**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**







**FORM
      10-K**







**ANNUAL
      REPORT PURSUANT TO SECTION 13 or 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**




**For
      fiscal year ended June 30, 2007**




**Commission
      File Number: 0-14712**







**FOUNTAIN
      POWERBOAT INDUSTRIES, INC.**


**(Exact
      name of registrant as specified in its charter)**







**NEVADA**
            **56-1774895****(State
                or other jurisdiction**
              **of
                incorporation)**
            **(IRS
                Employer**
              **Identification
                No.)**




**Post
      Office Drawer 457, Whichard’s Beach Road, Washington, NC 27889**


**(Address
      of principal executive offices) (Zip Code)**




**(252)
      975-2000**


**Registrant’s
      telephone number, including area code:**







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




**Title
                of each class**
            
            **Name
                of each exchange on which registered:****Common
                Stock, par value $ .01 per share**
            
            **American
                Stock Exchange**







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





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 x No





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 past 12 months (or for such shorter period that the registrant was
      required to file such reports) and (2) has been subject to such filing
      requirement for the past 90 days. x Yes  ̈ No





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. x





Indicate
      by check mark whether the Registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (as defined
      in Rule 12b-2 of the Act):    Large accelerated
      filer  ̈ Accelerated
      filer  ̈ Non-accelerated filer x





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




As
      of
      December 31, 2006 the aggregate market value of the Registrant’s voting common
      equity held by non-affiliates was $9,227,467.




As
      of
      September 27, 2007, the number of outstanding shares of Registrant’s Common
      Stock (excluding shares treated as treasury shares) was 4,829,275.




Portions
      of the Registrant’s definitive proxy statement to be distributed in connection
      with its next Annual Meeting of Shareholders are incorporated by reference
      into
      Part III of this Report.












**Part
      I** ****




**Item 1.
      Business.**




**Background.**




Fountain
      Powerboat Industries, Inc. (the “Company”), through its wholly owned subsidiary,
      Fountain Powerboats, Inc. (the “Subsidiary”), designs, manufactures and sells
      internationally recognized recreational offshore sport boats, sport fishing
      boats and sport cruisers that target a segment of the recreational powerboat
      market where speed, performance, quality and safety are the primary purchase
      criteria. The Company sells its boats and ancillary products through a worldwide
      network of 32 domestic and 24 international dealers.




Fountain
      Powerboats, based upon an innovative, award-winning design, are well branded
      within the boating industry. The Company markets the celebrity of its Chairman,
      Chief Executive Officer and founder, Reginald M. Fountain Jr., an
      internationally recognized designer, engineer and builder of high speed
      powerboats and holder of three world titles and seven national racing
      championships.




**Products.**




Fountain
      continuously incorporates new and improved designs in its boats. The Company
      believes that the best boats come from combining an intuitive management team
      with hardcore experience gained by boat racing in offshore conditions. Each
      boat
      is tested in the Pamlico River, located alongside the factory, before it is
      shipped to its new owner. This testing is unique to Fountain Powerboats, as
      most
      boat manufacturers are not located on or near the water.




Fountain
      maintains that its boats, with their innovative design and unitized
      construction, are among the fastest, smoothest, safest and best-handling boats
      of their kind. The expansive product line of sport cruisers, sport fishing
      and
      sport boats is based upon a deep V-shaped fiberglass hull for speed and fuel
      efficiency that uses less horse power. For superb handling and performance,
      the
      boats are designed with a notched transom and pad keel running surface and
      engineered with an innovative step-bottom design.




The
      Company has twenty different models that fall into three categories — express
      cruisers, sport fishing boats and sport boats. Initially known for its sport
      boats, Fountain Powerboats has evolved into a company with a wide variety of
      boats for the most discriminating boater.




Fountain
      Powerboats has captured market share approaching 50 percent of the high
      performance sport boat market and offers eight different sport boat models
      ranging from the 29’ Fever to the 47’ Lightning. These V-bottom boats carve
      turns at all speeds, even when being propelled at over 100 MPH by twin or triple
      Mercury 525 engines.




Fountain
      Powerboats has become well known for its upscale, high performance and elegant
      Express Cruisers which redefine the term “performance cruiser”. The cruiser
      market had been growing as the populace ages and begins to look for not only
      speed but luxurious amenities for the entire family. Fountain Powerboats, with
      its 38’ and 48’ Express Cruisers is poised with the right products to capitalize
      on the niche of this market that desires high performance.




A
      long
      established water sport is continuing to grow in popularity – tournament
      fishing. With the advent of popular sport fishing television shows and two
      quality sport fishing competition programs, the American Striper Association
      Tournaments and the Southern Kingfish Association Tournaments, the Company
      has
      significantly expanded its line of sport fishing boats, building a competitive
      edge in this fast growing market.




Demand
      for Fountain sport fish boats is on the increase. These boats are designed
      for
      the fishing aficionado who demands speed and superb amenities for his family
      and
      friends. Entering the tournament fishing market in the late 1980’s, and now
      considered “the boat to beat”, the Company’s fish boat product line boasts nine
      different models ranging from the 23’ Center Console (“CC”) to the 38’ Sport
      Fish Cruiser outboard.




Fountain
      participates in Poker Run events, which is an increasingly popular sporting
      event that involves large numbers of recreational boat owners. These events
      are
      sponsored by local organizations, generally including one of the Company’s
      dealers, and present a great opportunity to showcase its boats to an affluent
      audience.




During
      Fiscal 2007, the Company introduced a redesigned 35’ sport boat model and a new
      38’ outboard cruiser fish boat model at the Company’s annual dealer meeting in
      October 2006 and delivered a redesigned 38’ sport boat cabin in late
      spring.





The
      35’ sport boat was totally redesigned, including a staggered engine
      configuration that significantly improved performance to speeds in excess of
      100
      MPH. The 35’ and 38’ sport boats were outfitted with a new cabin layout that
      will be standard in all of the Company’s sport boats. The new cabin will be
      installed in the 42’ and 47’ sport boats during Fiscal 2008. The 38’ sport boat
      captured the coveted Powerboat Magazine “Offshore Boat of the Year” award in
      Fiscal 2007.




2




A
      new 38’
sport fish cruiser outboard boat was introduced at the dealer meeting in
      October, 2006. It is a versatile boat that can be used as a fish boat or for
      family cruising, with triple 275HP Verado engines it will run at speeds up
      to 64
      MPH and cruises at 40MPH at a fuel efficient 1.4 MPG.





The
      33’
sport fish cruiser outboard hull will be redesigned in Fiscal 2008 to provide
      that model an even smoother and more stable ride in all types of water
      conditions, at all speeds, and with twin outboard Mercury Verado engines to
      match the performance of the 38’ sport fish cruiser outboard.





A
      new 32’
sport boat model will be launched during Fiscal 2008, complete with the
      redesigned Lightning series interior and Mercury 425HP stern drives engines.
      It
      will perform at speeds approaching 90 MPH.





In
      Fiscal
      2008 the 48’ express cruiser will be available with twin Cummins diesel engines.
      This option will reduce the overall cost of the boat and operating costs while
      maintaining high performance operating speeds.




The
      chart
      below shows the number of boats completed and shipped during the last three
      fiscal years by product line.




**Fiscal**
              **2007**
            
            **Fiscal**
              **2006**
            
            **Fiscal**
              **2005**Sport
                boats
            
            
            127
            
            
            167
            
            
            206Express
                cruisers
            
            
            31
            
            
            42
            
            
            41Sport
                fishing boats
            
            
            168
            
            
            190
            
            
            154Other
            
            
            3
            
            
            1
            
            
            4Total
            
            
            329
            
            
            400
            
            
            405




As
      of
      June 30, 2007 Fountain Powerboats had a backlog of firm orders for 76
      boats, totaling sales of $16.8 million, all of which are expected to be
      completed during Fiscal 2008. At June 30, 2006, the sales backlog was 200
      boats, totaling $43 million.




**Research
      and Development.**





Staying
      ahead of its competition, Fountain’s employees conduct ongoing research and
      development pertaining to the design of its boats’ hulls and decks and its small
      parts production. The Company invested approximately $1 million on the
      development of new plugs and molds during Fiscal 2007. Over the past three
      fiscal years, the investments into product development were as follows:




**Fiscal**
              **2007**
            
            **Fiscal**
              **2006**
            
            **Fiscal**
              **2005**Design,
                Research & Development
            
            $
            757,186
            
            $
            780,520
            
            $
            786,129Construction
                of New Plugs and Molds
            
            
            1,034,366
            
            
            1,092,994
            
            
            1,636,621




For
      fiscal 2008, design, research and development planned expenses are estimated
      to
      be $792,000, and plug and mold construction expenditures are estimated to be
      $900,000. Primarily, these expenditures will go to upgrading the Company’s line
      of sport boats in an effort to maintain its market share and enhancing its
      line
      of sport fish cruisers to continue to expand its presence in that profitable
      and
      more stable market.




**Manufacturing.**





Manufacturing
      capacity of the facility can accommodate 40 to 45 boats in various stages of
      construction at any one time. Construction time is approximately three to eight
      weeks, dependent on the product mix.




As
      a
      result of manufacturing productivity improvements and the restructuring of
      the
      production work force to be compatible with our reduced production rate our
      total headcount was reduced by 120 employees, primarily from attrition, during
      Fiscal 2007. The Company currently has the capacity to manufacture approximately
      350 sport and fish boats, and 60 cruisers per year of a comparable product
      mix
      as was manufactured in fiscal 2007.




The
      manufacturing process is labor intensive and requires seasoned craftsmen. The
      process for manufacturing the hull and deck of a Fountain Powerboat is done
      by
      hand. Vinylester resins and high quality stitched, bi-directional and
      quad-directional fiberglass is hand laid over a foam core in molds designed
      and
      constructed by the Company’s engineers and tooling department. This artisan
      method creates a composite structure with strong outer and inner skins and
      a
      thicker, lighter core in between, resulting in superior strength and a finer
      appearance, compared to mechanically blown, chopped fiberglass used by other
      manufacturers.




3




The
      resin
      used to bind the composite structure is vinylester, which is stronger, better
      bonding, blister resistent and more flexible than the polyester resins used
      by
      most fiberglass boat manufacturers. Decks are bonded to the hull using a
      combination of bonding agents, rivets, screws and fiberglass to achieve a strong
      unitized construction. This manufacturing process was developed and improved
      upon as a result of the Company’s many years of racing experience. When a
      Fountain Powerboat is traveling at 177 MPH through the water, this manufacturing
      process provides the speed and safety the Company’s boats are known for.




As
      one of
      the most highly integrated manufacturers in the marine industry, Fountain
      manufactures many metal, plexiglass, plastic, and small parts (such as fuel
      tanks, seat frames, instrument panels, bow rails, brackets, T-tops and
      windscreens) to assure that its rigid quality standards are met and, if a design
      change is needed to improve a boat, it can be made immediately.




The
      Company also manufactures all of its upholstery to its own custom specifications
      and benefits from receiving these parts just in time for assembly. All other
      component parts and materials used in the manufacture of the Company’s boats are
      readily available from a variety of suppliers at comparable prices exclusive
      of
      discounts. The Company purchases certain supplies and materials from a limited
      number of suppliers in order to obtain the benefit of volume discounts.




Recreational
      powerboats must be certified by the manufacturer to meet U.S. Coast Guard
      specifications. Their safety is subject to federal regulation under the Boat
      Safety Act of 1971, as amended, pursuant to which boat manufacturers may be
      required to recall products for replacement of parts or components that have
      demonstrated defects affecting safety. Boats manufactured for sale in the
      European Community must meet CE Certification Standards.




**Product
      Warranty.**




The
      Company warrants the boat hull and deck structure against defects in material
      and workmanship for a period of six years. Warranty costs, if any, on other
      components of the boats are generally absorbed by the original component
      manufacturer. Warranty costs can vary depending on the size and number of
      components in the boats sold. The Company focuses on high quality manufacturing
      programs and processes, including actively monitoring the quality of our
      component suppliers and managing the dealer and customer warranty experience
      and
      reimbursements. Our estimated warranty obligation is based upon the warranty
      terms, the enforcement of those terms over time, defects, repair costs, and
      the
      volume and mix of boats sold. The estimate of warranty costs is regularly
      analyzed and is adjusted based on several factors including the actual claims
      that occur by model and model year. The following is a table of the Company
      warranty expense for fiscal years 2007 and 2006:





**Fiscal**
              **2007**
            
            **Fiscal**
              **2006**Net
                Sales
            
            $
            68,829,987
            
            $
            79,226,224Warranty
                Expense
            
            $
            1,347,511
            
            $
            1,346,521Warranty
                Expense as a % of Sales
            
            
            2.0
            %
            
            1.7
            %





**Sales
      and Marketing.**




The
      Company sells its products through a worldwide network of 32 domestic dealers
      and 24 international dealers. While most of these dealers are not exclusive,
      the
      Company uses discretion in locating new dealers in an effort to protect the
      interests of its existing dealer network. To attract and keep the highest
      producing dealers, Fountain Powerboats offers a sales training program through
      its Fountain University.




The
      Fountain University program trains the Company’s dealers’ salespersons on: How
      to Apply Features and Benefits, Selling in Today’s Environment, How to Overcome
      Objections and Close the Sale, and How to Properly Deliver a Boat. The program
      also includes in-water, high performance boat training for the salespersons.





4




The
      following is a table of sales by geographic area for the last three fiscal
      years.




**Fiscal**
              **2007**
            
            **Fiscal**
              **2006**
            
            **Fiscal**
              **2005**United
                States
            
            $
            60,011,000
            
            $
            70,934,584
            
            $
            65,790,034Canada,
                Mexico, Central/South America
            
            
            3,689,071
            
            
            1,849,529
            
            
            2,474,619Europe
            
            
            4,059,120
            
            
            2,722,920
            
            
            1,417,819Middle
                East
            
            
            455,687
            
            
            2,753,281
            
            
            1,088,838Africa
            
            
            —
            
            
            965,910
            
            
            410,758Asia
            
            
            300,691
            
            
            —
            
            
            —Australia
            
            
            314,418
            
            
            —
            
            
            —Total
            
            $
            68,829,987
            
            $
            79,226,224
            
            $
            71,182,068




Fountain
      Powerboats targets a significant portion of revenue for its branding and
      advertising programs in the U.S. and internationally. The Company continues
      to
      expand its dealer network into Europe, South America and the Middle East. The
      Company’s International sales were $8,818,987 for fiscal 2007 and $8,291,640 for
      fiscal 2006. The Company requires payment in full or an irrevocable letter
      of
      credit from a domestic bank before it will ship a boat out of the U.S.




In
      Fiscal
      2007, one dealer accounted for 13.6 percent of sales, one accounted for 9
      percent of sales and four each accounted for 5.0 to 5.5 percent of sales. In
      fiscal 2006, one dealer accounted for 10.9 percent of sales, one accounted
      for
      8.5 percent of sales and four each accounted for 5.8 to 6.3 percent of sales.
      In
      fiscal 2005, one dealer accounted for 10.5 percent of sales, one accounted
      for 6
      percent of sales and three each accounted for 5.4 percent of sales.




While
      the
      loss of any particular dealer could have an adverse affect on sales, the Company
      believes it could find other dealers within the same geographical area to
      replace a lost dealer. Sales continue to grow through existing dealers and
      the
      Company continues to add new dealers with the goal of reducing the concentration
      risk in its distribution channel.




The
      Company has a strategically located team of sales representatives supporting
      existing dealer locations and developing new dealers in targeted locations.
      The
      sales team, headed up by the President, is responsible for developing a dealer
      organization for sport boats, sport fishing boats and express cruisers. The
      product line is extremely diverse and requires specialized sales training and
      service and support, so the Company’s strategy is to develop individual dealers
      for each of its product lines.




Fountain
      Powerboats does not manufacture to inventory, as its boats are pre-sold to
      dealers before entering the production line. The Company can ship to dealers
      on
      a cash-on-delivery basis or through floor plan financing programs in which
      the
      Company participates on behalf of its dealers. For Fiscal years 2007, 2006
      and
      2005, the Company has paid the interest on the floor plan, for a certain period
      of time, as a sales promotion program.




The
      dealer’s responsibility is to establish a line of credit with one or more
      third-party lenders for the purchase of its showroom inventory. When a dealer
      purchases a boat utilizing the floor plan arrangement, it draws against its
      line
      of credit and the lender pays the invoice for the boat directly to Fountain
      Powerboats, typically within five business days. When the boat is sold to the
      retail customer, the dealer repays the lender, restoring his credit line. The
      Company, along with most major boat manufacturers, will repurchase its boats
      from a lender who has repossessed them from a dealer, if the lender returns
      the
      boats to Fountain Powerboats in a new or like-new condition. The Company has
      no
      material obligation to repurchase boats from its dealers.




The
      marketing of boats to retail customers is the responsibility of the dealer,
      whose efforts are complemented by Fountain Powerboats’ advertising in boating
      magazines, participating in boat shows and its Sales Service Bureau responding
      to and tracking leads from advertisements, boat shows and internet inquiries.
      To
      assist in brand recognition, the Company has developed racing programs to
      participate in the major classes of offshore powerboat races in which many
      of
      Fountain’s single and twin engine racing boats continue to hold their respective
      world speed records. Fountain Powerboats founder and CEO Reggie Fountain, who
      has won numerous races in both factory and customer owned boats and has set
      numerous world speed records in both, in August 2004 set a V-bottom World Speed
      Record with a phenomenal 171.883 MPH on a Fountain 42’ Lightning.




To
      enhance brand recognition, Fountain Powerboats sponsors outstanding sport
      fishermen who own Fountain boats and fish in tournaments organized by the
      Southern Kingfish Association (SKA) and the American Striper Association (ASA).
      The Company’s fishing teams of the SKA and ASA are captained by world class
      anglers who can afford to purchase any boat, but choose to run a Fountain
      Powerboat. The Company supports the ASA tournaments held throughout the
      Northeast in areas ranging from Virginia to Maine, and the SKA tournaments
      held
      throughout the South and Southwest, from North Carolina to Texas. The Fountain
      team’s winning records have given its sport fishing boats favorable exposure to
      serious sport fishermen looking for superior performance.




5




**Competition.**




Competition
      within the powerboat manufacturing industry is intense. The high performance
      sports, fish and cruiser boat markets, which comprises only a small segment
      of
      all boats manufactured, are significant markets in terms of total dollars spent.
      The manufacturers who compete with the Company in these market segments include:




Sport
      Boats


·
            Formula,
                a Division of Thunderbird Products Corporation


·
            Baja
                Boats, a Division of Brunswick Corporation


·
            Cigarette
                Racing Team, Inc.


·
            Donzi,
                American Marine Holdings


·
            Outer
                Limits


·
            Velocity


·
            Hustler


Fish
      Boats


·
            Contender
                Boats


·
            Donzi,
                American Marine Holdings


·
            Wellcraft


·
            Hydrasports


·
            Grady
                White


·
            Triton


·
            Jupiter


·
            Yellowfin


·
            Boston
                Whaler, a Division of Brunswick
                Corporation


Cruisers


·
            Formula,
                a Division of Thunderbird Products Corporation


·
            Donzi,
                American Marine Holdings


·
            SeaRay,
                a Division of Brunswick Corporation


·
            Sunseeker




The
      Company believes that in its market segments buyers select boats based on speed,
      performance, quality, image and safety, with style and price being secondary
      considerations.




Market
      demographics and industry experts indicate the fish boat market offers the
      best
      growth potential within the boating industry. Fountain Powerboats continues
      to
      expand its family of fish boats to meet the rising demand in this significant
      high-growth market. The Company introduced a new model in 2007 and plans to
      upgrade one of its existing models in 2008.




The
      Company had experienced strong demand for its higher priced cruisers prior
      to
      Fiscal 2007. This is due in part to a populace that not only wants speed but
      requires the additional space to bring along the family. The Company believes
      that a large number of current product owners, many of whom have purchased
      multiple and increasingly larger boats from the Company, provide a target market
      for the fast-growing cruiser segment. Sales of this product line were weak
      during the first three quarters of 2007 but made a revival in the fourth
      quarter.




**Employees.**




As
      of
      June 30, 2007, the Company had 328 employees, of which eight were executive
      and management personnel. Twenty-two were engaged primarily in administrative
      positions, such as accounting, human resources, marketing and sales. None of
      the
      Company’s employees are party to a collective bargaining agreement. The Company
      considers its employee relations to be excellent. The Company is an equal
      opportunity employer.





**Item 1A.
      Risk Factors.**





**General
      economic conditions in the United States may adversely affect the Company’s
      results.** The
      Company’s revenues may be affected by U. S. and international market conditions
      and consumer confidence. Any substantial deterioration in general economic
      conditions which diminishes consumer confidence in any of the regions where
      the
      Company competes could reduce the Company’s sales and adversely affect its
      business and financial results.




6




**The
      Company’s profitability may suffer as a result of competitive product offerings
      and pricing pressures** .
      The
      introduction of lower-priced competitive products by other companies can hurt
      the Company’s competitive position. Such competitive pricing may limit the
      Company’s ability to increase prices in response to raw material and other cost
      increases.





**The
      Company’s financial results may be adversely affected if the Company is unable
      to maintain effective distribution** .
      The
      Company’s products are sold through dealers and the financial health of these
      dealers is critical to the Company’s continued success. The Company’s results
      can be negatively affected if dealers experience higher operating costs that
      can
      result from rising interest rates, higher rents, labor costs and taxes, and
      compliance with regulations.





**Inventory
      adjustments by the Company’s major dealers adversely affects the Company’s
      operating margins** .
      If the
      Company’s dealers adjust their inventories downward in response to weakness in
      retail demand, wholesale demand for the Company’s product diminishes. In turn,
      the Company must reduce production, which results in lower rates of absorption
      of fixed costs and thus lower margins.





**Adverse
      weather conditions can have a negative impact on revenues** .
      Weather
      conditions can have a significant impact on the Company’s operating and
      financial results. Sales of the Company’s products are generally stronger just
      before and during spring and summer, and favorable weather during these months
      generally has a positive effect on consumer demand. Conversely, unseasonably
      cool weather, excessive rainfall or drought conditions during these periods
      can
      reduce demand. Hurricanes and other storms can result in the disruption of
      the
      Company’s manufacturing operations and its distribution channel.





**Higher
      energy costs can adversely affect the Company’s results and can hurt demand for
      the Company’s products** .
      Higher
      energy costs increase the Company’s operating costs at its manufacturing
      facility and the cost of shipping its products to dealers. In addition, the
      Company’s products are powered by gasoline and diesel engines and any increase
      in the price of petroleum-based fuel, or the imposition of taxes or an
      interruption of supply, could reduce the demand for the Company’s
      products.





**Higher
      interest rates can reduce demand** .
      Purchases of the Company’s products are often financed. Rising interest rates
      can have an adverse effect on dealers’ and consumers’ ability to finance boat
      purchases.





**Disruption
      of deliveries from the Company’s single-source suppliers can adversely affect
      production and revenues** .
      The
      Company’s single-source supply and just-in-time inventory strategies of some
      critical boat components, including high performance marine engines, could
      adversely affect production if a single-source supplier is unable for any reason
      to meet the Company’s requirements on a timely basis.





**Item 1B.
      Unresolved Staff Comments.**





Not
      applicable.




**Item 2.
      Properties.**




The
      Company’s executive offices and manufacturing facilities are located on 65 acres
      along the Pamlico River in Beaufort County, North Carolina. All of the land,
      buildings and improvements are owned by the Company and were held as collateral
      on notes and mortgages payable outstanding at June 30, 2007. (See Note 5 to
      the Company’s consolidated financial statements contained in Item 8 of this
      Report). The operating facility contains buildings totaling 237,360 square
      feet
      located on fifteen acres. The buildings consist of the following:




**Approximate**
              **Square Footage**
            
            **Principal
                Use**Building 1
            
            14,020
            
            Executive
                offices, shipping, receiving, and paint shops.Building 2
            
            6,400
            
            Final
                prep.Building 3
            
            106,070
            
            Lamination,
                mating, small parts, upholstery, assembly, inventory,
                cafeteria.Building 4
            
            14,270
            
            Wood
                shop, consoles rigging.Building 5
            
            24,080
            
            Metal
                fabrication.Building 6
            
            48,420
            
            Tooling,
                service and warranty, mold maintenance, sportswear.Building 7
            
            11,500
            
            Powder
                coating, storage, maintenance shop.Building 8
            
            12,600
            
            Cruiser
                manufacturing.Total
            
            237,360




7




Over
      the
      last several years there have been significant expenditures for property, plant
      and equipment, which include plant additions, a travel lift bay, a boat ramp,
      and docking facilities along a 600-foot canal leading to the Pamlico River.
      In
      addition, the Company has approximately 200,000 square feet of concrete paving
      surrounding the buildings and providing guest or employee parking. The present
      plant site can accommodate an addition of up to 300,000 square feet of
      manufacturing space.




**Item 3.
      Legal Proceedings.**




As
      of
      June 30, 2007, the Company’s only operating subsidiary was a defendant in
      lawsuits arising in the ordinary course of its business, including five alleged
      breach of warranty or product liability suits. In the Company’s opinion these
      lawsuits are without merit and, therefore, the Company intends to vigorously
      defend its interest in such suits. The Company carries sufficient liability
      and
      product liability insurance to cover attorney’s fees and any losses that may
      occur from a product liability or breach of contract suit, over and above
      applicable insurance deductibles. The management of the Company believes that
      none of such current proceedings will have a material adverse effect.




The
      Company’s subsidiary was notified by the United States Environmental Protection
      Agency (“EPA”) that it had been identified as a potentially responsible party
      (“PRP”) in the remediation of contamination at a clean up site. The Group
      administrator estimated the Company’s share of future remediation cost to be
      $28,105. The Company is eligible for a *de
      Minimus* Settlement Agreement, which is expected to be finalized in 2007.




**Item 4.
      Submission of Matters to a Vote of Security Holders.**




None
      applicable




**Part
      II** ****




**Item 5.
      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.**




The
      Company’s common stock, $.01 par value, trades on the American Stock Exchange
      (under the symbol “FPB”). The following table lists the high and low closing
      prices for the Company’s common stock as reported on the American Stock Exchange
      for each calendar quarter during its fiscal years ended June 30, 2006 and
      2007.




**Quarter
                Ending**
            
            **High**
            
            **Low**September
                2005
            
            
            5.12
            
            
            3.70December
                2005
            
            
            6.03
            
            
            3.45March
                2006
            
            
            8.62
            
            
            5.50June
                2006
            
            
            6.70
            
            
            4.05September
                2006
            
            
            4.55
            
            
            4.00December
                2006
            
            
            4.99
            
            
            3.63March
                2007
            
            
            4.38
            
            
            3.75June
                2007
            
            
            3.75
            
            
            2.51




The
      Company has not declared or paid any cash dividends on its common stock since
      it
      first began operations. In the future, any declaration and payment of cash
      dividends will be subject to the Board of Directors’ evaluation of the Company’s
      operating results, financial condition, future growth plans, general business
      and economic conditions, and other relevant considerations. Management of the
      Company expects that, for the foreseeable future, profits generated by the
      Company will be retained as additional capital to support the Company’s
      operations and that the Company will not pay any cash dividends.




On
      June 30, 2007 there were 208 holders of record for the Company’s common
      stock.




During
      Fiscal 2007, the Company sold 10,000 shares of its common stock for a
      consideration of $16,000 to an employee of the Company and its subsidiary upon
      their exercise of stock options and without registration in reliance upon the
      exemption from registration under Section 4(2) of the Securities Act of 1933.





**Performance
      Graph.** The
      following line graphs compare the cumulative total shareholder return (the
      “CTSR”) on the Company’s common stock during the previous five fiscal years with
      the CTSR over the same measurement period of the S&P 500 Index and the
      S&P Leisure Time (Products) Index. Each line graph assumes that $100 was
      invested on June 30, 2000, and that any dividends were reinvested in additional
      shares. We have not paid dividends on the Company’s common stock during the
      previous five fiscal years, so no reinvestment is included in the calculation
      of
      the CTSR on the Company’s common stock.





8




***The
      following information is being furnished for purposes of Rule 14a-3. It is
      not
      deemed to be filed with***


***the
      Securities and Exchange Commission or to be incorporated by reference into
      any
      filing under***


***the
      Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
      extent***


***the
      Company specifically incorporates it by reference into such a
      filing***









**Item
      6. Selected Financial Data.**




**Fiscal
      Years 2003 through 2007**


**Years
      ended June 30**




**Operations
      Statement Data**




**2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**Net
                Sales
            
            $
            68,829,987
            
            $
            79,226,224
            
            $
            71,182,069
            
            $
            59,296,964
            
            $
            52,557,084Net
                Income (loss)
            
            
            (5,046,286
            )
            
            2,404,912
            
            
            756,212
            
            
            609,087
            
            
            879,996Basic
                earnings (loss) per share
            
            
            (1.05
            )
            
            .50
            
            
            .16
            
            
            .13
            
            
            .19Weighted
                average shares outstanding
            
            
            4,821,987
            
            
            4,819,275
            
            
            4,815,188
            
            
            4,761,460
            
            
            4,744,457Diluted
                earnings (loss) per share
            
            
            (1.05
            )
            
            .49
            
            
            .15
            
            
            .13
            
            
            .18Diluted
                weighted average shares outstanding
            
            
            4,821,987
            
            
            4,903,949
            
            
            4,890,124
            
            
            4,825,179
            
            
            4,818,806




**Balance
        Sheet Data**


**2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**Current
                assets
            
            $
            13,381,819
            
            $
            17,134,786
            
            $
            13,023,588
            
            $
            12,460,218
            
            $
            7,648,996Total
                assets
            
            
            33,416,945
            
            
            37,860,360
            
            
            33,034,252
            
            
            30,621,143
            
            
            25,929,594Current
                liabilities
            
            
            13,397,212
            
            
            13,232,828
            
            
            11,062,016
            
            
            6,782,584
            
            
            11,646,433Long
                term debt
            
            
            15,969,407
            
            
            15,228,700
            
            
            15,433,446
            
            
            17,869,178
            
            
            9,010,527Stockholder’s
                equity*(1)*
            
            
            3,964,602
            
            
            9,093,699
            
            
            6,538,790
            
            
            5,721,726
            
            
            4,968,





*(1)*  *The
      Company has not paid any cash dividends since its inception*




9




**Item
      7. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations.**




Certain
      statements in Management’s Discussion and Analysis are forward-looking as
      defined in the Private Securities Litigation Reform Act of 1995. These
      statements are based on current expectations that are subject to risks and
      uncertainties. Actual results may differ materially from expectations as of
      the
      date of this filing because of factors discussed in **Item
      1A. Risk Factors** in this
      Annual Report.





The
      Company’s criteria for recording a C.O.D. sale, or payments prior to shipment
      sale or sale financed through third-party floor plan arrangements, are that
      the
      boat has been completed and that title has passed to the dealer or to the
      Government, and that there is no direct commitment to repurchase the boat or
      to
      pay floor plan interest beyond the sales program terms. As described more fully
      below at “Business Environment”, most of the Company’s shipments to dealers were
      financed through floor plan arrangements with third-party lenders pursuant
      to
      which the Company is subject, for a limited time, to repurchase boats
      repossessed by the third-party lenders if the dealer defaults under his credit
      arrangement. The Company has no repurchase liability for the balance of
      shipments. This is the method of sales recognition believed to be in use by
      most
      boat manufacturers.




At
      June 30, 2007, 2006, and 2005, there were no commitments to dealers to pay
      the interest on floor plan financed boats in excess of the time period specified
      in the Company’s written sales program and there were no direct repurchase
      agreements. There were no deferred sales or cost of sales estimated at
      June 30, 2007, 2006, and 2005.




The
      Company has a contingent liability to repurchase boats where it participates
      in
      the floor plan financing made available to its dealers by third-party finance
      companies, aggregating to $24,375,708  and
      $35,212,412  at
      June 30, 2007 and 2006, respectively. Sales to participating dealers are
      approved by the respective finance companies. If a participating dealer does
      not
      satisfy its obligation to the lender and the boat is subsequently repossessed
      by
      the lender, then the Company may be required to repurchase the boat.




**Business
      Environment.**




Recreational
      boating is a discretionary expenditure and many purchasing decisions are
      influenced by interest rates, fuel prices, insurance rates, weather, general
      economic factors, and other socioeconomic and environmental
      factors.





The
      overall marine industry began to soften in 2005 for small fiberglass (30 feet
      and less) and the downturn expanded into the larger fiberglass boat segment
      in
      2006. Demand for sport fishing boats and cruisers weakened in 2007. Attendance
      at major boat shows, e.g. Fort Lauderdale, New York, Chicago, Miami, in late
      2006 and early 2007 were lower than the prior year.





Generally,
      the marine industry reported dealer inventories were higher at the end of the
      2006 retail season as sales for the season had fallen short of expectations.
      Market analysts were reporting consumer confidence being down and a “tightening”
of consumer credit. Dealers kept their orders for inventory modest going into
      the off season and asked boat builders for more promotions and better financing.
      The small boat segment sales leveled out somewhat for 2007 after the decline
      through 2006 and 25-50 foot fiberglass boats sales were weak in 2007 with the
      upper end of the cruiser market being the softest of all boat segments for
      2007,
      reported industry analysts.





**Overview**





The
      Company entered Fiscal 2007 with approximately $43 million backlog of orders;
      however as orders were reconfirmed with dealers for production some dealers
      did
      not have available floor plan credit and some dealers declined to reconfirm
      orders as they were cautious about increasing their inventory during the off
      season. The Company’s sales for the second and third quarters of Fiscal 2007 in
      total were 20 percent lower than a total of the comparable quarters of Fiscal
      2006.





Overall
      attendance of the 2007 season boat shows was lower than the prior year. The
      Company increased its participation with its dealers at regional and national
      boat shows with much success. At the Miami International Boat Show in February
      2007 the Company recorded approximately $20 million in orders for new boats
      and
      boats from dealers’ inventory, the highest in the history of the
      Company.





During
      Fiscal 2007 the Company applied “lean manufacturing” principles and methods to
      its manufacturing processes, utilizing the Toyota Production System (TPS) as
      a
      model to improve production labor efficiency. Total production headcount was
      reduced by 27 percent as a result of improved productivity and reorganizing
      the
      work force for alignment with reduced production levels.




10




The
      Company implemented cost and expense reduction programs in Fiscal 2007 that
      are
      expected to reduce overhead costs by $2.5 million to $3 million annually. These
      programs, described below, had a positive effect on the results in the fourth
      quarter of Fiscal 2007 and will continue to do so in Fiscal 2008.


·
            Scaled
                back R&D and Tooling Department and
                projects


·
            Reduced
                indirect labor in manufacturing


·
            Reduced
                administrative salary expenses


·
            Reduced
                insurance costs


·
            Reduced
                administrative expenses


·
            Scaled
                back the offshore racing promotional program and related
                expenses




The
      Company’s revenue was $68,829,987 for Fiscal 2007, down 13 percent from revenue
      of $79,226,224 for Fiscal 2006. Revenue for the fish boat product line remained
      flat while the sport boat product line declined by 20 percent and the cruiser
      product line declined by 40 percent.





Revenue
      for the fourth quarter of Fiscal 2007, ended June 30, 2007, was $19,907,660,
      as
      compared to $23,332,063 for the fourth quarter of Fiscal 2006, a decrease of
      14.7 percent. Operating profit for the fourth quarter was $568,004, as compared
      to $183,300 operating profit for the fourth quarter of Fiscal 2006. The increase
      in profit was primarily attributable to an adjustment made to net sales to
      remedy the over accrual of a newly established year end dealer incentive award.
      This new dealer incentive award was over accrued because the rate of accrual,
      established at the beginning of the year, was based upon projected annual dealer
      sales, the actual volume of which was not known until the fourth quarter of
      Fiscal 2007.




Five
      boats were repurchased in Fiscal 2007, from finance companies under contingent
      repurchase obligations for a dealer that failed to meet its obligations to
      those
      finance companies, for a total repurchase amount of $809,347. All five boats
      were re-sold to other dealers with a total reduction in profit of $51,394.
      No
      boats were repurchased in Fiscal 2006 or Fiscal 2005 in connection with floor
      plan arrangements. At June 30, 2007, the Company had recorded a $64,124
      reserve for losses which may be reasonably expected to be incurred on boat
      repurchases in future years. At June 30, 2006 the reserve was $15,459 and
      at June 30, 2005 the reserve was $75,000.




**Outlook**





Analysts
      are forecasting that boat sales will continue to be down through the first
      half
      of calendar 2008, and at this point they are not forecasting a turn around
      for
      the 2008 season.





The
      Company’s fiscal plan for 2008 is based on the same revenue level as 2007,
      approximately $68 million. Upgraded and new boat models will be introduced
      in
      all three product lines to boost sales. The Company’s Sales and Marketing
      personnel will again take a very active role with the dealers at boat shows
      and
      promotional events and increase participation in the retail sales cycle. The
      Company has established a subsidiary (see Note 14) to sell Fountain boats at
      retail in a territory that can be serviced from the Company’s location and to
      provide retails sales support and training for its dealers.





Further
      cost reduction programs are underway that will have positive effect on results
      for Fiscal 2008:


·
            Reduction
                of advertising expenses


·
            Reduction
                of sales promotional expenses


·
            Reduction
                of offshore racing promotion
                expenses


·
            Reduction
                in manufacturing operating costs





**Results
      of Operations.**





Net
      sales
      for Fiscal 2007 were $68,829,987, down 13 percent as compared to net sales
      of
      $79,226,224 for Fiscal 2006. The decrease in net sales is a result of the
      general decline in the marine industry that affected the segments of the market
      in which the Company’s boats are sold. Net sales of the Express Cruiser product
      line also suffered due to issues with the engines which were installed early
      during Fiscal 2007. The Company has since migrated to installing engines from
      a
      different manufacturer in our Express Cruisers.




11





Net
      Sales
      by product line for the Fiscal years of 2007, 2006 and 2005 are:




**Fiscal 2007**
              **Net Sales**
            
            **% of**
              **Sales**
            
            **Fiscal 2006**
              **Net Sales**
            
            **% of**
              **Sales**
            
            **Fiscal 2005**
              **Net Sales**
            
            **% of**
              **Sales**Product
                LineSport
                boats
            
            $
            28,055,276
            
            
            40%
            
            $
            31,799,204
            
            
            40%
            
            $
            33,819,857
            
            
            47%Express
                cruisers
            
            
            9,399,064
            
            
            14%
            
            
            15,760,240
            
            
            20%
            
            
            13,395,691
            
            
            19%Sport
                fishing boats
            
            
            29,629,864
            
            
            43%
            
            
            29,194,785
            
            
            37%
            
            
            21,123,893
            
            
            30%Service,
                parts, sportswear
            
            
            1,745,783
            
            
            3%
            
            
            2,471,995
            
            
            3%
            
            
            2,842,627
            
            
            4%Net
                sales total
            
            $
            68,829,987
            
            
            
            
            $
            79,226,224
            
            
            
            
            $
            71,182,068




Gross
      profit on sales for Fiscal 2007 was $9,108,088, 13.2 percent of net sales,
      as
      compared to $13,073,800, 16.5% of net sales, for Fiscal 2006. Gross profit
      for
      Fiscal 2005 was $10,910,563, 15.3% of net sales. The decrease of 3.3 percentage
      points from 2006 to 2007 was primarily attributable to production inefficiencies
      due to lower production volumes, reduced fixed cost absorption from production
      cuts and promotional program pricing in the first half of the year. The increase
      in gross margin from 2005 to 2006 was the result of improvements in productivity
      and labor efficiency.




Operating
      loss was ($2,745,878) for Fiscal 2007, as compared to a profit of $2,275,355
      in
      2006 and $1,766,347 in Fiscal 2005. Operating profit for Fiscal 2007 was
      affected by the circumstances outlined above in the gross margin discussion
      of
      this report and increased selling expenses, detailed below.




Fiscal
      2007 net loss for the Company was ($5,046,286) or ($1.05) per share, of which
      ($1,283,728) or ($.27) per share was a tax adjustment. This compares to a net
      income of $2,404,912 or $.50 per share for Fiscal 2006 and net income of
      $756,212 or $.16 per share for Fiscal 2005. The tax adjustment for Fiscal 2007
      arose from the establishment of a valuation allowance to completely offset
      the
      Company’s Deferred Tax Assets (see Note 7 to the consolidated financial
      statements, appearing on page 32 of this report).




Depreciation
      expense was $2,313,807 for Fiscal 2007, $2,020,860 for Fiscal 2006, and
      $1,840,168 for Fiscal 2005.





Overall
      selling and general and administrative expense for Fiscal 2007 was $11,853,966,
      a $1,055,520 increase from $10,798,445 in Fiscal 2006.




Selling
      expenses were $8,040,083 for Fiscal 2007, $6,765,871 for Fiscal 2006 and
      $5,726,283 for Fiscal 2005. The increase in selling expense was primarily from
      an increase in advertising expenses, including an expanded international
      advertising program, increased salaries and commissions and increased expenses
      for the Company’s support of offshore racing and fishing tournament programs.




Major
      selling expenses for the past three fiscal years were as follows:




**2007**
            
            **2006**
            
            **2005**Fishing
            
            $
            548,693
            
            $
            444,328
            
            $
            201,857Racing
            
            
            1,776,198
            
            
            1,474,270
            
            
            1,011,829Advertising
            
            
            2,013,740
            
            
            1,412,435
            
            
            1,264,368Salaries
                & commissions
            
            
            1,345,709
            
            
            1,098,662
            
            
            1,043,363Boat
                shows
            
            
            691,633
            
            
            526,381
            
            
            563,810Dealer
                support
            
            
            456,802
            
            
            550,138
            
            
            294,092Other
                selling expenses
            
            
            1,207,308
            
            
            1,259,657
            
            
            1,346,964Total
            
            $
            8,040,083
            
            $
            6,765,871
            
            $
            5,726,283




General
      and administrative expenses include the executive, finance, human resources,
      information technology, legal and administrative operating expenses of the
      Company. These expenses were $3,813,883 for Fiscal 2007, $4,032,574 for Fiscal
      2006, and $3,417,933 for Fiscal 2005. The decrease in administrative expenses
      for 2007 was primarily attributable to reduced legal expenses. Increased
      administrative expenses for 2006 were generally attributable to expenses related
      to the restatement of 2004 and 2005 financial statements, legal expenses related
      to breach of warranty suits, of which the more costly suits have been settled,
      and consulting services for preparation of internal controls and procedures
      to
      comply with Sarbanes-Oxley Act: Section 404, all of which were non-recurring
      expenses.




Interest
      expense net of amounts capitalized was $966,784 for Fiscal 2007, $1,132,584
      for
      Fiscal 2006, and $1,011,860 for Fiscal 2005. Interest expense decreased in
      Fiscal 2007 due to Fiscal 2006 having an expense of $229,801 of capitalized
      loan
      costs from the previous Bank of America loan when it was refinanced by the
      new
      $16,500,000 loan from Regions Bank. The increase in interest expenses from
      Fiscal 2005 to Fiscal 2006 was also caused primarily due to the write-off of
      $229,801 unamortized loan expenses.




12




Current
      tax provision is $1,283,728 for the year ending June 30, 2007, ($1,283,746)
      for the year ending June 30, 2006, and ($21,232) for the year ended June
      30, 2005. The current tax provision of $0 for Fiscal 2007 is the natural
      consequence of the net loss incurred by the Company. Deferred tax
      (benefit)/provision is ($1,417,122) for the year ended June 30, 2007, $460,258
      for the year ended June 30, 2006 and $355,590 for the year ended 2005.
      Deferred taxes arise from temporary differences between financial and income
      tax
      reporting regarding the recognition of certain items.





As
      of
      June 30, 2007 the Company had net deferred tax assets of $2,700,850 that were
      fully offset by a valuation allowance because, as of that date, it was
      Management’s conclusion that there continued to be doubt as to whether those
      deferred tax assets were more likely than not to be realized in the future.
      The
      deferred tax assets principally relate to the potential future benefits of
      tax
      net operating loss carryforwards, most of which had been generated during the
      years ended June 30, 2002 and June 30, 2007 when the Company generated
      substantial net losses. During the year ended June 30, 2007 the Company
      performed an evaluation, in accordance with Statement of Financial Accounting
      Standard No. 109, *Accounting
      for Income Taxes* ,
      of the
      likelihood of realization of its deferred tax assets. The evaluation resulted
      in
      the application of a valuation allowance.





The
      Company has available federal and state operating loss carry forwards at
      June 30, 2007 of approximately $8,208,000 and $7,449,000, respectively,
      which expire at various dates through 2027.  The
      ultimate realization of the benefits from the deferred tax assets is dependent
      upon the Company’s future earnings, the future tax laws in effect, and other
      unknown factors; all of which are uncertain. In recent years the Company elected
      to provide for a tax asset valuation allowance of $2,700,850 at June 30,
      2007, $0 at June 30, 2006 and $1,709,951 at June 30, 2005.




**Liquidity
      and Financial Resources.**





As
      disclosed in the Condensed Consolidated Statement of Cash Flows, the cash
      balance decreased by $2,095,169 during the Fiscal Year ended June 30, 2007.
      By
      comparison, during the previous Fiscal Year the cash balance increased
      $461,327.





Cash
      used
      by operations was $2,063,315 in Fiscal 2007 and resulted primarily
      from:


·
            The
                net loss of $5,046,286 incurred, adjusted for non-cash provisions,
                including depreciation expense of $2,313,807 and deferred taxes of
                $1,283,728. The net loss is the most significant use of cash and
                is
                discussed elsewhere in this
                document.


·
            Reductions
                in Accounts Payable, Accrued Expenses and Accrued Dealer Incentives
                represent a use of cash in the amount of $1,200,326. This contraction
                in
                current liabilities is consistent with the reduction in boats manufactured
                and sold during Fiscal 2007


·
            Reductions
                in the working capital accounts of Accounts Receivable, Inventories
                and
                Prepaid Expenses provided $123,883. Contraction in working capital
                accounts is consistent with the reductions in manufacturing and sales
                activity during Fiscal 2007.


·
            Customer
                Deposits provided $488,079, indicating that we are collecting larger
                deposits when orders are placed.





Cash
      required for Investing activities during Fiscal 2007 was $1,635,200. As is
      typically the case, the largest investment made was in creation of plugs and
      molds. Plugs are wooden forms constructed for the purpose of creating molds.
      Molds are used to replicate hulls, decks and various other fiberglass parts
      for
      our boats. $1,045,057 was invested in plugs and molds during Fiscal 2007.
      Another $593,518 was spent on other property, plant and equipment.





Financing
      activities provided $1,603,346 during Fiscal 2007.


·
            Loans
                under the “Credit Facility” (See Note 5, in the Notes to Consolidated
                Financial Statements) provided $799,333, net of
                repayments.


·
            The
                Company borrowed $1,500,000 of the Cash Surrender Value of the Key
                Man
                Life Insurance Policies it owns on the life of the Company’ founder,
                Chairman and CEO.


·
            The
                Company repaid $711,987 of the principal of the “Loan” as per the terms of
                that loan (see Note 5, in the Notes to Consolidated Financial
                Statements).


·
            An
                employee of The Company purchased shares of common stock providing
                $16,000
                of cash.




Management
      is of the opinion that cash flows will be sufficient to satisfy its current
      and
      future liquidity demands because Management has realigned operating costs and
      expenses for the reduced level of production and returned the Company to
      profitability in the fourth quarter of Fiscal 2007 and is expecting to continue
      to operate profitably through Fiscal 2008 .




13




**Effects
      of Inflation.**




The
      Company has not been materially affected by the inflation of recent years.
      Materials that are petroleum-based (e.g. resin, gel coat, foam) have been
      subject to price increases, and fuel surcharges have increased freight costs.
      The Company has been able to minimize the effect of material price increases
      by
      negotiating favorable purchase agreements with suppliers, using alternative,
      less costly materials, by finding less costly sources for materials and
      increasing selling prices of its products to recover the cost
      increases.




The
      Company’s products are targeted at the segment of the powerboat market where
      retail purchasers are generally less significantly affected by price or other
      economic conditions. Consequently, management believes that the impact of
      inflation on sales and the results of operations will not be material.




**Contractual
      Obligations.**




The
      following table sets forth a summary of the Company’s contractual cash
      obligations as of June 30, 2007:




**Payments
                due by period****Total**
            
            **Less than**
              **1 year**
            
            **2-3 years**
            
            **4-5 years**
            
            **Over**
              **5 years****(In
                thousands)**Contractual
                Obligations:Long-term
                debt, including current maturities
            
            $
            16,728
            
            $
            759
            
            $
            1,673
            
            $
            12,796
            
            $
            1,500Interest
                payments on long-term debt
            
            
            2,930
            
            
            960
            
            
            1,765
            
            
            205
            
            
            —Operating
                lease obligations
            
            
            386
            
            
            106
            
            
            190
            
            
            90
            
            
            —Total
                contractual obligations
            
            $
            20,044
            
            $
            1,825
            
            $
            3,628
            
            $
            13,091
            
            $
            1,500




The
      Company has an agreement with Mercury Marine, a division of Brunswick
      Corporation, that the Company will purchase from Mercury all of the Company’s
      requirements for marine engines and other power components that Mercury
      manufactures. The term of this agreement is through June 30, 2012.




**Off-Balance
      Sheet Arrangements.**




Guarantees.
      Based on historical experience and current facts and circumstances, and in
      accordance with Financial Accounting Standards Board (FASB) Interpretation
      No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for
      Guarantees, Including Indirect Guarantees of Indebtedness of Others — An
      Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB
      Interpretation No. 34,” the Company has reserves to cover potential losses
      associated with guarantees and repurchase obligations. Historical cash
      requirements and losses associated with these obligations have not been
      significant. See Note 8, Commitments and Contingencies, in the Notes to
      Consolidated Financial Statements, for a description of these arrangements.




**Environmental
      Regulation.**




The
      Company does not believe that compliance with federal, state, and local
      environmental laws will have a material adverse effect on the Company’s
      competitive position.




**Critical
      Accounting Policies.**




The
      preparation of the consolidated financial statements in accordance with
      accounting principles generally accepted in the United States requires
      management to make certain estimates and assumptions that affect the amount
      of
      reported assets and liabilities and disclosure of contingent assets and
      liabilities at the date of the consolidated financial statements and revenues
      and expenses during the periods reported. Actual results may differ from those
      estimates. The Company discussed the development and selection of the critical
      accounting policies with the Audit Committee of the Board of Directors and
      believes the following are the most critical accounting policies that could
      have
      an effect on the Company’s reported results.




Revenue
      Recognition and Sales Incentives. The Company’s revenue is derived primarily
      from the sale of boats. Revenue is recognized in accordance with the contracted
      terms of the sale, upon completion and legal title and all other incidents
      of
      ownership have passed to dealers or the Government, and the ability to collect
      is assured. The Company offers discounts and sales incentives. The estimated
      liability for sales incentives is recorded at the later of the time of program
      communication to the customer or at the time of sale in accordance with Emerging
      Issues Task Force (EITF) No. 01-9, “Accounting for Consideration Given by a
      Vendor to a Customer (Including a Reseller of a Vendor’s Products)” and EITF No.
      00-22, “Accounting for Points and Certain Other Time-Based or Volume-Based Sales
      Incentive Offers, and Offers for Free Products or Services to be Delivered
      in
      the Future.” The liability is estimated based on the costs for the incentive
      program, the planned duration of the program and historical experience. If
      actual costs are different from estimated costs, the recorded value of the
      liability would be adjusted.




14




Allowances
      for Doubtful Accounts. The Company records an allowance for uncollectible trade
      receivables based upon currently known bad debt risks and provides reserves
      based on past loss history, customer payment practices and economic conditions.
      Actual collection experience may differ from the current estimate of reserves.
      Changes to the allowance for doubtful accounts may be required if a future
      event
      or other circumstance results in a change in the estimate of the ultimate
      ability to collect a specific account or invoice.




Reserve
      for Obsolete Inventories. The Company records a reserve for obsolete inventories
      in order to ensure inventories are carried at the lower of cost or fair market
      value. Fair market value can be affected by assumptions about market demand
      and
      conditions, historical usage rates, model changes and new product introductions.
      If model changes or new product introductions create more or less than favorable
      market conditions, the reserve for obsolete inventories may need to be adjusted.
      Refer to Note 1, Nature of the Business and Significant Accounting Policies,
      in
      the Notes to Consolidated Financial Statements for further discussion on the
      basis of accounting for inventories.




Warranty
      Reserves. The Company records a liability for standard product warranties.
      The
      liability is recorded using historical warranty experience to estimate projected
      warranty costs. If necessary, the Company adjusts its liability for specific
      warranty matters when they become known and are reasonably estimable. The
      Company’s warranty reserves are affected by product failure rates and material
      usage and labor costs incurred in correcting a product failure. If these
      estimated costs differ from actual product failure rates, and actual material
      usage and labor costs, a revision to the warranty reserve would be required.




Income
      Taxes. Deferred taxes are recognized for the future tax effects of temporary
      differences between financial and income tax reporting using tax rates in effect
      for the years in which the differences are expected to reverse. The Company
      estimates its probable tax obligations based on historical experience and
      current tax laws and litigation. The judgments made at any point in time may
      change based on the outcome of tax audits and settlements of tax litigation,
      as
      well as changes due to new tax laws and regulations and the Company’s
      interpretations of those laws and regulations. These factors may cause the
      tax
      rate for the Company to increase or decrease. As of June 30, 2007 the Company
      had net deferred tax assets of $2,700,850 that were fully offset by a valuation
      allowance because, as of that date, it was Management’s conclusion that there
      continued to be doubt as to whether those deferred tax assets were more likely
      than not to be realized in the future. The deferred tax assets principally
      related to the potential future benefits of tax net operating loss
      carryforwards, most of which had been generated during the years ended June
      30,
      2002 and June 30, 2007 when the Company generated substantial net losses. During
      the year ended June 30, 2007 the Company performed an evaluation, in accordance
      with Statement of Financial Accounting Standard No. 109, *Accounting
      for Income Taxes* ,
      of the
      likelihood of realization of its deferred tax assets. The evaluation resulted
      in
      the application of a valuation allowance.





The
      Company has available federal and state operating loss carry forwards at
      June 30, 2007 of approximately $8,208,000 and $7,449,000, respectively,
      which expire at various dates through 2027.




**Cautionary
      Statement for Purposes of “Safe Harbor” Under the Private Securities Reform Act
      of 1995.**




Certain
      statements in this Annual Report are forward-looking as defined in the Private
      Securities Litigation Reform Act of 1995. Forward-looking statements in this
      Annual Report may include words such as “expect”, “anticipate”, “believe”,
“may”, “should”, “could” or “estimate”. These statements involve certain risks
      and uncertainties that may cause actual results to differ materially from
      expectations as of the date of this filing. These risks include, but are not
      limited to, those set forth under **Item
      1A – Risk
      Factors** .





Caution
      should be taken not to place undue reliance on the Company’s forward-looking
      statements, which represent the Company’s views only as of the date this report
      is filed. The Company undertakes no obligation to update publicly or revise
      any
      forward-looking statement, whether as a result of new information, future events
      or otherwise.




**Item 7A.
      Quantitative and Qualitative Disclosures About Market Risk.**




The
      Company is exposed to market risk from changes in interest rates. The Company
      enters into hedging transactions to mitigate this risk in accordance with
      guidelines established by the Company’s management. A description of the
      Company’s interest rate hedging activities is presented in Note 1. to the
      consolidated financial statements. The Company does not use financial
      instruments for trading or speculative purposes.





The
      Company uses an interest rate swap agreement to mitigate the effect that changes
      in interest rates have on the fair market value of the Company’s debt and to
      lower the Company’s borrowing costs on long term debt. The Company’s net
      exposure to interest rate risk is primarily attributable to the term loan with
      Regions Bank, which bears interest at a floating-rate. Interest rate risk
      management is accomplished through the use of a floating-to-fixed interest
      rate
      swap. Both the loan and the swap are benchmarked to short-term money market
      interest rates.





15




**Item 8.
      Financial Statements and Supplementary Data.**









***REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM***




To
      the
      Stockholders and the Board of Directors


Fountain
      Powerboat Industries, Inc.


Washington,
      North Carolina




We
      have
      audited the accompanying consolidated balance sheets of Fountain Powerboat
      Industries, Inc. and subsidiary as of June 30, 2007 and 2006, and the
      related consolidated statements of operations, stockholders’ equity, cash flows
      and the schedule of valuation and qualifying accounts for each of the years
      in
      the three-year period ended June 30, 2007. These consolidated financial
      statements and schedules are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these consolidated 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. We were not engaged to perform
      an
      audit of the Company’s internal control over financial reporting. Our audit
      included consideration of internal control over financial reporting as a basis
      for designing audit procedures that are appropriate in the circumstances, but
      not for the purpose of expressing an opinion on the effectiveness of the
      Company’s internal control over financial reporting. Accordingly, we express no
      such opinion. An audit also includes examining, on a test basis, evidence
      supporting the amounts and disclosures in the financial statements, assessing
      the accounting principles used and significant estimates made by management,
      and
      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 Fountain Powerboat
      Industries, Inc. and subsidiary at June 30, 2007 and 2006 and the results
      of their operations and their cash flows for each of the years in the three-year
      period ended June 30, 2007 in conformity with accounting principles generally
      accepted in the United States of America. Also, in our opinion, the related
      financial statement schedules, when considered in relation to the 2005, 2006
      and
      2007 basic consolidated financial statements taken as a whole, present fairly
      in
      all material respects the information set forth therein.








*Greenville,
      North Carolina*


*September
      26, 2007*





16





**FOUNTAIN
      POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**


**CONSOLIDATED
      BALANCE SHEETS**


**JUNE
      30, 2007 AND 2006**




**ASSETS**




**2007**
            
            **2006**ASSETSCURRENT
                ASSETSCash
                and cash equivalents
            
            $
            2,379,383
            
            $
            4,474,552Accounts
                receivable, net
            
            
            3,688,986
            
            
            3,405,868Inventories
            
            
            6,645,213
            
            
            6,959,188Prepaid
                expenses
            
            
            668,237
            
            
            849,160Deferred
                tax assets
            
            
            —
            
            
            1,446,018Total
                Current Assets
            
            
            13,381,819
            
            
            17,134,786PROPERTY,
                PLANT AND EQUIPMENT
            
            
            49,533,443
            
            
            47,898,410Less:
                Accumulated depreciation
            
            
            (33,104,217
            )
            
            (30,790,537
            )16,429,226
            
            
            17,107,873CASH
                SURRENDER VALUE LIFE INSURANCE, NET
            
            
            2,951,010
            
            
            2,552,682OTHER
                ASSETS
            
            
            654,890
            
            
            1,065,019TOTAL
                ASSETS
            
            $
            33,416,945
            
            $
            37,860,360




**LIABILITIES
      AND STOCKHOLDERS’ EQUITY**




LIABILITIES
                AND STOCKHOLDERS’ EQUITYCURRENT
                LIABILITIES:Current
                maturities of long-term debt
            
            $
            759,290
            
            $
            711,984Note
                payable
            
            
            799,333
            
            
            —Accounts
                payable
            
            
            2,846,303
            
            
            3,861,061Accrued
                expenses
            
            
            1,092,908
            
            
            1,253,714Dealer
                incentives
            
            
            6,342,467
            
            
            6,367,229Customer
                deposits
            
            
            879,102
            
            
            391,024Allowance
                for boat repurchases
            
            
            64,124
            
            
            15,459Warranty
                reserve
            
            
            941,928
            
            
            632,357Total
                Current Liabilities
            
            
            13,725,455
            
            
            13,232,828OTHER
                LONG TERM LIABILITIES
            
            
            4,828
            
            
            —LONG-TERM
                DEBT, less current portion
            
            
            15,969,407
            
            
            15,228,700DEFERRED
                TAX LIABILITY
            
            
            80,896
            
            
            305,133Total
                Liabilities
            
            
            29,780,586
            
            
            28,766,661COMMITMENTS
                AND CONTINGENCIES*[NOTE
                8]*STOCKHOLDERS’
                EQUITYCommon
                stock, $.01 par value, 200,000,000 shares authorized, 4,844,275 shares
                issued and outstanding as of June 30, 2007 and 4,834,275 as of
                June 30, 2006
            
            
            48,442
            
            
            48,342Additional
                paid-in capital
            
            
            10,574,753
            
            
            10,558,853Accumulated
                deficit
            
            
            (7,005,001
            )
            
            (1,630,472
            )Less:
                Treasury stock, at cost, 15,000 shares
            
            
            (110,748
            )
            
            (110,748
            )Accumulated
                other comprehensive income from interest rate swap
            
            
            128,913
            
            
            227,724Total
                Stockholders’ Equity
            
            
            3,636,359
            
            
            9,093,699Total
                Liabilities and Stockholders’ Equity
            
            $
            33,416,945
            
            $
            37,860,360




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




17




**FOUNTAIN
      POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**




**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**YEARS
      ENDED JUNE 30, 2007, 2005 AND 2005**




**2007**
            
            **2006**
            
            **2005**NET
                SALES
            
            $
            68,829,987
            
            $
            79,226,224
            
            $
            71,182,069COST
                OF SALES
            
            
            59,721,899
            
            
            66,152,424
            
            
            60,271,506Gross
                Profit
            
            
            9,108,088
            
            
            13,073,800
            
            
            10,910,563EXPENSESSelling
                Expense
            
            
            8,040,083
            
            
            6,765,871
            
            
            5,726,283General
                and Administrative
            
            
            3,813,883
            
            
            4,032,574
            
            
            3,417,933Total
                Expense
            
            
            11,853,966
            
            
            10,798,445
            
            
            9,144,216OPERATING
                (LOSS) INCOME
            
            
            (2,745,878
            )
            
            2,275,355
            
            
            1,766,347Other
                (Income) Expense
            
            
            49,855
            
            
            9,944
            
            
            23,507Interest
                Expense
            
            
            966,784
            
            
            1,132,584
            
            
            1,011,860(Gain)
                loss on disposal of assets
            
            
            41
            
            
            11,661
            
            
            (4,000
            )TOTAL
                NON-OPERATING EXPENSE
            
            
            1,016,680
            
            
            1,154,189
            
            
            1,031,367(LOSS)
                INCOME BEFORE INCOME TAXES
            
            
            (3,762,558
            )
            
            1,121,166
            
            
            734,980TAX
                PROVISION (BENEFIT)
            
            
            1,283,728
            
            
            (1,283,746
            )
            
            (21,232
            )NET
                (LOSS) INCOME
            
            $
            (5,046,286
            )
            $
            2,404,912
            
            $
            756,212BASIC
                (LOSS) EARNINGS PER SHARE
            
            $
            (1.05
            )
            $
            .50
            
            $
            .16WEIGHTED
                AVERAGE SHARES OUTSTANDING
            
            
            4,821,987
            
            
            4,819,275
            
            
            4,815,188DILUTED
                (LOSS) EARNINGS PER SHARE
            
            $
            (1.05
            )
            $
            .49
            
            $
            .15DILUTED
                WEIGHTED AVERAGE SHARES OUTSTANDING
            
            
            4,821,987
            
            
            4,903,949
            
            
            4,890,124




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




18




**FOUNTAIN
      POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


**FROM
      JUNE 30, 2004 THROUGH JUNE 30, 2007**




**Additional**
            
            
            
            **Accumulated**
              **Other Com-**
            
            
            
            **Total****Common Stock**
            
            **Paid
                in**
            
            **Accumulated**
            
            **prehensive**
            
            **Treasury Stock**
            
            **Stockholders’****Shares**
            
            **Amount**
            
            **Capital**
            
            **(Deficit)**
            
            **Income**
            
            **Shares**
            
            **Amount**
            
            **Equity**BALANCE,
                June 30, 2004
            
            
            4,807,608
            
            $
            48,076
            
            $
            10,517,451
            
            $
            (4,791,596
            )
            $
            58,543
            
            
            (15,000
            )
            $
            (110,748
            )
            $
            5,721,726Issuance
                of common stock upon exercise of options
            
            
            26,667
            
            
            266
            
            
            41,402
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            41,668Other
                comprehensive income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            19,184
            
            
            —
            
            
            —
            
            
            19,184Net
                income for the year ended June 30, 2005
            
            
            —
            
            
            —
            
            
            —
            
            
            756,212
            
            
            —
            
            
            —
            
            
            —
            
            
            756,212BALANCE,
                June 30, 2005
            
            
            4,834,275
            
            
            48,342
            
            
            10,558,853
            
            
            (4,035,384
            )
            
            77,727
            
            
            (15,000
            )
            
            (110,748
            )
            
            6,538,790Other
                comprehensive income, net of taxes of $142,861
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            149,997
            
            
            —
            
            
            —
            
            
            149,997Net
                income for the year ended June 30, 2006
            
            
            —
            
            
            —
            
            
            —
            
            
            2,404,912
            
            
            —
            
            
            —
            
            
            —
            
            
            2,404,912BALANCE,
                June 30 2006
            
            
            4,834,275
            
            
            48,342
            
            
            10,558,853
            
            
            (1,630,472
            )
            
            227,724
            
            
            (15,000
            )
            
            (110,748
            )
            
            9,093,699Issuance
                of common stock upon exercise of options
            
            
            10,000
            
            
            100
            
            
            15,900
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            16,000Other
                comprehensive loss, net of taxes of $(61,965)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (98,811
            )
            
            —
            
            
            —
            
            
            (98,811
            )Net
                loss for the year ended June 30, 2007
            
            
            —
            
            
            —
            
            
            —
            
            
            (5,046,286
            )
            
            —
            
            
            —
            
            
            —
            
            
            (5,046,286
            )Adjustment
                from adoption of SAB 108
            
            
            —
            
            
            —
            
            
            —
            
            
            (328,243
            )
            
            —
            
            
            —
            
            
            —
            
            
            (328,243
            )BALANCE,
                June 30 2007
            
            
            4,844,275
            
            $
            48,442
            
            $
            10,574,753
            
            $
            (7,005,001
            )
            $
            128,913
            
            
            (15,000
            )
            $
            (110,748
            )
            $
            3,636,359





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





19




**FOUNTAIN
      POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**YEARS
      ENDED JUNE 30, 2007, 2006 AND 2005**




**2007**
            
            **2006**
            
            **2005**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                (Loss) Income
            
            $
            (5,046,286
            )
            $
            2,404,912
            
            $
            756,212Adjustments
                to reconcile net (loss) income to net cash provided (used) by operating
                activities:Inventory
                valuation adjustment
            
            
            68,071
            
            
            42,060
            
            
            22,682Depreciation
                expense
            
            
            2,313,807
            
            
            2,020,860
            
            
            1,840,168Net
                increase in cash surrender value of life insurance
            
            
            (398,328
            )
            
            (373,064
            )
            
            (598,301
            )Deferred
                loan costs expensed
            
            
            —
            
            
            229,801
            
            
            —Gain
                on termination of interest rate swap
            
            
            —
            
            
            (84,524
            )
            
            —(Gain)
                loss on disposal of equipment
            
            
            41
            
            
            11,661
            
            
            (4,000
            )Bad
                debt expense
            
            
            19,825
            
            
            83,546
            
            
            168,634Amortization
                of deferred loan costs
            
            
            36,002
            
            
            43,323
            
            
            79,932Deferred
                income tax expense (benefit)
            
            
            1,283,728
            
            
            (1,283,746
            )
            
            —Change
                in assets and liabilities:Accounts
                receivable
            
            
            (302,943
            )
            
            (1,294,057
            )
            
            1,143,255Inventories
            
            
            245,904
            
            
            (528,231
            )
            
            (1,842,297
            )Prepaid
                expenses
            
            
            180,922
            
            
            (507,171
            )
            
            87,668Other
                assets
            
            
            213,369
            
            
            (212,617
            )
            
            (47,593
            )Accounts
                payable
            
            
            (1,014,758
            )
            
            16,959
            
            
            1,001,236Accrued
                expenses
            
            
            (160,806
            )
            
            174,156
            
            
            4,853Dealer
                incentives
            
            
            (24,762
            )
            
            2,664,491
            
            
            2,499,216Customer
                deposits
            
            
            488,078
            
            
            (468,855
            )
            
            773,802Warranty
                reserve
            
            
            (18,672
            )
            
            (107,643
            )
            
            30,000Allowance
                for boat repurchases
            
            
            48,665
            
            
            (59,541
            )
            
            —Other
                long-term liabilities
            
            
            4,828
            
            
            —
            
            
            —Net
                Cash Provided (Used) by Operating Activities
            
            
            (2,063,315
            )
            
            2,772,320
            
            
            5,915,467CASH
                FLOWS FROM INVESTING ACTIVITIESProceeds
                from sale of equipment
            
            
            3,375
            
            
            3,883
            
            
            4,000Investment
                in molds and related plugs
            
            
            (1,045,057
            )
            
            (1,092,994
            )
            
            (1,641,238
            )Purchase
                of property, plant and equipment
            
            
            (593,518
            )
            
            (872,897
            )
            
            (1,463,523
            )Maturity
                of certificate of deposit
            
            
            —
            
            
            —
            
            
            255,197Net
                Cash Used by Investing Activities
            
            
            (1,635,200
            )
            
            (1,962,008
            )
            
            (2,845,564
            )CASH
                FLOWS FROM FINANCING ACTIVITIESProceeds
                from notes payable
            
            
            4,045,863
            
            
            —
            
            
            —Proceeds
                from long term debt
            
            
            1,500,000
            
            
            16,545,878
            
            
            —Payments
                of notes payable
            
            
            (3,246,530
            )
            
            —
            
            
            —Payments
                of long term debt
            
            
            (711,987
            )
            
            (16,799,378
            )
            
            (2,441,040
            )Proceeds
                from termination of interest rate swap
            
            
            —
            
            
            84,524
            
            
            —Payments
                of deferred loan costs
            
            
            —
            
            
            (180,009
            )
            
            —Proceeds
                from exercise of stock options
            
            
            16,000
            
            
            —
            
            
            41,668Payments
                on long term capital lease
            
            
            —
            
            
            —
            
            
            (24,367
            )Net
                Cash Provided (Used) by Financing Activities
            
            
            1,603,346
            
            
            (348,985
            )
            
            (2,423,739
            )Net
                (decrease) increase in cash and cash equivalents
            
            
            (2,095,169
            )
            
            461,327
            
            
            646,164Beginning
                cash and cash equivalents balance
            
            
            4,474,552
            
            
            4,013,225
            
            
            3,367,061Ending
                cash and cash equivalents balance
            
            $
            2,379,383
            
            $
            4,474,552
            
            $
            4,013,225




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





20




**FOUNTAIN
      POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS** ***[CONTINUED]*** ****


**YEARS
      ENDED JUNE 30, 2007, 2006 AND 2005**




**2007**
            
            **2006**
            
            **2005**Supplemental
                Disclosures of Cash Flow Information:Cash
                paid during the period for:Interest
                to unrelated parties, net of amounts capitalized
            
            $
            1,340,969
            
            $
            1,417,874
            
            $
            1,123,293Supplemental
                Schedule of Non-cash Investing and Financing Activities:Unrealized
                gain (loss) on interest rate swap
            
            $
            (98,811
            )
            $
            149,997
            
            $
            19,184




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




21




**FOUNTAIN
      POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**YEARS
      ENDED JUNE 30, 2007, 2006 AND 2005**





**Note
      1. Nature of the Business and Significant Accounting Policies.**




**Nature
      of the Business:** Fountain
      Powerboat Industries, Inc. and Subsidiary (the Company) manufacture
      high-performance sport boats, sport cruisers, sport fishing boats, and custom
      offshore racing boats. These boats are sold worldwide to a network of 32
      domestic and 24 international dealers. The Company’s offices and manufacturing
      facilities are located in Washington, North Carolina, and the Company has been
      in business since 1979. The Company employs 328 people.




**Principles
      of Consolidation:** The
      consolidated financial statements include the accounts of Fountain Powerboat
      Industries, Inc. and its wholly owned subsidiary, Fountain Powerboats, Inc.
      All
      significant inter-company accounts and transactions have been eliminated in
      consolidation.




**Fiscal
      Year:** The
      Company’s fiscal year-end is June 30th, which is its natural business
      year-end.




**Accounting
      Estimates:** The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities, the disclosures of contingent assets and liabilities at the date
      of
      the financial statements, and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those estimated
      by
      management. These estimates 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.




Estimates
      in these consolidated financial statements include, but are not limited to:




•
            Allowances
                for doubtful accounts;




•
            Inventory
                obsolescence reserves;




•
            Reserves
                for dealer incentives and allowances;




•
            Warranty
                related reserves;




•
            Losses
                on litigation and other contingencies;




•
            Environmental
                liability reserves;




•
            Insurance
                reserves;




•
            Income
                tax reserves.




**Cash
      and Cash Equivalents:** For
      purposes of the statement of cash flows, the Company considers all highly liquid
      debt instruments purchased with a maturity of three months or less to be cash
      equivalents. At June 30, 2007 and 2006, the Company had $2,379,383 and
      $4,474,552 respectively, held in cash. ****




**Accounts
      Receivable:** Accounts
      Receivable are customer obligations due under normal trade terms requiring
      payment within 7 days from the invoice date for boat sales and within 30 days
      for all other sales. The carrying amount of accounts receivable is reduced
      by an
      allowance that reflects management’s best estimate of the amounts that will not
      be collected. Management reviews each accounts receivable balance that exceeds
      90 days from the invoice date and based on an assessment of the current
      creditworthiness, estimates the portion, if any, of the balance that will not
      be
      collected.




**Inventories:** Inventories are stated at the lower of cost or market. Cost is determined by
      the
      first-in, first-out method (See Note 3). The Company records a reserve for
      obsolete inventories in order to ensure inventories are carried at the lower
      of
      cost or fair market value. Fair market value can be affected by assumptions
      about market demand and conditions, historical usage rates, model changes and
      new product introductions. If model changes or new product introductions create
      more or less than favorable market conditions, the reserve for obsolete
      inventories may need to be adjusted.




22




**Property,
      Plant, and Equipment and Depreciation:** Property, plant, and equipment are carried at cost. Depreciation on property,
      plant, and equipment is calculated using the straight-line method and is based
      upon the estimated useful lives of the assets. The Company continually evaluates
      whether events and circumstances have occurred that indicate the remaining
      estimated useful lives of its long-lived assets may warrant revision or that
      the
      remaining balance of such assets may not be recoverable . (See
      Note 4)




**Fair
      Value of Financial Instruments:** Management estimates of the carrying value of financial instruments on the
      consolidated financial statements approximate fair values. The carrying values
      of the Company’s short term financial instruments, including cash and cash
      equivalents, accounts receivable, and debt approximate their fair values because
      of the short maturity of these instruments and the variability of the associated
      interest rates.




**Dealer
      Incentive Accruals:** The
      Company has established sales programs to pay service and/or other awards to
      dealers for boat deliveries into their market territory for which they will
      perform service or based upon sales of boats from their locations. These
      programs are based in part on the model of the boat sold, a factor for the
      dealer’s service performance rating, the dollar value of the sale and other
      factors, including total sales volume to dealers. The Company has accrued dealer
      incentives of $6,342,467 and $6,367,229 at June 30, 2007 and 2006,
      respectively. Dealer incentive accruals are recorded as a reduction to net
      sales. These amounts also include an accrual for dealer interest as discussed
      in
      Note 8, “Commitments and Contingencies”.




**Allowance
      for Boat Repurchases:** The
      Company provides an allowance for boats financed by dealers under floor plan
      finance arrangements that may be repurchased from finance companies under
      certain circumstances where the Company has a repurchase agreement with the
      lender. The amount of the allowance is determined based upon the current
      financial status of the Company’s dealers. The Company has accrued allowance for
      boat repurchases of $64,124 and $15,459 at June 30, 2007 and June 30, 2006
      respectively.




**Revenue
      Recognition:** The
      Company generally sells boats only to authorized dealers and to the U.S.
      Government. A sale is recorded when legal title and all other incidents of
      ownership have passed to the dealer or to the Government. Prior to the sale
      to
      the dealer or the Government, the Company must have received a signed Sales
      Order Acknowledgement from the dealer or the Government specifying the terms
      of
      the sale, including the sales price. All boat sales are Cash on Delivery basis,
      or with prior approval of the buyer’s third party commercial lender, thus
      assuring the ability to collect.





In
      addition to other dealer incentives, the Company offers a sales incentive
      plan whereby floor plan interest is paid by the Company up to six months (180
      days) or until the boat is sold by the dealer. Each month the Company calculates
      an amount equal to the estimated potential floor plan interest payment for
      the
      remainder of the 180 day period beginning on the invoice date for each boat
      still in floor plan inventory. The sum of these individual calculations is
      accrued as a liability and recorded as a selling expense. (See Note 8) As the
      number of boats and the time remaining in the free floor plan interest period
      varies from month to month, the variation is reflected in floor plan interest
      expense.




**Income
      Taxes:** The
      Company accounts for income taxes in accordance with issued Statement of
      Financial Accounting Standards (SFAS) No. 109, “Accounting for Income
      Taxes” (See Note 7).




**Advertising
      Cost:** Cost
      incurred in connection with advertising and promotion of the Company’s products
      is expensed as incurred. Such costs amounted to $2,013,740, $1,412,435 and
      $1,264,368 for the years ended 2007, 2006 and 2005, respectively.




**Earnings
      Per Share:** The
      Company accounts for earnings per share in accordance with the Statement of
      Financial Accounting Standards (SFAS) No. 128 “Earnings Per Share,” which
      requires the Company to present basic and diluted earnings per share. The
      computation of basic earning per share is based on the weighted average number
      of shares outstanding during the periods presented. The computation of diluted
      earnings per shares is based on the weighted average number of outstanding
      common shares during the year plus, when their effect is dilutive, additional
      shares assuming the exercise of certain vested and non-vested stock options
      and
      warrants, reduced by the number of shares which could be purchased from the
      proceeds (See Note 12).




**Warranties:** The
      Company warrants the entire deck and hull, including its supporting bulkhead
      and
      stringer system, against defects in materials and workmanship for a period
      of
      six years. The Company has accrued a reserve for these anticipated future
      warranty costs.




23




**Reclassifications:** The
      consolidated financial statements and notes for years prior to the year ended
      June 30, 2007 have been reclassified to conform with headings and
      classifications used in the June 30, 2007 financial statements. The
      reclassifications had no effect on net income or shareholder’s equity as
      previously reported.




**Cash
      Surrender Value of life insurance policies** **:**  **-** At
      June 30, 2007 and 2006, the Company owns six life insurance policies on
      Reginald M. Fountain, Jr., the Company’s Chairman and Chief Executive Officer
      for a total of $8,091,411 and $7,780,253 in coverage and $2,951,010 and
      $2,552,682 cash value, respectively. At June 30, 2007 the Company has
      borrowed $1,500,000 against the policies, which is shown in long term debt
      on
      the consolidated balance sheet. At June 30, 2006, the Company had no outstanding
      loans against the policies.




**Research
      and Development** **:** The
      Company expenses the costs of research and development for new products and
      components as the costs are incurred. Research and development costs are
      included in the cost of sales and amounted to $757,186 for Fiscal 2007, $780,520
      for Fiscal 2006, and $786,129 for Fiscal 2005.




**Derivative
      Financial Instruments** **:** The
      Company uses derivative financial instruments for the purpose of reducing its
      exposure to adverse fluctuations in interest rates. While these hedging
      instruments are subject to fluctuations in value, such fluctuations are
      generally offset by the value of the underlying exposures being hedged. The
      Company has determined that the hedges’ ineffectiveness is not material and
      accounts for these derivative financial instruments as an effective cash flow
      hedge under the provisions of Statement of Financial Accounting Standards (SFAS)
      No. 133, “Accounting for Derivative Instruments and Hedging Activities.”
The Company is not a party to leveraged derivatives and does not hold or issue
      financial instruments for speculative purposes.





The
      Company utilizes an interest rate swap agreement to hedge exposure to
      fluctuations in market interest rates. Under United States GAAP, an interest
      rate swap agreement is considered a derivative financial instrument. Due to
      the
      nature of the derivative and the intended use by the Company, the derivative
      qualifies as a Cash Flow Hedge. As such, SFAS No. 133 requires that the value
      of
      the derivative be “marked-to-market” periodically and any change in the market
      value of the swap be reflected in the financial statements of the Company.
      The
      market value of the derivative is calculated as of the last day of the period
      and any change since the end of the previous period is reflected, net of tax,
      in
      an adjustment to Stockholders’ Equity in the Consolidated Balance
      Sheet.




**Recently
      Enacted Accounting Standards** **:**




In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
      Corrections - a replacement of APB Opinion No. 20 and FASB Statement
      No. 3” (SFAS No. 154). SFAS No. 154 replaces APB Opinion
      No. 20, “Accounting Changes” (Opinion 20), and SFAS No. 3, “Reporting
      Accounting Changes in Interim Financial Statements,” changes the requirements
      for the accounting for and reporting of a change in accounting principle.
      Opinion 20 previously required that most voluntary changes in accounting
      principle be recognized by including in net income of the period of the change
      the cumulative effect of changing to the new accounting principle. SFAS
      No. 154 requires retrospective application to prior periods’ financial
      statements of changes in accounting principle. SFAS No. 154 defines
      retrospective application as the application of a different accounting principle
      to prior accounting periods as if that principle had always been used or as
      the
      adjustment of previously issued financial statements to reflect a change in
      the
      reporting entity. SFAS No. 154 also requires that a change in depreciation,
      amortization, or depletion method for long-lived, non-financial assets be
      accounted for as a change in accounting estimate effected by a change in
      accounting principle. We adopted the provisions of SFAS No. 154 during the
      fiscal year beginning July 1, 2006. The adoption of SFAS No. 154 did
      not significantly impact our consolidated financial statements.




In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments, an amendment of FASB statements No. 133 and 140”
(SFAS 155). SFAS No. 155 allows financial instruments that have embedded
      derivatives to be accounted for as a whole (eliminating the need to bifurcate
      the derivative from its host) as long as the entire instrument is valued on
      a
      fair value basis. The statement also resolves and clarifies other specific
      SFAS
      No. 133 and SFAS No. 140 related issues. SFAS No. 155 is
      effective for all financial instruments acquired or issued after the beginning
      of an entity’s first fiscal year that begins after September 15, 2006. We
      will be required to adopt SFAS No. 155 on July 1, 2007 and do not
      expect that it will have a material effect on our consolidated financial
      statements.





In
      June
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes
      by prescribing a two-step method of first, evaluating whether a tax position
      has
      met a more-likely-than-not recognition threshold, and second, measuring that
      tax
      position to determine the amount of benefit to be recognized in the financial
      statements. FIN 48 provides guidance on the presentation of such positions
      within a classified statement of financial position as well as on derecognition,
      interest and penalties, accounting in interim periods, disclosure and
      transition. FIN 48 is effective for the Company beginning July 1,
      2007.  Compliance is not expected to significantly impact our consolidated
      financial statements.




24




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No. 157, “Fair Value Measurements” (SFAS 157). FAS 157 enhances existing
      guidance for measuring assets and liabilities using fair value. Prior to the
      issuance of FAS 157, guidance for applying fair value was incorporated in
      several accounting pronouncements. FAS 157 provides a single definition of
      fair
      value, together with a framework for measuring it, and requires additional
      disclosure about the use of fair value to measure assets and liabilities. FAS
      157 also emphasizes that fair value is a market-based measurement, not an
      entity-specific measurement, and sets out a fair value hierarchy with the
      highest priority being quoted prices in active markets. Under FAS 157, fair
      value measurements are disclosed by level within that hierarchy. While FAS
      157
      does not add any new fair value measurements, it does change current practice.
      Changes to practice include: (1) a requirement for an entity to include its
      own credit standing in the measurement of its liabilities; (2) a
      modification of the transaction price presumption; (3) a prohibition on the
      use of block discounts when valuing large blocks of securities for
      broker-dealers and investment companies; and (4) a requirement to adjust
      the value of restricted stock for the effect of the restriction even if the
      restriction lapses within one year. FAS 157 is effective for financial
      statements issued for fiscal years beginning after November 15, 2007, and
      interim periods within those fiscal years. The Company has not determined the
      impact of adopting FAS 157 on its consolidated financial statements.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities”, (SFAS 159). SFAS 159 allows
      entities to measure financial instruments and certain other items at fair value
      that are not currently required to be measured at fair value. Unrealized gains
      and losses on items for which the fair value option has been elected must be
      reported in earnings at each subsequent reporting date. The fair value option
      can be applied instrument by instrument, however the election is irrevocable.
      SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.
      The Company does not expect the statement to have an effect on its financial
      position, results of operations or cash flows.




In
      September 2006, the SEC issued Staff Accounting Bulletin No.108 (“SAB 108”),
“Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements.” SAB 108 was issued in order
      to eliminate the diversity of practice surrounding how public companies quantify
      financial statement misstatements. Traditionally, there have been two
      widely-recognized methods for quantifying the effects of financial statement
      misstatements: the “roll-over” method and the “iron curtain” method. The
      roll-over method focuses primarily on the impact of a misstatement on the income
      statement—including the reversing effect of prior year misstatements—but its use
      can lead to the accumulation of misstatements in the balance sheet. The iron
      curtain method focuses primarily on the effect of correcting the period-end
      balance sheet with less emphasis on the reversing effects of prior year’s errors
      on the income statement. We have previously used the roll-over method for
      quantifying identified financial statement misstatements.




SAB
      108
      establishes an approach that requires quantification of financial statement
      misstatements based on the effects of the misstatements on each of the Company’s
      consolidated financial statements and the related financial statement
      disclosures. This model is commonly referred to as a “dual approach” because it
      requires quantification of errors under both the iron curtain and the roll-over
      methods. SAB 108 permits public companies to initially apply its provisions
      either by (i) restating prior financial statements as if the “dual
      approach” had always been applied or (ii) recording the cumulative effect
      of initially applying the “dual approach” as adjustments to the carrying values
      of assets and liabilities as of July 1, 2006 with an offsetting adjustment
      recorded to the opening balance of retained earnings.




25




We
      adopted SAB 108 during the quarter ended June 30, 2007 and elected to use the
      cumulative effect transition method in connection with the preparation of our
      financial statements. The following table summarizes the effects of applying
      the
      guidance in SAB 108:





Period
                in which the misstatement originated (1)Cumulative
              Prior to July 1,
              2004
            
            Year ended
              June 30, 2005
            
            Year ended
              June 30, 2006
            
            Adjustment
              Recorded as of
              June 30, 2006Warranty
                reserve adjustment (2)
            
            $
            389,244
            
            $
            (91,526
            )
            $
            30,525
            
            $
            328,243Impact
                on net income (loss) (3)
            
            $
            (389,244
            )
            $
            91,526
            
            $
            (30,525
            )Accumulated
                deficit (4)
            
            
            
            
            
            
            
            
            
            
            $
            (328,243
            )





(1)
            The
                Company quantified these errors under the roll-over method and concluded
                that they were immaterial both individually and in the
                aggregate.(2)
            The
                Company’s calculation of warranty reserve, and the resulting warranty
                expense, had inappropriately always excluded boats remaining in dealer
                inventory. As a result of this error, our warranty reserve liability
                and
                warranty expense was understated by $389,244 in fiscal years beginning
                prior to July 1, 2004, overstated by $91,526 in the fiscal year ended
                June
                30, 2005 and understated by $30,525 in the fiscal year ended June
                30,
                2006. Due to our assessment as to the recoverability of deferred
                tax
                assets, we have determined that there is no related tax impact resulting
                from these understatements.(3)
            Represents
                the net over/(under)statement of net income for the indicated periods
                resulting from these misstatements.(4)
            Represents
                the net reduction to retained earnings recorded as of July 1, 2006
                to
                record the initial application of SAB
                108.





In
      2006
      the Emerging Issues Task Force issued EITF Issue 06-4 “Accounting for Deferred
      Compensation and Postretirement Benefits Aspects of Endorsement Split-Dollar
      Life Insurance Arrangements” requires the recognition of a liability related to
      the postretirement benefits covered by an endorsement split-dollar life
      insurance arrangement. The employer (who is also the policyholder) has a
      liability for the benefit it is providing to its employee. As such, if the
      policyholder has agreed to maintain the insurance policy in force for the
      employee’s benefit during his or her retirement, then the liability recognized
      during the employee’s active service period should be based on the future cost
      of insurance to be incurred during the employee’s retirement. Alternatively, if
      the policyholder has agreed to provide the employee with a death benefit, then
      the liability for the future death benefit should be recognized by following
      the
      guidance in Statement 106 or Opinion 12, as appropriate. This issue is
      applicable for interim or annual reporting periods beginning after
      December 15, 2007. The Company is currently evaluating the impact that this
      pronouncement will have on the consolidated financial statements.




In
      March
      2007, the FASB ratified the consensuses reached by the EITF relating to EITF
      06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance
      Arrangements.” EITF 06-10 established that an employer should recognize a
      liability for the postretirement benefit related to a collateral assignment
      split-dollar life insurance arrangement in accordance with either SFAS No.
      106
      or APB No. 12 if the employer has agreed to maintain a life insurance policy
      during the employee's retirement or provide the employee with a death benefit
      based on the substantive arrangement with the employee. EITF 06-10 is effective
      for fiscal years beginning after December 15, 2007 and is not expected to have
      a
      material affect on the Company’s financial position, results of operations or
      cash flows.




**Comprehensive
      Income (Loss)** - The
      Company reports as comprehensive income changes in stockholders’ equity during
      the year from sources other than shareholders. Other comprehensive income (loss)
      refers to all components (revenues, expenses, gains, and losses) of
      comprehensive income (loss) that are excluded from net income (loss). The
      Company’s only component of other comprehensive income (loss) is unrealized
      gains and losses related to interest rate swap agreements. For the years ended
      June 30, 2007, 2006 and 2005, the Company’s other comprehensive income
      (loss) was ($98,811), $149,997, and $19,184, respectively, resulting in total
      comprehensive income (loss) of ($5,145,097), $2,554,909, and $775,396
      respectively for those years.




26




**Stock
      Based Compensation** - The
      Company has stock incentive plans that provide for stock-based employee
      compensation, including the granting of stock options, to certain key employees
      and other individuals. The plans are more fully described in Note 6. Prior
      to
      the year ended June 30, 2006 the Company accounted for stock options issued
      to
      employee, officers and directors under the stock incentive plan in accordance
      with the recognition and measurement principles of APB Opinion No. 25,
“Accounting for Stock Issued to Employees”, and related Interpretations. Under
      this method, compensation expense is recorded on the date of grant only if
      the
      current market price of the underlying stock exceeded the exercise price. Under
      the Company’s stock incentive plan, stock options are granted at exercise prices
      that equal or exceed the market value of the underlying common stock on the
      date
      of grant. Therefore, no compensation expense related to stock options is
      recorded in the Consolidated Statements of Income for the year ended June 30,
      2005.




In
      December 2004, the FASB issued SFAS No. 123(R), “Accounting for Stock-Based
      Compensation” (SFAS No. 123(R)). SFAS No. 123(R) establishes standards
      for the accounting for transactions in which an entity exchanges its equity
      instruments for goods and services. The Statement focuses primarily on
      accounting for transactions in which an entity obtains employee services in
      share-based payment transactions. SFAS No. 123(R) requires that the fair
      value of such equity instruments be recognized as an expense in the historical
      financial statements as services are performed. Prior to SFAS No. 123(R),
      only certain pro forma disclosures of fair value were required. The provisions
      of this Statement are effective for the fiscal year that begins after
      June 15, 2005. Accordingly, we adopted SFAS No. 123(R) on July 1, 2005
      and it had no effect on net income for Fiscal 2007 or 2006 because all
      outstanding options vested fully prior to July 1, 2005.




Had
      compensation cost for stock options issued to employees under the Company’s
      stock option plans and agreements been determined based on the fair value at
      the
      grant date for awards prior to July 1, 2005 consistent with the provisions
      of
      SFAS No. 123, the Company’s net earnings before taxes and earnings per
      share would have been reduced to the pro forma amounts indicated below:





**2005**Net
                IncomeAs reported
            
            $
            756,212Less:
                total stock-based compensation expense determined under fair market
                value
                method for all awards, net of tax
            
            
            5,083Pro forma
            
            $
            751,129Basic
                net income per shareAs
                reported
            
            
            .16Pro forma
            
            
            .16Diluted
                net income per shareAs
                reported
            
            
            .15Pro forma
            
            
            .15




**Note
      2. Accounts Receivable**





Accounts
      Receivable consists of the following:




**Year
                Ended June 30,****2007**
            
            **2006**Trade
                receivables
            
            $
            3,567,893
            
            $
            3,098,978Other
                receivables
            
            
            138,845
            
            
            344,221Subtotal
            
            $
            3,185,588
            
            $
            3,443,199Less
                Allowance for doubtful accounts
            
            
            (17,752
            )
            
            (37,331
            )Net
                accounts receivable
            
            $
            3,688,986
            
            $
            3,405,868





27





**Note
      3. Inventories.**




Inventories
      consist of the following:




**Year
                Ended June 30,****2007**
            
            **2006**Parts
                and supplies
            
            $
            3,021,355
            
            $
            2,916,893Work-in-process
            
            
            3,431,664
            
            
            3,189,007Finished
                goods
            
            
            246,666
            
            
            885,3396,699,685
            
            
            6,991,239Reserve
                for obsolescence
            
            
            (54,472
            )
            
            (32,051
            )$
            6,645,213
            
            $
            6,959,188




All
      of
      the inventory is owned by the Company and pledged as collateral on notes and
      mortgages payable at June 30, 2007.





**Note
      4. Property, Plant and Equipment.**





Property,
      plant and equipment consists of the following:




**Estimated**
              **Useful Lives**
            
            **June 30,****in Years**
            
            **2007**
            
            **2006**Land
                and related improvements
            
            
            10-30
            
            $
            4,746,710
            
            $
            4,697,418Buildings
                and related improvements
            
            
            10-30
            
            
            10,191,770
            
            
            10,023,630Construction-in-progress
            
            
            N/A
            
            
            322,219
            
            
            369,259Production
                molds and related plugs
            
            
            8
            
            
            25,736,699
            
            
            24,685,048Machinery
                and equipment
            
            
            3-5
            
            
            6,325,792
            
            
            6,078,588Furniture
                and fixtures
            
            
            5
            
            
            768,985
            
            
            760,800Computer
                equipment
            
            
            5
            
            
            1,152,731
            
            
            1,003,404Transportation
                equipment
            
            
            5
            
            
            288,537
            
            
            280,26349,533,443
            
            
            47,898,410Accumulated
                depreciation
            
            
            
            
            
            (33,104,217
            )
            
            (30,790,537
            )$
            16,429,226
            
            $
            17,107,873





Depreciation
      expense by asset category was as follows:




**2007**
            
            **2006**
            
            **2005**Land
                improvements
            
            $
            135,374
            
            $
            132,009
            
            $
            129,372Buildings
            
            
            326,567
            
            
            309,695
            
            
            278,563Molds &
                plugs
            
            
            1,392,333
            
            
            1,214,869
            
            
            1,111,953Machinery &
                equipment
            
            
            283,781
            
            
            219,210
            
            
            218,440Furniture &
                fixtures
            
            
            52,553
            
            
            30,597
            
            
            16,518Transportation
                equipment
            
            
            17,208
            
            
            23,580
            
            
            33,422Computer
                equipment
            
            
            105,991
            
            
            90,900
            
            
            51,900Total
            
            $
            2,313,807
            
            $
            2,020,860
            
            $
            1,840,168





All
      of
      the land, buildings and improvements are owned by the Company and are held
      as
      collateral on notes payable and long term debt at June 30, 2007.




Construction
      costs of production molds for new and existing product lines are capitalized
      and
      depreciated over an estimated useful life of eight years. Depreciation starts
      when the production mold is placed in service to manufacture the product. The
      costs include the direct materials, direct labor, and an overhead allocation
      based on a percentage of direct labor.





In
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets,” the Company continually evaluates whether events and
      circumstances have occurred that indicate the remaining estimated useful lives
      of its long-lived assets may warrant revision or that the remaining balance
      of
      such assets may not be recoverable. During 2007 and 2006, the Company reviewed
      its long-lived asset balances for impairment and no adjustments were recorded
      as
      a result of those reviews.




28




**Note
      5. Long-term Debt and Pledged Assets.**




On
      September 19, 2005, the Company entered into a $16,500,000 term loan
      agreement (the “Loan”) with Regions Bank. The proceeds from the Loan were used
      to repay, and concurrently cancel, the long-term loan with Bank of America.
       Upon cancellation of the Bank of America loan, the Company expensed that
      portion of the deferred costs paid to acquire the loan which had not been
      amortized during the term of the loan. The amount of the deferred loan costs
      expensed in Fiscal 2006 is $229,801. The Loan with Regions Bank matures
      September 19, 2010 and is secured by accounts receivable, inventories,
      property, plant and equipment, death proceeds under certain life insurance
      policies, and common stock. Principal payments, beginning at approximately
      $55,000 and escalating over time, are due monthly, commencing September 30,
      2005, with a final principal payment of $12,646,733 due September 19, 2010.
      Interest is payable monthly. The Loan includes $4,125,000 that bears interest,
      at the Company’s option, under one of two available methods. The first available
      interest computation method provides for interest at the higher of the Prime
      Rate or the Federal Funds rate plus 1/2%. The second available interest
      computation method provides for interest at the sum of (i) the one month
      LIBOR rate divided by 1.0 minus the Eurodollar Reserve Percentage, and
      (ii) 1.75%. The Company may select either of the two interest rate
      methodologies by providing written notification to Regions Bank. The balance
      of
      the Loan ($12,375,000 at inception) bears interest that has been set at a fixed
      annual rate of 6.45% through the use of an interest rate swap. The fixed annual
      rate of 6.45% is a blended rate that combines the 1.75% premium over one month
      LIBOR listed above with a fixed interest rate of 4.70% paid by the Company
      to
      the counterparty under the terms of our interest rate swap agreement, described
      below.





The
      Company utilizes interest rate swap agreements to hedge exposure to fluctuations
      in market interest rates. Under United States GAAP, an interest rate swap
      agreement is considered a derivative financial instrument. Due to the nature
      of
      the derivative and the intended use by the Company, the derivative qualifies
      as
      a Cash Flow Hedge. As such, SFAS No. 133, *“Accounting
      for Derivative Instruments and Hedging Activities”* ,
      requires that the value of the derivative be “marked-to-market” periodically and
      any change in the market value of the swap be reflected in the financial
      statements of the Company. The market value of the derivative is calculated
      as
      of the last day of the period and any change since the end of the previous
      period is reflected in an adjustment to Stockholders’ Equity in the Consolidated
      Balance Sheet. During the quarter ended September 30, 2005, the Company
      terminated a then extant interest rate swap agreement with Bank of America
      related to the Bank of America loan, which was repaid during the period. At
      termination, that swap agreement with Bank of America resulted in a gain to
      the
      Company of $84,524. The Company entered into a new interest rate swap agreement
      (the “Swap”) with Regions Bank related to the new Regions Bank loan, taken
      during the period. The Swap with Regions Banks has a notional amount of
      $12,375,000, a term of five years and a fixed annual rate of 4.70% due to
      Regions Bank. The Swap has a floating interest rate due to the Company which
      is
      based on LIBOR and is reset monthly. As of June 30, 2007 and 2006 the market
      value adjustment for the Swap results in an unrealized gain totaling $209,809
      and $370,585 respectively. SFAS No. 133 also requires periodic assessment of
      the
      effectiveness of any instrument designated as a hedge. If the assessment
      indicates the hedge is less than highly effective in offsetting the gains or
      losses incurred by the hedged transaction, the ineffective portion of the hedge
      must be reported currently in the Company’s Consolidated Statement of
      Operations. The results of the assessment as of June 30, 2007 indicate that
      the
      hedge is highly effective, and we have determined that the ineffective portion
      is immaterial.





The
      Loan
      contains certain restrictive covenants setting forth earnings before interest,
      taxes and depreciation (EBITDA) and capital expenditures, which were
      restructured by Regions Bank on June 27, 2007. These covenants also include
      a
      number of other limitations, including restrictions on capital expenditures,
      mergers or consolidations, disposal of assets, investments, incurrence of other
      indebtedness and payment of dividends. The Company expects to maintain
      compliance with these restrictive covenants, and believes that these
      restrictions will not have a material effect on the Company’s ability to
      maintain and improve its facilities and compete with other companies in the
      boating industry. As of June 30, 2007 the Company was in compliance with all
      covenants.





On
      July
      12, 2006, the Company entered into an Agreement (the “Credit Facility”),
      referenced in the consolidated balance sheet as notes payable, with Regions
      Bank
      that provides for a secured, non-revolving line of credit under which the
      Company may obtain up to an aggregate of $5 million in loans from the lender
      during the one-year term of the agreement. The Company will use loans it obtains
      under the Credit Facility to finance its production of boats for display or
      demonstration at dealer meetings, boat shows, performance trials and factory
      demonstrations and that are of a configuration that are not available from
      a
      dealer’s stock. Boats financed with loans under the Credit Facility will be sold
      to dealers after they are no longer needed by the Company. At June 30, 2007
      there was one loan outstanding under the Credit Facility in the amount of
      $799,333. That loan has been repaid subsequent to June 30, 2007.




29




Each
      loan
      under the Credit Facility will be repayable in full one year following the
      loan
      date or, if earlier, upon the sale or transfer of the boat that secures that
      loan. The Company may obtain a six (6) month extension of the maturity of any
      loan upon repayment of at least 20 percent (20%) of the outstanding loan amount
      prior to the loan maturity date. The Company has fully and unconditionally
      guaranteed all obligations under the Credit Facility.





At
      the
      Company’s option, and subject to the terms and conditions of the Credit
      Facility, each loan will bear interest from the loan date on its unpaid balance
      at a rate equal to (1) the higher of the federal funds rate, as in effect from
      time to time, plus one-half of one percent per annum, or the lender’s prime
      lending rate as in effect from time to time, or (2) a rate calculated as
      provided in the Loan Agreement based on LIBOR.





The
      Company’s obligations in connection with each loan under the Credit Facility
      will be secured by a lien on the boat for which that loan was obtained.
      Additionally, collateral documents that the Company entered into with the lender
      on September 19, 2005 to secure the Company’s obligations under a $16,500,000
      term loan agreement, the Loan, (including a (1) Deed of Trust, Assignment of
      Rents, Security Agreement and Financing Statement, (2) Security Agreement,
      and
      (3) Pledge Agreement), have been amended to also secure loans under the Credit
      Facility as well. As a result, the Company’s obligations under the Credit
      Facility are secured by all real estate and all furniture, fixtures and
      equipment owned by the Company and associated with its manufacturing facilities,
      all of the Company’s accounts receivable, inventory and other assets, and all
      shares of Fountain Powerboats, Inc. (the subsidiary) capital stock that the
      Company owns.




Following
      is a summary of long-term debt at June 30, 2007:




**2007**
            
            **2006**Regions
                Bank term loan (the “Loan”)
            
            $
            15,228,697
            
            $
            15,940,684Borrowings
                against the Cash Surrender Value of key man life insurance policies
                owned
                by the Company.
            
            
            1,500,000
            
            
            —Total
                long term debt
            
            
            16,728,697
            
            
            15,940,684Less:
                Current maturities included in current liabilities:
            
            
            (759,290
            )
            
            (711,984
            )$
            15,969,407
            
            $
            15,228,700




The
      estimated aggregate maturities required on the long-term debt for each of the
      years ending June 30 are as follows:




2008
            
            
            759,2902009
            
            
            809,7372010
            
            
            863,5372011
            
            
            12,796,133No
                contractual maturity (Cash Surrender Value borrowing)
            
            
            1,500,000$
            16,728,697




**Note
      6. Stock Options.**




Effective
      July 1, 2005 the Company adopted SFAS No. 123 (revised 2004), “ *Share-Based
      Payment* ,”
(“SFAS
      No. 123R”) which was issued by the FASB in December 2004. SFAS No. 123R revised
      SFAS 123 “ *Accounting
      for Stock Based Compensation* ”
and
      supersedes APB No. 25, “ *Accounting
      for Stock Issued to Employees* ,”
(APB
      No. 25) and its related interpretations. SFAS No. 123R requires recognition
      of
      the cost of employee services received in exchange for an award of equity
      instruments in the financial statements over the period the employee is required
      to perform the services in exchange for the award (presumptively the vesting
      period). SFAS No. 123R also requires measurement of the cost of employee
      services received in exchange for an award based on the grant-date fair value
      of
      the award. SFAS No. 123R also amends SFAS No. 95 “Statement of Cash Flows” to
      require that excess tax benefits be reported as financing cash inflows, rather
      than as a reduction of taxes paid, which is included within operating cash
      flows.





The
      Company adopted SFAS No. 123R using the modified prospective application as
      permitted under SFAS No. 123R. Accordingly, prior period amounts have not been
      restated. Under this application, the Company is required to record compensation
      expense for all awards granted after the date of adoption and for the unvested
      portion of previously granted awards that remain outstanding at the date of
      adoption.




30




Prior
      to
      the adoption of SFAS No. 123R, the Company used the intrinsic value method
      as
      prescribed by APB No. 25 and thus recognized no compensation expense for option
      granted with exercise prices equal to the fair market value of the Company’s
      common stock on the date of grant.





The
      Company has two stock option plans in effect at June 30, 2007. All options
      outstanding as of June 30, 2006 were fully vested and no new options were issued
      during the year ended June 30, 2007, therefore no option related compensation
      cost has been charged against income for the years ended June 30, 2007 and
      2006.





On
      June 21, 1995, the shareholders voted to adopt the 1995 stock option plan.
      The plan provided 450,000 options to purchase the common stock to be granted
      by
      the Board of Directors to employees or directors of the Company. On
      August 4, 1995, the Board of Directors voted to grant the 450,000 stock
      options to Mr. Reginald M. Fountain, Jr. at $4.67 per share,
      exercisable for 10 years from the date granted, on a non-qualified basis. On
      November 9, 2004, the shareholders of Fountain Powerboats, Inc. approved an
      amendment to this plan to permit the Board of Directors to extend the term
      of
      this plan to August 4, 2008. As of June 30, 2007, none of these
      options have been exercised.




During
      1999, the shareholders voted to adopt the 1999 Employee Stock Option Plan (the
      Plan), which expires January 11, 2009. Under the Plan, the board is
      empowered to grant options to purchase up to 120,000 shares of common stock
      to
      employees, officers, directors and consultants of the Company. Additionally,
      the
      Board will determine at the time of granting the vesting provisions and whether
      the options will qualify as Incentive Stock Options under Section 422 of
      the Internal Revenue Code (Section 422 provides certain tax advantages to the
      employee recipients). During the Company’s November 19, 2002 Annual Meeting
      the shareholders approved amendment of the 1999 Employee Stock Option Plan
      to
      increase the number of shares available for issuance under that plan from
      120,000 to 175,000 shares. As of June 30, 2007, 88,333 options are
      available for grant under the plan.




The
      fair
      market value of each option award is estimated on the date of grant using the
      Black-Scholes option pricing model. No options were granted during the years
      ended June 30, 2007 and 2006.





The
      risk
      free rate is based upon a U.S. Treasury instrument with a life that is similar
      to the expected life of the option grant. Expected volatility is based upon
      the
      historical volatility of the price of the Company’s common stock for a period
      consistent with the anticipated life of the option granted. The expected term
      of
      the options is based upon the average life of previously issued stock options.
      The expected dividend yield is based upon current yield on date of grant. No
      post-vesting restrictions exist for these options.





A
      summary
      of the status of the options granted under the Company’s 1995 and 1999 stock
      option plans and other agreements at June 30, 2007, 2006 and 2005, and
      changes during the periods then ended is presented in the table below:




**2007**
            
            **2006**
            
            **2005****Shares**
            
            **Weighted Average****Exercise Price**
            
            **Shares**
            
            **Weighted Average****Exercise Price**
            
            **Shares**
            
            **Weighted Average****Exercise Price**Outstanding
                at beginning of period
            
            
            470,000
            
            
            4.53
            
            
            500,000
            
            $
            4.36
            
            
            560,000
            
            $
            4.16Exercised
            
            
            10,000
            
            
            1.60
            
            
            **—**
            
            
            **—**
            
            
            26,667
            
            $
            1.56Forfeited
            
            
            **—**
            
            
            **—**
            
            
            30,000
            
            $
            1.60
            
            
            33,333
            
            $
            3.37Outstanding
                at end of period
            
            
            460,000
            
            
            4.59
            
            
            470,000
            
            $
            4.53
            
            
            500,000
            
            $
            4.36Exercisable
                at end of period
            
            
            460,000
            
            
            4.59
            
            
            470,000
            
            $
            4.53
            
            
            500,000
            
            $
            4.36




31




A
      summary
      of the status of the options outstanding under the Company’s stock option plans
      and other agreements at June 30, 2007 is presented below:




**Options
                Outstanding**
            
            **Options
                Exercisable****Range of****Exercise Prices**
            
            **Number****Outstanding**
            
            **Weighted Average****Remaining****Contractual Life**
            
            **Weighted Average****Exercise****Price**
            
            **Number****Exercisable**
            
            **Weighted Average****Exercise****Price**$1.34
            
            
            10,000
            
            
            .45
                years
            
            $
            1.34
            
            
            10,000
            
            $
            1.34$4.67
            
            
            450,000
            
            
            1.10
                years
            
            
            4.67
            
            
            450,000
            
            
            4.67460,000
            
            
            
            
            
            
            
            
            460,000





The
      Company had 10,000 options exercised during the year ended June 30, 2007 at
      an
      intrinsic value of $22,000. Of the options outstanding on June 30, 2007, only
      10,000 had intrinsic value, totaling $15,400. As of June 30, 2006, the intrinsic
      value of options outstanding was approximately $9,000.




**Note
      7. Income Taxes.**




The
      Company has provided for deferred income taxes in accordance with SFAS
      No. 109, “Accounting for Income Taxes”, ** whereby
      deferred income taxes are determined based upon the enacted income tax rates
      for
      the years in which these taxes are estimated to be payable or recoverable.
      Deferred income taxes arise from temporary differences resulting from a
      difference between the tax basis of an asset or liability and its reported
      amount in the financial statements.




The
      significant components of the provision for income taxes for the years ended
      June 30, 2007, 2006 and 2005 are as follows:




**2007**
            
            **2006**
            
            **2005**Current
                tax provisionFederal
            
            $
            —
            
            $
            —
            
            $
            (20,263
            )State
            
            
            —
            
            
            —
            
            
            (969
            )Total
                current tax provision
            
            
            —
            
            
            —
            
            
            (21,232
            )Deferred
                tax provisionFederal
            
            
            (1,158,091
            )
            
            383,221
            
            
            292,283State
            
            
            (259,031
            )
            
            77,037
            
            
            63,307Total
                deferred tax provision
            
            
            (1,417,122
            )
            
            460,258
            
            
            355,590Provision
                for income tax expense before adjustment to deferred tax asset valuation
                allowance
            
            
            (1,417,122
            )
            
            460,258
            
            
            334,358Increase
                (decrease) in valuation allowance
            
            
            2,700,850
            
            
            (1,744,004
            )
            
            (355,590
            )Net
                provision (benefit) for income taxes
            
            
            1,283,728
            
            $
            (1,283,746
            )
            $
            (21,232
            )




The
      difference between the provision (benefit) for income taxes and the amounts
      computed by applying the statutory federal income tax rate of 34% to income
      before income taxes is summarized below:




**2007**
            
            **2006**
            
            **2005**Expected
                income tax expense (benefit)
            
            $
            (1,279,269
            )
            $
            381,197
            
            $
            249,893Increase
                (decrease) resulting from:State
                income taxes, net of federal tax effect
            
            
            (171,347
            )
            
            51,058
            
            
            41,165Nondeductible
                expenses
            
            
            37,215
            
            
            28,004
            
            
            43,300Adjustment
                to deferred tax asset valuation allowance
            
            
            2,700,850
            
            
            (1,744,004
            )
            
            (355,590
            )Other
                permanent differences
            
            
            (3,721
            )
            
            —
            
            
            —Provision
                (benefit) for income taxes
            
            $
            1,283,728
            
            $
            (1,283,746
            )
            $
            (21,232
            )





32




**Note
      7. Income Taxes. [** ***Continued*** **]**




Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. Significant components of deferred
      taxes at June 30, 2007 and 2006 are as follows:




**2007**
            
            **2006**Deferred
                tax assets relating to:Inventory
                capitalization difference
            
            $
            191,136
            
            $
            180,881Bad
                debt allowance
            
            
            6,843
            
            
            14,391Reserve
                for obsolete inventory
            
            
            20,999
            
            
            12,356Reserve
                for buy backs
            
            
            24,719
            
            
            5,960Warranty
                reserve
            
            
            236,576
            
            
            243,774Accrued
                dealer incentives
            
            
            234,063
            
            
            299,906Reserve
                for health insurance
            
            
            55,898
            
            
            62,451Accrued
                executive compensation
            
            
            —
            
            
            60,170Net
                operating loss carryforward
            
            
            3,130,059
            
            
            1,744,639Charitable
                contributions carryforward
            
            
            2,713
            
            
            892Alternative
                minimum tax credit carryforward
            
            
            41,524
            
            
            41,524Investment
                tax credits
            
            
            86,294
            
            
            86,294Total
                deferred tax assets
            
            
            4,030,826
            
            
            2,753,238Less
                valuation allowance
            
            
            2,700,850
            
            
            —Deferred
                tax assets net of valuation allowance
            
            
            1,329,976
            
            
            2,753,238Deferred
                tax liabilities relating to:Property
                and equipment
            
            
            (1,329,976
            )
            
            (1,469,492
            )Unrealized
                gain on swap
            
            
            (80,896
            )
            
            (142,861
            )Total
                deferred tax liability
            
            
            (1,410,872
            )
            
            (1,612,353
            )Net
                recorded deferred tax asset (liability)
            
            $
            (80,896
            )
            $
            1,140,885





Deferred
      income taxes are presented in the accompanying consolidated balance sheets
      as
      follows at June 30, 2007 and 2006:




**2007**
            
            **2006**Current
                deferred tax asset.
            
            $
            —
            
            $
            1,446,018Noncurrent
                deferred tax liability.
            
            
            (80,896
            )
            
            (305,133
            )$
            (80,896
            )
            $
            1,140,885





As
      of
      June 30, 2007 the Company had net deferred tax assets of $2,700,850 that were
      fully offset by a valuation allowance because, as of that date, it was
      Management’s conclusion that there continued to be doubt as to whether those
      deferred tax assets were more likely than not to be realized in the future.
      The
      deferred tax assets principally related to the potential future benefits of
      tax
      net operating loss carryforwards, most of which had been generated during the
      years ended June 30, 2002 and June 30, 2007 when the Company generated
      substantial net losses. During the year ended June 30, 2007 the Company
      performed an evaluation, in accordance with Statement of Financial Accounting
      Standard No. 109, *Accounting
      for Income Taxes* ,
      of the
      likelihood of realization of its deferred tax assets. The evaluation resulted
      in
      the application of a valuation allowance.





The
      Company has available federal and state operating loss carry forwards at
      June 30, 2007 of approximately $8,208,000 and $7,449,000, respectively,
      which expire at various dates through 2027.




33




**Note
      8. Commitments and Contingencies.**




**Employment
      Agreement:** The
      Company entered into a one-year employment agreement in 1989 with it’s Chairman,
      Reginald M. Fountain, Jr. The agreement provides for automatic one-year
      renewals at the end of each year subject to Mr. Fountain’s continued
      employment. The agreement was reviewed and reaffirmed by the Board of Directors
      during the year ended June 30, 2007.




During
      Fiscal 2005 the Company entered into a one-year employment agreement with R.
      David Knight, it’s President. The agreement provides for automatic one-year
      renewals at the end of each year, subject to Mr. Knight’s continued
      employment, and compensation for three years in event of termination or change
      in status without cause due to change in control. The agreement was reviewed
      and
      revised by the Board of Directors during the year ended June 30,
      2006.




**Dealer
      Interest:** The
      Company regularly pays a portion of dealers’ interest charges for floor plan
      financing. These interest charges amounted to $1,534,302 for Fiscal 2007,
      $1,462,821 for Fiscal 2006 and $1,238,274 for Fiscal 2005. They are included
      in
      the accompanying consolidated statements of operations as part of net sales.
      At
      June 30, 2007, 2006 and 2005 the estimated dealer incentive interest
      included in accrued dealer incentives amounted to $202,791, $257,050 and
      $223,542, respectively.




**Product
      Liability and Other Litigation:** There
      were various warranty lawsuits against the Company extant at June 30, 2007.
      The Company intends to vigorously defend its interests in these matters. The
      Company carries sufficient product liability insurance to cover attorney’s fees
      and any losses, which may occur from these lawsuits over and above the insurance
      deductibles. The Company is also involved from time to time in other litigation
      through the normal course of its business. Management believes there are no
      such
      undisclosed claims which would have a material effect on the financial position
      of the Company.




**Manufacturer
      Repurchase Agreements:** The
      Company makes available through third-party finance companies floor plan
      financing for many of its dealers. Sales to participating dealers are approved
      by the respective finance companies. If a participating dealer does not satisfy
      its obligations under the floor plan financing agreement in effect with its
      commercial lender(s) and boats are subsequently repossessed by the lender(s),
      then under certain circumstances the Company may be required to repurchase
      the
      repossessed boats if it has executed a repurchase agreement with the lender(s).
      At June 30, 2007 and 2006, the Company had a contingent liability to
      repurchase boats in the event of dealer defaults and if repossessed by the
      commercial lenders amounting to $24,375,708 and $35,212,412,
      respectively . The
      Company has reserved for the future losses it might incur upon the repossession
      and repurchase of boats from commercial lenders. The amount of the reserve
      is
      based upon probable future events, which can be reasonably estimated. At
      June 30, 2007 and 2006, the allowance for boat repurchases was $64,124 and
      $15,459, respectively.




**401
      (k) Payroll Savings Plan:** During
      Fiscal 1991, the Company initiated a 401(k) Payroll Savings Plan (the 401(k)
      Plan) for all employees. Eligible employees may elect to defer up to twenty-five
      percent of their salaries. The amounts deferred by the employees are fully
      vested at all times. The Company currently matches fifty percent of the
      employee’s deferred salary amounts limited to a maximum of six percent of their
      salaried amounts, or effectively a maximum of three percent of their salaries.
      Amounts contributed by the Company vest at a rate of twenty percent per year
      of
      service. Mr. Fountain, by his own election, does not participate in the
      401(k) Plan. There are no post-retirement benefit plans in effect. The Company’s
      employer contribution to the 401(k) Plan was $125,429 for Fiscal year 2007,
      $131,626 for Fiscal 2006 and $113,633 for Fiscal 2005.




**Environmental:** The
      Company was notified in 1994 by the United States Environmental Protection
      Agency (“EPA”) that it has been identified as a potential responsible party
      (“PRP”) and may incur, or may have incurred, liability for the remediation of
      contamination at the Seaboard waste disposal site, located in High Point, North
      Carolina (also referred to as the Jamestown, North Carolina site) resulting
      from
      the disposal of hazardous substances at that site by a third party contractor
      of
      the Company. The Company’s share of the approximately 14.3 million gallons
      of waste is 19,245 gallons, a volumetric share of .1387%. The Company’s
      liability at this site was defined by the Group administrator to be $28,105.
      The
      Company has entered into a *de
      Minimus* Settlement Agreement, which is expected to be executed in 2007. The entire
      $28,105 liability has been accrued and is reflected in the consolidated balance
      sheet.




34





**Note
      9. Export Sales.**




The
      Company had export sales to customers in the following geographic areas:




**Year
                Ended June 30,****2007**
            
            **2006**
            
            **2005**Canada,
                Central and South America
            
            $
            3,689,071
            
            $
            1,849,529
            
            $
            2,474,619Europe
            
            
            4,059,120
            
            
            2,722,920
            
            
            1,417,819Middle
                East
            
            
            455,687
            
            
            2,753,281
            
            
            1,088,838Africa
            
            
            —
            
            
            965,910
            
            
            410,758Asia
            
            
            300,691
            
            
            —
            
            
            —Australia
            
            
            314,418
            
            
            —
            
            
            —$
            8,818,987
            
            $
            8,291,640
            
            $
            5,392,034




**Note
      10. Transactions with Related Parties.**




The
      Company expensed the following amounts for apartment rentals owned or controlled
      by Reginald M. Fountain, Jr., the Company’s Chairman and Chief Executive
      Officer: in Fiscal 2007, $3,576; in Fiscal 2006, $25,435; and in Fiscal 2005,
      $32,358. At June 30, 2007, the Company owed Reginald M. Fountain, Jr. $0
      for these rentals.




The
      Company expensed the following amounts for aircraft services and rentals to
      an
      entity controlled by Reginald M. Fountain, Jr.: in Fiscal 2007, $297,785; in
      Fiscal 2006, $255,339; and in Fiscal 2005, $178,383. At June 30, 2006 the
      Company owed $0 in unpaid services to this entity.




The
      Company expensed $20,000 during Fiscal 2007 related to a race boat owned by
      Reginald M. Fountain, Jr. The payment to Mr. Fountain was compensation for
      the
      Company’s use of his boat over the course of 5 years for promotion and
      demonstration purposes.





A
      Director of the Company purchased a single boat in Fiscal 2007 for $296,314
      and
      a single boat in Fiscal 2006 for $211,174, both were at standard wholesale
      price
      for the boat model and optional features.





A
      Director of the Company contributed $28,000 to the Company in Fiscal 2007 and
      $42,000 in Fiscal 2006 in support of the Company’s offshore racing
      program.




**Note
      11. Concentration of Credit Risk.**




Concentration
      of credit risk arises due to the Company operating in the marine industry,
      particularly in the United States. In Fiscal 2007 one dealer accounted for
      13.6
      percent of sales, one accounted for 9 percent of sales and four each accounted
      for 5.0 to 5.5 percent of sales. In Fiscal 2006 one dealer accounted for 10.9
      percent of sales, one accounted for 8.5 percent of sales and four each accounted
      for 5.8 to 6.3 percent of sales. In Fiscal 2005, one dealer accounted for 10.5
      percent of sales, one for 6 percent of sales, and three dealers for 5 percent
      of
      sales individually.




**Note
      12. Earnings per Share.**




Basic
      earnings per share represent income available to common shareholders divided
      by
      the weighted- average number of common shares outstanding during the period.
      Diluted earnings per share reflect additional common shares that would have
      been
      outstanding if dilutive potential common shares had been issued, as well as
      any
      adjustment to income that would result from the assumed issuance. Potential
      common shares that may be issued by the Company relate to outstanding stock
      options and is determined using the treasury stock method.




**2007**
            
            **2006**
            
            **2005**Weighted
                average number of common shares outstanding used in basic earnings
                per
                share
            
            
            4,821,987
            
            
            4,819,275
            
            
            4,815,188Effect
                of dilutive stock options
            
            
            —
            
            
            84,674
            
            
            74,936Weighted
                number of common shares and potential dilutive common shares outstanding
                used in dilutive earnings per share
            
            
            4,821,987
            
            
            4,903,949
            
            
            4,890,124




35




For
      the
      year ended June 30, 2007, there were 460,000 options that were antidilutive
      due to the net loss generated by the Company. These antidilutive options have
      been omitted from the calculation of diluted earnings per share for that year.
      For the years ended June 30, 2006 and June 30, 2005, there were no
      antidilutive options outstanding . There
      were no adjustments required to be made to net income in the computation of
      diluted earnings per share.




**Note
      13 – Sales
      by
      Product Line.**




The
      Company’s net sales resulted from the following product lines for the years
      ended June 30, 2007, 2006 and 2005:




**2007**
            
            **2006**
            
            **2005**Sports
                boats
            
            $
            28,055,275
            
            $
            31,799,204
            
            $
            33,819,857Express
                cruisers
            
            
            9,399,064
            
            
            15,760,240
            
            
            13,395,691Sport
                fishing boats
            
            
            29,629,864
            
            
            29,194,785
            
            
            21,123,893Non-boat
                sales including (Service, Parts, Sportswear)
            
            
            1,745,784
            
            
            2,471,995
            
            
            2,842,627Net
                sales
            
            $
            68,829,987
            
            $
            79,226,224
            
            $
            71,182,068




**Note
      14 – Leases.**




The
      Company leases, under separate non-cancelable operating lease agreements,
      certain machinery and equipment. These leases expire at various dates through
      October 2012. Future rentals under these leases are as follows:





2008
            
            
            105,5362009
            
            
            105,3322010
            
            
            84,5162011
            
            
            73,2392012
            
            
            16,970$
            385,593





Rental
      expense amounted to $106,115, $39,767, and $19,943 during the years ended June
      30, 2007, 2006 and 2005, respectively.





**Note
      15 – Profitability Enhancements.**




As
      shown
      on the accompanying consolidated financial statements, for the year ended June
      30, 2007 the Company recorded a pre-tax loss totaling $3,762,558 and tax expense
      of $1,283,728, primarily relating to the establishment of a net deferred tax
      asset valuation allowance, together resulting in a net loss of $5,046,286,
      which
      represents a 56% reduction of beginning stockholders equity. While such a
      significant loss may raise substantial doubt about the Company’s ability to
      return to sustained profitability and positive cashflows, management believes
      such a concern has been alleviated by steps taken to improve performance. For
      instance, the number of employees was reduced by 24% during Fiscal 2007 to
      a
      level consistent with the lower sales achieved during Fiscal 2007. Additionally,
      the Company is re-engineering its distribution channels to maximize
      profitability. The compensation plan for the Company’s sales force has been
      revised to more closely align compensation with performance. The substantial
      expenses incurred during Fiscal 2007 for the development of “lean manufacturing”
will not be repeated going forward. The Company’s management is committed to
      expense reductions, particularly in the areas of support for offshore powerboat
      racing and offshore fishing tournaments.





**Note
      16 – Subsequent Event.**




The
      Company formed a wholly owned subsidiary, “Fountain Dealer’s Factory Super
      Store” effective July 1, 2007 for the principal purpose of selling Fountain
      boats at retail in a territory that can be serviced from the Company’s
      Washington, North Carolina location and to provide retail sales support and
      training to its dealer network. The subsidiary will operate out of facilities
      owned by the Company. The Company’s initial investment in this subsidiary
      totaled $100,000.





36





**FOUNTAIN
      POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**




**SCHEDULES
      TO THE FINANCIAL STATEMENTS**




SCHEDULE
      II - VALUATION AND QUALIFYING ACCOUNTS


**Fiscal
                  2007****Valuation and Qualifying Account Description**
              
              **Balance****June 30, 2006**
              
              **Additions Chargedto Costs andExpenses**
              
              **Additions Chargedto Other Accounts**
              
              **Payments/****Deductions**
              
              **Balance****June 30, 2007**Allowance
                  for doubtful accounts
              
              $
              37,331
              
              $
              19,825
              
              $
              —
              
              $
              39,404
              
              $
              17,752Inventory
                  Obsolescence Reserve
              
              
              32,051
              
              
              68,071
              
              
              —
              
              
              45,650
              
              
              54,472Deferred
                  Tax Valuation Allowance
              
              
              —
              
              
              2,700,850
              
              
              —
              
              
              —
              
              
              2,700,850Warranty
                  Expense Reserve
              
              
              632,357
              
              
              1,325,133
              
              
              328,243
              
              
              1,343,805
              
              
              941,928Allowance
                  for Boat Repurchases
              
              
              15,459
              
              
              117,879
              
              
              —
              
              
              69,214
              
              
              64,124
  **Fiscal
                  2006****Valuation and Qualifying Account Description**
              
              **Balance****June 30, 2005**
              
              **Additions Chargedto Costs andExpenses**
              
              **Additions Chargedto Other Accounts**
              
              **Payments/****Deductions**
              
              **Balance****June 30, 2006**Allowance
                  for doubtful accounts
              
              $
              221,572
              
              $
              83,546
              
              $
              —
              
              $
              267,787
              
              $
              37,331Inventory
                  Obsolescence Reserve
              
              
              72,682
              
              
              42,060
              
              
              —
              
              
              82,691
              
              
              32,051Deferred
                  Tax Valuation Allowance
              
              
              1,744,004
              
              
              (1,744,004
              )
              
              —
              
              
              —
              
              
              —Warranty
                  Expense Reserve
              
              
              740,000
              
              
              26,579
              
              
              —
              
              
              134,222
              
              
              632,357Allowance
                  for Boat Repurchases
              
              
              75,000
              
              
              61,719
              
              
              —
              
              
              121,260
              
              
              15,459
  **Fiscal
                  2005****Valuation and Qualifying Account Description**
              
              **Balance****June 30, 2004**
              
              **Additions Chargedto Costs andExpenses**
              
              **Additions Chargedto Other Accounts**
              
              **Payments/****Deductions**
              
              **Balance****June 30, 2005**Allowance
                  for doubtful accounts
              
              $
              82,841
              
              $
              168,634
              
              $
              —
              
              $
              29,903
              
              $
              221,572Inventory
                  Obsolescence Reserve
              
              
              50,000
              
              
              22,682
              
              
              —
              
              
              —
              
              
              72,682Deferred
                  Tax Valuation Allowance
              
              
              2,065,541
              
              
              (321,537
              )
              
              —
              
              
              —
              
              
              1,744,004Warranty
                  Expense Reserve
              
              
              710,000
              
              
              892,480
              
              
              —
              
              
              862,480
              
              
              740,000Allowance
                  for Boat Repurchases
              
              
              75,000
              
              
              —
              
              
              —
              
              
              —
              
              
              75,000




**Detailed
      disclosure of activity in Schedule II accounts during Fiscal
      2007**





Allowance
      for Doubtful Accounts - Deductions during Fiscal 2007 to the Allowance for
      Doubtful Accounts totaled $39,404. That amount consists of accounts actually
      written off as bad debt totaling $47,252, which is partially offset by $7,848
      from reversing allowances for accounts, previously determined to be
      uncollectible, which were properly settled.





Inventory
      Obsolescence Reserve – During
      Fiscal
      2007, $45,650 of inventory was disposed of and deducted from the
      reserve.





Deferred
      Tax Valuation Allowance – As of June 30, 2007 the Company had net deferred tax
      assets of $2,700,850 that were fully offset by a valuation allowance because,
      as
      of that date, it was Management’s conclusion that there is doubt as to whether
      those deferred tax assets were more likely than not to be realized in the
      future. The deferred tax assets principally related to the potential future
      benefits of tax net operating loss carryforwards, most of which had been
      generated during the years ended June 30, 2002 and June 30, 2007 when the
      Company generated substantial net losses.





Warranty
      Expense Reserve – The Company records a liability for standard product
      warranties. The liability is recorded using historical warranty experience
      to
      estimate projected warranty costs. If necessary, the Company adjusts its
      liability for specific warranty matters when they become known and are
      reasonably estimable. The estimate of future warranty liability is calculated
      at
      least once during each quarter and appropriate adjustments are made to this
      liability account. The adoption of SAB 108 during Fiscal 2007 resulted in a
      $328,243 Addition to the Warranty Reserve, and, therefore, Warranty
      Expense.





Allowance
      for Boat Repurchases – Deductions during Fiscal 2007 totaled $69,214, reflecting
      the amount previously reserved for boats which were sold, subsequent to
      repurchase, during Fiscal 2007.





37




**FOUNTAIN
      POWERBOATS INDUSTRIES, INC.**


**SUPPLEMENTARY
      DATA**


**UNAUDITED
      SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA**




**First**
              **Quarter**
            
            **Second**
              **Quarter**
            
            **Third**
              **Quarter**
            
            **Fourth**
              **Quarter****Fiscal
                2007 ***Net
                sales
            
            $
            19,413,852
            
            $
            13,032,786
            
            $
            16,475,688
            
            $
            19,907,661Gross
                profit
            
            
            2,875,917
            
            
            1,123,938
            
            
            1,374,322
            
            
            3,749,583(Loss)
                Income before taxes
            
            
            (277,670
            )
            
            (2,363,585
            )
            
            (1,640,690
            )
            
            535,059Net
                (loss) income
            
            
            (196,670
            )
            
            (1,495,479
            )
            
            (3,873,524
            )
            
            535,059Net
                (loss) income per share:Basic
            
            
            (.04
            )
            
            (.31
            )
            
            (.80
            )
            
            .11Diluted
            
            
            (.04
            )
            
            (.31
            )
            
            (.80
            )
            
            .11**Fiscal
                2006**Net
                sales
            
            $
            19,157,736
            
            $
            18,210,092
            
            $
            18,526,332
            
            $
            23,332,064Gross
                profit
            
            
            3,676,114
            
            
            2,897,702
            
            
            2,764,533
            
            
            3,735,452Income
                before taxes
            
            
            697,058
            
            
            319,296
            
            
            22,410
            
            
            82,402Net
                income
            
            
            697,058
            
            
            319,296
            
            
            22,410
            
            
            1,366,148Net
                income per share:Basic
            
            
            .14
            
            
            .07
            
            
            .00
            
            
            .29Diluted
            
            
            .14
            
            
            .07
            
            
            .00
            
            
            .28**Fiscal
                2005**Net
                sales
            
            $
            16,742,309
            
            $
            17,256,520
            
            $
            16,714,140
            
            $
            20,469,100Gross
                profit
            
            
            1,993,148
            
            
            2,375,903
            
            
            2,891,593
            
            
            3,649,919Income
                (loss) before taxes
            
            
            (373,338
            )
            
            137,404
            
            
            359,492
            
            
            611,422Net
                income (loss)
            
            
            (373,338
            )
            
            137,404
            
            
            360,460
            
            
            631,686Net
                income (loss) per share:Basic
            
            
            (.08
            )
            
            .03
            
            
            .07
            
            
            .13Diluted
            
            
            (.08
            )
            
            .03
            
            
            .07
            
            
            .13




* Quarterly
      data for Fiscal 2007 is presented after giving the effect of the adoption of
      SAB
      108 as of the first quarter of Fiscal 2007. The sum of quarterly earnings data
      in this presentation may differ from the Consolidated Statement of Operations
      due to the adoption of SAB 108. See Note 1 of “Notes to Consolidated Financial
      Statements” for further discussion of SAB 108.





**Item
      9. Changes in and Disagreements with Independent Registered Public Accounting
      firms on Accounting and Financial Disclosure.**




The
      information contained under the section captioned “Relationship with Independent
      Registered Public Accounting Firm” in the Company’s definitive proxy statement
      for the Company’s 2007 Annual Meeting of the Stockholders (the “Proxy
      Statement”) is incorporated herein by reference.




**Item
      9A. Controls and Procedures.**




Disclosure
      Controls and Procedures




As
      of the
      end of the period covered by this report, the Company carried out an evaluation,
      under the supervision and with the participation of the Company’s management,
      including the Company’s Chief Executive Officer and Chief Financial Officer, of
      the effectiveness of the design and operation of the Company’s disclosure
      controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
      the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on
      that evaluation, the Chief Executive Officer and the Chief Financial Officer
      concluded that the Company’s disclosure controls and procedures are effective to
      ensure that information required to be disclosed by the Company in the reports
      that it files or submits under the Securities Act of 1934, as amended, is
      recorded, processed, summarized and reported. There are inherent limitations
      to
      the effectiveness of any system of disclosure controls and procedures. Even
      effective disclosure controls and procedures can only provide reasonable
      assurance of achieving their control objectives.





38




Changes
      have been made in the Company’s internal control over financial reporting
      identified in connection with the evaluation required under paragraph (d) of
      the
      Securities and Exchange Commission Rule 13a-15 that occurred during the
      Company’s last fiscal quarter that have materially affected, or are reasonably
      likely to materially affect, the Company’s internal control over financial
      reporting. Documented policies and procedures were implemented to provide a
      framework necessary to develop, implement and administer an effective internal
      control process necessary for the Company to comply with requirements of the
      Sarbanes-Oxley Act of 2002. The Company believes that the implementation has
      and
      will significantly strengthen internal control over financial
      reporting.





**Item
      9B. Other Information.**




None.




**Part
      III**




**Item
      10. Directors, Executive Officers and Corporate Governance.**




***Directors
      and Executive Officers*** .
      Information regarding the Company’s directors and executive officers that
      appears under the captions (1) “Proposal 1: Election of Directors,”
and (2) ”Executive Officers,” in the Company’s definitive Proxy Statement
      to be filed with the Commission in connection with the Company’s next Annual
      Meeting of Shareholders is incorporated herein by reference.




***Audit
      Committee*** .
      Information regarding the Audit Committee of the Company’s Board of Directors
      that appears under the captions “Committees of our Board – General”
and
“Audit Committee,”
of the
      Company’s definitive Proxy Statement to be filed with
      the Securities and Exchange Commission in connection with the Company’s next
      Annual Meeting of Shareholders is incorporated herein by reference.




***Audit
      Committee Financial Expert*** .
      Information appearing under the caption “Audit Committee Financial Expert” in
      the Company’s definitive Proxy Statement to be filed with the Commission in
      connection with the Company’s next Annual Meeting of Shareholders is
      incorporated herein by reference.




***Compliance
      with Section 16(a) of the Securities Exchange Act of
      1934*** .
      Information regarding compliance by the Company’s directors, executive officers
      and principal shareholders with the reporting requirements of Section 16(a)
      of the Securities Exchange Act of 1934 that appears under the caption “Section
      16(a) Beneficial Ownership Reporting Compliance” of the Company’s definitive
      Proxy Statement to be filed with the Securities and Exchange Commission in
      connection with the Company’s next Annual Meeting of Shareholders is
      incorporated herein by reference.




***Code
      of Ethics*** **.** ****** Information
      appearing under the caption “Code of Ethics” in the Company’s definitive Prroxy
      Statement to be filed with the Commission in connection with the Company’s next
      Annual Meeting of Shareholders is incorporated herein by reference.




**Item
      11. Executive Compensation.**




Information
      appearing under the headings “Compensation Discussion and
      Analysis,””Compensation Committee Report,” Executive Compensation” and Director
      Compensation” in the Company’s definitive Proxy Statement to be filed with the
      Commission in connection with the Company’s next Annual Meeting of Shareholders
      is incorporated herein by reference.




**Item12.
      Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.**




***Beneficial
      Ownership of Securities and Certain Change in Control
      Arrangements.*** Information regarding the beneficial ownership of the Company’s equity
      securities, and arrangements that could result in a future change in control
      of
      the Company, appearing under the caption “Beneficial Ownership of Securities” in
      the Company’s definitive Proxy Statement filed with the Commission in connection
      with the Company’s annual meeting of shareholders is incorporated herein by
      reference.




***Securities
      Authorized for Issuance Under Equity Compensation
      Plans.*** The
      following table summarizes all compensation plans and individual compensation
      arrangements that were in effect on June 30, 2007, and under which shares
      of the Company’s common stock were authorized for issuance.




39




**EQUITY
      COMPENSATION PLAN INFORMATION** ****




**Plan
                category**
            
            **(a)****Number of shares****to be issued upon****exercise of****outstanding options**
            
            **(b)****Weighted-average****exercise price of****outstanding options**
            
            **(c)****Number of shares remaining****available for future issuance under****equity compensation plans (excluding****shares reflected in column (a))**Equity
                compensation plans approved by security holders
            
            
            450,000
            
            $
            4.67
            
            
            88,333Equity
                compensation plans not approved by security holders (1)
            
            
            10,000
            
            
            1.34
            
            
            —Total
            
            
            460,000
            
            $
            4.59
            
            
            88,333





(1)
            Includes
                individual options to purchase shares of the Company’s common stock held
                by independent contractors for 10,000 shares at an exercise price
                of $1.34
                per share granted during 2001 and expiring during 2007.




**Item
      13. Certain Relationships and Related Transactions, and Director Independence.**




**Related
      Person Transactions.** Information appearing under the caption “Transactions with Related Persons” in
      the Company’s definitive Proxy Statement to be filed with the Commission in
      connection with the Company’s next Annual Meeting of Shareholders is
      incorporated herein by reference.





**Director
      Independence.** Information
      appearing under the caption “Corporate Governance – Director
      Independence” in the Company’s definitive Proxy Statement to be filed with the
      Commission in connection with the Company’s next Annual Meeting of Shareholders
      is incorporate herein by reference.




**Item
      14. Principal Accountant Fees and Services.**




Information
      appearing under the caption “Proposal 2. Ratification of Independent Accountants
      - Services and Fees During Fiscal 2007 and Fiscal 2006” in the Company’s
      definitive Proxy Statement to be filed with the Commission in connection with
      the Company’s next Annual Meeting of Shareholders is incorporated herein by
      reference.




**Part
      IV** ****




**Item
      15. Exhibits and Financial Statement Schedules.**




**(a)**  **Documents
      filed with Report:**




**(1)** **Financial
      Statements.** The
      following consolidated financial statements of the Company are contained in
      Item 8 of this Report.






PageReport
                of Dixon Hughes PLLC
            16Consolidated
                balance sheets at June 30, 2007 and 2006
            17Consolidated
                statements of operations for the years ended June 30, 2007, 2006 and
                2005
            18Consolidated
                statements of stockholder’s equity for the years ended June 30, 2007,
                2006 and 2005
            19Consolidated
                statements of cash flows for the years ended June 30, 2007, 2006 and
                2005
            20Notes
                to consolidated financial statements
            22




**(2)
        Financial Statement Schedules.**




Schedule
                II –
                Valuation and Qualifying Accounts
            37




**(3)**  **Exhibits** .
      An
      index of exhibits that are a part of this Form 10-K appears following the
      signature page and is incorporated herein by reference.




40




**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.


**FOUNTAIN
                POWERBOAT INDUSTRIES, INC.**By:
            /S/*Reginald
                M. Fountain, Jr.*September
                27, 2007
            
            Reginald
                M. Fountain, Jr.Chairman,
                President, and Chief Executive
                Officer




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the Registrant and in the
      capacities and on the dates indicated.




**Signature**
            
            **Title**
            
            **Date**/S/*Reginald
                M. Fountain, Jr.*
            
            Chairman
                and Chief Executive Officer
            
            September
                27, 2007Reginald
                M. Fountain, Jr.
            
            (Principal
                Executive Officer)/S/*Craig
                F. Goess*
            
            Director
            
            September
                27, 2007Craig
                F. Goess/S/*Guy
                L. Hecker, Jr.*
            
            Director
            
            September
                27, 2007Guy
                L. Hecker, Jr./S/*David
                C. Miller*
            
            Director
            
            September
                27, 2007David
                C. Miller/S/*Anthony
                J. Romersa*
            
            Director
            
            September
                27, 2007Anthony
                J. Romersa/S/*Anthony
                A. Sarandes*
            
            Director
            
            September
                27, 2007Anthony
                A. Sarandes/S/*Mark
                L. Spencer*
            
            Director
            
            September
                27, 2007Mark
                L. Spencer/S/*Irving
                L. Smith*
            
            Chief
                Financial Officer
            
            September
                27, 2007Irving
                L. Smith
            
            (Principal
                Financial Officer)/S/*Roger
                F. Scott*
            
            Principal
                Accounting Officer
            
            September
                27, 2007Roger
                F. Scott





41




**EXHIBIT
      INDEX**




**Exhibit No.**
            
            **Exhibit
                Description**3.1
            
            Registrant’s
                Articles of Incorporation, as amended (incorporated herein by reference
                to
                exhibits to Registrant’s Annual Report on Form 10-K for the fiscal year
                ended June 30, 2000)3.2
            
            Registrant’s
                Bylaws, as amended (incorporated herein by reference to exhibits
                to
                Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30,
                2000)4.1
            
            Form
                of stock certificate (incorporated herein by reference to exhibits
                to
                Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30,
                2005)10.1 *
            
            Employment
                Agreement dated March 31, 1989, between Reginald M. Fountain, Jr.
                and
                Fountain Powerboats, Inc. (incorporated herein by reference to exhibits
                to
                Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30,
                2005)10.2 *
            
            Employment
                Agreement dated September 1, 2004, as amended on October 18, 2004,
                between
                R. David Knight and Fountain Powerboats, Inc. (incorporated herein
                by
                reference to exhibits to Registrant’s Annual Report on Form 10-K for the
                fiscal year ended June 30, 2005)10.3 *
            
            Stock
                Option Agreement dated August 4, 1995, as amended, between Registrant
                and
                Reginald M. Fountain, Jr. (incorporated herein by reference to exhibits
                to
                Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30,
                2001)10.4 *
            
            1999
                Employee Stock Option Plan (incorporated herein by reference to exhibits
                to Registrant’s Annual Report on Form 10-K for the fiscal year ended June
                30, 1999)10.5 *
            
            1995
                Stock Option Plan, as amended (incorporated herein by reference to
                exhibits to Registrant’s Current Report on Form 8-K dated November 9,
                2004)10.6
            
            Master
                Agreement between Registrant, Fountain Powerboats, Inc., Reginald
                M.
                Fountain, Jr. and Brunswick Corporation (incorporated herein by reference
                to exhibits to Registrant’s Current Report on Form 8-K dated July 17,
                2003)10.7
            
            Engine
                Supply Agreement between Registrant Fountain Powerboats, Inc. and
                Brunswick Corporation (incorporated herein by reference to exhibits
                to
                Registrant’s Current Report on Form 8-K dated July 17,
                2003)10.8
            
            Omnibus
                Amendment and Agreement dated September 13, 2005, between Brunswick
                Corporation, Fountain Powerboat Industries, Inc., Fountain Powerboats,
                Inc., and Reginald M. Fountain, Jr. (incorporated herein by reference
                to
                exhibits to Registrant’s Current Report on Form 8-K dated
                September 19, 2005)10.9
            
            Loan
                Agreement dated September 19, 2005, between Fountain Powerboats,
                Inc.,
                Fountain Powerboat Industries, Inc., and Regions Bank (incorporated
                herein
                by reference to exhibits to Registrant’s Current Report on Form 8-K dated
                September 19, 2005)10.10
            
            Loan
                Agreement dated July 12, 2006, between Fountain Powerboats, Inc.,
                Fountain
                Powerboat Industries, Inc., and Regions Bank (incorporated herein
                by
                reference to exhibits to Registrant’s Current Report on Form 8-K dated
                August 23, 2006)10.11
            
            Deed
                of Trust, Assignment of Rents, Security Agreement and Financing Statement
                dated September 19, 2005, between Fountain Powerboats, Inc., and
                Regions
                Bank (incorporated herein by reference to exhibits to Registrant’s Current
                Report on Form 8-K dated September 19, 2005)10.12
            
            First
                Amendment dated July 12, 2006 to Deed of Trust, Assignment of Rents,
                Security Agreement and Financing Statement dated September 19, 2005,
                between Fountain Powerboats, Inc., and Regions Bank (incorporated
                herein
                by reference to exhibits to Registrant’s Current Report on Form 8-K dated
                August 23, 2006)10.13
            
            Security
                Agreement dated September 19, 2005, between Fountain Powerboats,
                Inc.,
                Fountain Powerboat Industries, Inc., and Regions Bank (incorporated
                herein
                by reference to exhibits to Registrant’s Current Report on Form 8-K dated
                September 19, 2005)10.14
            
            First
                Amendment dated July 12, 2006, to Security Agreement dated September
                19,
                2005, between Fountain Powerboats, Inc., Fountain Powerboat Industries,
                Inc., and Regions Bank (incorporated herein by reference to exhibits
                to
                Registrant’s Current Report on Form 8-K dated August 23,
                2006)10.15
            
            Pledge
                Agreement dated September 19, 2005, between Fountain Powerboat Industries,
                Inc., and Regions Bank (incorporated herein by reference to exhibits
                to
                Registrant’s Current Report on Form 8-K dated September 19,
                2005)




42




10.16
            
            First
                Amendment dated July 12, 2006, to Pledge Agreement dated September
                19,
                2005, between Fountain Powerboat Industries, Inc., and Regions Bank
                (incorporated herein by reference to exhibits to Registrant’s Current
                Report on Form 8-K dated August 23, 2006)10.17
            
            Second
                Omnibus Amendment and Agreement dated June 21, 2007, between Brunswick
                Corporation, Fountain Powerboat Industries, Inc., Fountain Powerboats,
                Inc., and Reginald M. Fountain, Jr. (incorporated herein by reference
                to
                exhibits to Registrant’s Current Report on Form 8-K dated June 25,
                2007)31.1
            
            Certification
                of Registrant’s Chief Executive Officer required by Rule 13a-14(a) (filed
                herewith)31.2
            
            Certification
                of Registrant’s Chief Financial Officer required by Rule 13a-14(a)
                (filed herewith)32
            
            Certifications
                of Registrant’s Chief Executive Officer and Chief Financial Officer
                pursuant to 18 U.S.C. 1350 (furnished herewith)99.1
            
            Registrant’s
                definitive proxy statement to be filed with the
                Commission





*
      Denotes
      a management compensation plan or compensatory plan or arrangement.




43