allocation of costs to U.S. government contracts. CAS-covered contractors must
complete a disclosure statement, which is a written description of the contractor's cost accounting practices and procedures. The purpose of the disclosure statement is to determine whether the
contractor's cost accounting practices and procedures are consistently applied and whether they comply with CAS provisions. If the contractor fails to comply with CAS provisions, the U.S. government
may withhold up to ten percent of each payment due until the necessary corrections are made. If a contractor fails to provide accurate information, under certain circumstances, the U.S. government can
make unilateral adjustments. Additionally, DCAA may require more frequent updates if audits reveal non-compliant CAS submissions and accounting. We submitted a CAS disclosure statement to
DCAA on May 19, 2008, with an effective date of June 1, 2008. On November 11, 2008, we received an audit report that stated that our submission did not adequately describe our
accounting systems. We are in the process of updating our disclosure statement. To the extent that CAS requirements apply to future contracts awarded to us, we will be required to satisfy more
difficult U.S.
government accounting requirements than have previously applied, and a failure by us to comply with these new requirements may have consequences that would have a material adverse effect on our
business.

If we fail to comply with complex procurement laws and regulations, we could lose business and be liable for various penalties or sanctions.

We must comply with laws and regulations relating to the formation, administration and performance of federal government contracts.
These laws and regulations affect how we conduct

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business
with our federal government contracts. In complying with these laws and regulations, we may incur additional costs, and non-compliance may also allow for the assignment of
additional fines and penalties, including contractual damages. Among the more significant laws and regulations affecting our business are the following:



Our
contracting agency customers periodically review our performance under and compliance with the terms of our federal government contracts, and we may be required to disclose certain
types of alleged misconduct with regard to our federal government contracts. If a government review or investigation or Company disclosure results in a finding of improper or illegal activities, we
may be subject to civil or criminal penalties or administrative sanctions, including



Additionally,
the civil False Claims Act provides for potentially substantial civil penalties where, for example, a contractor presents a false or fraudulent claim to the government for
payment or approval. Actions under the civil False Claims Act may be brought by the government or by other persons on behalf of the government (who may then share a portion of any recovery).

If
we fail to comply with these laws and regulations, we may also suffer harm to our reputation, which could impair our ability to win awards of contracts in the future or receive
renewals of existing contracts. If we are subject to civil and criminal penalties and administrative sanctions or suffer harm to
our reputation, our current business, future prospects, financial condition, or operating results could be materially harmed.

The
government may also revise its procurement practices or adopt new contracting rules and regulations, including cost accounting standards, at any time. Any new contracting methods
could be costly to satisfy, administratively difficult for us to implement and could impair our ability to obtain new contracts.

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We are presently subject to a number of legal proceedings and claims and we may become subject to additional legal proceedings and claims in the future.

We have been named in several purported class actions brought by shareholders who purchased or otherwise acquired our securities
between 2006 and 2008, alleging violations of the Exchange Act, and making false and misleading public statements and/or omissions. Other shareholders have named us and certain current and former
officers and directors in derivative suits alleging breaches of fiduciary duties. We have also been subject to a variety of other lawsuits, including claims involving the use of our confidential
information and trade secrets, Equal Employment Opportunity Commission claims, contractual claims, claims related to our common shares, OSHA claims and claims by the Department of State, Directorate
of Defense Trade Controls ("DDTC"). Litigation and regulatory inquiries of these types are often expensive and time consuming and their outcome is uncertain.

Such
claims and regulatory inquiries, whether successful or not, could require us to devote significant amounts of monetary or human resources to defend ourselves and could harm our
reputation. We may need to spend significant amounts on our legal defense, senior management may be required to divert their attention from other portions of our business, new product launches may be
deferred or canceled as a result of any proceedings, and we may be required to make changes to our present and planned products or services. If, as a result of any proceedings, a settlement is
reached, a judgment is rendered or a decree is entered against us, it could materially and adversely affect our business, financial condition and results of operations and harm our reputation.

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

See
Item 3,Legal Proceedingsin Part I of this Annual Report on Form 10-K.

We may not be able to adequately safeguard our intellectual property rights and trade secrets from unauthorized use, and we may become subject to claims that we infringe on
others' intellectual property rights.

We rely on a combination of patents, trade secrets, trademarks, and other intellectual property laws, licensing agreements,
nondisclosure agreements with employees and customers and other protective measures to preserve our proprietary rights to our products and production processes. Our pending patent applications may not
be granted by the various patent offices examining them. Even if our patent applications are granted and issued as patents, these measures afford only limited protection and may not preclude
competitors from developing products or processes similar or superior to ours. Moreover, the laws of certain foreign countries do not protect intellectual property rights to the same extent as the
laws of the United States.

Although
we implement protective measures and intend to defend our proprietary rights, these efforts may not be successful. From time to time, we may litigate within the United States or
abroad to enforce our issued or licensed patents, to protect our trade secrets and know-how or to determine the enforceability, scope and validity of our proprietary rights and the
proprietary rights of others. For example, we were recently engaged in a lawsuit in which we alleged misappropriation of our intellectual property. See Item 3,Legal
Proceedings. Enforcing or defending our proprietary rights could be expensive, requires management's attention and might not bring us timely or effective relief.

We
are party to two long-term intellectual property agreements pursuant to which we have the exclusive right to use certain intellectual property technology relating to
blast- and ballistic-protected vehicles through 2011 and 2012, respectively. See Item 1,BusinessIntellectual Propertyfor a further

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discussion
of these agreements with CSIR and Mechem. In the event that the license agreements expire without renewal, CSIR and Mechem may permit other parties to use the licensed technology, including
our competitors. The loss of these intellectual property rights may adversely affect our operations.

Furthermore,
third parties may assert that our products or processes infringe their patent or other intellectual property rights. Our patents may be challenged, invalidated or
circumvented. Infringement claims against us could result in substantial costs and diversion of our resources even if we ultimately prevail. A third party claiming infringement may also obtain an
injunction or other equitable relief, which could effectively block the distribution or sale of allegedly infringing products. Although we may
seek licenses from third parties covering intellectual property that we are allegedly infringing, we may not be able to obtain any such licenses on acceptable terms, if at all.

Our products are subject to export limitations and we may be prevented from shipping our products to certain nations or buyers.

We are subject to federal licensing requirements with respect to the sale and support in foreign countries of certain of our products
and the importation of components for our products. In addition, we are obligated to comply with a variety of federal, state and local regulations, both domestically and abroad, governing certain
aspects of our international sales and support, including regulations promulgated by, among others, the U.S. Departments of Commerce, Defense and State and the U.S. Department of Justice, Bureau of
Alcohol, Tobacco, Firearms and Explosives.

Such
licenses may be denied for reasons of U.S. national security or foreign policy. In the case of certain large orders for exports of defense equipment, the Department of State must
notify Congress at least 15 to 30 days, depending on the size and location of the sale, prior to authorizing certain sales of defense equipment and services to foreign governments. During that
time, Congress may take action to block the proposed sale. We can give no assurance that we will continue to be successful in obtaining the necessary licenses or authorizations or that Congress will
not prevent or delay certain sales. Any significant impairment of our ability to sell products outside of the U.S. could negatively impact our results of operations and financial condition.

For
products and technology exported from the U.S. or otherwise subject to U.S. jurisdiction, we are subject to U.S. laws and regulations governing international trade and exports,
including, but not limited to ITAR, EAR, or FMS, program and trade sanctions against embargoed countries and destinations administered by OFAC, U.S. Department of the Treasury. We have discovered
shortcomings in our export compliance procedures. We are currently analyzing product shipments and technology transfers, working with U.S. government officials to ensure compliance with applicable
U.S. export laws and regulations, and enhancing our export compliance system. We have made voluntary disclosures to the Department of State and provided additional documentation to the U.S. Department
of State regarding compliance issues. The State Department personnel visited our facilities in December 2007 as part of the State Department company visit program for a further review of our export
control policies and procedures, as well as their implementation. The voluntary disclosures that have been finally adjudicated by the U.S. Department of State did not result in any monetary fines or
restrictions on exports. The U.S. Department of State recommended enhancements to our compliance program, some of which we have implemented and others which we are implementing. We are currently
reviewing additional compliance information and will file voluntary disclosures if warranted. A determination by the U.S. government that we have failed to comply with one or more of these export
controls or trade sanctions, as a consequence of the results of the directed disclosure or any other violations that may be determined, could result in civil or criminal penalties, including the
imposition of significant fines, denial of export privileges, loss of revenues from certain customers, and debarment from participation in U.S. government contracts. Any one or more of these sanctions
could have a material adverse effect on our business, financial condition and results of operations.

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We are subject to the FCPA and other laws which prohibit improper payments to foreign governments and their officials by U.S. and other business entities. We
operate in countries known to experience corruption. Our operations in such countries create the risk of an unauthorized payment by one of our employees or agents which would be in violation of
various laws including the FCPA. Violations of the FCPA may result in severe criminal penalties which could have a material adverse effect on our business, financial condition and results of
operations. In that regard, we do not have a formal FCPA compliance program.

Additionally,
the failure to obtain applicable governmental approval and clearances could materially adversely affect our ability to continue to service the government contracts we
maintain. Exports of some of our products to certain international destinations may require shipment authorization from U.S. export control authorities, including the U.S. Departments of Commerce and
State, and authorizations may be conditioned on end-use restrictions. Failure to receive these authorizations may materially adversely affect our revenues and in turn our business,
financial condition, results of operations, and cash flows.

Our
international business may pose greater risks than our domestic business due to the greater potential for changes in foreign economic and political environments. Our international
business is also highly sensitive to changes in foreign national priorities and government budgets. Sales of military products are affected by defense budgets (both in the U.S. and abroad) and U.S.
foreign policy.

Sales
of our products and services internationally are subject to U.S. and local government regulations and procurement policies and practices including regulations relating to
import-export control.

Risks Related to our Common Stock

Our articles of incorporation authorize the issuance of shares of blank check preferred stock.

Under the terms of our articles of incorporation, our board of directors is authorized to issue from time to time, without any need for
approval by our shareholders but subject to any limitations prescribed by law, shares of our preferred stock in one or more series. Each series shall consist of such number of shares and have the
rights, preferences, powers and restrictions, such as dividend rights and preferences, conversion rights, voting rights, terms of redemption and liquidation rights and preferences, as our board of
directors shall determine. Such shares of preferred stock could have preferences over our common stock with respect to dividends and liquidation rights. The board of directors may issue preferred
stock with voting, conversion or other rights that may have the effect of delaying, deferring or preventing a change in control of the Company and that could adversely affect the market price of the
common stock and the voting and other rights of the holders of common stock.

Our stock price has been volatile, and the value of an investment in our common stock may decline.

The
market price and trading volume of our common stock has been subject to significant volatility, and this trend may continue. For example, in the last quarter of fiscal year 2008, the
price of our common stock ranged from $1.70 to $6.03. The value of our common stock may decline regardless of our operating performance or prospects. Factors affecting our market price include, but
are not limited to, our failure to meet expectations regarding new orders or sales of our vehicles; differences between our reported results and those expected by investors and securities analysts;
announcements of new contracts or orders by us or our competitors; and market reaction to any future acquisitions, joint ventures or strategic investments announced by us or our competitors.

Recent
events have caused stock prices for many companies, including ours, to fluctuate in ways unrelated or disproportionate to their operating performance. The general economic,
political and stock market conditions that may affect the market price of our common stock are beyond our control. The

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continued
credit crisis and related turmoil in the global financial markets has had and may continue to have an impact on our stock price. The market price of our common stock at any particular time
may not remain the market price in the future. In the past, securities class action litigation has been instituted against companies following periods of volatility in the market price of their
securities. Any such litigation, if instituted against us, could result in substantial costs and a diversion of management's attention and resources.

Anti-takeover provisions in our articles of incorporation and by-laws, as well as Nevada Corporation Law, could make it difficult for our
shareholders to replace or remove our current board of directors or have the effect of discouraging, delaying or preventing a merger or acquisition, which could adversely affect the market price of
our common stock.

As discussed above, our board of directors is empowered to issue preferred stock in one or more series without shareholder approval.
Any issuance of this "blank check" preferred stock could materially limit the rights of holders of the common stock and render more difficult or discourage an attempt to obtain control of us by means
of a tender offer, merger, proxy contest or otherwise. In addition, our articles of incorporation and by-laws contain a number of provisions that could impede a takeover or change in
control of us, including our staggered board, limitation on the ability of our shareholders to act by written consent, advance notice provisions and the ability for the board of directors to fill a
vacancy on our board of directors.

Certain
provisions of the Nevada General Corporation Law could also discourage takeover attempts that have not been approved by our board of directors or shareholders. These provisions
relate to, among other things, the acquisition of a controlling interest in a Nevada corporation meeting certain requirements or certain business combinations and other transactions between a Nevada
corporation and certain "interested stockholders."

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

We have determined that our space is adequate for our current needs. We currently have excess manufacturing capacity. See
Item 1A,Risk Factorsfor a discussion of our excess manufacturing capacity.

We
currently have five leases for approximately 543,000 square feet of space in four buildings located on a single campus in Ladson, South Carolina, for our executive offices and to
manufacture our Buffalo and Cougar vehicles, designated Building #1 (office), Building #1 (industrial), Building #2, Building #3 and Building #6. Each lease contains four five-year options
that must be exercised six months prior to expiration. On December 22, 2008, we renewed all of these leases, with the exception of Building # 3, for an additional five year term. The leases for
Building # 1 (office and industrial), Building # 2 and Building # 6 expire on June 30, 2014. The lease for Building # 3 was extended on March 5, 2009 for an additional six months and
presently expires on December 31, 2009.

On
March 9, 2007, we purchased a blast range of approximately 306 acres in Edgefield County, South Carolina, along with the purchase of selected assets, and acquired a lease of an
office building with a lease term ending December 31, 2008. We are currently in the process of renewing this lease. We use these facilities for our own research and development activities and
may also contract with selected governmental and commercial customers to use our facilities.

On
March 22, 2007, we entered into an asset purchase agreement including an assignment and assumption of the lease for an approximately 60,000 square foot facility in Summerville,
South

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Carolina,
for the intended purpose of expanding research and development operations and to facilitate increased customer training requirements of products and applications. In 2007, we moved the
research and development operations previously housed in Building #3 in Ladson, South Carolina, to this facility.

On
July 12, 2007, we purchased an approximately 430,000 square foot facility in Roxboro, North Carolina, which we had intended to utilize to manufacture our Cheetah vehicle. We
currently intend to use this facility for training purposes.

On
November 11, 2008, we leased an approximately 9,700 square foot office in Sterling Heights, Michigan for offsite engineering with a three year term commencing on
December 15, 2008 with two options to renew with a term of one year each.

On
October 20, 2008, we leased an approximately 900 square foot office in the Washington, DC vicinity with a 12-month term.

On
January 27, 2009, we leased an office and warehouse space of approximately 18,000 square feet in North Charleston, South Carolina for a two year term with three options to
renew with a term of two years each.

ITEM 3.    LEGAL PROCEEDINGS



On March 10, 2008, the first of ten related class action lawsuits was filed against us and certain of our former and current
board members or officers in the United States District Court for the District of South Carolina Charleston Division on behalf of a proposed class of investors who purchased or otherwise acquired our
securities during the period between August 14, 2006, and February 29, 2008. The complaints seek class certification, and the allegations include, but are not limited to, allegations
that the defendants violated the Exchange Act and made false or misleading public statements and/or omissions concerning our business, internal controls, and financial results. The plaintiffs assert
that as a result of the defendants' allegedly wrongful acts and omissions, members of the proposed class have suffered significant losses and damages. The individual class action lawsuits were
consolidated on June 10, 2008, under the caption 'In Re Force Protection, Inc. Securities Litigation, Action No. 2:08-cv-845-CWH.' On
June 20, 2008, a group of investors consisting of the Laborers' Annuity and Benefit System of Chicago, Gary Trautman, David J. Jager, Bhadra Shah, Panteli Poulikakos, George Poulikakos, and
Niki Poulikakos were appointed lead plaintiff.

Between
March 27, 2008, and May 28, 2008, various alleged shareholders filed derivative lawsuits against former and current officers or board members wherein the plaintiff
shareholders are seeking damages for the Company. The Company has been named a nominal defendant in each derivative lawsuit. Four derivative lawsuits are pending in the United States District Court
for the District of South Carolina Charleston Division; two derivative lawsuits are pending in Charleston, South Carolina Circuit Court; and one derivative lawsuit is pending in Clark County, Nevada
District Court. The plaintiff shareholders' allegations include and are not limited to allegations of breach of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets, and
unjust enrichment in connection with the Company's public statements regarding its operations and financial results, internal controls, compensation of certain defendants, and alleged insider stock
sales by certain defendants. In August and September 2008, the defendants filed motions to dismiss the derivative lawsuits pending in the Charleston, South Carolina Circuit Court and the Clark County,
Nevada District Court. The motions filed in the Clark County, Nevada District Court were denied on February 10, 2009. On February 10, 2009, the defendants' joint motion to dismiss the
plaintiffs' derivative complaints filed in the Charleston, South Carolina Circuit court was denied as it relates to the Stevenson et al lawsuits and granted without prejudice as it relates to the
Hughes et al lawsuit with leave granted to the Hughes et

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al
plaintiffs to modify their complaint accordingly. Defendants' obligations to respond to the complaints in the derivative lawsuits pending in the United States District Court for the District of
South Carolina have been suspended pending a ruling on motions filed by certain plaintiffs seeking consolidation of the lawsuits and appointment of a lead plaintiff.



On August 21, 2007, we filed suit against Protected Vehicles, Inc. ("PVI") and three of PVI's employees (all of whom were
former employees of Force Protection) in the United States District Court for the District of South Carolina. In the complaint, we alleged that the named defendants used our confidential information
and trade secrets to create a competing business. We sought injunctive relief, unspecified damages, attorneys' fees and costs. The defendants answered our complaint and filed counterclaims against us.
In their answers and counterclaims, the defendants alleged, among other things, that we and several of our current and former officers and directors engaged in: certain transactions (including
transactions with Force Protection) in which such officers and directors maintained a financial interest; backdating and certain other improper acts in connection with certain stock issuances;
allegedly wrongful acts with respect to a procurement contract with a foreign government; and other transactions involving alleged self-dealing and certain allegedly retaliatory acts in
connection with defendants' prior attempts to bring such activities to the attention of the Company's personnel or governmental agencies. Defendants sought unspecified monetary damages, attorneys'
fees and costs. On January 18, 2008, the district court entered an order staying 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 Carolina with respect to PVI. On February 5, 2008, PVI filed a voluntary Chapter 7 petition. On March 28, 2008, the
Chapter 7 proceeding was converted to a Chapter 11 proceeding. On June 20, 2008, the Bankruptcy 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 with respect to our suit against it, were sold to a third party. On July 31, 2008, we settled our claim against one of the employees, and we rehired him on October 13,
2008. As of February 2, 2009 Force Protection Industries, Inc. and Force Protection, Inc. entered into a settlement agreement with defendants, including the third-party purchaser,
in which the defendants agreed to identify and return all our property and refrain from using it in the future, and agreed to dismiss all claims against us. The settlement agreement and release was
approved by the United States Bankruptcy Court on February 19, 2009, and became effective on March 6, 2009.

From
February 2007 through January 2009, we received a total of 70 complaints from current and former employees filed with the United States Equal Employment Opportunity Commission
alleging, among other things, race and/or gender discrimination. We have responded to the complaints as such responses have become due, and are investigating the allegations.

On
November 13, 2007, we were served with a lawsuit filed by former senior employee against Force Protection Inc., Force Protection Industries, Inc. and former Force
Protection officers. The complaint, filed in the Charleston (South Carolina) County Court of Common Pleas, alleges, among other things, that former employee is owed warrants of approximately 83,000
shares of our common stock and certain back wages and sets forth claims for,inter alia, breach of contract, violation of the South Carolina Payment of
Wages Act, retaliatory wrongful discharge, and defamation. We answered the complaint on January 25, 2008. We entered into a settlement agreeement and general release with the former employee on
March 13, 2009.

In
early December 2007, we submitted a voluntary disclosure to DDTC regarding the shipment of technical manuals, Cheetah spare parts, armored vest plates, parts not listed on our license
and transfers of technical data to and by our vendors without proper authorization or identification of the appropriate exemption. On January 22, 2008, the DDTC requested additional information
and documentation for each specific shipment of these items within sixty days. In addition, the DDTC

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directed
us to undertake certain specific measures, including, but not limited to, that we hire a full time senior export control compliance officer, implement certain procedures, conduct
comprehensive ITAR training, immediately conduct a comprehensive export compliance audit, and institute a plan to conduct periodic audits of the export compliance program. On February 11, 2008,
we provided DDTC with the job description for the Director of Export Controls, draft Export Controls Manual, ITAR presentation provided in new orientation training and the attendance logs for annual
ITAR training provided to executives and other employees having ITAR responsibilities. On March 11, 2008, we provided DDTC with our draft audit plan and on June 2, 2008, we provided the
final audit report. In response, we have hired an executive director of export controls. On July 14, 2008, we provided DDTC with supplemental information to our previous voluntary disclosure
and other information identified in the audit. We have developed and implemented an Export Control Policies and Procedures Manual and ITAR Product Classification Guide, established an Export Control
Council, and revised our Technology Control Plan and Code of Conduct and Ethics. As a result of the export compliance audit, we have identified additional unauthorized transfers internally at our
facility and in support of U.S. operations in Iraq and Afghanistan as well as issues associated with the execution of our licenses and agreements. We have reported these matters to DDTC. On
October 27, 2008, we received a letter from the DDTC advising
that, following this voluntary disclosure, this matter has been closed without taking any civil penalties, but reserving the right to reopen if circumstances warrant.

On
February 8, 2008, a temporary independent contractor whose services we had terminated filed a complaint with OSHA which alleges a violation under the employee protection
provisions of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, Title VIII of the Sarbanes-Oxley Act of 2002, 18 U.S.C. §1514A. The former independent
contractor alleges that we terminated his engagement in retaliation for his allegation of certain corporate governance, government contracting, accounting and other irregularities. On April 18,
2008, we responded to the allegations. In August 2008 the claimant submitted a proposed amended complaint which sought to add additional claims and the current and former chief executive officers as
defendants. On October 2, 2008, Force Protection and individuals submitted a further response. On November 20, 2008, the claimant exercised his rights under Section 806 to
withdraw his claim from the Department of Labor, stating that he had decided instead to pursue his claims in a lawsuit in federal district court. As a result of the claimant's election, the Department
of Labor terminated its processing of the matter at that time. However, to date we have not received any notice that the claimant has filed any lawsuit.

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

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

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

In
addition, compliance with the directives of the DDTC discussed above may result in substantial expenses and diversion of management. Any failure to adequately address the directives
of DDTC could result in civil fines or suspension or loss of our export privileges, any of which could have a material adverse effect on our business or financial position, results of operations, or
cash flows.

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

See
Item 1A,Risk Factorsin Part I of this Annual Report of Form 10-K.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We held our 2008 Annual Meeting of Shareholders on November 21, 2008. Our shareholders approved each of the following proposals
by the votes specified below.

Proposal
No. 1The election of two nominees as Class III Directors to the Board of Directors for a term of three years.

Nominee

For

Withheld

PercentageJohn S. Day


56,067,795


2,832,020


95.1
%John W. Paxton, Sr.


56,048,443


2,851,372


95.1
%


After
the 2008 Annual Meeting of Shareholders, Major General Jack A. Davis, USMC (RET.) continued his term as a Class I Director serving until the 2009 Annual Meeting of
Shareholders and Michael Moody and Lieutenant General Roger G. Thompson, Jr., USA (RET.) continued their terms as Class II Directors serving until the 2010 Annual Meeting of Shareholders.

Proposal
No. 2The approval of the proposed amendments to Force Protection, Inc.'s Amended Articles of Incorporation.

For

Against

Abstain56,910,726


1,989,087


272,698


Proposal
No. 3The ratification of the Audit Committee's appointment of Grant Thornton LLP, as Force Protection, Inc.'s independent registered public
accounting firm for the fiscal year ended December 31, 2007, and the fiscal year ending December 31, 2008.

For

Against

Abstain58,436,468


310,687


152,660


Proposal
No. 4The approval of the Force Protection, Inc. 2008 Stock Plan.

For

Against

Abstain30,403,919


5,966,515


175,267


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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Registrant's Common Equity

Our common stock has been listed on the Nasdaq Capital Market under the trading symbol "FRPT" since January 18, 2007. Prior to
that time, our common stock was traded on the OTC Bulletin Board under the symbol "FRCP.OB" and subsequently changed to "FRPT.OB."

The
following table reflects, for periods from and after January 18, 2007, the reported high and low sales prices of our common stock on the Nasdaq Capital Market and, for periods
prior to that date, the reported high and low bid prices as reported on the OTC Bulletin Board. While listed on the OTC Bulletin Board, bid and ask quotations for our common shares were submitted by
certain broker dealers who are members of the Financial Industry Regulatory Authority ("FINRA"), or its predecessor, the National Association of Securities Dealers, Inc. These quotations of our
stock price while listed on the OTC Bulletin Board reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

High

Low2007First Quarter (through January 17, 2007)

$
24.30

$
17.48First Quarter (commencing January 18, 2007)

$
22.95

$
14.55Second Quarter

$
31.16

$
18.40Third Quarter

$
24.50

$
13.92Fourth Quarter

$
25.25

$
3.892008First Quarter

$
5.74

$
1.03Second Quarter

$
4.80

$
2.00Third Quarter

$
4.40

$
2.22Fourth Quarter

$
6.03

$
1.70


We
estimate that there were 180 shareholders of record of our common stock as of March 20, 2009.

Dividend Policy

We have never paid nor declared any cash dividends on our common stock. We currently intend to retain earnings, if any, to finance the
growth and development of our business, and we do not expect to pay any cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any, will be at the discretion of
the board of directors and will depend on our financial position, results of operations, capital requirements, restrictions contained in current or future financing instruments, and other factors the
board considers relevant.

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Performance Graph

Comparison of five-year cumulative return among Force Protection, Inc., the S&P 600 Small Cap and the S&P Small Cap Aerospace and Defense Indices,
and the Peer Group

The annual changes for the five-year period shown in the graph below are based on the assumption that $100 had been
invested in each of our common stock, the S&P 600 Small Cap Index, the S&P 600 Small Cap Aerospace and Defense Index and the Peer Group on December 31, 2003, and that all
quarterly dividends were reinvested at the average of the closing stock prices at the beginning and end of the quarter. The total cumulative dollar returns shown on the graph represent the value that
such investments would have had on December 31, 2008, assuming reinvestment of all dividends.

Force Protection, Inc., S&P 600 Small Cap Index,
S&P 600 Small Cap Aerospace and Defense Index and Peer Group(1).

GRAPHIC

Date

Force
Protection, Inc.

S&P 600
Small Cap

S&P 600 Small
Cap Aerospace
and Defense

Peer GroupDecember 2003

$
100.00

$
100.00

$
100.00

$
100.00December 2004

$
397.14

$
122.60

$
131.77

$
135.63December 2005

$
92.86

$
132.00

$
133.21

$
143.91December 2006

$
2072.62

$
151.93

$
155.34

$
176.86December 2007

$
557.14

$
151.48

$
206.92

$
237.26December 2008

$
711.90

$
104.42

$
133.33

$
147.59


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Peer Group

The peer issuers included in the Peer Group are set forth below.

AAR Corp

DynCorp International

Moog, Inc.Ceradyne, Inc.

Esterline Technologies Corp.

Orbital Sciences CorporationCubic Corporation

GenCorp Inc.

Teledyne Technologies Inc.Curtiss-Wright Corporation

HEICO Corp.

TransDigm Group, Inc.Ducommun, Inc

Hexcel Corp.

Triumph Group, Inc.LMI Aerospace, Inc.


We
compared our stock performance with the S&P 600 Small Cap Index, the S&P 600 Small Cap Aerospace and Defense Index and the Peer Group. We believe these peer groups more
closely reflect our business and, as a result, provide a more meaningful comparison of our stock performance. The comparison for each of the periods assumes that $100 was invested on
December 31, 2003, in our common stock, the stocks included in each of the indices and the peer group and that all dividends were reinvested. The stock performance shown on the graph above is
not necessarily indicative of future price performance.

Recent Sales of Unregistered Securities

On each of January 11, 2008 and January 1, 2007, we issued an employee 50,000 shares of unregistered company stock
pursuant to a Board resolution dated July 7, 2006.

With
respect to the sales of our common stock described above, we relied on the Section 4(2) exemption from securities registration under the federal securities laws for
transactions not involving any public offering. No advertising or general solicitation was employed in offering the shares. The shares were sold to accredited investors. The shares were offered for
investment purposes only and not for the purpose of resale or distribution, and the transfer thereof was appropriately restricted by us.

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ITEM 6.    SELECTED FINANCIAL DATA

We derived the selected historical consolidated financial data presented below from our audited consolidated financial statements and
related notes included elsewhere in this Annual Report on Form 10-K. You should refer to Item 7,Management's Discussion and Analysis of Financial
Condition and Results of Operations,in Part II of this Annual Report on Form 10-K and the notes to our accompanying consolidated financial statements
for additional information regarding the financial data presented below, including matters that might cause this data not to be indicative of our future financial condition or results of operations.
In addition, you should note the following information regarding the selected historical consolidated financial data presented below.

The
net income (loss) available to common shareholders for the years ended December 31, 2006, and 2005 was impacted by dividends and accretion for our Series D 6%
convertible preferred stock. For additional information see Note 12,Earnings Per Common Share,to our accompanying consolidated financial
statements.

As
of December 31, 2006, we removed the valuation allowance from the deferred tax asset as we expect to be able to utilize our net operating loss carry-forwards for federal income
tax purposes. For additional information see Note 11,Income Taxes,to our accompanying consolidated financial statements.

As of and for the year ended December 31,

2008

2007

2006

2005

2004(In thousands, except per share data)Results of operationsNet sales

$
1,326,331

$
890,672

$
196,017

$
49,713

$
10,273Operating income (loss)


68,452


5,773


6,636


(15,630
)

(11,839
)Income (loss) before income tax (expense) benefit


69,583


9,373


5,870


(14,405
)

(11,954
)Income tax (expense) benefit


(22,664
)

(1,721
)

12,327





Net income (loss)


46,919


7,652


18,197


(14,405
)

(11,954
)Net income (loss) available to common shareholders


46,919


7,652


16,574


(17,225
)

(11,954
)Basic earnings (loss) per common share


0.69


0.11


0.37


(0.51
)

(0.62
)Diluted earnings (loss) per common share

$
0.69

$
0.11

$
0.36

$
(0.51
)
$
(0.62
)Weighted average common shares outstanding:Basic


68,314


68,054


44,786


33,927


19,358Diluted


68,393


68,404


50,428


33,927


19,358Financial Position at Year-EndProperty and equipment, net

$
61,429

$
66,707

$
8,964

$
2,139

$
1,037Total assets


418,024


474,670


280,414


39,777


13,627Current liabilities


136,417


242,746


62,392


38,372


10,958Other long-term liabilities


139


295


168





111Convertible preferred stock(a)











7,901


Shareholders' equity (deficit)

$
278,327

$
231,629

$
217,854

$
(6,497
)
$
2,558


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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide information that
is supplemental to, and should be read together with, our consolidated financial statements and the accompanying notes contained in this Annual Report on Form 10-K. Information in
this Item 7 is intended to assist the reader in obtaining an understanding of our consolidated financial statements, the changes in certain key items in those financial statements from year to
year, the primary factors that accounted for those changes, and any known trends or uncertainties that we are aware of that may have a material effect on our future performance, as well as how certain
accounting principles affect our consolidated financial statements. MD&A includes the following sections:



The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those
discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Annual Report on
Form 10-K, particularly in "Special Note Regarding Forward-Looking Statements," "Market Data" and "Risk Factors."

References
herein to the term "Force Protection, Inc." refers to Force Protection, Inc. only, and references to the "Company," "Force Protection," "we," "our" or "us" refer
to Force Protection, Inc. and its subsidiaries unless the context specifically indicates otherwise.

Highlights and Executive Summary

We are in the business of providing survivability solutions to support armed forces and security personnel in harm's way. We design,
manufacture, test, deliver and support our blast- and ballistic-protected products to increase survivability of the users of our products. Our specialty vehicles, which we believe are at the forefront
of blast- and ballistic-protected technology, are designed to protect their

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occupants
from landmines, hostile fire, and improvised explosive devices ("IEDs"). In addition, we develop, manufacture, test, deliver and support products aimed at further enhancing the survivability
of vehicles against additional threats. Our patented ForceArmor is designed to provide protection against explosively formed projectiles ("EFPs"). We are a key provider of the U.S.
military's Mine Resistant Ambush Protected ("MRAP") vehicle program and have sold over 3,000 vehicles under
this program. We also provide our Cougar Mastiff, Cougar Ridgback, Cougar Wolfhound, and Buffalo mine protected vehicles to the United Kingdom Ministry of Defence.

During
the period January 1, 2008, through December 31, 2008, we received orders for 474 vehicles. During this same period we delivered 2,067 vehicles under the MRAP and
other blast- and ballistic-protected vehicle programs, including vehicles manufactured pursuant to the terms of our arrangement with General Dynamics Land Systems Inc. ("GDLS") (described
further in Item 1,Business, Major Contractsunder "MRAP Competitive Contract.") During the period January 1, 2008 through
December 31, 2008, we also delivered eight ForceArmor kits, as well as $188 million in spare parts and $56 million in mechanical field services. During the period
January 1, 2007 through December 31, 2007, we delivered 1,558 vehicles under blast- and ballistic-protected vehicle programs.

Through
an acquisition in 2002, we began shifting our principal focus from our then existing recreational watercraft production business to the production of mine clearing and armored
vehicles. Our business began to grow exponentially when we were awarded contracts by the U.S. military in 2005 and each year after that. By 2008, substantially all of our net sales were derived from
work performed directly or indirectly under U.S. government contracts. For the years ended December 31, 2008, 2007 and 2006, our net sales totaled $1.3 billion, $891 million, and
$196 million, respectively, and our net income totaled $46.9 million, $7.7 million, and $18.2 million, respectively.

Overview

All of our products are aimed at offering improved protection to personnel operating in areas posing threats of blast- or ballistic-
attack. Since the early stages of Operation Iraqi and Operation Enduring Freedom, the U.S. military has sought a wheeled vehicle approach that balances three potentially competing operational or
mission dynamics: (i) protection, which refers to the level of crew survivability against blast- and ballistic- attack; (ii) payload, which refers to the load that the vehicles can carry
on board the platform, measured in units, such as crew members and cargo; and (iii) performance, which refers to a vehicle's automotive mobility, its ability to provide technological solutions
to mission requirements, and its suitability for transportation in existing military aircraft and ships.

We
currently offer the following vehicle types aimed at fulfilling different operational or mission requirements:



We
also currently offer ForceArmor as an external bolt-on solution, which provides state-of-the-art protection against attack
by EFPs. ForceArmor is designed of commercially available materials that, when combined and packaged into a kit, offer lightweight bolt-on solutions that can be tailored to
bolt on to the outside of any military vehicle platform. It is a modular solution that enables unit commanders to rapidly install or remove the kit depending on the threat they face. We also offer
products and solutions which are aimed at enhancing the survivability of vehicles against further attacks, such as our Life Cycle Support and
ForceArmor.

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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 facilities for our own research and development activities and may also contract with selected governmental and commercial customers to use our facilities. We also purchased, in
March 2007, a facility in Summerville, South Carolina, for the intended purpose of expanding research and development operations and to facilitate our increased customer training requirements of
products and applications. In July 2007, we purchased an additional facility in Roxboro, North Carolina. We intend to use this facility for training and sustainment purposes. In January 2008, we
leased a small furnished office space in Sterling Heights, Michigan, for use as an offsite engineering office.

Our Business

Business Model and Key Concepts

Our business is heavily influenced by the needs of the U.S. military for blast- and ballistic-protected wheeled vehicles. The DoD is
our largest customer. For the past several years, substantially all of our net sales have been derived from the U.S. government. We align our workforce to satisfy our business requirements.

Key Challenges

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



As
discussed in Item 1A,Risk Factors, the main uncertainty about our future operations is whether we will continue to receive
additional orders or contracts for our vehicles or our survivability solutions. We have no further substantial MRAP vehicle orders to fulfill at this time. Orders for our Cougar variant vehicles will
allow us to continue production through the second quarter of 2009 and for our Buffalo vehicles to extend production until the fourth quarter of 2009. It is impossible to predict with certainty
whether such future orders or contracts will be placed by existing or new customers. If we do not receive future orders or contracts for production beyond such dates, it is unlikely that our vehicle
business will continue and our business will be materially affected.

As
discussed in Item 1A,Risk Factors, substantially all of our income comes from our U.S. government contracts either as a prime
contractor or as a subcontractor to another prime contractor to the U.S. government. We received and fulfilled substantial vehicle orders from the U.S. military under the MRAP program, which accounted
for substantially all of the increase in our net sales during the year ended December 31, 2008. These orders have resulted, in significant part, from the particular combat situations
encountered by the U.S. military in Iraq and Afghanistan, especially the use of IEDs by enemy combatants. We cannot be certain, therefore, to what degree the U.S. military will continue placing
orders, and these orders may decrease significantly or cease. The loss or significant reduction in

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government
funding of a large program in which we participate could also result in a material decrease to our future sales, earnings and cash flows.

As
discussed in Item 1A,Risk Factors, we have identified material weaknesses in our internal control over financial reporting and
have concluded that our disclosure controls were not effective as of December 31, 2008, and although we have taken steps to correct our material weaknesses, we may still be subject to risks. If
we are unsuccessful in implementing or following our remediation plan, or fail to update our internal control over financial reporting as our business evolves, we may be unable to report financial
information timely and accurately or to maintain effective internal controls and procedures. There can be no assurance that, as a result of these remediation efforts or otherwise, we will not identify
other inaccuracies in either our previous or future financial statements that will require amendments and restatements to those financial statements, which could have a material adverse effect on us
and the price of our common stock.

During
2008, we sought to stabilize our business to match our contract delivery order requirements. We recognized that our business was changing, and in response, we are attempting to
rebalance our workforce and manufacturing capacity. We may incur costs as a result of our efforts to recalibrate our
business to meet the needs of our customers. In addition, in the past three years we had sought to rapidly expand and develop our operations and production capacity. We have incurred costs and are
continuing to incur significant costs associated with our rapid expansion based on the expectation of future contract revenues. We are still experiencing and may continue to experience certain effects
from this rapid growth, such as payments under severance arrangements and the costs associated with excess manufacturing capacity and inventory. This growth had placed significant demands on our
management and our administrative, operating, manufacturing and financial resources. In addition, our accounting and financial systems need to be substantially improved in order to accommodate our
current and projected production levels and to support our government compliance requirements now that we are classified as a large business under applicable federal contracting regulations. We
continue to face challenges in improving our administrative, operating, managerial, accounting and financial systems to accommodate our current and projected production levels.

Strategy and Key Trends

Strategy

Our
business strategy is built around three main imperatives: first, constant focus on innovation and the introduction of new survivability products and
solutions; second, expand our customer base; and third, procure contracts for sustainment services of our fleet of vehicles across all customers. Specific components of the strategy, discussed in
greater detail in Item 1,Business,include the following:



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Key Trends

For
periods subsequent to 2008, certain factors are expected to affect our results of operations as compared to results reported herein for 2006 through 2008.
Some of these factors are:



Results of Operations

The following discussion and analysis is based on our consolidated statements of operations, which reflect our results of operations
for the years ended December 31, 2008, 2007 and 2006, as prepared in accordance with GAAP.

The
following tables present our vehicle sales and our results of operations for the three years ended December 31, 2008, 2007 and 2006, as well as the percentage changes from
year to year:

For the year ended December 31,

Percentage ChangeUnits Sold

2008

2007

2006

2008 vs.
2007

2007 vs.
2006Buffalo


81


85


28


(5
)%

204
%Cougar (MRAP Competitive)*


1,724


1,165





48
%

n/mCougar (all other variants)


262


308
(a)

199
(a)

(15
)%

55
%Total units sold


2,067


1,558


227


33
%

586
%


---

n/mnot
meaningful

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Table of Contents

For the year ended December 31,

Percentage Change(in thousands)

2008

2007

2006

2008 vs.
2007

2007 vs.
2006Net sales

$
1,326,331

$
890,672

$
196,017


49
%

354
%Cost of sales


1,149,670


786,803


158,994


46
%

395
%Gross profit


176,661


103,869


37,023


70
%

181
%General and administrative expenses


93,950


84,044


27,183


12
%

209
%Research and development expenses


14,259


14,052


3,204


1
%

339
%Operating income


68,452


5,773


6,636


1,086
%

(13)
%Other income, net


1,463


4,209


963


(65)
%

337
%Interest expense


(332
)

(609
)

(1,729
)

(45)
%

(65)
%Income before income tax (expense) benefit


69,583


9,373


5,870


642
%

60
%Income tax (expense) benefit


(22,664
)

(1,721
)

12,327


1,217
%

114
%Net income


46,919


7,652


18,197


513
%

(58)
%Accretion of Series D 6% convertible preferred stock








(1,297
)

n/a


n/mPreferred stock dividend








(326
)

n/a


n/mNet income available to common shareholders

$
46,919

$
7,652

$
16,574


513
%

(54)
%


---

n/mnot
meaningful

Results of Operations for the Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007

Units sold

The increase in vehicles sold in 2008 compared to 2007 is primarily due to vehicles sold pursuant to the contracts awarded to us under
the MRAP program. The vehicles sold pursuant to our MRAP Competitive Contract, which started shipping in the first quarter of 2007, represent 1,724 or 83% of the vehicles sold in 2008, compared to
1,165 or 75% of the vehicles sold in 2007.

Net sales

The increase in net sales for the year ended December 31, 2008 compared with the year ended December 31, 2007 is
attributable to an increase in the volume of vehicle deliveries, spare parts, and logistics services (field service representatives, training, ILAV subcontractor revenues and technical publications).
The mix of vehicles delivered and spare parts and logistics sales are set forth in the following table:

For the year ended December 31,(in thousands)

2008

2007

Percentage
ChangeBuffalo

$
57,034

$
58,360


(2
)%Cougar (all variants)(a)


1,015,619


741,036


37
%Spare parts and logistics


253,678


91,276


178
%$
1,326,331

$
890,672


49
%


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Cost of sales and Gross profit

For the year ended
December 31,(in thousands)

2008

2007Cost of sales

$
1,149,670

$
786,803Gross profit

$
176,661

$
103,869Gross profit as a percentage of net sales


13.3%


11.7%


The
gross profit as a percentage of net sales increased by 1.6 percentage points for the year ended December 31, 2008 compared with the year ended December 31, 2007.
The increase was primarily a result of several factors:



These
increases were partially offset by increased GDLS Subcontract activity, whereby we recognized minimal gross profit in 2008 and no gross profit in 2007 on vehicles produced by GDLS.
The revenue on vehicles produced by GDLS totaled $479.5 million and $228.1 million for the years ended December 31, 2008 and 2007, respectively.

General and administrative expenses

For the year ended
December 31,(in thousands)

2008

2007General and administrative expenses

$
93,950

$
84,044As a percentage of net sales


7.1%


9.4%


General
and administrative expenses increased by approximately $9.9 million for the year ended December 31, 2008 compared with the year ended December 31, 2007.
Demand for our blast- and ballistic-protected vehicles was substantially unchanged during 2008. We produced and shipped 1,162 vehicles (excluding those produced by GDLS) in 2008 versus 1,097 vehicles
(excluding those produced by GDLS) in 2007, or an increase of 6%. The increase in general and administrative expense was primarily due to increased use of outside services in 2008 to restate each of
the interim periods of 2007, related litigation and other litigation; costs related to excess capacity and impairment of certain Roxboro, North Carolina facility assets; the costs of right sizing of
our workforce by over 600 full-time equivalent positions to more closely align with current and anticipated reduced future business levels; implementation of a short-term
incentive compensation plan for executives; and a one-time contribution to the Medical University of South Carolina Foundation for brain trauma research. These increases were partially
offset by the absence of a liquidated damage charge incurred during the year ended December 31, 2007 related to our December 2006 Private Investment in Public Entity ("PIPE")

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stock
offering because the registration statement for the PIPE shares was not declared effective within the required time frame.

Significant
year-over-year cost increases included: legal fees ($6.2 million), impairment charges ($4.9 million), consulting fees
($4.3 million), audit fees ($4.0 million), gain share and short-term incentive compensation ($3.9 million), severance expenses ($2.6 million), and charitable
contributions ($1.5 million). These increases were partially offset by the following year-over-year cost decreases: PIPE-related liquidated damage charges ($7.2 million),
litigation settlements and related expense ($2.8 million), stock-based compensation ($2.2 million) and all other net general and administrative expenses ($5.3 million).

Research and development expenses

For the year ended
December 31,(in thousands)

2008

2007Research and development expenses

$
14,259

$
14,052As a percentage of net sales


1.1
%

1.6
%


Research
and development expense increased by approximately $0.2 million for the year ended December 31, 2008 compared with the year ended December 31, 2007. The
increase was primarily due to an increase in prototype build activity. During 2008, we introduced Force Armor, developed and finished a protoype of the Tactical Support Vehicle and
developed the Cheetah M-ATV.

Other income

Other income decreased approximately $2.7 million for the year ended December 31, 2008 as compared with the year ended
December 31, 2007 primarily due to decreased levels of average funds available for investing and lower rates of return. Management consciously concentrated funds in lower return, but lower
risk, investment vehicles in the latter part of 2008 as a precaution against the impact of the nation's banking crisis.

Interest expense

Interest expense decreased $0.3 million for the year ended December 31, 2008 as compared with the year ended
December 31, 2007 primarily due to lower costs related to the refinancing of the company's line of credit.

Income tax (expense) benefit

We recorded income tax (expense) for the year ended December 31, 2008 as a result of the increase in our net sales and
profitability compared to the year ended December 31, 2007. The effective income tax rates for the year ended December 31, 2008 and 2007 were (32.57)%
and (18.36)%, respectively. See Note 11,Income Taxes,in the accompanying consolidated financial statements.

Series D 6% convertible preferred stock dividends and accretion

There are no preferred stock dividends or accretion of preferred stock in 2008 as all preferred stock was converted to common stock by
year-end 2006.

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Net Income available to common shareholders

For the year
ended
December 31,2008

2007Diluted earnings per share

$
0.69

$
0.11


Net
income available to common shareholders for the year ended December 31, 2008 increased over 2007 primarily due to increased gross margins, partially offset by higher income
tax expenses.

Backlog

The following table sets forth the number of vehicles included in our backlog as of December 31, 2008. The backlog shown in the
following table is "funded" backlog, meaning that it reflects vehicles for which we have received orders and for which funding has been appropriated and authorized for expenditure by the applicable
agency. We cannot assure you that we will deliver or sell all of the vehicles included in our backlog. See Item 1A,Risk Factorsin Part I
of this Annual Report on Form 10-K.

Vehicle Funded BacklogAs of December 31, 2008Buffalo


69Cougar MRAP (Competitive)*


5Cougar Mastiff


24Cougar Ridgback


83Cougar (all other variants)


28TOTAL


209






Results of Operations for the Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006

Units sold

The increase in vehicles sold in 2007 compared to 2006 is primarily due to vehicles sold pursuant to the contracts awarded to us under
the MRAP program. The vehicles sold under such contracts, which started shipping in the first quarter of 2007, represent approximately 91% of the vehicles sold in 2007.

Net sales

The increase in net sales for the year ended December 31, 2007 compared with the year ended December 31, 2006 is
attributable to an increase in volume of vehicle deliveries, spare parts, and

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logistics
services (field service representatives and technical publications). The mix of vehicles delivered and spare parts and logistics sales are set forth in the following table:

For the year ended December 31,(in thousands)

2007

2006

Percentage ChangeBuffalo

$
58,360

$
28,127


107
%Cougar (all variants)


741,036


132,872


458
%Spare parts and logistics


91,276


35,018


161
%$
890,672

$
196,017


354
%


Cost of sales and Gross profit

For the year ended December 31,(in thousands)

2007

2006Cost of sales

$
786,803

$
158,994Gross profit

$
103,869

$
37,023Gross profit as a percentage of net sales


11.7
%

18.9
%


The
gross profit decreased by 7.2 percentage points for the year ended December 31, 2007 compared with the year ended December 31, 2006. The gross profit was
impacted by 4.1 percentage points as a result of GDLS Subcontract activity, whereby we recognized no gross profit on $231.9 million of vehicles sold that were produced by GDLS. We also
incurred a write-down of our raw material and supplies to their net realizable values in the amount of $15.8 million, and we incurred a loss of $5.9 million on firm
commitments to acquire raw materials and supplies. See Note 3,Inventories, in the accompanying consolidated financial statements. The remainder
of the decrease was primarily due to operational inefficiencies, and the use of contract labor in the production process. We define the gross profit percentage as net sales less cost of sales divided
by net sales.

General and administrative expenses

For the year ended December 31,(in thousands)

2007

2006General and administrative expenses

$
84,044

$
27,183As a percentage of net sales


9.4
%

13.9
%


General
and administrative expenses increased by approximately $56.9 million for the year ended December 31, 2007 compared with the year ended December 31, 2006, or
an increase of 209%. Demand
for our blast- and ballistic-protected vehicles increased substantially during 2007, especially for the Mine Resistant Ambush Protected ("MRAP") vehicles, in response to the pervasive threat
confronting our troops in Iraq and Afghanistan from land mines, hostile fire, and improvised explosive devices ("IEDs"). We expanded our operations such that we were able to produce and ship 1,558
vehicles in 2007 versus only 227 vehicles in 2006, or an increase of 586%. The increase in expense was primarily due to our increased general and administrative functions required to support the
increased vehicle production activities associated with the MRAP program and the rapidly expanding customer base.

Prior
to 2007, we did not have the operational or administrative infrastructure in place to accommodate this accelerated level of production volume. Establishing this infrastructure
resulted in a sizeable increase in general and administrative costs, especially since it was accomplished in such a

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short
timeframe in order to deliver the vehicles to the battlefield as quickly as possible. We experienced growth in accounting, program and contract management, human resources, information systems,
business development, and other support functions. As a result, employees in our administrative functions increased from approximately 300 to approximately 675, as of December 31, 2006 and
2007, respectively. In addition, we had approximately 125 contractors filling newly created administrative positions as of December 31, 2007.

We
also engaged outside consultants to function as our internal audit department and assist with our evaluation of internal controls over financial reporting as required by
Section 404 of the Sarbanes-Oxley Act of 2002.

We
incurred a liquidated damage charge of $7.2 million during the year ended December 31, 2007 related to our December 2006 Private Investment in Public Entity ("PIPE")
stock offering because the registration statement for the PIPE shares was not declared effective within the required time frame. See Note 6,Other Current
Liabilities, in the accompanying consolidated financial statements.

Significant
year-over-year cost increases included salaries, wages and fringe benefits, ($15.5 million), consulting and temporary labor
($14.8 million), liquidated damages ($7.2 million), marketing, sales and other administrative costs ($4.2 million), supplies ($3.5 million), travel ($2.9 million),
depreciation ($2.7 million), information technology ($2.3 million), legal settlements and other charges ($2.3 million), and other general and administrative expenses
($1.5 million).

Research and development expenses

For the year ended December 31,(in thousands)

2007

2006Research and development expenses

$
14,052

$
3,204As a percentage of net sales


1.6
%

1.6
%


Research
and development expense increased by approximately $10.8 million primarily due to increased expenditures related to the development of the Cheetah vehicle. We also
increased research and development spending on upgrades and variants of the Buffalo and Cougar vehicles.

Other income

Other income increased approximately $3.2 million for the year ended December 31, 2007 as compared with the year ended
December 31, 2006 primarily due to the interest income earned on investment of the funds received from our December 2006 private placement of common stock.

Interest expense

Interest expense decreased $1.1 million for the year ended December 31, 2007 primarily due to the repayment of a
short-term loan in August 2006 and the termination of an accounts receivable factoring agreement in June 2006 facilitated by the sale of common stock through private placements, partially
offset by the bank fees associated with the line of credit.

Income tax (expense) benefit

We incurred income tax (expense) for the year ended December 31, 2007 as a result of the increase in our net sales and
profitability compared to the year ended December 31, 2006. The effective income tax rate for the year ended December 31, 2007 was (18.4%). See Note 11, Income Taxes,in the accompanying
consolidated financial statements. In addition, as of December 31,
2006, the valuation allowance for deferred tax assets of $14.2 million was eliminated as we expect to realize future earnings sufficient to fully utilize the accumulated income tax benefit.

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Series D 6% convertible preferred stock dividends and accretion

There are no preferred stock dividends or accretion of preferred stock in 2007 as all preferred stock was converted to common stock by
year-end 2006.

Net Income available to common shareholders

For the year
ended
December 31,2007

2006Diluted earnings per share

$
0.11

$
0.36


Net
income available to common shareholders for the year ended December 31, 2007 decreased over the comparable period in 2006 primarily due to decreased gross margins and
increased selling, administrative, development, research, and income tax expenses partially offset by increased interest income and decreased preferred stock dividends and accretion.

Liquidity and Capital Resources

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

Sources and Uses of Cash

Our primary sources of funding are cash flows from operations and from financing activities. Over the past three years, our funds were
used primarily to fund working capital requirements and to make capital expenditures. The following chart shows the cash flows provided by or used in operating, investing, and financing activities for
2008, 2007, and 2006 (in thousands):

For the year ended December 31,2008

2007

2006Net cash provided by (used in) operating activities

$
37,031

$
(9,075
)
$
(25,920
)Net cash used in investing activities


(16,318
)

(59,717
)

(7,537
)Net cash (used in) provided by financing activities


(709
)

3,470


188,559Increase (decrease) in cash and cash equivalents

$
20,004

$
(65,322
)
$
155,102


We
ended 2008 with $111.0 million of cash and cash equivalents, an increase from $91.0 million at the end of 2007 and a decrease from $156.3 million at the end of
2006.

Cash Flow from Operating Activities

Cash provided by operating activities increased by $46.1 million during the year ended December 31, 2008 compared to
2007. This change was primarily due to an increase in net income partially offset by an increase in working capital. Working capital excluding cash increased $37.2 million over the prior year.
Changes in working capital excluding cash in 2008 included:



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The
majority of our cash receipts are from the U.S. government and other foreign governments, and therefore the risk of default on payment of our accounts receivable as of
December 31, 2008 is very low. However, the deepening global credit crisis and recession in the United States and western Europe may have an impact on the U.S. and other governments to continue
to fund defense contracts and programs or delay payments to its contractors in the future.

Cash
used in operating activities decreased by $16.8 million during the year ended December 31, 2007 compared with 2006. This change was primarily due to an increase in
advance payments on contracts partially offset by an increase in working capital and a decrease in deferred income taxes. Our advance payments on contracts increased due to the receipt of
performance-based payments on the MRAP program. Working capital usage increased $26.7 million (accounts receivable, inventories, and accounts payable) to support increased sale volumes.
Deferred income taxes decreased due to the elimination of the valuation allowance for deferred tax assets of $14.2 million as of December 31, 2006.

Cash Flow from Investing Activities

Cash used in investing activities decreased by $43.4 million during 2008 compared with 2007. During 2008, we expended
approximately $16.3 million primarily to complete the expansion of our manufacturing capability and capacity that we began in 2007 and to upgrade our information technology infrastructure. The
majority of those expenditures were made in the first three months of 2008. We anticipate that capital expenditures for 2009 will total approximately $10-$15 million.

As
our business grew, we made several significant acquisitions and expanded our manufacturing capacity and infrastructure. In March 2007, we purchased the research and developmental
testing facility of NEWTEC Services Group, Inc., located near Edgefield, South Carolina, for $5.5 million, $5.1 million of which was in cash. In March 2007, we purchased real and
personal property located in Summerville, South Carolina, for $4.1 million in cash to use as a product development and logistic services training center. In July 2007, we purchased land and an
approximately 430,000 square foot building in Roxboro, North Carolina, for $3.5 million that we intend to use for training and sustainment purposes. Also, in July 2007, we completed
construction on and placed into service a 90,000 square foot warehouse facility at our corporate headquarters in Ladson, South Carolina, at a cost of approximately $3.5 million in cash. During
2007, we began to construct additional assembly lines. Construction in progress for the year ended December 31, 2007 totaled $31.3 million. Additionally, we made leasehold improvements
totaling $10.2 million and purchased computer equipment and software totaling $4.0 million.

During
2006, we acquired a paint booth, overhead cranes and welding equipment to expand our manufacturing capacity. We also acquired computers, furniture and a more robust accounting
system to support our business growth.

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Cash Flow from Financing Activities

During the years ended December 31, 2008 and 2007, we did not issue common stock (except for exercised employee options and
vested restricted stock) or debt to fund business activities. During the year ended December 31, 2006, we issued common stock for two private placements in public equity and exercised common
stock warrants, totaling $196.2 million to fund the
expansion of the business and retired $7.5 million of short-term debt. See Note 9,Shareholders' Equity,in the accompanying
consolidated financial statements.

Current Liquidity and Capital Resources

Our cash and cash equivalents as of December 31, 2008 were held for working capital purposes and were invested primarily in
short-term United States Treasury bills and money market funds. We do not enter into investments for trading or speculative purposes.

During
2008, we expended approximately $16.3 million to complete the expansion of our manufacturing capability and capacity and to upgrade our information technology
infrastructure. We do not expect any major capital expenditures in 2009.

The
amount of capital that we will require depends on several factors, including without limitation, the extent and timing of sales of our products, performance based payments, inventory
costs, costs of raw materials and components, labor costs, costs of improving our financial and accounting systems, the timing and costs associated with the expansion of our manufacturing,
development, engineering and customer support capabilities, the timing and cost of our product development and enhancement activities and our operating results. We currently estimate that the cash
flow we anticipate will be generated by our business will be sufficient to meet our presently budgeted capital expenditures and our other presently anticipated cash needs for the year ending
December 31, 2009. In addition, we have available to us a $40 million line of credit, which expires on April 30, 2010. After that time, we expect that we may need 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 will be available to
us when we need it or, if available, that the terms of any such financing will be satisfactory to us and not dilutive to our shareholders. Any failure to obtain necessary capital as and when required
could have a material adverse effect on our business, prospects, financial position, results of operations and cash flows.

Off-Balance Sheet Arrangements

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



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

As
of December 31, 2008, we do not have any obligation under certain guarantees or contracts as defined above.

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As of December 31, 2008, we do not have any retained or contingent interest in assets as defined above.

As
of December 31, 2008, we do not hold derivative financial instruments, as defined by FASB Statement No. 133,Accounting for Derivative
Instruments and Hedging Activities,as amended.

As
of December 31, 2008, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred
to as structured finance or special purpose entities ("SPEs"), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. As of December 31, 2008 and 2007, we were not involved in any unconsolidated SPE transactions.

Contractual Obligations

Achieving optimal returns on cash often involves making long-term commitments. SEC regulations require that we present our
contractual obligations, and we have done so in the table that follows. However, our future cash flow prospects
cannot reasonably be assessed based on such obligations, as the most significant factor affecting our future cash flows is our ability to earn and collect cash from our customers. Future cash
outflows, whether they are contractual obligations or not, will vary based on our future needs. While some such outflows are completely fixed (for example, commitments to repay principal and interest
on fixed-rate borrowings), most will depend on future events (for example, payments to subcontractors under long-term contracts). Further, normal operations involve significant
expenditures that are not based on "commitments" (for example, amounts paid for income taxes or for payroll).

Our
consolidated contractual obligations as of December 31, 2008, are as follows (in thousands):

Total

2009

2010 - 2011

2012 - 2013

2014 and
ThereafterOperating lease obligations(a)(b)(d)

$
11,132

$
2,525

$
4,171

$
3,523

$
913Purchase obligations(b)(c)(d)


117,533


117,533








Other long-term liabilities(d)(e)


300


150


150





Total

$
128,965

$
120,208

$
4,321

$
3,523

$
913


---

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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 and development of our business, and we do not expect to pay any cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any, will be at the discretion of
the board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in current or future financing instruments, and other factors the
board deems relevant.

Critical Accounting Policies and Estimates

Our discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial
statements, which have been prepared in accordance with GAAP. In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about
future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. We base our assumptions, estimates and judgments on
historical experience, current trends and other factors we believe to be relevant at the time we prepared our consolidated financial statements. On a regular basis, we review the accounting policies,
assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be
determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

The
preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the
reporting periods. Significant estimates and assumptions are used for, but are not limited to: (1) revenue recognition; (2) allowance for doubtful accounts; (3) definitization and
advance payments on contracts; (4) inventory costs and reserves; (5) asset impairments (6) depreciable lives of assets; (7) economic lives and fair value of leased assets;
(8) income tax reserves and valuation allowances; (9) fair value of stock options; (10) allocation of direct and indirect cost of sales; and (11) litigation reserves.
Future events and their effects cannot be predicted with certainty, and accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our
consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. We evaluate and
update our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluations. Actual results could differ from the estimates we have used.

Our
significant accounting policies are discussed in Note 1,Summary of Significant Accounting Policies,to our accompanying
consolidated financial statements. We believe the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results, as they require
management to make difficult, subjective or complex judgments, and to make estimates about the effect of matters that are inherently uncertain. We have reviewed these critical accounting policies and
related disclosures with the Audit Committee of our board of directors.

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Description

Judgments and Uncertainties

Effect if Actual Results
Differ from AssumptionsInventoriesWe 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.


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Description

Judgments and Uncertainties

Effect if Actual Results
Differ from AssumptionsIncome taxesWe 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. They are also recorded with respect to net operating losses and other tax attribute carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the years in which temporary differences are expected to be recovered or settled. Valuation allowances are established when it is more likely than not that deferred tax assets will not be realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the income of the period that includes the enactment date.
  
In addition, we establish reserves for tax contingencies in accordance with FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes.

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.
  
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.

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 AssumptionsAssessment of Loss ContingenciesWe 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.


Recent Accounting Pronouncements

In May 2008, the FASB issued FASB Statement No. 162,The Hierarchy of Generally Accepted Accounting
Principles. FASB Statement No. 162 defines the order in which accounting principles that are generally accepted should be followed. FASB Statement No. 162 became
effective November 15, 2008. We follow the hierarchy and therefore expect that the adoption of FASB Statement No. 162 will not have a material impact on our consolidated financial
position, results of operations, and cash flows.

In
April 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 be considered in developing the renewal or extension assumptions used to determine the 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 the determination of intangible asset useful lives. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008.
Earlier adoption is prohibited. We expect that the adoption of FSP FAS 142-3 will not have a material impact on our consolidated financial position, results of operations, and cash
flows.

In
March 2008, the FASB issued FASB Statement No. 161,Disclosures about Derivative Instruments and Hedging Activities, an
amendment of FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activities. FASB Statement No. 161 changes the
disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (i) how and why an entity uses derivative instruments,
(ii) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133,Accounting for Derivative Instruments and Hedging
Activities, and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity's financial position, results of operations,
and cash flows. FASB Statement No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application
permitted. FASB Statement No. 161 permits, but does not require, comparative disclosures for earlier periods at initial adoption. We do not have financial instruments subject to FASB Statement
No. 133, and, as a result, the adoption of FASB Statement No. 161 will not have a material effect on our consolidated financial position, results of operations, cash flows or disclosures
related to derivative instruments and hedging activities.

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In
September 2006, FASB issued FASB Statement No. 157,Fair Value Measurements,which clarifies the definition of fair value
whenever another standard requires or permits assets or liabilities to be measured at fair value. Specifically, the standard clarifies that fair value should be based on the
assumptions market participants would use when pricing the asset or liability, and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. FASB Statement
No. 157 does not expand the use of fair value to any new circumstances, and must be applied on a prospective basis except in certain cases. The standard also requires expanded financial
statement disclosures about fair value measurements, including disclosure of the methods used and the effect on earnings.

In
February 2008, FASB Staff Position ("FSP") FAS No. 157-2,Effective Date of FASB Statement No. 157,was issued.
FSP No. 157-2 defers the effective date of FASB Statement No. 157 to fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, for all
nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Examples of items within the
scope of FSP No. 157-2 are nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent
periods), and long-lived assets, such as property, plant and equipment and intangible assets measured at fair value for an impairment assessment under FASB Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.

The
partial adoption of FASB Statement No. 157 on January 1, 2008, with respect to financial assets and financial liabilities recognized or disclosed at fair value in the
consolidated financial statements on a recurring basis did not have a material impact on our consolidated financial statements. We are in the process of analyzing the potential impact of FASB
Statement No. 157 relating to our January 1, 2009 adoption of the remainder of the standard.

On
January 1, 2008, we adopted FASB Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities.FASB
Statement No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value, which are not otherwise currently required to be measured at fair
value. Under FASB Statement No. 159, the decision to measure items at fair value is made at specified election dates on an instrument-by-instrument basis and is irrevocable. Entities electing
the fair value option are required to recognize changes in fair value in earnings and to expense upfront costs and fees associated with the item for which the fair value option is elected. The new
standard did not impact our consolidated financial statements as we did not elect the fair value option for any instruments existing as of the adoption date. However, we currently plan to evaluate the
fair value measurement election with respect to financial instruments we enter into in the future.

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

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Prices

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

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Foreign Currency

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

Interest Rates

We do not have a trading portfolio and although our current financing arrangement is at a variable rate, we do not have any borrowings
under the arrangement. As a result, we are not currently directly at risk of interest rate fluctuations. As our financing needs change in the future, interest rate risk may become a more significant
issue for us.

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

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



PageManagement's Responsibility Report

76Report of Independent Registered Public Accounting Firm

77Report of Independent Registered Public Accounting Firm

79Consolidated Balance Sheets as of December 31, 2008 and 2007

80Consolidated Statements of Operations for the Years Ended December 31, 2008, 2007, and 2006

81Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2008, 2007, and 2006

82Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007, and 2006

83Notes to Consolidated Financial Statements

84


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Management's Responsibility Report

Force Protection's management is responsible for the preparation, integrity and fair presentation of the consolidated financial
statements and other information used in this Annual Report. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States
of America and include, where appropriate, estimates based on the best judgment of management. Financial and operating data elsewhere in the Annual Report are consistent with that contained in the
accompanying consolidated financial statements.

Force
Protection's policy is to maintain systems of controls over financial reporting and disclosure controls and procedures. Such systems are designed to provide reasonable assurance
that the financial information is accurate and reliable and Force Protection's assets are adequately accounted for and safeguarded. The Board of Directors oversees Force Protection's systems of
controls over financial reporting and disclosure controls and procedures through its Audit Committee, which is comprised of directors who are not employees. The Audit Committee meets regularly with
representatives of the Company's independent registered public accounting firm and management, including internal audit staff, to satisfy themselves that Force Protection's policy is being followed.
The Audit Committee has engaged Grant Thornton LLP as the independent registered public accounting firm.

The
financial statements have been reviewed by the Audit Committee and, together with the other required information in this Annual Report, approved by the Board of Directors. In
addition, the 2008, 2007, and 2006 financial statements have been audited by Grant Thornton LLP whose reports are provided on the following pages.

/s/ MICHAEL MOODY MICHAEL MOODYChief Executive Officer

/s/ CHARLES MATHIS CHARLES MATHISChief Financial OfficerMarch 26, 2009


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Shareholders of
Force Protection, Inc.:

We
have auditedForce Protection, Inc.(a Nevada Corporation) and subsidiaries' (the Company) internal control over financial
reporting as of December 31, 2008, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion
on the Company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the
financial statements.

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

A
material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in
management's assessment.



In
our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained effective
internal control over financial reporting as of December 31, 2008, based on criteria established inInternal ControlIntegrated
Frameworkissued by COSO.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Force Protection, Inc.
and

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subsidiaries
as of December 31, 2008 and December 31, 2007, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 2008. The material weaknesses identified above were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2008 financial
statements, and this
report does not affect our report dated March 26, 2009 which expressed an unqualified opinion on those financial statements.

/s/
Grant Thornton LLP

Columbia,
South Carolina
March 26, 2009

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Shareholders of
Force Protection, Inc.:

We
have audited the accompanying consolidated balance sheets ofForce Protection, Inc.(a Nevada corporation) and subsidiaries (the
Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended
December 31, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Force Protection, Inc. and subsidiaries
as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States of America.

As
discussed in the notes to consolidated financial statements, effective January 1, 2007, the Company adopted the provision of Financial Accounting Standards Board (FASB)
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109."

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Force Protection, Inc. and subsidiaries' internal control
over financial reporting as of December 31, 2008, based on criteria established inInternal ControlIntegrated Frameworkissued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 26, 2009, expressed an adverse opinion on the effectiveness of the Company's internal
controls over financial reporting.

/s/
Grant Thornton LLP

Columbia,
South Carolina
March 26, 2009

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Force Protection, Inc. and Subsidiaries        Consolidated Balance Sheets

As of December 31,2008

2007Assets

(In Thousands,Current assets:

Except Share Data)Cash and cash equivalents

$
111,001

$
90,997Accounts receivable, net of allowance for doubtful accounts of none in 2008 and $323 in 2007


138,449


118,794Inventories


88,502


140,639Advances to subcontractor





25,106Deferred income tax assets


15,572


14,530Income taxes receivable





6,565Other current assets


2,417


8,481Total current assets


355,941


405,112Property and equipment, net


61,429


66,707Intangible assets, net


654


1,355Deferred income tax assets





1,496Total assets

$
418,024

$
474,670Liabilities and Shareholders' EquityCurrent liabilities:Accounts payable

$
47,115

$
146,515Due to United States government


39,015


18,969Other current liabilities


20,783


20,710Advance payments on contracts


29,504


56,552Total current liabilities


136,417


242,746Deferred income tax liabilities


3,141


Other long-term liabilities


139


295139,697


243,041Commitment and contingenciesSeries D 6% convertible preferred stock, $.001 par value; 20,000 shares authorized; none issued and outstanding





Shareholders' equity:Series A preferred stock, $.001 par value; 1,600 shares authorized; none issued and outstanding





Series B preferred stock, $.001 par value; 25 shares authorized; none issued and outstanding





Series C preferred stock, $.001 par value; 150 shares authorized; none issued and outstanding





Common stock, $.001 par value; 300,000,000 shares authorized; issued and outstanding 68,349,162 in 2008 and 68,247,648 in 2007


68


68Additional paid-in capital


256,939


257,160Retained earnings (accumulated deficit)


21,320


(25,599
)Total shareholders' equity


278,327


231,629Total liabilities and shareholders' equity

$
418,024

$
474,670


The accompanying notes to consolidated financial statements are an integral part of
these balance sheets.

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Force Protection, Inc. and Subsidiaries        Consolidated Statements of Operations

For the year ended December 31,2008

2007

2006(In Thousands, Except Per Share Data)Net sales

$
1,326,331

$
890,672

$
196,017Cost of sales


1,149,670


786,803


158,994Gross profit


176,661


103,869


37,023General and administrative expenses


93,950


84,044


27,183Research and development expenses


14,259


14,052


3,204Operating income


68,452


5,773


6,636Other income, net


1,463


4,209


963Interest expense


(332
)

(609
)

(1,729
)Income before income tax (expense) benefit


69,583


9,373


5,870Income tax (expense) benefit


(22,664
)

(1,721
)

12,327Net income


46,919


7,652


18,197Accretion of Series D 6% convertible preferred stock








(1,297
)Preferred stock dividend








(326
)Net income available to common shareholders

$
46,919

$
7,652

$
16,574Earnings per common share:Basic

$
0.69

$
0.11

$
0.37Diluted

$
0.69

$
0.11

$
0.36Weighted average common shares outstanding:Basic


68,314


68,054


44,786Diluted


68,393


68,404


50,428


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

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Force Protection, Inc. and Subsidiaries        Consolidated Statements of Shareholders' Equity

For the year ended December 31,2008

2007

2006(In Thousands, Except Share Data)NUMBER OF COMMON SHARES OUTSTANDINGBalance at beginning of year


68,247,648


66,762,565


36,114,216Issuance for:CashPrivate placement





(27,700
)

21,250,000CashWarrants








2,852,140Employee stock option exercises


31,000


1,415,481


1,000Employee and board of director stock grants


70,514


97,302


313,644Third-party agreements








30,000Other








8,937Conversion of Series D 6% convertible preferred stock to common stock








6,192,628Balance at end of year


68,349,162


68,247,648


66,762,565COMMON STOCKBalance at beginning of year

$
68

$
67

$
36Issuance for:CashPrivate placement





Nil


21CashWarrants








3Employee stock option exercises


Nil


1


NilEmployee and board of director stock grants


Nil


Nil


1Third-party agreements





Nil


NilOther








NilConversion of Series D 6% convertible preferred stock to common stock








6Balance at end of year

$
68

$
68

$
67COMMON STOCK WARRANTSBalance at beginning of year

$


$


$
5,781Issuance for common stock








(5,781
)Balance at end of year

$


$


$
ADDITIONAL PAID-IN CAPITALBalance at beginning of year

$
257,160

$
251,038

$
38,808Issuance of common stock for:CashPrivate placement








185,806CashWarrants








16,153Employee stock option exercises


46


1,335


6Employee and board of director stock grants


Nil





Third-party agreements








NilOther








1,119Conversion of Series D 6% convertible preferred stock to common stock








9,192Accretion of Series D 6% convertible preferred stock








(1,297
)Stock-based compensation


270


2,511


1,251Income tax effect realized from stock transactions


(537
)

2,276


Balance at end of year

$
256,939

$
257,160

$
251,038RETAINED EARNINGS (ACCUMULATED DEFICIT)Balance at beginning of year

$
(25,599
)
$
(33,251
)
$
(51,122
)Net income


46,919


7,652


18,197Series D 6% convertible preferred stock dividends:Cash








(277
)Common stock








(49
)Balance at end of year

$
21,320

$
(25,599
)
$
(33,251
)


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

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Force Protection, Inc. and Subsidiaries        Consolidated Statements of Cash Flows

For the year ended December 31,2008

2007

2006(In Thousands)Cash flows from operating activities:Net income

$
46,919

$
7,652

$
18,197Adjustments to reconcile net income to net cash provided by (used in) operating activitiesDepreciation and amortization


12,761


5,810


769Deferred tax provision (benefit)


3,058


(3,699
)

(12,327
)Income tax effect realized from stock transactions


537


(2,276
)

Stock-based compensation


270


2,511


1,251Common stock issued for services and other expenses








1,071Provision for asset impairment


4,947





Allowance for doubtful accounts


(323
)

278


45Provision for inventory obsolescence


12,269


15,772


1,925Warranty reserve


1,546


1,844


164Reserve for loss on firm purchase commitments


148


5,871


Loss on disposal of property and equipment


61





(Increase) decrease in assetsAccounts receivable


(19,332
)

(77,037
)

(37,395
)Inventories


39,868


(96,015
)

(29,835
)Advances to subcontractor


25,106


(25,106
)

Income taxes receivable


6,565


(4,289
)

Other current assets


6,064


(8,108
)

(107
)Increase (decrease) in liabilitiesAccounts payable


(94,872
)

103,060


23,965Due to United States government


20,046


12,946


5,006Other current liabilities


(1,559
)

7,983


1,126Advance payments on contracts


(27,048
)

43,728


225Total adjustments


(9,888
)

(16,727
)

(44,117
)Net cash provided by (used in) operating activities


37,031


(9,075
)

(25,920
)Cash flows from investing activities:Capital expenditures


(16,318
)

(59,717
)

(7,537
)Net cash used in investing activities


(16,318
)

(59,717
)

(7,537
)Cash flows from financing activities:Proceeds from issuance of common stock:Private placement








185,828Warrants








10,375Other


46


1,336


6Dividends on Series D 6% convertible preferred stock








(277
)Payments on debt








(7,500
)Income tax effect realized from stock transactions


(537
)

2,276


Net increase (decrease) in other long-term liabilities


(218
)

(142
)

127Net cash provided by (used in) financing activities


(709
)

3,470


188,559Increase (decrease) in cash and cash equivalents


20,004


(65,322
)

155,102Cash and cash equivalents at beginning of year


90,997


156,319


1,217Cash and cash equivalents at end of year

$
111,001

$
90,997

$
156,319Supplemental cash flow information:Cash paid during the year forInterest, net of amounts capitalized

$
302

$
616

$
1,722Income taxes

$
8,861

$
9,940

$
Supplemental schedule of noncash investing and financing activities:Property and equipment additions in accounts payable

$
273

$
4,801

$
Note payable, net of discount, issued as consideration for non-compete agreement

$


$
390

$



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

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Force Protection, Inc. and Subsidiaries        Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Organization and Description of the Business

Force Protection, Inc., reincorporated under the laws of Nevada in 2005, and its subsidiaries, is a provider of blast- and
ballistic-protected products used to support armed forces and security personnel in harm's way. We design, manufacture, test, deliver and support our blast- and ballistic-protected products with the
purpose to increase survivability of the users of the products. Our specialty vehicles, which we believe are at the forefront of blast- and ballistic-protected technology, are designed to protect
their occupants from landmines, hostile fire, and improvised explosive devices ("IEDs"). Our primary customer is the United States Department of Defense ("DoD"). We are a key provider of the U.S.
military's Mine Resistant Ambush Protected ("MRAP") vehicle program and have sold over 3,000 vehicles under this program. We also provide our Cougar Mastiff, Cougar Ridgback, Cougar Wolfhound, and
Buffalo mine protected vehicles to the United Kingdom Ministry of Defence. In total, across all vehicle programs we have sold approximately 4,000 vehicles.

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

Basis of Presentation and Consolidation

The accompanying consolidated financial statements of Force Protection and its subsidiaries were prepared in accordance with generally
accepted accounting principles in the United States of America ("GAAP") and include the assets, liabilities, revenues, and expenses of our two wholly owned subsidiaries, Force Protection
Industries, Inc. and Force Protection Technologies, Inc. We eliminate from our financial results all significant intercompany accounts and transactions.

Use of Estimates

The preparation of our consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues
and expenses during the reporting periods. Significant estimates and assumptions are used for, but are not limited to: (1) revenue recognition; (2) allowance for doubtful accounts;
(3) definitization and advance payments on contracts; (4) inventory costs and reserves; (5) asset impairments; (6) depreciable lives of assets; (7) economic lives
and fair value of leased assets; (8) income tax reserves and valuation allowances; (9) fair value of stock options; (10) allocation of direct and indirect cost of sales; and
(11) contingent liabilities, warranty, and litigation reserves. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of
judgment. The accounting estimates used in the preparation of our consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is
obtained and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluation, as considered
necessary. Actual results could differ from those estimates.

Risks and Uncertainties

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

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Force Protection, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting Policies (Continued)

Customer Concentration

Substantially all of our revenue comes from our DoD contracts either as a prime contractor or as a subcontractor to another prime
contractor to the U.S. government. Revenue from contracts for which we are the prime contractor approximated 96%, 94%, and 82%, ofNet salesfor the
years ended December 31, 2008, 2007, and 2006, respectively. Our accounts receivable from the U.S. government as of December 31, 2008 and 2007 were 83% and 89% of our accounts
receivable, respectively.

Law and Regulations

As a result of our DoD contracts, we are required to participate in the U.S. government contracting process, which involves extensive
statutes, regulations and requirements of the U.S. government agencies and entities that govern these programs, including award, administration, funding, and performance of contracts. These statutes
and regulations impose a broad range of requirements, many of which are unique to government contracting, including various procurement, import and export, federal national security, contract pricing
and cost, funding, contract termination and adjustment, audit requirements, and protection of classified information requirements. Our failure to comply with these regulations and requirements could
result in reductions of the value of contracts, contract modifications or termination, loss of security clearance, and the assessment of civil or criminal penalties and fines, inability to win new
contracts, and lead to suspension or debarment from government contracting or subcontracting for a period of time, any of which could have a material adverse affect on our financial position, results
of operations, and cash flows.

We
are also subject to certain unique business risks associated with the defense market, including changes in budget appropriations, procurement policies, political developments both
domestically and abroad, and other factors. Any material deterioration in the economic and environmental factors that impact the defense industry could have a material adverse effect on our financial
position, results of operations, and cash flows.

There
are certain federal laws that, while not specifically directed at us as a contractor, may affect our U.S. government contracts. The Anti-Deficiency Act is one of the
major laws through which Congress exercises its constitutional control of the public purse. The Anti-Deficiency Act indirectly regulates how the agency awards our contracts and pays our
invoices. Accounts receivable related to DoD contracts approximated 83% and 89% of our accounts receivable as of December 31, 2008 and 2007, respectively.

Our
operations also are subject to a broad range of environmental, health and safety laws and regulations in the jurisdictions in which we operate. These laws and regulations impose
increasingly stringent environmental, health and safety protection standards and permitting requirements regarding, among other things, air emissions, wastewater storage, treatment and discharges, the
use and handling of hazardous or toxic materials, waste disposal practices, and the remediation 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, and comparable state laws, impose joint and several liability for the cost of
environmental remediation, natural resource damages, third-party claims, and other expenses, without regard to the fault or the legality of the original conduct, on those persons who contributed to
the release of a hazardous substance into the environment.

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Force Protection, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting Policies (Continued)

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

Sources and Supply of Materials

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

In
addition, some of our product components are manufactured in and supplied from foreign countries. If import tariffs or taxes increase for any reason, our cost of goods would increase.
Our financial performance could be adversely affected by changes in the political, social and economic environment in these foreign countries. The role of the central and local governments in the
economies of these foreign countries may be significant. Policies toward economic liberalization, and laws and policies affecting foreign companies, foreign investment, currency exchange rates and
other matters could change, resulting in greater restrictions on our ability to do business with suppliers based in other countries. A foreign government could impose surcharges, increase tax rates,
or revoke, terminate or suspend operating licenses without compensating us. In addition, the U.S. government could impose charges and taxes and could take other actions that could make it more
expensive or costly for us to obtain components from sources in foreign countries or could prevent us from acquiring those components. Also, other countries, from time to time, experience instances of
civil unrest and hostilities and confrontations have occurred between the military, insurgent forces, and civilians. If for these or any other reason, we are unable to obtain required components from
foreign sources as and when required, or at all, it could have a material adverse effect on our financial position, results of operations, and cash flows.

Revenue Recognition

Substantially all of our revenues from the U.S. government and certain of our revenues from others are earned pursuant to written
contractual arrangements to design, develop, manufacture and/or modify blast- and ballistic-protected products and to provide related engineering and technical or other

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Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting Policies (Continued)

services
according to the specifications of the buyers (customers). These contracts are generally fixed-price, cost-reimbursable, or time and material based. We recognize revenues and
earnings on fixed-production contracts, whose units are produced and delivered in a continuous or sequential process, based upon the unit's contract selling price as we deliver it and the customer's formal
acceptanceof the unit. We charge the actual unit cost toCost of sales.

We
defineformal acceptanceunder the U.S. government contract as taking place when a representative of the U.S. government signs the
United States Form DD250 entitled "Material Inspection and Receiving Report." Under the Federal Acquisition Regulation ("FAR"), a signed Form DD250 signifies contractual inspection and acceptance by
the United States of the work performed by Force Protection. A signed Form DD250 also is the event contractually obligating the U.S. government to pay us for the approved goods or services (subject to
any "definitization" contractual adjustment(s), as discussed below).

In
accordance with standard industry practice, there is a representative from the United States Defense Contract Management Agency ("DCMA") acting as a contractual representative of the
U.S. government present at our facilities. This DCMA representative inspects each vehicle as it is delivered by us, and upon confirmation of the vehicle's conformity with the contractual
specifications, the inspector or other contractually designated official signs the Form DD250 and formally accepts delivery of the vehicle. We only recognize revenues arising from our U.S. government
contracts upon execution of the Form DD250 by the DCMA inspector.

Under
some of our U.S. government contracts, we receive performance-based payments based on completion of specific milestones stipulated under the contract (for example, completion of
manufacturing fabrication). We report these payments asAdvance payments on contractsin our consolidated balance sheets until the final delivery of the
products and formal acceptance by the U.S. government as evidenced by an executed Form DD250. As discussed above, upon acceptance of the products and the execution of the Form DD250, we recognize the
full sale price of the product as revenue.

We
recognize 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, when we meet four basic criteria: (i) persuasive evidence that a customer arrangement exists; (ii) the price is fixed or determinable;
(iii) collectibility is reasonably assured; and (iv) delivery of product has occurred or services have been rendered.

We
negotiate contracts with our customers that may include revenue arrangements with multiple deliverables. We account for each deliverable under a contract separately. Historically, we
negotiate and sign contracts with our customers that provide a contract amount and specific terms and conditions associated with each deliverable.

Shipping
and handling costs are expensed as incurred and included inCost of sales.

Definitization / Due to United States Government

Our contracts with the U.S. government are negotiated as either a "sole source" or "open competition" bid process. A sole source
process is one in which we are the sole bidder for the contract. An open competition could involve various bidders. Once a bid is accepted, the U.S. government usually expects work to commence
immediately. An open competition results in a final agreed-upon

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Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting Policies (Continued)

contract
price to which the U.S. government has agreed. A sole source process results in an agreed-upon contract with the U.S. government, subject to an adjustment process at a later date,
termed the "definitization process." The definitization process commences upon awarding of a contract, whereby the U.S. government undertakes a detailed review of our costs involved in the
manufacturing and delivery process. We then work with the U.S. government to determine an adequate and fair final contract price. We have the right to submit proposed prices, but they are subject to
final review and approval by the contracting officer, who may require that we use different prices. Although both parties make an effort to definitize the contract as quickly as possible, the process
is time consuming and can take months to complete. In addition, if an agreement is not reached as to price by a specific date, the contracting officer may unilaterally determine a price. During
definitization, we are usually required to perform the contract work and make deliveries before the final contract price has been established. For this reason, as part of the original award, we bill
the U.S. government at a predetermined price that is used for invoicing and accounting purposes pending final definitization.

As
a result of the adjustments related to the definitization process, we recognize a liability,Due to United States government, and
reduce gross sales to arrive at net sales. As of December 31, 2008, our liability for contracts subject to the definitization process has been determined based upon our estimate of final
contract prices or subsequently negotiated settlements. As of December 31, 2007, our liability for contracts subject to the definitization process have been determined based upon subsequent
settlement with the United States government.

Sales Returns and Allowance for Doubtful Accounts

Historically, we have not encountered sales returns or significant uncollectible accounts receivable and we do not anticipate them in
the near future. The majority of our accounts receivable are with the U.S. government and we do not maintain an allowance for doubtful accounts for those accounts due to the credit-worthiness of the
U.S. government. When necessary, we maintain an allowance for doubtful accounts, which is based upon specific identification, for our non-governmental customers.

Cash and Cash Equivalents

Cash and cash equivalentsincludes investments that are highly liquid and have maturities of three months or less when purchased. The carrying values
of cash and cash equivalents approximate their fair value due to the short-term nature of these instruments.

We
maintain amounts on deposit with various financial institutions, which may at times exceed federally insured limits. However, management periodically evaluates the credit-worthiness
of those institutions, and we have not experienced any losses on such deposits.

Inventories

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

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Force Protection, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting Policies (Continued)

Where
there is evidence that the utility of goods, in their disposal in the ordinary course of business, will be less than cost, whether due to physical obsolescence, changes in price
levels, or other causes, we recognize the difference as a loss in the current period. A write-down of inventory to the lower of cost or market creates a new cost basis that subsequently is
not marked up based on changes in underlying facts and circumstances.

Property and Equipment

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

The
ranges of estimated useful lives of our property and equipment are as follows:

YearsBuildings and building improvements


5-29Leasehold improvements


2-5Machinery and equipment, including tooling and molds


5-7Computer equipment and software


3-7Furniture and fixtures


3Demonstration vehicles


5Manuals


5Vehicles


5


The
carrying amounts of all long-lived assets are evaluated periodically to determine if adjustment to the depreciation and amortization period or to the remaining balance is
warranted. Such evaluation is based principally on the expected utilization of the long-lived assets.

Maintenance
and repairs of property and equipment are expensed as incurred. We capitalize replacements and improvements that increase the estimated useful life of an asset and we
capitalize interest on major construction and development projects while in progress.

We
retain fully depreciated assets in property and accumulated depreciation accounts until we remove them from service. In the case of sale, retirement, or disposal, the asset cost and
related accumulated depreciation balance is removed from the respective account, and the resulting net amount, less any proceeds, is included as a component of income from operations in the
consolidated statements of operations.

We
recognize escalated rents, including any rent holidays, on a straight-line basis over the term of the lease for those lease agreements where we receive the right to
control the use of the entire leased property at the beginning of the lease term.

We
test for impairment of long-lived assets, including intangible assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset
group (hereinafter referred to as "asset group") may not be recoverable by comparing the sum of the estimated undiscounted future

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Force Protection, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting Policies (Continued)

cash
flows expected to result from use of the asset group and its eventual disposition to the carrying value. If the sum of the estimated undiscounted future cash flows is less than the carrying
value, an impairment determination is required. The amount of impairment is calculated by subtracting the fair value of the asset group from the carrying value of the asset group. An impairment
charge, if any, is recognized withinOperating income.

Intangible Assets

We amortize the cost of intangible assets over their respective estimated useful lives on a straight-line basis. The
amortization periods are as follows:

YearsLicenses


3Non-compete agreement


4Customer base


2Special expertise


2Weighted-average useful lives


3


Investments in and Advances to Non-consolidated Affiliates

Equity method investments are recorded at original cost and adjusted periodically to recognize (i) our proportionate share of
the investees' net income or losses after the date of investment; (ii) additional contributions made and dividends or distributions received; and (iii) impairment losses resulting from
adjustments to net realizable value. However, for contracts not yet novated to an equity method investee, we continue to recognize the revenues and expenses from those contracts in our consolidated
financial statements.

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

Force Dynamics LLC

On September 10, 2007, we entered into a subcontract with General Dynamics Land Systems, Inc. ("GDLS") (the "GDLS
Subcontract") pursuant to which GDLS performs approximately 50% percent of the work under the MRAP Competitive Contract for vehicle manufacturing and life cycle support based on revenues. We
previously entered into a joint venture with GDLS on December 15, 2006 ("Workshare Agreement") pursuant to which we and GDLS would fulfill the obligations of the MRAP Competitive Contract. We
formed a Delaware limited liability company, Force Dynamics, LLC ("Force Dynamics"), to govern the terms of the joint venture. However, the MRAP Competitive Contract was awarded to us and not
to Force Dynamics or GDLS. We have attempted to transfer this contract to Force Dynamics, although the U.S. government has not yet agreed to the transfer. Revenue related to the Workshare Agreement
was $574.7 million, $231.8 million and $zero for the years ended December 31, 2008, 2007 and 2006, respectively.

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Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting Policies (Continued)

Advances to subcontractorconsist of amounts paid to a subcontractor based upon the achievement of contractual performance milestones. These advances
are a pass-through pursuant to our contract with the U.S. government.

In
connection with our joint venture arrangement with GDLS, we entered into a technology license agreement with Force Dynamics and GDLS. The agreement provides that we grant Force
Dynamics and GDLS a non-exclusive license without the right to sublicense. Force Dynamics and GDLS will pay us a vehicle fee for each MRAP vehicle produced. The term of this technology
agreement is the later of completion or complete termination of the MRAP program or the Workshare Agreement.

Stock-Based Compensation

As of December 31, 2008, Force Protection had one formal stock-based compensation plan, the Force Protection, Inc. 2008
Stock Incentive Plan ("2008 Stock Incentive Plan"), which was approved by shareholders in 2008. The purpose of the 2008 Stock Incentive Plan is to attract, retain and motivate officers, directors and
key employees (including prospective employees), consultants and others who may perform services for Force Protection, to compensate them for their contributions to the long-term growth
and profits of Force Protection and to encourage them to acquire a proprietary interest in our success.

Awards
may be made under the 2008 Stock Incentive Plan in the form of any of the following, in each case in respect of common stock: (a) stock options, (b) stock
appreciation rights, (c) restricted shares, (d) restricted stock units, (e) dividend equivalent rights and (f) other equity-based or equity-related awards, such as the
grant or offer for sale of unrestricted shares of common stock and performance share awards and performance units settled in cash in such amounts and subject to such terms and conditions as the
Compensation Committee may determine. Such awards may entail the transfer of actual shares of common stock to award recipients and may include awards designed to comply with or take advantage of the
applicable local laws of jurisdictions other than the United States that the Compensation Committee determines to be consistent with the purposes of the 2008 Stock Incentive Plan and the interests of
Force Protection.

As
approved by shareholders, the total number of shares of common stock that may be granted under the 2008 Stock Incentive Plan is 5,200,000.

Stock
options granted under the 2008 Stock Incentive Plan will have contractual terms not to exceed 10 years (or 5 years for 10% shareholders) and generally vest ratably
over three years. Restricted Stock granted under the 2008 Stock Incentive Plan will generally vest ratably over three years.

Prior
to 2008, Force Protection did not have a formal stock option plan. However, we provided stock-based compensation to some of our employees in the form of stock options and shares of
our common stock.

Warranty

Our sales contracts generally include a warranty that our products are free from defects in design, material, and workmanship for a
period of one year from the acceptance date. The warranty does not apply to any damage or failure to perform caused by the misuse or abuse of the vehicle, combat damage, fair
wear-and-tear items (brake shoes, wiper blades, etc.), or by the customer's failure to

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1. Summary of Significant Accounting Policies (Continued)

perform
proper maintenance or service on the supplies. We base our warranty accruals on estimates of the expected warranty costs that incorporate historical information and forward assumptions about
the nature, frequency, and average cost of warranty claims. Warranty costs are included inCost of sales.

Litigation Reserve

We accrue for loss contingencies associated with outstanding litigation, claims and assessments for which management has determined it
is probable that a loss contingency exists and the amount of loss can be reasonably estimated. We expense professional fees associated with litigation claims and assessments as incurred.

Research and Development

We incur costs in connection with research and development programs that are expected to contribute to future earnings, and charge such
costs against income as incurred. Research and development costs consist primarily of payroll and personnel related costs, contractor fees, infrastructure costs, materials to assemble prototype
vehicles, and administrative expenses directly related to research and development support.

Advertising Costs

We expense costs of print and other advertisements as incurred. Advertising expenses, included inGeneral and
administrative expenseswithin the accompanying consolidated statements of operations, approximated $0.6 million in 2008, $0.8 million in 2007, and
$0.3 million in 2006.

Income Taxes

We provide for income taxes using the asset and liability method. This approach recognizes the amount of federal, state, and local
taxes payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequence of events recognized in the consolidated financial statements and income
tax returns. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates. In addition, we establish reserves for tax contingencies in
accordance with FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes. We include interest and penalties related to federal and
state income taxes, if any, as a component ofIncome tax expense.

A
valuation allowance is required when it is more likely than not that some portion of the deferred tax assets will not be realized. Realization is dependent on generating sufficient
future taxable income.

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

Earnings per Common Share

The calculation of basic earnings per common share is based on the weighted-average number of our common shares outstanding during the
applicable period. The calculation for diluted earnings per

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Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting Policies (Continued)

common
share recognizes the effect of all potential dilutive common shares that were outstanding during the respective periods, unless their impact would be anti-dilutive.

Fair Value of Financial Instruments

FASB Statement No. 107,Disclosures about Fair Value of Financial Instruments,
requires disclosures of the fair value of financial instruments. Our financial instruments include cash and cash equivalents, accounts receivable, advances to subcontractor, accounts payable, and
amounts due to United States government. The carrying amounts of cash and cash equivalents, accounts receivable, advances to subcontractors, accounts payable and amounts due to the U.S. government,
approximate their fair value because of the short-term maturity and highly liquid nature of these instruments. The carrying values of our financial instruments approximate their fair value
as of December 31, 2008 and 2007.

Recent Accounting Pronouncements

In May 2008, the FASB issued FASB Statement No. 162,The Hierarchy of Generally Accepted Accounting
Principles. FASB Statement No. 162 defines the order in which accounting principles that are generally accepted should be followed. FASB Statement No. 162 became
effective November 15, 2008. We follow the hierarchy and therefore expect that the adoption of FASB Statement No. 162 will not have a material impact on our consolidated financial
position, results of operations, and cash flows.

In
April 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 be considered in developing the renewal or extension assumptions used to
determine the 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 the determination of intangible asset useful lives. FSP FAS 142-3 is effective for fiscal years beginning
after December 15, 2008. Earlier adoption is prohibited. We expect that the adoption of FSP FAS 142-3 will not have a material impact on our consolidated financial position,
results of operations, and cash flows.

In
March 2008, the FASB issued FASB Statement No. 161,Disclosures about Derivative Instruments and Hedging Activities, an
amendment of FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activities. FASB Statement No. 161 changes the
disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (i) how and why an entity uses derivative instruments,
(ii) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133,Accounting for Derivative Instruments and Hedging
Activities, and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity's financial position, results of operations,
and cash flows. FASB Statement No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application
permitted. FASB Statement No. 161 permits, but does not require, comparative disclosures for earlier periods at initial adoption. We do not have financial instruments subject to FASB Statement
No. 133, and, as a result, the adoption of FASB Statement No. 161 will not have a material effect on our consolidated financial position, results of operations, cash flows or disclosures
related to derivative instruments and hedging activities.

In
September 2006, FASB issued FASB Statement No. 157,Fair Value Measurements,which clarifies the definition of fair value
whenever another standard requires or permits assets or liabilities to be measured at fair value. Specifically, the standard clarifies that fair value should be based on the

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1. Summary of Significant Accounting Policies (Continued)

assumptions
market participants would use when pricing the asset or liability, and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. FASB Statement
No. 157 does not expand the use of fair value to any new circumstances, and must be applied on a prospective basis except in certain cases. The standard also requires expanded financial
statement disclosures about fair value measurements, including disclosure of the methods used and the effect on earnings.

In
February 2008, FASB Staff Position ("FSP") FAS No. 157-2,Effective Date of FASB Statement No. 157,was issued.
FSP No. 157-2 defers the effective date of FASB Statement No. 157 to fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, for all
nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Examples of items within the
scope of FSP No. 157-2 are nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent
periods), and long-lived assets, such as property, plant and equipment and intangible assets measured at fair value for an impairment assessment under FASB Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.

The
partial adoption of FASB Statement No. 157 on January 1, 2008, with respect to financial assets and financial liabilities recognized or disclosed at fair value in the
consolidated financial statements on a recurring basis did not have a material impact on our consolidated financial statements. We are in the process of analyzing the potential impact of FASB
Statement No. 157 relating to our January 1, 2009 adoption of the remainder of the standard.

On
January 1, 2008, we adopted FASB Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities.FASB
Statement No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value, which are not otherwise currently required to be measured at fair
value. Under FASB Statement No. 159, the decision to measure items at fair value is made at specified election dates on an instrument-by-instrument basis and is irrevocable. Entities electing
the fair value option are required to recognize changes in fair value in earnings and to expense upfront costs and fees associated with the item for which the fair value option is elected. The new
standard did not impact our consolidated financial statements as we did not elect the fair value option for any instruments existing as of the adoption date. However, we currently plan to evaluate the
fair value measurement election with respect to financial instruments we enter into in the future.

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

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2. Accounts Receivable

Accounts receivable consists of the following (in thousands):

As of December 31,2008

2007U.S. government

$
114,230

$
106,021Other accounts receivable


24,219


13,096138,449


119,117Less: Allowance for doubtful accounts





(323
)Accounts receivable, net

$
138,449

$
118,794


Other
accounts receivable includes amounts that relate to non-government entities and the sale of excess raw materials to suppliers. Any gain or loss on the sale of excess
raw materials is included inOther income, netin the accompanying consolidated statements of operations. As of December 31, 2008 and 2007, our
accounts receivable from the U.S. government included $8.6 million and $8.2 million, respectively, of earned and unbilled accounts receivable.

The
following is the activity related to our allowance for doubtful accounts (in thousands):

For the year ended December 31,

Balance at
Beginning
of Period

Additions
and Charges
to Expense

Deductions
and Accounts
Written Off

Balance at
End of
Period2008

$
323

$


$
(323
)
$
2007

$
45

$
278

$


$
3232006

$


$
45

$


$
45


On
June 22, 2006, we terminated our Factoring Agreement with GC Financial, Inc. and we have no further obligation under that agreement as of December 31, 2006. We
incurred factoring expenses of $0.8 million for the year ended December 31, 2006. These amounts are included inGeneral and administrative
expensesin the accompanying consolidated statements of operations.

3. Inventories

Inventories consist of the following (in thousands):

As of December 31,2008

2007Raw material and supplies

$
64,857

$
105,313Work in process


23,645


35,035Finished goods





291Inventories

$
88,502

$
140,639


Due
to excess and obsolete inventory and to account for our inventory at the lower of cost or market, we reduced the cost basis of our raw material and supplies and charged to Cost of Sales$12.3 million, $15.8 million and $1.9 million during the years ended December 31, 2008, 2007 and 2006,

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Notes to Consolidated Financial Statements (Continued)

3. Inventories (Continued)

respectively.
We also incurred a loss of $0.1 million and $5.9 million on firm purchase commitments to acquire raw material during 2008 and 2007, respectively.

4. Property and Equipment

Property and equipment consist of the following (in thousands):

As of December 31,2008

2007Land

$
4,419

$
4,419Buildings and building improvements


12,669


5,221Leasehold improvements


13,988


11,775Machinery and equipment; including tooling and molds


32,421


6,698Computer equipment and software


9,062


6,750Furniture and fixtures


3,580


4,454Demonstration vehicles


1,863


1,531Manuals


705


705Vehicles


676


57679,383


42,129Less: Accumulated depreciation


(18,683
)

(6,714
)60,700


35,415Construction in progress

$
729


31,292Property and equipment, net

$
61,429

$
66,707


The
amount of fully depreciated assets, depreciation expense, and rent expense under operating leases is as follows (in thousands):

As of and for the year ended
December 31,2008

2007

2006Fully depreciated assets

$
344

$
134

$
57Depreciation expense

$
12,060

$
5,225

$
769Rent expense:Minimum rent payments

$
2,564

$
1,966

$
1,027Contingent and other rents


875


846


708Total rent expense

$
3,439

$
2,812

$
1,735


Significant Asset Acquisitions

In January 2008, we placed into service a new automotive integrated assembly line for use in producing our Cougar vehicles at a total
cost of $19.2 million.

In
March 2007, we purchased the research and developmental testing facility of NEWTEC Services Group, Inc., located near Edgefield, South Carolina, for $5.5 million
($5,050,000 in cash and $450,000

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Notes to Consolidated Financial Statements (Continued)

4. Property and Equipment (Continued)

note
payable, which was discounted using an implied interest rate of 7.25%). We use this facility for expanded research and development activities and to support the verification and quality control
validation of our armored vehicles used to protect military personnel against explosive threats. The purchase price was allocated as follows (in thousands):

AmountLand

$
2,100Furniture and fixtures


800Manuals


600Intangible assets (See Note 5,Intangible Assets)


1,940Total

$
5,440


In
March 2007, we purchased real and personal property located in Summerville, South Carolina, for $4.1 million in cash. We use this facility as a product development and logistic
services training center. In June 2009, we plan to move our logistic services training to our Roxboro facility. The purchase price was allocated as follows (in thousands):

AmountLand

$
1,320Building


2,502Furniture and fixtures


278Total

$
4,100


In
July 2007, we purchased land and an approximately 430,000 square foot building in Roxboro, North Carolina for $3.5 million in cash, which we originally planned to use as a
manufacturing plant. We now plan to use the Roxboro facility for training purposes beginning in June 2009 (seeAsset Impairmentdiscussion below). We
allocated approximately $0.8 million to land and $2.7 million to the building. In 2008, we completed the renovation of the Roxboro facility and capitalized costs as building improvements
of approximately $5.8 million.

Also,
in July 2007, we completed construction on and placed into service a 90,000 square foot warehouse facility at our corporate headquarters in Ladson, South Carolina at a cost of
approximately $4.4 million, which is included in leasehold improvements.

Leases

We lease buildings located on a single campus in Ladson, South Carolina under non-cancelable operating leases expiring on
June 30, 2009; with five separate five-year renewal options which must be exercised six months prior to the expiration of the lease term. On December 22, 2008, we renewed
four of the five leases for an additional five-year term; they now expire on June 30, 2014. On March 5, 2009, we extended the lease that was not renewed for six months and it
now expires on December 31, 2009. Leases for other office and warehouse space have terms ranging from one to three years.

Our
other operating leases generally have 3- to 5-year terms, with one or more renewal options, with terms to be negotiated at the time of renewal. Contingent
rents are included in rent expense in the year incurred. The excess of cumulative rent expense (recognized on the straight-line basis) over

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4. Property and Equipment (Continued)

cumulative
rent payments made on leases with fixed escalation terms is recognized as straight-line rental accrual and is included inOther current
liabilitiesin the accompanying consolidated balance sheets, as follows (in thousands):

As of
December 31,2008

2007Straight-line rental accrual

$
174

$
200


Future
minimum lease payments at December 31, 2008, for those leases having an initial or remaining non-cancelable lease term in excess of one year are as follows (in
thousands):

For the year ending December 31,

Amount2009

$
2,5252010


2,2742011


1,8972012


1,7342013


1,7892014 and thereafter


913Total

$
11,132


Construction in Progress

Amounts in construction in progress as of December 31, 2008 related primarily to information technology upgrades and leasehold
improvements at our new Sterling Heights, Michigan office. Amounts in construction in progress as of December 31, 2007 related primarily to the construction of an assembly line at our Ladson,
South Carolina manufacturing plant that was completed in 2008, and the construction of an assembly line at our Roxboro, North Carolina manufacturing plant (seeAsset Impairmentdiscussion below).

Asset Impairment

In March 2008, we decided to suspend the construction of the assembly line at our Roxboro facility and we have now redeployed that
facility for training purposes. As a result, we charged $4.9 million to operations in 2008, comprised of $2.1 million in deposits on services to be provided and $2.8 million in
design costs.

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Notes to Consolidated Financial Statements (Continued)

5. Intangible Assets

Intangible assets consist of the following (in thousands):

December 31, 2008

December 31, 2007Gross
Carrying
Amount

Accumulated
Amortization

Net

Gross
Carrying
Amount

Accumulated
Amortization

NetLicenses

$
800

$
489

$
311

$
800

$
222

$
578Non-compete agreement


540


248


292


540


113


427Customer base


200


183


17


200


83


117Special expertise


400


366


34


400


167


233Total

$
1,940

$
1,286

$
654

$
1,940

$
585

$
1,355


As
discussed in Note 4,Property and Equipment, we acquired the above intangible assets in March 2007 in connection with the
purchase of a research and development testing facility located in Edgefield, South Carolina.

Amortization
expense for intangible assets was $701,000 and $585,000 for the years ended December 31, 2008 and 2007, respectively. Future amortization expense is as follows (in
thousands):

For the year ending December 31,

Amount2009


4522010


1792011


23Total

$
654


6. Other Current Liabilities

Other current liabilities consist of the following (in thousands):

As of December 31,2008

2007Current portion of other long-term liabilities

$
128

$
193Current income taxes payable


4,207


Compensation and benefits


7,686


2,721Warranty reserves


5,240


3,694Vehicle fee payable


2,334


4,626Litigation reserve (See Note 14,Commitments and Contingencies)


500


3,147Property tax accrual


325


Straight-line rent accrual


174


200Loss on firm purchase commitments


148


5,871Liquidated damages settlement


19


258Other


22


Other current liabilities

$
20,783

$
20,710


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Notes to Consolidated Financial Statements (Continued)

6. Other Current Liabilities (Continued)

Warranty Reserves

Warranty reserves consist of the following (in thousands):

As of December 31,2008

2007

2006Balance at beginning of year

$
3,694

$
1,850

$
1,686Charges to expense


4,394


4,779


164Costs paid or otherwise settled


(2,848
)

(2,935
)

Balance at end of year

$
5,240

$
3,694

$
1,850


Vehicle Fee Payable

Intellectual property rights, which apply to various Force Protection products and technologies, include patents, copyrights, trade
secrets and trademarks. We seek to remain competitive in the market place by placing emphasis on research and development and are committed to capturing, protecting and enforcing our intellectual
property rights. We continue to review our practices and procedures to ensure the protection of all intellectual property.

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

The
agreement with CSIR provides for the license, on an exclusive basis, by CSIR to us of certain technical, scientific and commercial intellectual property rights pertaining to the
development of our Cougar and Buffalo vehicles. Under our agreement with CSIR, we pay CSIR a fee for each vehicle sold and/or manufactured by us 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 in respect of our Cheetah vehicle, and the manufacture of the Cheetah vehicles is not
dependent 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 after March 2012 and, if the agreement expires without renewal, after such date CSIR may grant a license to the licensed intellectual property to other
parties. However, even upon expiration of the agreement we will have the ability to manufacture and deliver the Cougar and Buffalo vehicles.

The
agreement with Mechem provides for the provision, on an exclusive basis, by Mechem to us of certain technical, scientific and commercial intellectual property rights pertaining to
the development of our Cougar and Buffalo vehicles. Under our agreement with Mechem, we pay Mechem a fee for each vehicle sold and/or manufactured by us 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 with respect to our Cheetah vehicle, and the manufacture of the Cheetah vehicle is
not dependent upon the technology granted to us under the agreement with Mechem. Our original agreement with

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Notes to Consolidated Financial Statements (Continued)

6. Other Current Liabilities (Continued)

Mechem
was effective October 15, 2001 and expired October 15, 2006. Our current agreement with Mechem, which we entered into on September 13, 2006, expires on September 12,
2011. We have no right to extend the agreement after September 2011 and, if the agreement expires without renewal, after such date Mechem may license the licensed intellectual property to other
parties. However, even upon expiration of the agreement, we will have the ability to manufacture and deliver the Cougar and Buffalo vehicles.

Liquidated Damages Settlement

On December 20, 2006, we completed a private placement of 13 million shares of our common stock to 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 the Securities Purchase Agreement, we agreed to
file a registration statement to register all 13 million shares of common stock for resale and distribution under the Securities Act of 1933, as amended, within 30 calendar days
thereafter (January 19, 2007) and cause the registration statement to be declared effective by the SEC no later than 120 calendar days thereafter (April 19, 2007). If the registration
statement registering these shares was not declared effective on or before the applicable date, then we were required to deliver to each purchaser, as liquidated damages, an amount equal to one and
one third percent (11/3%) for each 30 days (or such lesser pro-rata amount for any period of less than 30 days) of the total purchase price of the securities
purchased and still held by such purchaser pursuant to the Securities Purchase Agreement on the first day of each 30 day or shorter period for which liquidated damages were calculable. The
registration statement for the shares issued became effective July 26, 2007. On October 15, 2007, we filed a prospectus supplement with respect to the registration statement. Liquidated
damage expense for the years ended December 31, 2008 and 2007 was $31,000 and $7.2 million, respectively, and is included inGeneral and administrative
expensesin the accompanying consolidated statements of operations.

7. Advance Payments on Contracts

Advance payments on contracts consist of the following (in thousands):

As of December 31,2008

2007Mine Resistant Ambush Protected ("MRAP") program

$
29,504

$
53,767Iraqi Light Armored Vehicles ("ILAV")





2,785Advance payments on contracts

$
29,504

$
56,552


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Notes to Consolidated Financial Statements (Continued)

8. Other Long-term Liabilities

Other long-term liabilities consist of the follow items.

As of December 31,2008

2007Non-compete agreement note payable

$
267

$
417Equipment note payable





71267


488Less: Current portion (included inOther current liabilities)


(128
)

(193
)Other long-term liabilities

$
139

$
295


As
discussed above in Note 4,Property and Equipment,we purchased the research 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 discounted the note using an implied interest rate of 7.25%. The
note is payable in annual installments of $150,000 on January 1, 2008, 2009, and 2010.

9. Shareholders' Equity

Authorization of Shares

We have the authority to issue 310 million shares, in aggregate, consisting of 300 million shares of common stock and
10 million shares of preferred stock, of which 1,600 have been designated "Series A," 25 of which have been designated as "Series B," 150 of which have been designated as
"Series C" and 20,000 of which have been designated as "Series D." By shareholder resolution effective January 1, 2005, all classes of stock were declared to have a par value of
$0.001 per share. As of December 31, 2008 and 2007, we had no shares of preferred stock outstanding.

Preferred Stock

Our preferred stock has the following characteristics:



Each
holder of preferred stock shall be entitled to receive dividends in cash, stock or otherwise, if, when and as declared by our board of directors, with the
exception of the preferred stock designated as Series A, which shall not be entitled to receive dividends. However, we will not declare or pay a dividend to common shareholders without first
declaring and paying a dividend to the preferred shareholders. Each share of Series D 6% convertible preferred stock is specifically entitled to 6% cumulative dividends, payable
semi-annually in cash or common stock.



In
the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company, the assets of the Company available for
distribution to its shareholders shall be distributed as follows:



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Notes to Consolidated Financial Statements (Continued)

9. Shareholders' Equity (Continued)



Additionally,
upon a liquidation event, holders of Series A preferred stock will receive $1,000 per share of Series A preferred stock. Holders of Series B preferred
stock will receive the greater of $2,500 per share of Series B preferred stock or the pro-rata share of the Company's remaining net assets to be distributed, after rank
considerations. Holders of Series C preferred stock will receive a 150% return on the face value of the share of Series C preferred stock, or $1,500 per share of Series C
preferred stock, after rank considerations. In any event whereby the preceding distributions are unable to be met, the rank considerations outlined above shall be considered and the distribution of
our net assets shall be determined according to rank and on a pro-rata basis.



Series A
preferred stock shall convert into common stock at a rate of $4.00 per share, as adjusted accordingly. Each share of Series B preferred
stock shall convert into 759,167 shares of common stock. Each share of Series C preferred stock shall convert into 75,917 shares of common stock. Each share of Series D 6% convertible
preferred stock shall convert into common stock at $2.10 per share.

All
shares of Series B and Series C preferred stock were converted into common stock effective January 19, 2005. All outstanding shares of the Series D 6%
convertible preferred stock were converted
in full in 2006, and no shares of the Series D 6% convertible preferred stock were outstanding as of December 31, 2008 and 2007. We had classified our Series D 6% convertible
preferred stock as mezzanine equity.

Preferred Stock Transactions

During the year ended December 31, 2006, 13,004 shares of Series D 6% convertible preferred stock were voluntarily
converted to 6,192,628 shares of common stock. The fully accreted conversion value of these shares of common stock at the time converted was $9.2 million.

During
the year ended December 31, 2006, 8,937 shares of common stock were issued in lieu of cash dividends for the holders of Series D 6% convertible preferred stock. The
shares issued were valued at $48,825, which was 85% of the average of the lowest market value for three of the prior 10 trading days.

103

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Table of Contents

Force Protection, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

9. Shareholders' Equity (Continued)

Common Stock Transactions

For the year ended December 31, 2008

During
2008, employees exercised stock options to purchase 31,000 shares of our common stock valued at $47,000.

On
May 1, 2008, we issued 20,513 shares of common stock as a result of the vesting of an award of restricted stock made to a former executive.

On
January 2, 2008, we issued 50,000 shares of common stock granted in June 2006 to an employee that vested on January 2, 2008.

For the year ended December 31, 2007

During
2007, employees exercised stock options to purchase 1,411,133 shares of our common stock valued at $1.4 million. We also issued 4,348 shares of
our common stock related to 2006 employee stock option exercises that were identified as shares to be issued in shareholders' equity as of December 31, 2006.

During
2007, it was discovered that, during 2006, that we inadvertently issued an additional 27,700 purchased shares relating to the December 2006 Private Investment in Public Equity
("PIPE") offering. Upon discovery of this error, we cancelled those shares in 2007.

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

On
January 1, 2007, we issued 50,000 shares of common stock granted in June 2006 to an employee that vested on January 1, 2007.

On
June 1, 2007, we issued 20,513 shares of common stock as a result of the vesting of an award of restricted stock made to a former executive.

For the year ended December 31, 2006

During
2006, employees exercised stock options to purchase 5,348 shares of the Company's common stock valued at $6,001. A total of 4,348 shares of our common
stock were indentified as shares to be issued in the shareholders' equity as of December 31, 2006 related to employee exercised stock options.

On
December 20, 2006, we closed a private placement sale and issued 13,000,000 shares of common stock to investors for gross proceeds of $152.8 million. Net proceeds
received after expenses were $146.6 million.

On
July 24, 2006, we closed a private placement sale and issued 8,250,000 shares of common stock to investors for gross proceeds of $41.3 million. Net proceeds received
after expenses were $39.2 million.

104

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Table of Contents

Force Protection, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

9. Shareholders' Equity (Continued)

The
following issuances of our common stock during 2006 were valued by us using our closing bid price of our common stock as quoted on the OTC Bulletin Board market as of the date of the
associated contract or the issuance date if no contract existed:



During
2006, warrants associated with Series D 6% convertible preferred stock were exercised and we issued 2,633,333 shares of common stock for gross proceeds of
$9.9 million. In addition, various warrants were exercised and we issued 218,807 shares of common stock for gross proceeds of $499,573.

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

10. Stock-Based Compensation



In 2008, 61 employees were granted options to purchase an aggregate of 715,000 shares of our common stock. Stock options are granted at
an exercise price equal to the closing market price at the date of grant. Options vest ratably over three years. Options granted expire no later than 10 years after the grant date.
Twenty-five (25) employees and non-employee directors received grants of restricted stock totaling 880,600 shares. Stock grants generally vest ratable over three years.
Shares available for future option and stock grants at December 31, 2008 totaled 3,604,400 shares.

105

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Table of Contents

Force Protection, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

10. Stock-Based Compensation (Continued)

Options
granted prior to 2008 were not granted under a formal stock option plan and generally had vesting ranging from immediate to 14 months with contractual terms of four to
five years.

All
equity awards are settled by issuing new shares of common stock.

We
used the Black-Scholes valuation model to determine the fair value options granted during the years ended December 31, 2008 and December 31, 2006. No awards were granted
in 2007. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition,
option-pricing models require the input of highly subjective assumptions, including the expected stock price volatility. Because our trading history is shorter than the expected life of the options,
we used historical stock price volatility data from comparable companies to supplement our own historical volatility to determine expected volatility assumptions. We calculated volatility using weekly
closing prices as of grant date for a period commensurate with the expected term. We do not pay a dividend, and therefore assume a zero percent dividend yield in our pricing model.
Risk-free interest rates are based on U.S. Treasury STRIP yields, converted to continuously compounded rates, with terms to maturity consistent with the expected lives of the options.
Because we do not have a sufficient history of option exercise or cancellation, we estimated the expected life of the options by using the short-cut approach described and permitted in
Staff Accounting Bulletin ("SAB") No. 107,Share-Based Payment, and SAB No. 110,Share-Based
Payment, for grants made in 2008. Prior to 2008, also due to insufficient history of option exercise and cancellations, the expected life of the options was estimated to be two
years, which for a majority of the options was generally the midway point through the contractual term. Under the Black-Scholes option-pricing model, the weighted-average fair value per share of
employee stock options granted during the years ended December 31, 2008 and December 31, 2006 was $1.83, and $1.20, respectively. For Restricted Stock, the fair value recognized is equal
to the closing price of our stock on the date of grant.

The
fair value of our options was estimated using the following assumptions:

For the year ended December 31,2008

2007

2006Expected volatility


58.60
%




45.82%70.31%Risk-free interest rate


2.28
%




4.40%4.97%Expected forfeiture rate


10.00
%




5%Dividend yield


0.00
%




%Stock price on date of grants

$
3.28





$0.77$7.48Expected option terms (in years)


6.00





2.00Contractual Term (in years)


10.00





4 and 5Option vesting term (in years)


3.00





1-day1.17 years




106

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Table of Contents

Force Protection, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

10. Stock-Based Compensation (Continued)

The
following table summarizes stock option activity for the Stock Plans during 2008:

Number of
Options

Weighted-
Average
Exercise
Price
(per share)

Weighted-
Average
Remaining
Contractual
Term
(in years)

Aggregate
Intrinsic
Value
(in thousands)Options outstandingDecember 31, 2007


548,532

$
6.96Granted


715,000

$
3.28Exercised


(31,000
)
$
1.50Forfeited


(15,000
)
$
3.28Cancelled/expired


(500,033
)
$
7.48Options outstandingDecember 31, 2008


717,499

$
3.25Vested and expected to vest (net of estimated forfeitures)December 31, 2008(a)


660,999

$
3.25


9.67

$
1,809ExercisableDecember 31, 2008


17,499

$
2.19


1.54

$
71


The
following table summarizes stock option activity for the Stock Plans the year ended December 31, 2007:

Number of
Options

Weighted-
Average
Exercise
Price
(per share)

Weighted-
Average
Remaining
Contractual
Term
(in years)

Aggregate
Intrinsic
Value
(in thousands)Options outstandingDecember 31, 2006


1,959,665

$
2.63Granted


Exercised


(1,411,133
)
$
0.95Forfeited


Cancelled/expired


Options outstandingDecember 31, 2007


548,532

$
6.96Vested and expected to vest (net of estimated forfeitures)December 31, 2007(a)


548,532

$
6.96


2.89

$
147ExercisableDecember 31, 2007(a)


548,532

$
6.96


2.89

$
147


107

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Table of Contents

Force Protection, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

10. Stock-Based Compensation (Continued)

The following table summarizes stock option activity for the Stock Plans during the year ended December 31, 2006:

Number of
Options

Weighted-
Average
Exercise
Price
(per share)Options outstandingDecember 31, 2005


456,666

$
1.50Granted


1,508,347

$
2.97Exercised


(5,348
)
$
1.40Forfeited


Cancelled/expired


Options outstandingDecember 31, 2006


1,959,665


2.63ExercisableDecember 31, 2006(a)


1,509,018


1.28


---

Restricted
Stock

Non-vested Restricted Stock ActivityThe following table summarizes
activity for non-vested restricted stock awards for the years ended December 31, 2008, 2007, and 2006.

Number of
Shares

Average
Grant Date
Fair Value
(per share)Non-vested restricted stockDecember 31, 2007


120,513

$
5.68Granted


880,600


3.28Vested


(70,513
)

5.14Forfeited


(15,000
)

3.28Non-vested restricted stockDecember 31, 2008


915,600

$
3.45


108

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Table of Contents

Force Protection, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

10. Stock-Based Compensation (Continued)



Number of
Shares

Weighted-
Average
Grant Date
Fair Value
(per share)Non-vested restricted stockDecember 31, 2006


191,026

$
5.48Granted





Vested


(70,513
)

5.14Forfeited





Non-vested restricted stockDecember 31, 2007


120,513

$
5.68




Number of
Shares

Average
Grant Date
Fair Value
(per share)Non-vested restricted stockDecember 31, 2005




$
Granted


191,026


5.48Vested





Forfeited





Non-vested restricted stockDecember 31, 2006


191,026

$
5.48


Other
information pertaining to stock-based compensation for the years ended December 31, 2008, 2007 and 2006 is as follows:

Stock-based
compensation includes the expense associated with both stock options granted to employees and stock grants issued to employees, both of which are assumed to result in future
tax deductions, and is recognized inGeneral and administrative expenses in the consolidated statement of operations as follows (in thousands):

For the year ended
December 31,2008

2007

2006Stock options

$
44

$
2,142

$
701Stock grants

$
226

$
369

$
550Total stock-based compensation

$
270

$
2,511

$
1,251Related tax benefit of stock-based compensation

$
96

$
937

$
480


As
of December 31, 2008, Force Protection, Inc. had total unrecognized compensation cost of $3.635 million to be amortized over a weighted average period of
2.89 years.

All
equity awards settled in 2008 were settled in shares and no cash was used to settle awards. The following table presents the total intrinsic value of options exercised and fair value
of restricted stock which vested during the years ended December 31, 2008, 2007, and 2006 (in thousands):

2008

2007

2006Intrinsic Value of Options Exercised

$
120

$
28,286

$
$63Grant Date Fair Value of Shares Vested During Year

$
363

$
386

$



109

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Table of Contents

Force Protection, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

10. Stock-Based Compensation (Continued)

The
income tax benefit related to stock options exercised and restricted stock vesting were $0.1 million, $2.3 million and $0, for the years ended December 31, 2008,
2007, and 2006, respectively.

11. Income Taxes

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

For the year ended December 31,2008

2007

2006Income before income tax (expense) benefit

$
69,583

$
9,373

$
5,870


The
significant components of the provision for income tax (expense) benefit are as follows (in thousands):

For the year ended December 31,2008

2007

2006Current:Federal

$
(19,531
)
$
(5,105
)
$
State and local


(75
)

(315
)

Total current expense


(19,606
)

(5,420
)

Deferred:Federal


(2,477
)

3,738


10,715State and local


(581
)

(39
)

1,612Total deferred benefit


(3,058
)

3,699


12,327Income tax (expense) benefit

$
(22,664
)
$
(1,721
)
$
12,327


A
reconciliation of the statutory federal income tax expense rate to the effective income tax expense rate is as follows:

For the year ended
December 31,2008

2007

2006Tax (expense) benefit at statutory rate


(35.00
)%

(35.00
)%

(35.00
)%(Increase) decrease in tax rate resulting from:State income taxes, net of federal tax benefit


(0.92
)%

(4.70
)%

(2.37
)%Decrease in valuation allowance








241.67
%Reversal of other tax accruals no longer required





8.21
%

Research and development credit


1.44
%

11.63
%

Domestic Production Activities Deduction


1.92
%




Other


0.61
%

2.55
%

4.89
%Nondeductible items


(0.62
)%

(1.05
)%

0.79
%Effective income tax (expense) benefit rate


(32.57
)%

(18.36
)%

209.98
%


110

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Table of Contents

Force Protection, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

11. Income Taxes (Continued)

The
effective tax rate is the provision for income taxes as a percent of income before income taxes. The 2008 effective tax rate is lower than the expected federal statutory rate of 35%
primarily due to research and development tax credits and the domestic production activities deduction, offset by state income taxes. The 2007 effective rate is lower than the expected federal
statutory rate of 35% primarily due to state income taxes, reversal of other tax accruals no longer required, research and development credits, and certain nondeductible items at the statutory rate.
The 2006 effective rate is lower than the expected federal statutory rate of 35% primarily due to the change in the valuation allowance in that year.

Deferred
income taxes recognize the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for
income tax purposes and the impact of available net operating loss ("NOL") carryforwards. The significant components of Force Protection's deferred tax assets and liabilities are as follows (in
thousands):

As of December 31,2008

2007Deferred income tax assets:Net operating loss carryforward

$
1,250

$
1,639Inventories


11,367


8,068Accounts receivable


700


120Warranty reserves


1,860


1,379Loss on firm purchase commitments


52


2,192Litigation reserve


178


1,175Depreciation and amortization





52Stock-based compensation


498


1,128Employee compensation accruals


471


160Other


260


113Total deferred income tax assets


16,636


16,026Deferred income tax liabilities:Depreciation and amortization


(4,205
)

Total deferred income tax liabilities


(4,205
)

Net deferred income tax assets


12,431


16,026Less current deferred tax assets


15,572


14,530Noncurrent deferred tax (liabilities) assets

$
(3,141
)
$
1,496


FASB
Statement No. 109Accounting for Income Taxesrequires that we reduce our deferred income tax assets by a valuation allowance
if, based on the weight of the available evidence, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. We removed our valuation allowance against our previously recognized
deferred tax assets as of December 31, 2006 because we expected at that time to realize future earnings to be offset by future tax benefits.

111

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Table of Contents

Force Protection, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

11. Income Taxes (Continued)

As
of December 31, 2008 and 2007, we had unused federal net operating loss carryforwards of approximately $3.5 million and $4.4 million, respectively. Such losses
expire in various amounts at varying times through December 31, 2025. However, in accordance with Internal Revenue Code Section 382, these NOL carryforwards are subject to limitations.
These NOL carryforwards resulted in a deferred tax asset of approximately $1.3 million and $1.6 million as of December 31, 2008 and 2007, respectively.

As
a result of the adoption of FASB Statement No. 123 (Revised 2004),Share-Based Payment, our deferred tax assets as of
December 31, 2008 and 2007 did not include excess tax benefits from stock option exercises. Shareholders' equity will be increased if these excess tax benefits are ultimately realized.

We
adopted FASB Interpretation No. 48, on January 1, 2007. FASB Interpretation No. 48 clarifies the accounting for uncertainty in income taxes recognized in a
company's financial statements in accordance with FASB Statement No. 109. FASB Statement No. 109 does not prescribe a recognition
threshold or measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. FASB Interpretation No. 48 clarifies the application of FASB
Statement No. 109 by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in a company's financial statements.
Additionally, FASB Interpretation No. 48 provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

Tax
years ended December 31, 2002 through December 31, 2008 remain open and are subject to examination by the Internal Revenue Service. However, we believe that we have
appropriate support for the income tax positions taken and to be taken on our income tax returns and that our income tax receivable and accruals for tax liabilities are adequate for all open years
based on an assessment of many factors including past experience and interpretations of tax laws applied to the facts of each matter. Accordingly, we have not recognized a liability as a result of
applying the guidance in FASB Interpretation No. 48 as of December 31, 2008 and 2007.

112

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Force Protection, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

12. Earnings Per Common Share

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

For the year ended December 31,2008

2007

2006NumeratorBasic:Net income

$
46,919

$
7,652

$
18,197Less: Accretion of Series D 6% convertible preferred stock








(1,297
)Less: Preferred dividends








(326
)Income available for common shareholdersbasic

$
46,919

$
7,652

$
16,574NumeratorDiluted:Income available for common shareholdersbasic

$
46,919

$
7,652

$
16,574Add: Accretion of Series D 6% convertible preferred stock








1,297Add: Preferred dividends








326Income available for common shareholdersdiluted

$
46,919

$
7,652

$
18,197Denominator:Weighted average common shares outstandingbasic


68,314,279


68,054,477


44,786,083Add: Series D 6% convertible preferred stock








2,369,259Add: Warrants








1,631,822Add: Stock options


17,346


253,163


1,543,458Add: Stock grants


61,707


96,302


97,844Weighted average common shares outstandingdiluted


68,393,332


68,403,942


50,428,466Basic earning per common share:Income available for common shareholdersbasic

$
0.69

$
0.11

$
0.37Diluted earning per common share:Income available for common shareholdersdiluted

$
0.69

$
0.11

$
0.36


The
calculation of basic earnings per common share is based on the weighted-average number of our common shares outstanding during the applicable period. The calculation for diluted
earnings per common share recognizes the effect of all dilutive potential common shares that were outstanding during the respective periods, unless their impact would be anti-dilutive. We
use the treasury stock method to calculate the dilutive effect of stock options and other common stock
equivalents (potentially dilutive shares). These potentially dilutive shares include: (1) Series D 6% convertible preferred stock, (2) warrants, (3) stock options, and
(4) stock grants. For the periods presented above, we have not excluded any potentially dilutive shares from the calculation of diluted earnings per share.

13. Related Party Transactions

Our former Chief Executive 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 Force Protection $0.5 million and $0.6 million for the years ended December 31, 2007 and 2006, respectively.
Mr. McGilton disclosed to the board of directors each year that he did not receive any dividends, distributions or other compensation from APT

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Force Protection, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

13. Related Party Transactions (Continued)

Leadership
at any time while 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,
who at the time was also an employee of Force Protection, for $1 in consideration. In 2008, we paid approximately $150,000 to the other party in consideration of a release of all claims from APT
Leadership. In addition, as part of the 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 proper amount
of federal income taxes for Mr. McGilton in connection with his exercise of stock options in January 2007 and, as a result, Mr. McGilton owed us $315,085 as of December 31, 2007,
which is included inOther current assetsin the accompanying consolidated balance sheets. Mr. McGilton repaid this amount on
September 11, 2008.

On
February 18, 2006, we entered into a Modification and Assignment Agreement with Longview Fund, LP and Longview Equity Fund, LP (collectively "Longview") pursuant
to which we paid $1.3 million against the principal balance of the secured promissory notes ("Notes") and extended the maturity date of the Notes for an additional 60 days. In addition,
we consented to the assignment of $2.5 million of the Notes to Fort Ashford Funds LLC ("Fort Ashford"). Mr. Frank Kavanaugh, a former director of Force Protection, is the
principal owner of Fort Ashford and at such time was a substantial shareholder of our common stock. Mr. Kavanaugh's relationship to Fort Ashford Funds LLC was fully
disclosed to us and Mr. Kavanaugh did not participate in the negotiations or decision process with respect to the Modification and Assignment Agreement. We paid $87,510 to Longview and $50,000
to Fort Ashford in cash as compensation for the extension of the maturity dates of the Notes. On June 20, 2006, we paid off the principal balance and all applicable accrued interest under the
Notes. Additionally, we extended the maturity date of the Ashford Note for an additional 30 days, through July 20, 2006. We paid $50,000 to Fort Ashford in cash as compensation for the
extension of the Ashford Note.

On
April 20, 2006, we paid $1.0 million against the principal balance of the Notes and extended the maturity date on the Notes and the Note with Fort Ashford for an
additional 60 days, through June 20, 2006. We paid $55,000 to Longview and $50,000 to Fort Ashford in cash as compensation for this extension. On August 9, 2006, we paid off the
principal balance of the Ashford Note, and all applicable accrued interest under the Ashford Note.

14. Commitments and Contingencies

Financing CommitmentsCredit Facility

On July 20, 2007, we entered into a revolving credit agreement with Wachovia Bank, NA, now owned by Wells Fargo &
Company. Borrowings under the original credit agreement bore interest at a floating rate per annum equal to the one-month London Interbank Offered Rate ("LIBOR") plus 2.0%. The original
amount of the agreement was $50 million and all amounts payable under this credit agreement were originally due and payable on September 30, 2007. We have entered into several
modification agreements with the lender to reduce the principal amount, change terms, and extend the maturity.

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Force Protection, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

14. Commitments and Contingencies (Continued)

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

Until
March 31, 2009, the floating rate interest per annum is reduced to the one-month LIBOR plus an additional amount ("Applicable Margin") of 1.75%. Beginning with
the quarter starting April 1, 2009, the Applicable Margin will be determined quarterly based on the Funded Debt to EBITDA ratio calculated on a rolling four quarter basis and will vary from
1.75% to 2.75% depending on that ratio.

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

Unconditional Purchase Commitments

As of December 31, 2008, we had outstanding $117.5 million of noncancelable purchase obligations. Purchase obligations
include agreements to purchase goods or services that are enforceable and legally binding on Force Protection and that specify all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.

Legal Proceedings



On March 10, 2008, the first of ten related class action lawsuits was filed against us and certain of our former and current
board members or officers in the United States District Court for the District of South Carolina Charleston Division on behalf of a proposed class of investors who purchased or otherwise acquired our
securities during the period between August 14, 2006, and February 29, 2008. The complaints seek class certification, and the allegations include, but are not limited to, allegations
that the defendants violated the Exchange Act and made false or misleading
public statements and/or omissions concerning our business, internal controls, and financial results. The plaintiffs assert that as a result of the defendants' allegedly wrongful acts and omissions,
members of the proposed class have suffered significant losses and damages. The individual class action lawsuits were consolidated on June 10, 2008, under the caption "In Re Force
Protection, Inc. Securities Litigation, Action No. 2:08-cv-845-CWH." On June 20, 2008, a group of investors consisting of the Laborers' Annuity
and Benefit System of Chicago, Gary Trautman, David J. Jager, Bhadra Shah, Panteli Poulikakos, George Poulikakos, and Niki Poulikakos were appointed lead plaintiff.

Between
March 27, 2008, and May 28, 2008, various alleged shareholders filed derivative lawsuits against former and current officers or board members wherein the plaintiff
shareholders are seeking damages for the Company. The Company has been named a nominal defendant in each derivative

115

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Table of Contents

Force Protection, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

14. Commitments and Contingencies (Continued)

lawsuit.
Four (4) derivative lawsuits are pending in the United States District Court for the District of South Carolina Charleston Division; two (2) derivative lawsuits are pending in
Charleston, South Carolina Circuit Court; and one (1) derivative lawsuit is pending in Clark County, Nevada District Court. The plaintiff shareholders' allegations include and are not limited
to allegations of breach of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment in connection with the Company's public statements regarding its
operations and financial results, internal controls, compensation of certain defendants, and alleged insider stock sales by certain defendants. In August and September 2008, the defendants filed
motions to dismiss the derivative lawsuits pending in the Charleston, South Carolina Circuit Court and the Clark County, Nevada District Court. The motions filed in the Clark County, Nevada District
Court were denied on February 10, 2009. On February 10, 2009, the defendants' joint motion to dismiss the plaintiffs' derivative complaints filed in the Charleston, South Carolina
Circuit court was denied as it relates to the Stevenson et al lawsuits and granted without prejudice as it relates to the Hughes et al lawsuit with leave granted to the Hughes et al plaintiffs to
modify their complaint accordingly. Defendants' obligations to respond to the complaints in the derivative lawsuits pending in the United States District Court for the District of South Carolina have
been suspended pending a ruling on motions filed by certain plaintiffs seeking consolidation of the lawsuits and appointment of a lead plaintiff.



On August 21, 2007, we filed suit against Protected Vehicles, Inc. ("PVI") and three of PVI's employees (all of whom were
former employees of Force Protection) in the United States District Court for the District of South Carolina. In the complaint, we alleged that the named defendants used our confidential information
and trade secrets to create a competing business. We sought injunctive relief, unspecified damages, attorneys' fees and costs. The defendants answered our complaint and filed counterclaims against us.
In their answers and counterclaims, the defendants alleged, among other things, that we and several of our current and former officers and directors engaged in: certain transactions (including
transactions with Force Protection) in which such officers and directors maintained a financial interest; backdating and certain other improper acts in connection
with certain stock issuances; allegedly wrongful acts with respect to a procurement contract with a foreign government; and other transactions involving alleged self-dealing and certain
allegedly retaliatory acts in connection with defendants' prior attempts to bring such activities to the attention of the Company's personnel or governmental agencies. Defendants sought unspecified
monetary damages, attorneys' fees and costs. On January 18, 2008, the district court entered an order staying 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 Carolina with respect to PVI. On February 5, 2008, PVI filed a voluntary Chapter 7 petition. On
March 28, 2008, the Chapter 7 proceeding was converted to a Chapter 11 proceeding. On June 20, 2008, the Bankruptcy 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 with respect to our suit against it, were sold to a third party. On July 31, 2008, we
settled our claim against one of the employees, and we rehired him on October 13, 2008. As of February 2, 2009 Force Protection Industries, Inc. and Force Protection, Inc.
entered into a settlement agreement with defendants, including the third-party purchaser, in which the defendants agreed to identify and return all our property and refrain from using it in the
future, and agreed to dismiss all claims against us. The settlement agreement and release was approved by the United States Bankruptcy Court on February 19, 2009, and became effective on
March 6, 2009.

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Force Protection, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

14. Commitments and Contingencies (Continued)

From
February 2007 through January 2009, we received a total of 70 complaints from current and former employees filed with the United States Equal Employment Opportunity Commission
alleging, among other things, race and/or gender discrimination. We have responded to the complaints as such responses have become due, and are investigating the allegations.

On
November 13, 2007, we were served with a lawsuit filed by former senior employee against Force Protection Inc., Force Protection Industries, Inc. and former Force
Protection officers. The complaint, filed in the Charleston (South Carolina) County Court of Common Pleas, alleges, among other things, that former employee is owed warrants of approximately 83,000
shares of our common stock and certain back wages and sets forth claims for,inter alia, breach of contract, violation of the South Carolina Payment of
Wages Act, retaliatory wrongful discharge, and defamation. We answered the complaint on January 25, 2008. We entered into a settlement agreement and general release with the former employee on
March 13, 2009.

In
early December 2007, we submitted a voluntary disclosure to DDTC regarding the shipment of technical manuals, Cheetah spare parts, armored vest plates, parts not listed on our license
and transfers of technical data to and by our vendors without proper authorization or identification of the appropriate exemption. On January 22, 2008, the DDTC requested additional information
and documentation for each specific shipment of these items within sixty days. In addition, the DDTC directed us to undertake certain specific measures, including, but not limited to, that we hire a
full time senior export control compliance officer, implement certain procedures, conduct comprehensive ITAR training, immediately conduct a comprehensive export compliance audit, and institute a plan
to conduct periodic audits of the export compliance program. On February 11, 2008, we provided DDTC with the
job description for the Director of Export Controls, draft Export Controls Manual, ITAR presentation provided in new orientation training and the attendance logs for annual ITAR training provided to
executives and other employees having ITAR responsibilities. On March 11, 2008, we provided DDTC with our draft audit plan and on June 2, 2008, we provided the final audit report. In
response, we have hired an executive director of export controls. On July 14, 2008, we provided DDTC with supplemental information to our previous voluntary disclosure and other information
identified in the audit. We have developed and implemented an Export Control Policies and Procedures Manual and ITAR Product Classification Guide, established an Export Control Council, and revised
our Technology Control Plan and Code of Conduct and Ethics. As a result of the export compliance audit, we have identified additional unauthorized transfers internally at our facility and in support
of U.S. operations in Iraq and Afghanistan as well as issues associated with the execution of our licenses and agreements. We have reported these matters to DDTC. On October 27, 2008, we
received a letter from the DDTC advising that this voluntary disclosure has been closed without taking any civil penalties, but reserving the right to reopen if circumstances warrant.

On
February 8, 2008, a temporary independent contractor whose services we had terminated filed a complaint with OSHA which alleges a violation under the employee protection
provisions of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, Title VIII of the Sarbanes-Oxley Act of 2002, 18 U.S.C. §1514A. The former independent
contractor alleges that we terminated his engagement in retaliation for his allegation of certain corporate governance, government contracting, accounting and other irregularities. On April 18,
2008, we responded to the allegations. In August 2008 the claimant submitted a proposed amended complaint which sought to add additional claims and the current and former chief executive officers as
defendants. On October 2, 2008, Force Protection and individuals submitted a further response. On November 20, 2008, the claimant exercised

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Force Protection, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

14. Commitments and Contingencies (Continued)

his
rights under Section 806 to withdraw his claim from the Department of Labor, stating that he had decided instead to pursue his claims in a lawsuit in federal district court. As a result of
the claimant's election, the Department of Labor terminated its processing of the matter at that time. However, to date we have not received any notice that the claimant has filed any lawsuit.

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

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

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

In
addition, compliance with the directives of the DDTC discussed above may result in substantial expenses and diversion of management. Any failure to adequately address the directives
of DDTC could result in civil fines or suspension or loss of our export privileges, any of which could have a material adverse effect on our business or financial position, results of operations, or
cash flows.

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

15. Employee Benefits



We entered into a 401(k)/Profit Sharing Plan ("Plan") effective January 1, 2004. The Plan, which covered 367 and 255
participants as of December 31, 2008 and 2007, respectively, is a defined contribution plan covering all of our full-time and certain part-time employees.

The
Plan permits employees to participate in the Plan effective with the first day of employment. The Plan is participant directed, and, therefore, participants are allowed to select the
investment funds to which they wish to contribute. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA").

Contributions:    Participants electing to make contributions to the Plan may contribute not less than 1% and no more than
50% of compensation. Contributions are limited in accordance with IRS regulations. Participants may allocate their contributions among the Plan's various funds.

Prior
to March of 2008, the plan did not include Company matching contributions. Effective March 10, 2008, the Plan was amended to include Company matching contributions. For
employee

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Force Protection, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

15. Employee Benefits (Continued)

contributions
up to 6% of compensation, the Company will match 50%. The Plan also provides that the maximum discretionary contribution that may be made by the Company on behalf of any participant is
4% of compensation. The Company's matching contribution expense for the year ended December 31, 2008 totaled $0.5 million.

Participant Accounts:    Each participant's account is credited with the participant's contribution and an allocation of
the Company contribution and plan earnings. Gains and losses resulting from market appreciation or depreciation, interest, and dividends are allocated on the basis of participants' account balances.

Vesting:    Participants are immediately vested in their contributions and our contributions, as well as any investment
earnings on these contributions.



The Gain Sharing Program was authorized by the board of directors on March 1, 2007 and provides for additional compensation that
is paid quarterly in arrears to eligible employees for quarters in which we earn net income. Under the Gain Sharing Program, we distribute
ten percent of each quarter's net income equally to all eligible employees. However, due to the restatement of our 2007 quarterly results we did not calculate or pay gain sharing for the fourth
quarter of 2007 because our total net income for the year ended December 31, 2007 was less than the previously reported net income for the nine-month period ended
September 30, 2007. We expensed $4.7 million and $2.4 million under the Gain Sharing Program for the years ended December 31, 2008 and 2007, respectively.

16. Summarized Quarterly Unaudited Financial Data

The following tables present selected operating results for each quarter of the years ended December 31, 2008 and 2007 (in thousands, except per share amounts):

For the year ended December 31, 2008First
Quarter

Second
Quarter

Third
Quarter

Fourth
QuarterNet sales

$
403,047

$
340,917

$
343,309

$
239,058Gross profit


38,331


37,351


63,777


37,202Net income


7,037


8,267


19,907


11,708Earnings per share:Basic

$
0.10

$
0.12

$
0.29

$
0.17Diluted

$
0.10

$
0.12

$
0.29

$
0.17




For the year ended December 31, 2007First
Quarter

Second
Quarter

Third
Quarter

Fourth
QuarterNet sales

$
104,825

$
138,659

$
206,794

$
440,394Gross profit


19,700


20,569


22,534


41,066Net income (loss)


(480
)

663


(799
)

8,268Earnings (loss) per share:Basic

$
(0.01
)
$
0.01

$
(0.01
)
$
0.12Diluted

$
(0.01
)
$
0.01

$
(0.01
)
$
0.12


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ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to provide reasonable assurance that the
information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms
and accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Our
management, at the direction of our chief executive officer and chief financial officer, performed an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(f) under the Exchange Act), as of December 31, 2008. Based on that evaluation and the identification of
material weaknesses in our internal control over financial reporting as described in this Item 9A below under the headingManagement's Report on Internal Control over
Financial Reporting, our management concluded that our disclosure controls and procedures were not effective as of December 31, 2008.

Notwithstanding
these material weaknesses, management has concluded that the consolidated financial statements included in this report present fairly, in all material respects, Force
Protection's financial position and results of operations, and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles ("GAAP").

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control
over financial reporting is a process designed by or under the supervision of our chief executive officer and chief financial officer and effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with GAAP. A
company's internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail,
transactions and dispositions of our assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP
and that receipts and expenditures are being made only in accordance with authorizations of our management and board of directors, and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

Our
management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, our management used the criteria
established in theInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission
("COSO").

In
connection with the evaluation of our disclosure controls and procedures, our management team attempted to identify any "material weakness" in our internal control environment. We
defined "material weakness" as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of
our annual or interim financial statements will not be prevented or detected on a timely basis. We defined "significant

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deficiency"
as a deficiency, or combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those
responsible for oversight of our financial reporting.

As
previously disclosed under "Item 9AControls and Procedures" in our Annual Report on Form 10-K for the fiscal year ended December 31,
2007, we concluded that our internal control over financial reporting was not effective based on identified material weaknesses. The method of remediation of certain of these material weaknesses has
been addressed below inChanges in Internal Control Over Financial Reporting.

Based
on our assessment and the criteria discussed above, our management, including our chief executive officer and chief financial officer, concluded that our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) under the Exchange Act) was not effective as of December 31, 2008 as a result of the material
weaknesses:

Accounting for revenue recognitionWe did not maintain effective controls over the completeness and accuracy of revenue, accounts receivable and
related reserves. Specifically, effective controls were not designed and in place to ensure that sales orders were complete, accurate and recorded on a timely basis. Further, reconciliations were not
completed in a timely manner to ensure the accuracy of revenue recognition.

Inadequate monitoring of non-routine and non-systematic transactionsWe did not have effective controls in place to monitor
and accurately record non-routine and non-systematic transactions. During the fourth quarter,
we implemented additional processes for reviewing and monitoring non-routine business activities within our financial statement close process. These have not been in place for an adequate
period of time for us to determine whether the material weakness had been adequately addressed.

Our
independent registered public accounting firm, Grant Thornton LLP, has issued a report on our internal control over financial reporting as of December 31, 2008. That
report is included in this Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting

As previously disclosed under "Item 9AControls and Procedures" in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2007, we concluded that our internal control over financial reporting was not effective based on the material weaknesses identified. For the fiscal year
ended December 31, 2007, our six areas of material weakness represented significant, broad-based gaps in our control environment. We have worked throughout the year to remediate the material
weaknesses that existed as of December 31, 2007. In the fourth quarter ended December 31, 2008, we had sufficient evidence to conclude that we completed remediation of the following
material weaknesses:

Financial statement closing processTo address previously disclosed material weaknesses related to the financial statement closing process and the
insufficient complement of personnel with an appropriate level of accounting knowledge, experience with the Company, and training in the application of GAAP, we have implemented policies and
procedures and hired personnel with a sufficient level of accounting, GAAP, and financial reporting expertise commensurate with our financial reporting requirements. The additions include but are not
limited to a Chief Financial Officer, Corporate Controller, Financial Controller, and various staff and manager level positions in fixed assets, accounts receivable, and accounts payable.

Accounting for inventory and related accountsTo address previously disclosed material weaknesses related to the accounting for inventory and related
accounts, we have implemented policies, procedures and processes to strengthen the accounting for inventory, accounts payable and cost of goods sold.

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Accounting for income taxesTo address previously disclosed material weaknesses related to the accounting for income taxes and related tax assets and
liabilities, we have hired an external advisor to provide accounting and tax consulting services. Additionally, we have implemented procedures and processes for management to review and approve the
work performed by the external advisor.

Information technology controlsTo address previously disclosed material weaknesses related to information technology controls, we have improved the
controls over the management of information security and changes to applications and data.

Remediation of Remaining Material Weaknesses

We have engaged in, and are continuing to engage in, substantial efforts to improve our internal controls over revenue, accounts
receivable and related reserves. These efforts include strengthening the processes and controls over sales order maintenance and invoicing, timeliness of reconciliations, and monitoring of revenue,
accounts receivable, and related reserves. This is accomplished with the addition of professional staff with the skills and experience needed for a public company of our size and complexity.

To
address the weakness around non-routine and non-systematic transactions, we have implemented policies and procedures and hired personnel with a sufficient
level of financial reporting expertise commensurate with our financial reporting requirements. Further, we have implemented a Disclosure Committee that meets often during reporting periods and
includes employees from all areas of the company including executive, financial, information technology and operations management.

ITEM 9B.    OTHER INFORMATION

Not applicable.

PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Incorporated by reference from the information in our proxy statement for the 2009 Annual Meeting of Shareholders, which we will file
with the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.

ITEM 11.    EXECUTIVE COMPENSATION

Incorporated by reference from the information in our proxy statement for the 2009 Annual Meeting of Shareholders, which we will file
with the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS

Incorporated by reference from the information in our proxy statement for the 2009 Annual Meeting of Shareholders, which we will file
with the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Incorporated by reference from the information in our proxy statement for the 2009 Annual Meeting of Shareholders, which we will file
with the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.

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ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

Incorporated by reference from the information in our proxy statement for the 2009 Annual Meeting of Shareholders, which we will file
with the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.

PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please remember they are
included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Force Protection or the other parties to the
agreements. Some of the agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit
of the other parties to the applicable agreement and:



Accordingly,
the representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about Force
Protection, Inc. may be found elsewhere in this Annual Report on Form 10-K and Force Protection's other public filings, which are available without charge on Force
Protection, Inc.'s website at www.forceprotection.net.

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EXHIBIT INDEX

NUMBER

DESCRIPTION2.1

Agreement and Plan of Merger, filed as Exhibit 2.1 to the Company's Annual Report on Form 10-K filed September 15, 2008, is hereby incorporated by reference.3.1

Articles of Incorporation, filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K filed September 15, 2008, is hereby incorporated by reference.3.2

Certificate of Amendment to Articles of Incorporation, filed as Exhibit 3.3 to the Company's Annual Report on Form 10-K filed September 15, 2008, is hereby incorporated by reference.3.3

Certificate of Amendment to Articles of Incorporation, filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed November 26, 2008, is hereby incorporated by reference.3.4

Second Amended and Restated By-Laws of Force Protection, Inc., filed as Exhibit 3.2 to the Company's Current Report on Form 8-K filed November 26, 2008, is hereby incorporated by
reference.4.1

Certificate of Designation for Series D Convertible Preferred Stock, dated January 19, 2005, filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed January 27, 2005, is hereby
incorporated by reference.4.2

Amended and Restated Certificate of Designation for Series B Convertible Preferred Stock, filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed February 15, 2005, is hereby
incorporated by reference.4.3

Amended and Restated Certificate of Designation for Series C Convertible Preferred Stock, filed as Exhibit 4.2 to the Company's Current Report on Form 8-K filed February 15, 2005, is hereby
incorporated by reference.10.1

Lease Agreement between Dorchester County, South Carolina and Lati Industries, Inc., dated December 7, 1998, filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K filed
September 15, 2008, is hereby incorporated by reference. (This lease was assumed by the Company under the Assignment and Assumption Agreement, dated March 22, 2007 referred to in Exhibit 10. 35 to this Form 10-K.)10.2

Industrial Lease between Force Protection, Inc. and Aerospace/Defense, Inc., dated September 2, 2003, filed as Exhibit 10.12 to the Company's Quarterly Report on Form10-QSB filed August 13,
2004, is hereby incorporated by reference.10.3

Letter regarding Industrial Lease Agreement between Force Protection, Inc. and Aerospace/Defense, Inc., dated July 13, 2004, filed as Exhibit 10.11 to the Company's Quarterly Report on
Form 10-QSB filed August 13, 2004, is hereby incorporated by reference.10.4

Building No. 1 Office Lease among Force Protection, Inc., Force Protection Industries, Inc., and Aerospace/Defense, Inc., dated June 1, 2005, filed as Exhibit 10.8 to the Company's
Quarterly Report on Form 10-Q filed November 13, 2007, is hereby incorporated by reference.10.5

Building No. 1 Industrial Lease among Force Protection, Inc., Force Protection Industries, Inc., and Aerospace/Defense, Inc., dated January 15, 2006, filed as Exhibit 10.10 to the
Company's Quarterly Report on Form 10-Q filed November 13, 2007, is hereby incorporated by reference.


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NUMBER

DESCRIPTION10.6

First Amendment to Building No. 1 Industrial Lease among Force Protection, Inc., Force Protection Industries, Inc., and Aerospace/Defense, Inc., dated May 1, 2006, filed as Exhibit 10.11 to
the Company's Quarterly Report on Form 10-Q filed November 13, 2007, is hereby incorporated by reference.10.7

Production License Agreement between Force Protection Industries, Inc. and BAE Systems Land & Armaments, LP, dated June 13, 2006, filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q filed August 14, 2006, is hereby incorporated by reference.10.8

Logistic Support Agreement between Force Protection Industries, Inc. and BAE Systems Land & Armaments, LP, dated June 13, 2006, filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q filed August 14, 2006, is hereby incorporated by reference.10.9

Second Amendment to Building No. 1 Industrial Lease among Force Protection, Inc., Force Protection Industries, Inc., and Aerospace/Defense, Inc., dated July 1, 2006, filed as
Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q filed November 13, 2007, is hereby incorporated by reference.10.10

Letter Agreement among Force Protection, Inc., Force Protection Industries, Inc., and Aerospace/Defense, Inc., dated July 18, 2006, regarding Building No. 2 Industrial Lease and Building
No. 3 Industrial Lease, filed as Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q filed November 13, 2007, is hereby incorporated by reference.10.11

Modification No. 01 to Subcontract No. SCT0044135 between Force Protection Industries, Inc. and BAE Land Systems and Armaments L.P., dated August 8, 2006, filed as Exhibit 10.18 to the
Company's Annual Report on Form 10-K filed September 15, 2008, is hereby incorporated by reference.10.12

Contract between Force Protection Industries, Inc. and the British Ministry of Defence, dated August 11, 2006, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed August 17,
 2006, is hereby incorporated by reference.10.13

Memorandum of Agreement and Cooperation between Mechem, a division of Denel (PTY) Ltd. and Force Protection, Inc., dated September 28, 2006, filed as Exhibit 10.1 to the Company's Current Report on
Form 8-K filed September 28, 2006, is hereby incorporated by reference.10.14

Third Amendment to Building No. 1 Industrial Lease among Force Protection, Inc., Force Protection Industries, Inc., and Aerospace/Defense, Inc., dated October 1, 2006, filed as
Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q filed November 13, 2007, is hereby incorporated by reference.10.15

Memorandum of Understanding between Force Protection, Inc. and General Dynamics Land Systems, Inc., dated November 9, 2006, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K
filed November 17, 2006, is hereby incorporated by reference.10.16

Joint Venture Agreement between General Dynamics Land Systems, Inc. and Force Protection, Inc., dated December 15, 2006, as amended, filed as Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q filed August 9, 2007, is hereby incorporated by reference.


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NUMBER

DESCRIPTION10.17

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.10.18

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.10.19

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.10.20

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.10.21

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.10.22

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.10.23

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.10.24

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.10.25

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.10.26

Technology and License Agreement among Force Protection, Inc., General Dynamics Land Systems Inc. and Force Dynamics LLC, dated April 3, 2007, filed as Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q filed November 13, 2007, is hereby incorporated by reference.10.27

Modification of Contract Agreement with the United States Marine Corps, dated April 17, 2007, filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed August 9, 2007, is hereby
incorporated by reference.10.28

Delivery Order under Contract No. M67854-07-D-5031 with the United States Marine Corps Systems Command, dated April 23, 2007, filed as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q filed
August 9, 2007, is hereby incorporated by reference.10.29

Delivery Order under Contract No. M67854-07-D-5031 with the United States Marine Corps Systems Command, dated June 19, 2007, filed as Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q filed
August 9, 2007, is hereby incorporated by reference.


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NUMBER

DESCRIPTION10.30

First Amendment to Building No. 1 Office Lease among Force Protection, Inc., Force Protection Industries, Inc., and Aerospace/Defense, Inc., dated July 1, 2007, filed as Exhibit 10.9 to the
Company's Quarterly Report on Form 10-Q filed November 13, 2007, is hereby incorporated by reference.10.31

First Amendment to Ground Lease among Force Protection, Inc., Force Protection Industries, Inc., and Aerospace/Defense, Inc., dated July 1, 2007, filed as Exhibit 10.7 to the Company's
Quarterly Report on Form 10-Q filed November 13, 2007, is hereby incorporated by reference.10.32

Second Amendment to Building No. 3 Industrial Lease among Force Protection, Inc., Force Protection Industries, Inc., and Aerospace/Defense, Inc., dated July 1, 2007, filed as
Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q filed November 13, 2007, is hereby incorporated by reference.10.33

Fourth Amended and Restated Building No. 1 Industrial Lease among Force Protection, Inc., Force Protection Industries, Inc., and Aerospace/Defense, Inc., dated July 1, 2007, filed as
Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q filed November 13, 2007, is hereby incorporated by reference.10.34

Third Amendment to Building No. 2 Industrial Lease among Force Protection, Inc., Force Protection Industries, Inc., and Aerospace/Defense, Inc., dated July 1, 2007, filed as Exhibit 10.17
to the Company's Quarterly Report on Form 10-Q filed November 13, 2007, is hereby incorporated by reference.10.35

License Agreement between Force Protection Industries, Inc. and the CSIR, dated July 6, 2007, filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed November 13, 2007, is
hereby incorporated by reference.10.36

Loan Agreement between Force Protection, Inc. and Wachovia Bank, National Association, dated July 20, 2007, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed August 9,
2007, is hereby incorporated by reference.10.37

Security Agreement between Force Protection, Inc. and Wachovia Bank, National Association, dated July 20, 2007, filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed
August 9, 2007, is hereby incorporated by reference.10.38

Promissory Note between Force Protection, Inc. and Wachovia Bank, National Association, dated July 20, 2007, filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed August 9,
 2007, is hereby incorporated by reference.10.39

Delivery Order No. 5 under Contract M67854-07-D-5031 with the United States Marine Corps Systems Command, dated August 10, 2007, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
filed November 13, 2007, is hereby incorporated by reference.10.40

Subcontract Agreement among Force Protection Industries, Inc., General Dynamics, Inc., and General Dynamics Land Systems, Inc., dated September 10, 2007, filed as Exhibit 10.52 to the
Company's Annual Report on Form 10-K filed September 15, 2008, is hereby incorporated by reference.10.41

Modification Number One to Promissory Note between Force Protection, Inc. and Wachovia Bank, National Association, dated September 30, 2007, filed as Exhibit 10.5 to the Company's Quarterly Report on
Form 10-Q filed November 13, 2007, is hereby incorporated by reference.


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NUMBER

DESCRIPTION10.42

Delivery Order No. 6 under Contract M67854-07-D- 5031 with the United States Marine Corps Systems Command, dated October 18, 2007, filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
filed November 13, 2007, is hereby incorporated by reference.10.43

Memorandum of Agreement between the CSIR and Force Protection Industries, Inc., dated October 29, 2007, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed November 2, 2007,
 is hereby incorporated by reference.10.44

Fourth Amendment to Building No. 2 Industrial Lease among Force Protection, Inc., Force Protection Industries, Inc., and Aerospace/Defense, Inc., dated November 1, 2007, filed as
Exhibit 10.56 to the Company's Annual Report on Form 10-K filed September 15, 2008, is hereby incorporated by reference.10.45

Delivery Order No. 7 under Contract No. M67854-07-D-5031 with the United States Marine Corps Systems Command, dated December 18, 2007, filed as Exhibit 10.57 to the Company's Annual Report on
Form 10-K filed September 15, 2008, is hereby incorporated by reference.**10.46

Modification Number Two to Promissory Note between Force Protection, Inc. and Wachovia Bank, National Association, dated January 9, 2008, filed as Exhibit 10.58 to the Company's Annual Report on
Form 10-K filed September 15, 2008, is hereby incorporated by reference.10.47

First Amendment to Loan Agreement between Force Protection, Inc. and Wachovia Bank, National Association, dated January 9, 2008, filed as Exhibit 10.59 to the Company's Annual Report on Form 10-K
filed September 15, 2008, is hereby incorporated by reference.10.48

Modification Number Three to Promissory Note between Force Protection, Inc. and Wachovia Bank, National Association, dated January 9, 2008, filed as Exhibit 10.60 to the Company's Annual Report on
Form 10-K filed September 15, 2008, is hereby incorporated by reference.10.49

Extension Amendment to Leases between Force Protection, Inc. and Aerospace/Defense, Inc., dated January 10, 2008, filed as Exhibit 10.61 to the Company's Annual Report on Form 10-K filed
September 15, 2008, is hereby incorporated by reference.10.50

Second Amendment to Loan Agreement between Force Protection, Inc. and Wachovia Bank, National Association, dated February 15, 2008, filed as Exhibit 10.63 to the Company's Annual Report on
Form 10-K filed September 15, 2008, is hereby incorporated by reference.10.51

Modification, dated April 15, 2008, to the Second Amendment to Loan Agreement, dated February 15, 2008, filed as Exhibit 10.64 to the Company's Annual Report on Form 10-K filed September 15,
2008, is hereby incorporated by reference.10.52

Amendment of Solicitation/Modification of Contract with United States Marine Corps Systems Command, dated February 22, 2008, filed as Exhibit 10.65 to the Company's Annual Report on Form 10-K filed
September 15, 2008, is hereby incorporated by reference.**10.53

Employment Agreement between Force Protection, Inc. and Michael Moody, dated March 19, 2008, filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed March 24, 2008, is hereby
incorporated herein by reference.*


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NUMBER

DESCRIPTION10.54

Agreement between Force Protection, Inc. and Lenna Ruth Macdonald, dated March 24, 2008, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed March 24, 2008, is hereby
incorporated by reference.*10.55

Agreement between Force Protection, Inc. and Damon Walsh, dated April 4, 2008, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed April 8, 2008, is hereby incorporated by
reference.*10.56

Agreement between Force Protection, Inc. and Mark Edwards, dated April 4, 2008, filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed April 8, 2008, is hereby incorporated by
reference.*10.57

Agreement between Force Protection, Inc. and Daniel Busher, dated April 4, 2008, filed as Exhibit 10.3 to the Company's Current Report on Form 8-K filed April 8, 2008, is hereby incorporated
by reference.*10.58

Agreement between Force Protection, Inc. and Shelia Boyd, dated April 4, 2008, filed as Exhibit 10.4 to the Company's Current Report on Form 8-K filed April 8, 2008, is hereby incorporated by
reference.*10.59

Amended and Restated Loan Agreement between Force Protection, Inc., Force Protection Technologies, Inc., Force Protection Industries, Inc., and Wachovia Bank, National Association, dated May 6,
2008, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed May 9, 2008, is hereby incorporated by reference.10.60

Promissory Note between Force Protection, Inc. and Wachovia Bank, National Association, dated May 6, 2008, filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed May 9, 2008,
is hereby incorporated by reference.10.61

Amendment of Solicitation/Modification of Contract between Force Protection Industries, Inc. and the United States Marine Corps Systems Command, dated May 19, 2008, filed as Exhibit 10.78 to the
Company's Annual Report on Form 10-K filed September 15, 2008, is hereby incorporated by reference.**10.62

Amendment of Solicitation/Modification of Contract between Force Protection Industries, Inc. and the United States Marine Corps Systems Command, dated May 30, 2008, filed as Exhibit 10.79 to the
Company's Annual Report on Form 10-K filed September 15, 2008, is hereby incorporated by reference.**10.63

Agreement between Force Protection, Inc. and Charles Mathis, dated June 25, 2008, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed June 27, 2008, is hereby incorporated
by reference.10.64

Second Extension Amendment to Leases between Force Protection, Inc. and Aerospace/Defense, Inc., dated June 25, 2008, filed as Exhibit 10.81 to the Company's Annual Report on Form 10-K filed
September 15, 2008, is hereby incorporated by reference.10.65

Amendment of Solicitation/Modification of Contract between Force Protection Industries, Inc. and the United States Marine Corps, dated October 1, 2008.**10.66

Amendment of Solicitation/Modification of Contract between Force Protection Industries, Inc. and the United States Army Tank Automotive and Armaments Command, dated October 20, 2008.**


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Table of Contents

NUMBER

DESCRIPTION10.67

Second Amended and Restated Loan Agreement between Force Protection, Inc., Force Protection Technologies, Inc., Force Protection Industries, Inc., and Wachovia Bank, National Association, dated
October 31, 2008, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on November 3, 2008, is herby incorporated by reference.10.68

Amended and Restated Promissory Note between Force Protection, Inc. and Wachovia Bank, National Association, October 31, 2008, filed as Exhibit 10.2 to the Company's Current Report on Form 8-K
filed November 3, 2008, is hereby incorporated by reference.10.69

Amendment of Solicitation/Modification of Contract between Force Protection Industries, Inc. and the United States Marine Corps Systems Command, dated December 17, 2008.**10.70

Letter Agreement among Force Protection, Inc., Force Protection Industries, Inc., and Aerospace/Defense, Inc., dated December 22, 2008, regarding Building No. 1 Industrial Lease, Building
No. 1 Office Lease, Building No. 2 Industrial Lease and Building No. 6 Ground Lease, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 30, 2008, is hereby incorporated by
reference.10.71

Amendment of Solicitation/Modification of Contract between Force Protection Industries, Inc. and the United States Marine Corps Systems Command, dated November 14, 2008.**10.72

Basic Contract between Force Protection Industries, Inc. and the United States Marine Corps Systems Command, dated May 3, 2007.**10.73

First Amendment to Agreement between Force Protection, Inc. and Daniel Busher, dated December 24, 2008.*10.74

First Amendment to Agreement between Force Protection, Inc. and Mark Edwards, dated December 24, 2008.*10.75

First Amendment to Agreement between Force Protection, Inc. and Damon Walsh, dated December 24, 2008.*10.76

First Amendment to Agreement between Force Protection, Inc. and Lenna Ruth Macdonald, dated December 24, 2008.*10.77

First Amendment to Agreement between Force Protection, Inc. and Shelia Boyd, dated December 24, 2008.*10.78

First Amendment to Agreement between Force Protection, Inc. and Charles Mathis, dated December 24, 2008.*10.79

Second Amendment to Agreement between Force Protection, Inc. and Daniel Busher, dated January 12, 2009.*10.80

Second Amendment to Agreement between Force Protection, Inc. and Shelia Boyd, dated January 12, 2009.*10.81

Second Amendment to Agreement between Force Protection, Inc. and Charles Mathis, dated January 12, 2009.*10.82

Second Amendment to Agreement between Force Protection, Inc. and Damon Walsh, dated January 12, 2009.*


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Table of Contents

NUMBER

DESCRIPTION10.83

Second Amendment to Agreement between Force Protection, Inc. and Lenna Ruth Macdonald, dated January 12, 2009.*10.84

Second Amendment to Agreement between Force Protection, Inc. and Mark Edwards, dated January 12, 2009.*10.85

First Amendment to Agreement between Force Protection, Inc. and Michael Moody, dated December 23, 2008.*14.1

Code of Conduct and Ethics of Force Protection, Inc., filed as Exhibit 14.1 to the Company's Annual Report on Form 10-K filed September 15, 2008, is hereby incorporated by reference.21.1

Subsidiaries of the Registrant.23.1

Consent of Grant Thornton LLP31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

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


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(Exhibits
marked with a () are filed electronically herewith.)

(Exhibits
marked with an asterisk (*) are a management contract or compensatory plan required to be filed as an Exhibit to this Annual Report on Form 10-K.)

(Exhibits
marked with two asterisks (**) have portions of the exhibit omitted pursuant to a confidential treatment request. This information has been filed or will be filed separately with the
Securities and Exchange Commission.)

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.

FORCE PROTECTION INC.(Registrant)Date: March 26, 2009

By:

/s/ MICHAEL MOODYName:

Michael MoodyTitle:

President and Chief Executive Officer (principal executive officer)


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on the 26th of March, 2009, on behalf of the registrant
and in the capacities indicated.

Signature

Capacity/s/ MICHAEL MOODY Michael Moody

President, Chief Executive Officer and Chairman of the Board of Directors (principal executive officer)/s/ CHARLES MATHIS Charles Mathis

Chief Financial Officer (principal financial and accounting officer)/s/ MAJOR GENERAL JACK A. DAVIS Major General Jack A. Davis

Director/s/ JOHN S. DAY John S. Day

Director/s/ LIEUTENANT GENERAL ROGER G. THOMPSON, JR. Lieutenant General Roger G. Thompson, Jr.

Director/s/ JOHN W. PAXTON, SR. John W. Paxton, Sr.

Director


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