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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2009

OR

For the transition period from                to               

Commission File Number 001-33253

FORCE PROTECTION, INC.

(Exact Name of Registrant as Specified in Its Charter)

(843) 574-7000

(Registrant’s Telephone Number, Including Area Code)

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.  x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  o Yes o No

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 the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

The registrant had 69,908,996 shares of common stock outstanding as of August 6, 2009.

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PART I. FINANCIAL STATEMENTS

Item 1.    Financial Statements

Force Protection, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

The accompanying notes to condensed consolidated financial statements

are an integral part of these statements.

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Force Protection, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

The accompanying notes to condensed consolidated financial statements

are an integral part of these statements.

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Force Protection, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

The accompanying notes to condensed consolidated financial statements

are an integral part of these statements.

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1.     Summary of Significant Accounting Policies

Organization and Description of the Business

Force Protection, Inc., a Nevada corporation, together with 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 the forefront of blast- and ballistic-protected technology, are designed to protect their occupants from landmines, hostile fire, and improvised explosive devices (“IEDs”).  We are a key provider of vehicles to the United States military under the Mine Resistant Ambush Protected (“MRAP”) program. Our customers include all branches of the United States Department of Defense (“DoD”) and through foreign military sales of the DoD, military customers located in the United Kingdom, Iraq, Canada, Italy, and France, as well as direct sales to the United Kingdom Ministry of Defence and the Hungarian Ministry of Defense.

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.

We formed Integrated Survivability Technologies Limited, an England and Wales company (“IST”), a joint venture between Force Protection Advanced Solutions Limited (“FPAS”), a subsidiary of Force Protection Industries, Inc., and NP Aerospace Limited (“NPA”), a subsidiary of The Morgan Crucible Company plc.   Pursuant to the terms of the joint venture, IST shall act as the prime contractor for vehicles and related total life cycle support awarded by the United Kingdom Ministry of Defence to ensure that this customer has a single point of contact for its current and future Force Protection fleet of vehicles (Buffalo, Mastiff, Ridgback and Wolfhound).  FPAS and NPA each own a 50% interest in IST and the board of IST consists of six members, three of whom are appointed by Force Protection.  As of June 30, 2009, we have contributed $2.1 million for this investment in IST.  On July 1, 2009, the IST board agreed to defer the capital contribution which was due on July 6, 2009 to September 4, 2009, subject to further review by the parties of any future funding requirements that may be required. We account for this joint venture as an equity-method investment.

On April 1, 2009, IST received its first award from the United Kingdom Ministry of Defence, for the production of 97 fully integrated Wolfhound vehicles, which are based on the Mastiff vehicle model, valued at approximately $122.6 million.  On April 1, 2009, IST awarded a sub-contract to Force Protection Industries, Inc. for the delivery of 97 base Wolfhound vehicles.  On April 1, 2009, IST awarded a subcontract to NPA for the integration of equipment and armor on the base vehicles provided to IST by Force Protection Industries, Inc. In May 2009, the United Kingdom Ministry of Defence exercised its option under the IST contract to purchase an additional representative blast vehicle, which IST subcontracted to Force Protection Industries, Inc.

On August 2, 2009, FPAS changed its name to Force Protection Europe Limited, and we are focusing on  enhancing its market presence and leveraging our brand strength in the United Kingdom and other international markets.

On January 25, 2007, we were awarded a Government Prime Contract by the United States Marine Corps Systems Command (“MARCORPSYSCOM”) for the delivery of, among other things, certain Category I and Category II Cougar vehicles and related life cycle support services (“MRAP Competitive Contract”).  MARCORPSYSCOM subsequently issued a series of delivery orders related to the MRAP Competitive Contract.  We completed the work under these delivery orders and may continue receiving delivery orders under the MRAP Competitive Contract.  Commencing February 5, 2007, we entered into certain letter agreements with General Dynamics Land Systems, Inc. (“GDLS”), whereby GDLS would act as a subcontractor for certain work under the MRAP Competitive Contract.  On May 4, 2007, we requested that MARCORPSYSCOM novate the MRAP Competitive Contract to Force Dynamics (described below), but the novation has not yet occurred. On September 10, 2007, we entered into a subcontract (the “MRAP Subcontract”) with GDLS, incorporating all prior letters of agreement and setting forth the provisions related to any subsequent work awarded to GDLS by us under the MRAP Competitive Contract. The work under the MRAP Competitive Contract continues to be performed by Force Protection Industries, Inc. as the prime and specific work is performed by GDLS under the MRAP Subcontract.

Prior to the award of the MRAP Competitive Contract, we entered into a joint venture agreement with GDLS on December 15, 2006 (“Workshare Agreement”) with the intent that the MRAP Competitive Contract would be

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novated to the joint venture.  Under the Workshare Agreement, we and GDLS would each perform obligations for awards related to the MRAP Competitive Contract.  In furtherance of this agreement, we and GDLS formed a Delaware limited liability company on January 8, 2007, Force Dynamics, LLC (“Force Dynamics”), to jointly pursue the MRAP Competitive Contract.  We account for this arrangement as an equity-based investment.

On December 8, 2008, the MRAP Joint Program Office issued a competitive Request for Proposal (“RFP”), named the M-ATV through which the United States government was seeking a vehicle solution that provides MRAP levels of survivability with enhanced mobility. On January 12, 2009, Force Dynamics submitted a proposal to the US Army Tank-Automotive and Armaments Command (“TACOM”) for this RFP offering the M-ATV Cheetah as a solution. During the six months ended June 30, 2009, Force Dynamics was awarded contracts for 5 production representative M-ATV Cheetah vehicles and testing. Force Dynamics subcontracted the production of these 5 vehicles to Force Protection Industries, Inc. and the testing to GDLS. On June 30, 2009, Force Dynamics was informed by TACOM that our M-ATV Cheetah was not selected to receive the initial production delivery order in the M-ATV competition.

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the United States Securities and Exchange Commission (“SEC”) on March 26, 2009. These unaudited condensed consolidated financial statements have been prepared pursuant to Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made herein are adequate to make the information not misleading.

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

These unaudited condensed consolidated financial statements include the assets, liabilities, revenues and expenses of our two wholly owned subsidiaries, Force Protection Industries, Inc. and Force Protection Technologies, Inc., and our 50% owned Delaware limited liability company, Force Dynamics, LLC. We eliminate from our financial results all significant intercompany accounts and transactions.

Certain prior period information has been reclassified to conform to the current period presentation.

Recent Accounting Pronouncements

In April 2008, the Financial Accounting Standard Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 142-3, Determination of Useful Life of Intangible Assets, (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should 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 was prohibited. We adopted FSP FAS 142-3 in the first quarter of 2009.  This standard did not have a material impact on our consolidated financial position, results of operations and cash flows.

In September 2006, the 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.

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In February 2008, FASB Staff Position (“FSP”) FAS No. 157-2, Effective Date of FASB Statement No. 157, was issued. FSP FAS 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 FAS 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, 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 adoption of FASB Statement No. 157, including FSP FAS No. 157-2, 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 position, results of operations and cash flows. The Company adopted the provisions of SFAS No. 157 for financial assets and liabilities on January 1, 2008, and for nonfinancial assets and liabilities on January 1, 2009.

FSP FAS 107-1/APB 28-1, which was issued in April 2009, requires disclosures about fair values of financial instruments in interim and annual financial statements. Prior to the issuance of FSP FAS 107-1/APB 28-1, disclosures about fair values of financial instruments were only required to be disclosed annually.  We adopted FSP FAS 107-1/APB 28-1 in the second quarter of 2009.  This standard did not have an impact on our consolidated financial position, results of operations and cash flows.

In May 2009, the FASB issued FASB Statement No. 165, Subsequent Events, which defines a date through which management must evaluate subsequent events, and lists the circumstances which an entity must recognize and disclose events or transactions occurring after the balance sheet date.  It is effective prospectively for interim and annual periods ending after June 15, 2009.  We adopted FASB Statement No. 165, Subsequent Events, on June 30, 2009.  This standard did not have a material impact on our consolidated financial position, results of operations and cash flows.

In July 2009, the FASB issued FASB Statement No. 168, The Hierarchy of Generally Accepted Accounting Principles, which launched the FASB Accounting Standards Codification that will become the single source of non-SEC authoritative GAAP.  It is effective for interim and annual periods beginning after September 15, 2009.  We will adopt FASB Statement No. 168, The Hierarchy of Generally Accepted Accounting Principles, as of September 30, 2009.  This will not have a material impact on our consolidated financial position, results of operations and cash flows.

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.

2.     Accounts Receivable

Accounts receivable consists of the following (in thousands):

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 in Other income (expense), net in the accompanying condensed consolidated statements of operations.  As of June 30, 2009 and December 31, 2008, our accounts receivable included $43.9 million and $8.6 million, respectively, of earned and unbilled accounts receivable.   The earned and unbilled accounts receivable as of June 30, 2009 has grown significantly since December 31, 2008 primarily due to an increased amount of not-to-exceed contracts where we cannot fully bill until the contracts are definitized.

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3.     Inventories

Inventories consist of the following (in thousands):

Due to excess and obsolete inventory and to account for our inventory at the lower of cost or market, we reduce the cost basis of our raw material and supplies and incur an expense to Cost of sales.

As of June 30, 2009, raw material and supplies includes $14.1 million of inventory related to the M-ATV Cheetah submission.

Work in process consists of vehicles and subassemblies in process and overhead costs capitalized in ending inventory.  As of June 30, 2009, the work in process balance included $0.7 million relating to the M-ATV Cheetah.

As of June 30, 2009, the finished goods consists of $10.8 million of ForceArmor™ kits, $1.0 million of Independent Suspension System (“ISS”) kits, $3.9 million of other finished products, and $11.1 million of  vehicles, including: Wolfhound ($7.5 million), Buffalo A2 ($3.2 million) and M-ATV Cheetah ($0.4 million).

Total inventory relating to the M-ATV Cheetah submission at June 30, 2009 is $15.2 million. Although we were not selected in the M-ATV competition for our M-ATV Cheetah vehicles, we are actively pursuing other opportunities with some potential customers and believe that we can liquidate this inventory and recover all costs incurred for this inventory.

4.     Property and Equipment

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

In March 2008, we decided to suspend the construction of the assembly line at our Roxboro, North Carolina facility.  As a result, we charged $4.9 million to operations in the first quarter of 2008, comprised of $2.1 million in deposits on services to be provided and $2.8 million in design costs.

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During 2008, we completed the renovation of our Roxboro facility and capitalized costs as building improvements of approximately $5.8 million.  In May 2009, we began to use the Roxboro facility for training purposes.

In June 2009, we determined that certain customized machines, which were used to dispense vehicle fluids, no longer had a future benefit to us.  As a result, we charged $0.7 million to operations in the second quarter of 2009 for these machines.

5.     Advance Payments on Contracts

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

Under some of our United States 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 as Advance payments on contracts in our consolidated balance sheet until the final delivery of the products and formal acceptance by the United States government as evidenced by an executed Form DD250.

6.     Income Taxes

We provide for income taxes using the liability method in accordance with FASB Statement No. 109, Accounting for Income Taxes. In accordance with APB Opinion No. 28, Interim Financial Reporting, and FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods, the provision for taxes on income recognizes our estimate of the effective tax rate expected to be applicable for the full year, adjusted for the impact of any discrete events, which are reported in the period in which they occur. Each quarter, we re-evaluate our estimated tax expense for the year and make adjustments for changes in the estimated tax rate. Additionally, we evaluate the realizability of our deferred tax assets on a quarterly basis. Our evaluation considers all positive and negative evidence and factors, such as the scheduled reversal of temporary differences, historical and projected future taxable income or losses, and prudent and feasible tax planning strategies.

The income tax expense for the three and six months ended June 30, 2009 was based on the estimated effective tax rates applicable for the fiscal year ending December 31, 2009, after considering items specifically related to the interim period.  The income tax expense for the three- and six-month periods ended June 30, 2008 was based on the estimated effective tax rates applicable for the fiscal year ended December 31, 2008, after considering items specifically related to the interim period.

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

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

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The effective income tax rate is the provision for income tax expense as a percent of income before income taxes. The effective rate for the six months ended June 30, 2009 is lower than the expected federal statutory rate of 35% due to research and development tax credits and the Domestic Production Activities Deduction, partially offset by state income taxes and nondeductible items.

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, Accounting for Income Taxes. 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. We include interest and penalties related to federal and state income taxes, if any, as a component of Income tax expense in the accompanying unaudited condensed consolidated statements of operations.

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.

7.     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):

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The calculation of 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 stock options and stock grants.  For the periods presented above, we have not excluded any potentially dilutive shares from the calculation of diluted earnings per share.

8.     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.

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 was reduced to the one-month LIBOR plus an additional amount (“Applicable Margin”) of 1.75%. Beginning with the quarter started April 1, 2009, the Applicable Margin is determined quarterly based on the Funded Debt to EBITDA ratio calculated on a rolling four quarter basis and varies 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.  As of June 30, 2009, we are in compliance with all of our line of credit covenants.

Shareholder Derivative Complaints

As previously reported, 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 pending in the United States District Court for the District of South Carolina Charleston Division were consolidated on March 31, 2009, under the caption “In Re Force Protection, Inc.  Derivative Litigation, Action No. 2:08-cv-01907-CWH”, three derivative lawsuits are pending in Charleston, South Carolina Circuit Court, and one derivative lawsuit pending in Clark County, Nevada District Court has been stayed.  The plaintiffs in the derivative lawsuit stayed in Clark County, Nevada re-filed their lawsuit in Charleston, South Carolina Circuit Court on April 9, 2009.  An order to consolidate the three shareholder derivative actions filed in Charleston, South Carolina Circuit Court was issued by the Court on May 27, 2009.

Certain Other Disputes

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

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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. On June 26, 2009 a lawsuit was filed by the individual against the Company in the United States District Court for the District of South Carolina, Charleston Division as Civil Action No. 2:09cv1708-DCN-BM.

On or about June 17, 2009, ASG Renaissance filed a demand for arbitration against Force Protection Industries, Inc., bearing the caption ASG Renaissance v. Force Protection Industries, Inc., No. 31 132 Y 00256 09, with the American Arbitration Association.  Both ASG and Force Protection alleged breach of contract among other requests for relief.  On July 13, 2009, we settled this matter for $325,000 and reversed the accrual, which was included in Total current liabilities as of June 30, 2009.

In connection with our suit against Protected Vehicles, Inc. (“PVI”) and three of PVI’s employees, as disclosed in the section entitled “Legal Proceedings” in Note 14, Commitments and Contingencies, Part I of our Annual Report on Form 10-K for the year ended December 31, 2008, as of February 2, 2009 Force Protection Industries, Inc. and Force Protection, Inc. had entered into a settlement agreement with defendants, including the third-party purchaser of the bulk of PVI’s assets (which includes certain rights and liabilities with respect to our suit against it), 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.   As of June 4, 2009, we entered into a supplemental agreement with the third party purchaser in which that purchaser agreed to pay us $160,000 in exchange for a covenant not to sue for its continued use of certain Force Protection files on PVI devices that were to have been identified and returned under the February 2, 2009 agreement.

Although we intend to defend ourselves in connection with the foregoing legal proceedings and claims and the legal proceedings set forth in Part I, Note 14, Commitments and Contingencies, of our Annual Report on Form 10-K for the year ended December 31, 2008, 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.

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 and in Part I, Note 14, Commitments and Contingencies, of our Annual Report on Form 10-K for the year ended December 31, 2008, 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.

9.     Subsequent Events

Subsequent events have been considered through August 10, 2009.

Item 2. 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 unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q.  Information in this Item 2 is intended to assist the reader in obtaining an understanding of our unaudited condensed consolidated financial statements, the changes in certain key items in those financial statements from period to period, 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 unaudited condensed consolidated financial statements. MD&A includes the following sections:

·                  Overview

·                  Our Business

·            Business Model and Key Concepts

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·            Key Challenges

·            Strategy and Key Trends

·                  Results of Operations—an analysis of our consolidated results of operations, for the three- and six-month periods presented in our unaudited condensed consolidated financial statements

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

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

·                  Contractual Obligations—a summary of our aggregate contractual obligations

·                  Critical Accounting Policies and Estimates—a discussion of accounting policies that require significant judgments and estimates

·                  New Accounting Pronouncements—a summary and discussion of our plans for the adoption of new accounting standards relevant to us

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains 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 United States Securities Exchange Act of 1934, as amended (“Exchange Act”).  All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q 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:

·                  statements regarding the growth of the United States and world market for blast- and ballistic-protected vehicles and survivability solutions;

·                  statements with respect to our expectation regarding our ability to obtain materials, components and supplies necessary to manufacture our vehicles, our ability to improve cost efficiencies, including, without limitation, as a result of volume purchasing, improvements in our manufacturing process and possible future changes in the efficiencies in our operations;

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

·                  statements regarding the effect on our financial statements of the adoption of new accounting standards;

·                  statements regarding the revenues that may be derived from, and the quantities of vehicles that may be purchased or ordered pursuant to, existing or possible future contracts or orders by various customers, including statements regarding the estimated value of those orders and contracts and statements about the amount of vehicles in our backlog and the value of our backlog and statements regarding potential customers for the 50 M-ATV Cheetah vehicles;

·                  statements regarding our ability to stabilize our business to match our contract delivery order requirements, including the rebalancing of our work force to meet the demand for our vehicles, the effectiveness of the utilization of partners and subcontractors and improvements to our accounting and financial systems;

·                  statements regarding the amount of capital we will require in the future;

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

·                  statements regarding the rate at which we produce our vehicles, including orders for our Cougar and Buffalo vehicles and when we and IST will produce Wolfhound vehicles, and the date as of which we will achieve any particular monthly production rate of these vehicles.

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

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 Freedom and Operation Enduring Freedom, the United States military has sought tactical wheeled vehicle solutions that balance 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:

·                  The Buffalo platform;

·                  The Cougar platform; and

·                  The Cheetah platform.

We also currently offer ForceArmor™ as an external bolt-on solution, which provides state-of-the-art protection against attack by explosively formed projectiles, or EFPs. ForceArmor™ is designed of 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 wheeled 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 ™.

We formed Integrated Survivability Technologies Limited, an England and Wales company (“IST”), a joint venture between Force Protection Advanced Solutions Limited (“FPAS”), a subsidiary of Force Protection Industries, Inc., and NP Aerospace Limited (“NPA”), a subsidiary of The Morgan Crucible Company plc.   Pursuant to the terms of the joint venture, IST shall act as the prime contractor for vehicles and related total life cycle support awarded by the United Kingdom Ministry of Defence to ensure that this customer has a single point of contact for its current and future Force Protection fleet of vehicles (Buffalo, Mastiff, Ridgback and Wolfhound). FPAS and NPA each own a 50% interest in IST and the board of IST consists of six members, three of whom are appointed by Force Protection.  As of June 30, 2009, we have contributed $2.1 million for this investment in IST.  On July 1, 2009, the IST board agreed to defer the capital contribution which was due on July 6, 2009 to September 4, 2009 subject to further review by the parties of any future funding requirements that may be required. We account for this joint venture as an equity-method investment.

On April 1, 2009, IST received its first award from the United Kingdom Ministry of Defence, for the production of 97 fully integrated Wolfhound vehicles, which are based on the Mastiff vehicles, valued at approximately $122.6 million.  On April 1, 2009, IST awarded a subcontract to Force Protection Industries, Inc. for the delivery of 97 base Wolfhound vehicles.  On April 1, 2009, IST awarded a subcontract to NPA for the integration of equipment and armor on the base vehicles provided to IST by Force Protection Industries, Inc. In May 2009, the United Kingdom Ministry of Defence exercised its option under the IST contract to purchase an additional representative blast vehicle, which IST subcontracted to Force Protection Industries, Inc.

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On August 2, 2009, FPAS changed its name to Force Protection Europe Limited. We are focusing on enhancing its market presence and leveraging our brand strength in the United Kingdom and other international markets.

On January 25, 2007, we were awarded a Government Prime Contract by the United States  Marine Corps Systems Command (“MARCORPSYSCOM”) for the delivery of, among other things, certain Category I and Category II Cougar vehicles and related life cycle support services (“MRAP Competitive Contract”).  MARCORPSYSCOM subsequently issued a series of delivery orders related to the MRAP Competitive Contract.  We have completed the work under these delivery orders and may continue receiving delivery orders under the MRAP Competitive Contract.  Commencing February 5, 2007, we entered into certain letter agreements with General Dynamics Land Systems, Inc. (“GDLS”), whereby GDLS would act as a subcontractor for certain work under the MRAP Competitive Contract.  On May 4, 2007, we requested that MARCORPSYSCOM novate  the MRAP Competitive Contract to Force Dynamics (described below) but the novation has not yet occurred. On September 10, 2007, we entered into a subcontract (the “MRAP Subcontract”) with GDLS, incorporating all prior letters of agreement and setting forth the provisions related to any subsequent work awarded to GDLS by us under the MRAP Competitive Contract. The work under the MRAP Competitive Contract continues to be performed by Force Protection Industries, Inc. as the prime contractor, and specific work is performed by GDLS under the MRAP Subcontract.

Prior to the award of the MRAP Competitive Contract, we entered into a joint venture agreement with GDLS on December 15, 2006 (“Workshare Agreement”) with the intent that the MRAP Competitive Contract would be novated to the joint venture.  Under the Workshare Agreement, we and GDLS would each perform obligations for awards related to the MRAP Competitive Contract.  In furtherance thereof, we and GDLS formed a Delaware limited liability company on January 8, 2007, Force Dynamics, LLC (“Force Dynamics”), to jointly pursue the MRAP Competitive Contract.  We account for this arrangement as an equity-based investment.

On December 8, 2008, the MRAP Joint Program Office issued a competitive Request for Proposal (“RFP”), named the M-ATV through which the United States government was seeking a vehicle solution that provides MRAP levels of survivability with enhanced mobility. On January 12, 2009, Force Dynamics submitted a proposal to the US Army Tank-Automotive and Armaments Command (“TACOM”) for this RFP offering the M-ATV Cheetah as a solution. During the six months ended June 30, 2009, Force Dynamics was awarded contracts for 5 production representative M-ATV Cheetah vehicles and testing. Force Dynamics subcontracted the production of these 5 vehicles to Force Protection Industries, Inc. and the testing to GDLS. On June 30, 2009, Force Dynamics was informed by TACOM that our M-ATV Cheetah was not selected to receive the initial production delivery order in the M-ATV competition.

We are headquartered, and have leased 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, to expand our 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 and in May 2009, we began to use this facility for training and sustainment purposes. In October 2008, we leased an office in the Washington DC vicinity. In November 2008, we leased office space in Sterling Heights, Michigan, for use as an offsite engineering office. In January 2009, we leased office and warehouse space in North Charleston, SC. In March 2009, IST leased office space in Bristol, United Kingdom.  In May 2009, we entered into an agreement to sublease a vehicle support facility in Kuwait. In July, 2009 we exercised an option to renew and extended our lease for Building No. 3 at Ladson facility.

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.

Our Business

Business Model and Key Concepts

Our business is heavily influenced by the needs of the United States military for blast- and ballistic-protected wheeled vehicles. The United States Department of Defense (“DoD”) is our largest customer, although we have recently begun direct sales to foreign governments. We continually align our workforce to satisfy our business requirements.

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Key Challenges

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

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 fourth quarter of 2009 and for our Buffalo vehicles to extend production through the first quarter of 2010. 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.

Substantially all of our income has previously come from our United States government contracts either as a prime contractor or as a subcontractor to another prime contractor to the United States government. However, approximately 58% of our current vehicle backlog relates to our subcontract with IST to deliver base Wolfhound vehicles which will ultimately be delivered to the United Kingdom Ministry of Defence.  We received and fulfilled a large number of vehicle orders from the United States 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 United States military in Iraq and Afghanistan, especially the use of improvised explosive devices, or IEDs, and EFPs by enemy combatants. We cannot be certain, therefore, to what degree the United States military or other foreign governments will continue placing orders, and these orders may decrease significantly or cease. 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.

We have identified material weaknesses in our internal control over financial reporting and have concluded that our disclosure controls were not effective as of June 30, 2009.  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 and the first six months of 2009, we sought to stabilize our business to match our contract delivery order requirements. We recognize that our business is 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

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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 has 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, obtain contracts for sustainment services of our fleet of vehicles across all customers. Some of our actions to meet these imperatives include:

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

·                  Capitalize on the demand for blast- and ballistic-protected vehicles and other survivability solutions;

·                  Expand our total life cycle support footprint;

·                  Expand and diversify our customer base;

·                  Focus on core competencies;

·                  Stabilizing our business to match current production requirements;

·                  Leverage key relationships to grow our business; and

·                  Develop and expand strategic partnerships.

Key Trends

We expect that certain key trends may affect our results of operations as compared to results reported through 2008. Some of these trends include:

·                  Likely reduction of combat forces using our vehicles in Iraq will reduce the operational tempo placed on our fleet;

·                  An increase in military forces deploying to Afghanistan will necessitate modifications to the vehicles and increased sustainment and maintenance requirements;

·                  Declining defense budgets may have an impact on planned future defense procurement needs; and

·                  Our current customers establishing long-term plans and visibility for their fleets of our vehicles.

Results of Operations

The following discussion and analysis is based on our unaudited condensed consolidated statements of operations, which reflect our results of operations for the three- and six-month periods ended June 30, 2009 and 2008 as prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”).

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Comparison of Results of Operations for the Three and Six Months Ended June 30, 2009 and 2008

The following table presents our results of operations for the three- and six-month periods ended June 30, 2009 and 2008 as well as the percentage change from year to year.

Units sold

The following table presents our vehicle shipments for the three- and six-month periods ended June 30, 2009 and 2008 as well as the percentage change from year to year.

n/m—not meaningful

* Includes 300 and 721 vehicles produced by GDLS for the three and six months ended June 30, 2008, respectively. This balance excludes the Iraqi Light Armored Vehicles (“ILAV”) for which we act as a subcontractor to primarily provide labor only for a portion of the production of the vehicles. As a result, we have reduced the previously reported units sold for Cougar (all variants) and total units sold by 5 and 27 units for the three and six months ended June 30, 2008, respectively.

The decrease in vehicles sold for the three- and six-month comparative periods is primarily due to the completion of the sole source and competitive contracts awarded to us under the MRAP program during 2008.  Additionally, during the six months ended June 30, 2009, we continued to experience delays in the initial production of the Buffalo A2 route-clearance vehicle.

Net sales

The decrease in net sales from the comparative periods is attributable to a decrease in volume of vehicle deliveries, partially offset by a $2.1 million reduction of a definitization reserve and an increase in sales of spare parts and logistics services, which includes field service representatives, training, modernization efforts, ILAV

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subcontractor revenues and technical publications. The mix of vehicles delivered and spare parts and logistics sales and the percentage change in the comparative periods are set forth in the following table:

n/m—not meaningful

* Excludes revenue from the ILAV for which we act as a subcontractor to primarily provide labor only for a portion of the production of the Cougar (all variants) and related spare parts and logistics revenue. As a result, we have recorded $0.0 million and $0.4 million and we reclassified $0.5 million and $6.1 million from Cougar (all variants) to spare parts and logistics revenue for the three and six months ended June 30, 2009 and June 30, 2008, respectively.

Cost of sales and Gross profit

The gross profit percentage increased by 2.7 and 6.6 percentage points for the three and six months ended June 30, 2009, over the comparable 2008 periods. The increase was primarily due to the absence of the fulfillment of awards pursuant to our MRAP Subcontract activity during 2009.  During the three and six months ended June 30, 2008, we recognized no gross profit on $143.3 million and $339.6 million of vehicles sold that were produced by GDLS. There were no vehicles produced by GDLS under the MRAP Subcontract during the three and six months ended June, 30 2009.  Excluding the MRAP Subcontract activity, the gross profit percentage decreased for the three and six months ended June 30, 2009 due to costs incurred on the M-ATV Cheetah and manufacturing costs associated with fewer vehicles produced, partially offset with a $2.1 million reduction of a definitization reserve.

General and administrative expenses

General and administrative expenses decreased $1.4 million and $5.1 million for the three and six months ended June 30, 2009 from the comparable 2008 periods.  The $5.1 million decrease for the six months ended June 30, 2009 from the comparative 2008 period is primarily due to the $4.9 million impairment charge for certain Roxboro, North Carolina assets and the $1.5 million contribution to the Medical University of South Carolina Foundation for brain trauma research, which both occurred in the first quarter of 2008, and the $2.5 million decrease in legal and other service costs, which occurred in second quarter of 2009.  These decreases were partially offset by $3.2 million of 2006 re-audit costs during the first quarter of 2009 and the $0.7 million impairment for certain custom  machines that both were incurred in the second quarter of 2009.

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Research and development expenses

Research and development expenses increased $1.9 million and $3.6 million in the three and six months ended June 30, 2009 over the comparable periods in 2008 primarily due to an increased level of expenditures on the         M-ATV Cheetah and other prototypes during the three and six months ended June 30, 2009.

Other income (expense), net

Other income decreased in the three and six months ended June 30, 2009, as compared to the 2008 periods, due to lower interest income as a result of decreased interest rates coupled with a $0.3 million and $0.5 million loss on our joint venture with IST, respectively.  See Note 1, Organization and Description of the Business, in the accompanying unaudited condensed consolidated financial statements.

Interest income (expense), net

Interest expense was relatively flat for the three and six months ended June 30, 2009, as compared to the 2008 periods.

Income tax expense

The effective income tax expense rate for the three and six months ended June 30, 2009 was approximately 29% and 34% compared to the effective income tax rate of approximately 37% for each of the comparable 2008 periods.  See Note 6, Income Taxes, in the accompanying unaudited condensed consolidated financial statements.

Net income

Net income for the three and six months ended June 30, 2009 decreased over the comparable 2008 periods primarily due to lower gross profit percentages as a result of a decrease in our revenue (including the exclusion of the vehicle revenues from the MRAP Subcontract in the 2008 periods) and higher operating expense percentages.

Backlog

The following table sets forth the number of vehicles included in our backlog as of June 30, 2009 and 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 customer. We cannot assure you that we will deliver or sell all of the vehicles included in our backlog. See Part I, Item 1A, Risk Factors, included in our Annual Report on Form 10-K for the year ended December 31, 2008.

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*  Refers to Cougar vehicles manufactured under the MRAP Subcontract pursuant to which we and GDLS fulfill the MRAP Competitive Contract.

On July 24, 2009, TACOM awarded us an undefinitized contract modification for the delivery of 48 Buffalo A2 vehicles. The contract has an approximate value of $52.8 million.

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 United States government.

Sources and Uses of Cash

Our primary sources of funding are cash flows from operations. Our funds were used primarily to fund working capital requirements and make capital expenditures. The following chart shows the cash flows provided by or used in operating, investing, and financing activities for the three and six months ended June 30, 2009 and 2008: