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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-K/A



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ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT
OF 1934



For fiscal year ended June 30, 2004



Commission File Number: 0-14712



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FOUNTAIN POWERBOAT INDUSTRIES, INC.

(Exact name of registrant as specified in
its charter)



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|                                               |  |                                  
|---------------------------------------------- |  | ---------------------------------
|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:



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

Common Stock, par value $ .01 per share



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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 there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will 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. ̈



Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act): ̈Yes    x  No



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



The aggregate market value of the Registrants voting and non-voting common equity held by affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrants most
recently completed second fiscal quarter was $7,857,930.



As of September 28,
2004, the number of outstanding shares of Registrants Common Stock was 4,814,275.



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.



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EXPLANATORY NOTE

RESTATMENT OF CONSOLIDATED FINANCIAL STATEMENTS



The Audit Committee of the Board of Directors of Fountain Powerboat Industries, Inc. (the Company), together with the management of the Company, have concluded that the Company should restate its consolidated financial
statements as of and for the fiscal year ended June 30, 2004.



As previously
disclosed, the Company, through an internal review process, has identified certain accounting errors made during the fiscal year ended June 30, 2004 that had the effect of overstating net income for the year and stockholders equity at fiscal
year-end. The errors related to certain general ledger balance sheet accounts that had not been properly reconciled to the appropriate underlying subsidiary records. After an extensive investigation, the Company has identified the journal entries
and transactions that caused the errors in these account balances. Specifically, the errors resulted primarily from the following:



| |  |  | Certain customer payments received were misapplied or not applied which affected the ending balances in three customer accounts.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | A sequence of ten checks was issued but not recorded in the general ledger. In reconciling the affected cash account, the sequence of ten checks was left off the listing of
outstanding checks. As a result, cash was overstated and certain expenses were understated, resulting in the cash balance on the general ledger to be overstated.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The unrealized gain on an interest rate swap agreement was miscalculated, causing an understatement of other comprehensive income which resulted in a corresponding understatement of
interest expense and overstatement of long-term debt at fiscal year end June 30, 2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company has corrected these errors and other insignificant errors in the restatement. The principal corrections of the Companys consolidated financial statements for the errors noted above are summarized
below.



The corrections to the consolidated statements of operations for the
fiscal year ended June 30, 2004 are:



| |  |  | Net sales were reduced by $544,796, attributable to errors in applying cash receipts to the three customer ledger accounts, and cost of sales was increased by $80,174, attributable
to the miscalculation of checks outstanding in the cash to bank reconciliation that overstated the cash balance in the general ledger. The cumulative effect of these errors resulted in a reduction in gross profit of $624,972 and a reduction in
operating income of $624,972.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other comprehensive income and accumulated other comprehensive income increased by $75,312 to correct the error in valuing the interest rate swap agreement. Interest expense also
increased by $67,792 and long-term debt decreased by $7,519 as a result of the error in valuing the interest rate swap agreement.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Current tax expense was reduced by $706 for fiscal year-end June 30, 2004, as a result of these errors.
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | The reduction in net income resulted in a reduction in basic and diluted earnings per share of $0.14. Net income was reduced by $692,055, attributable to the decrease in operating
income and the increase in total non-operating expense and the decrease in current tax expense.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The corrections to the consolidated balance sheet for the errors at June 30, 2004 are:



| |  |  | Cash & cash equivalents were reduced by $91,532, attributable to the miscalculation of the checks outstanding and deposits in-transit, and accounts receivable (less allowance
for doubtful accounts) was reduced by $630,237, attributable to errors in applying cash receipts to the customer ledger. The cumulative effect of these errors resulted in a reduction of the current tax asset balance by $21,248, a reduction in
current assets of $743,017 and a reduction in total assets of $743,017.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Accrued expenses were reduced by $97,505, attributable to the errors in posting cash receipts in the customer ledger creating credit balances and the reduction of current tax
expense, resulting in a reduction in total current liabilities of $97,505.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Long-term debt (less current maturities) was reduced by $7,519, attributable to incorrectly calculating the gain (loss) on the interest rate swap agreement for year-end June 30,
2004 and deferred tax liability was reduced by $21,248 as a result of the items described above, resulting in a reduction in total liabilities of $126,272.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Retained deficit was increased by $692,055, attributable to the reduction in net income of $692,055, and the unrealized gain (loss) balance was adjusted by $75,311 resulting in a
decrease in total stockholders equity of $616,744.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In
addition, the Companys management has determined that the accounting errors referenced above were the result of material weaknesses in the Companys internal control over financial reporting related to (i) its system of entry of certain
types of transactions into the general and subsidiary ledgers and (ii) the timely reconciliation of general ledger balance sheet accounts to the appropriate underlying subsidiary records. The Company has taken steps to remediate the material
weaknesses as of the date of this report. See Item 9A Controls and Procedures.



This Form 10K/A amends the Companys Annual Report on Form 10K for the fiscal year ended June 30, 2004, initially filed with the Securities and Exchange Commission (SEC) on September 28, 2004 (the
Original Filing) to reflect the restatement of the Companys audited consolidated financial statements as of and for the fiscal year ended June 30, 2004, as well as the notes and schedules related thereto. See note 14 to the
consolidated financial statements in this Form 10-K/A. In addition, the selected financial data has been corrected in Item 6 of this Form 10K/A. For the convenience of the reader, this Form 10K/A sets forth the Original Filing in its
entirety. However, this Form 10K/A only amends and restates certain information in Item 1 of Part I, Items 6, 7, 7A, 8 and 9A of Part II and Item 15 of Part IV of the Original Filing, in each case, solely as a result of and to reflect the
restatement, and no other information in the Original Filing is amended hereby. Except for the amended information referred to above, this Form 10K/A continues to describe conditions as of the date of the Original Filing and the Company has
not modified or updated other disclosures presented in the Original Filing. This Form 10K/A does not reflect events occurring after the filing of the Original Filing or modify or update disclosures (including, except as otherwise provided
herein, the exhibits to the Original Filing), affected by subsequent events. Accordingly, this Form 10K/A should be read in conjunction with the Companys filings made with the SEC subsequent to the date of the Original Filing. In
addition, this Form 10K/A includes certifications from the Companys Chief Executive Officer and Chief Financial Officer as Exhibits 31.1, 31.2 and 32.



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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 offshore sport boats, sport
fishing boats and sport cruisers intended for that segment of the recreational power boat market where speed, performance, and quality are the main criteria for purchase. The Company also produces military support craft for domestic and
international government agencies, including the United States Customs Service, the United States Navy and the United States Coast Guard. The Companys strategy in concentrating on these segments of the market is to maximize its use of the
reputation of its Chairman and President, Reginald M. Fountain, Jr., as an internationally recognized designer and builder of high speed power boats.



The Companys products are sold through a network of authorized dealers worldwide. The Company has targeted that segment of the market in which purchase decisions
are generally predicated to a relatively greater degree on the products image, style, speed, performance, quality, and safety.



Products.



The majority of the companys recreational products are based upon a deep V-shaped fiberglass hull with a V-shaped pad, a notched transom, and a positive lift step hull. This design enables the boat to achieve
performance with standard reliable power which the Company believes are greater than those offered by any of its competitors worldwide. As a result, the Company maintains that its boats are among the fastest, smoothest, safest, and best-handling
boats of their kind.



The Companys sport boats, ranging from 27 to
47, are of inboard/outboard design. These boats are propelled by single, twin, or triple gasoline or diesel engines ranging from 300 HP to more than 1075 HP each. The Company builds outboard powered center consoles, and outboard or stern drive
cabin model offshore sport fishing boats ranging from 23 through 38. In addition the company also has a line of express cruisers with 38 and 48 offerings. These boats are offered with gas or diesel options. The 48
utilizes surface drives which are very efficient, durable, and resist corrosion better than traditional stern drives. The 48 was named Boating Magazines Boat of the Year award for 2002 in its December 2002 issue, which is the boating
industries highest accolade. In addition, the Robb Report named the 48 the Best of the Best for 2003 in their June 2003 issue. This boat also set the record from Key West, Florida to Cancun, Mexico in just 8 hours and 35 minutes in August
2003. The Company also builds custom racing boats for the APBA and SBI racing circuits.



In addition to Sportboats, Fishing boats, and the new Cruiser Lines, the Company also produces a line of military/governmental boats of various configurations. These boats are commercial versions of the large sportboats and fishing boats,
and along with the rigid inflatable boats (RIB), form a separate military/commercial product line.



The Companys 47 Lightning Sport Boat operates at speeds of 75 to 100 mph and is very stable and suited for long range cruising in offshore waters. Its sleek styling makes it particularly attractive.
Depending primarily upon the type of engines and options selected, this boat retails at prices ranging from $400,000 to $625,000. This boats standard features include a custom windshield, integrated swim platform, flush deck hatches, and an
attractively appointed cockpit and cabin.



The Companys redesigned
42 Lightning, comes with a newly designed positive lift hull, a full wrap around windshield, as well as an impressive range of speed, stability and ride comfort. This top selling model equipped with special engines currently holds the world
speed record for V-bottom boats at 171.883 mph recorded by APBA/UIM & SBI on August 7, 2004. The retail price of the 42 ranges from $293,000 to $592,000.



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The 42 Executioner was introduced in Fiscal 2004 with retro styling and competitive pricing for the 40+ foot sport
boat market.



The 38 Lightning operates at speeds of between 70 and 100
mph. The retail price ranges from $269,000 to $344,000, depending primarily upon the type of engines selected. This model was cited by Powerboat Magazine in 2002 as Offshore Performance Boat of the Year. In Fiscal 2002, the 38
Lightning incorporated a new superventilated hull that is the most advanced superventilated hull produced by Fountain to date and it is based on their successful design, enhancing performance and interior space.



The 35 Lightning Sport Boat was totally redesigned and introduced in Fiscal 2000 to go
with a higher freeboard, new twin-step design, and new deck and interior. It operates at speeds between 70 and 100 mph. This boat won the 2001 Offshore Boat of the Year by Powerboat Magazine and has proven itself as the fastest boat in Factory II
history, setting the kilo record at 94.187 mph. This boats retail price ranges from $230,000 to $303,000, depending primarily upon the type of engines selected.



For Fiscal 2003 we reintroduced the 35 Executioner. Its retro styling and a competitive offshore entry level price has made it our
number one seller.



The 32 Fever was also reintroduced in Fiscal 2003.
Retail price ranges from $154,000 to $168,000.



The 29 Fever is still one
of the most popular boats. It operates at speeds of 65 to 85 mph and retail price ranges from $112,000 to $153,000 depending on engine size. It has great balance and speed for a single engine and operates in offshore sea conditions with superior
safety and handling. This boat is also offered with twin small block engines. This model has been awarded the 2001 Outstanding Sport Boat Performance Award by Powerboat Magazine and has set the 2000 APBA F-1 record at 89.873 mph.



The 27 Fever is a single engine model that incorporates the same features, components
and designs as our larger offshore performance boats. Its retail price ranges from $101,000 and $131,000.



The Company also builds and markets a sport fishing line. Our new generation of fishing boat is once again setting the standard for offshore fishing. The 34 and 38 are heavily campaigned on the Southern
Kingfish Association (SKA) tournament trail.



The 38 sport fish model is
a wide beam center console with T-Top and cuddy cabin that was introduced in fiscal 2001. It features triple outboards and retail price ranges from $218,000 to $245,000.



The 34 sport fish wide beam center console model was introduced in fiscal 2002 and is offered with twin or triple outboard engines.
Its retail prices range from $194,000 to $224,000, depending upon engine selection. The addition of this model has added greatly to our fish boat volume and profitability.



The 31 sport fish model features a center console with T-Top design and incorporates the same high performance, styling, and
structural integrity as the sport boat models. It has a deck configuration engineered for the knowledgeable, experienced sport fisherman. Retail price for this model ranges from $125,000 to $137,000.



The additional models include the 29 twin engine center console model and 23
single engine center console model. The design, construction, and performance of these models, together with the proven features of the 31 center console model, makes a line that appeals to many experienced sport fishermen, in addition to the
weekend warrior.



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To further enhance its sport fishing line, the Company has a 31 walk around cabin model based upon the proven
31 center console hull design. This model features a deck design that incorporates a cabin with standup headroom, an enclosed head with shower, and a full galley. With twin outboard engine power, this model is produced either as a fishing
machine or as a recreational cruiser.



The Company also produces a 29
walk around cabin fishing boat with outboard engine power and a single stern drive 29 and a 32 walk around cabin fishing model with twin stern drive power.



The 38 sport fish cruiser was introduced at the Miami Boat Show in February of 2003 and is offered with twin gas or diesel engines.
The 38 sport fish cruiser offers the customer the luxury and amenities of an express fisher while maintaining the performance and handling of a Fountain sport boat. Retail price for this boat ranges from $338,000 to $371,000.



Our newest boat, the 38LX is the perfect combination for fishing, performance, entertaining
and over -nighting. Powered by triple Mercury outboards, the 38 is extremely efficient and runs in excess of 60 MPH. The price ranges from $285,000 to $300,000.



During the past three years the Company has made great strides in the express cruiser market by developing the 38 and 48 express cruiser models. These
boats offer customers the speed and performance that you would typically find in a sport boat with the amenities of a traditional cruiser. We do it by integrating our positive lift bottom, notched transom and pad keel design, which greatly enhances
the performance.



The 38 express cruiser was introduced at the Miami Boat
Show in February of 2001. The 38 express cruiser offers the customer the luxury and space of a full cruiser while maintaining the performance and handling of a Fountain sport boat. This boat been extremely well received by the market and
retail price ranges from $323,000 to $367,000.



In Fiscal 2002, the Company
introduced the latest in their express cruiser and wide-beam lines. The 48 wide-beam express cruiser debuted offering a whole new level of comfort and luxury. With speeds of up to 65 mph, the 48 Express Cruiser launched the Company into
a new expanding market segment with an edge in performance and class. This 48 retail price ranges from $697,000 to $864,000, depending upon engine choice and option configurations.



In Fiscal 2005, the Company will introduce new and redesigned fish boat and sport boat models, to include:



23 Fish Boat  Built to succeed our 23 fish boat, features a wide,
deep hull for smooth ride no matter what the condition of the seas. Plus, the hulls double stepped, and available with twin Mercury engines, for added performance and safety. There is also plenty of fishing room, so the fisherman can easily
maneuver about.



33 Sport Fish Cruiser  So versatile it
appeals to serious fishermen as well as fun-loving families, this new boat is sure to make a big splash next year. Powered by twin 275 HP Mercury Verado outboards, it races to the fish and features every amenity anglers demand. With large areas for
entertaining, fishing and overnight capabilities for six, families will be just as impressed.



42 Poker Run  Speed rules in the world of sport boats, which is why we expect next years 42 Poker Run Edition to be a superstar. Its a highly customized specialty boat aimed at the
ever-growing poker-run market. Participants in these wildly popular events love to flaunt the speed of their boats, and nothing will leave a more lasting impression than our new Poker Run Edition.



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Following is a table showing the number of boats completed and shipped in each of the last three fiscal years by product
line:



|                     |  |            |  |            |  |           
|-------------------- |  | ---------- |  | ---------- |  | ----------
|                     |  | Fiscal2004 |  | Fiscal2003 |  | Fiscal2002
|Sport boats          |  | 244        |  | 198        |  | 115       
|Wide beam fish boats |  | 70         |  | 69         |  | 44        
|Wide beam cruisers   |  | 31         |  | 29         |  | 21        
|Sport fishing boats  |  | 66         |  | 89         |  | 48        
|Other                |  | 0          |  | 3          |  | 3         
|                     |  |            |  |            |  |           
|Total                |  | 411        |  | 388        |  | 231       
|                     |  |            |  |            |  |           



As of June 30, 2004 the Company had a
backlog of firm orders for 206 boats, totaling sales of $39,087,752, all of which will be completed during Fiscal 2005. At June 30, 2003 the sales backlog was 54 boats, totaling $7,585,761.



The Company conducts research and development projects for the design of its plugs and molds
for hull, deck, and small parts production. The design, engineering, and tooling departments currently employ approximately 32 full-time employees. Amounts spent on design, research, and development to build new plugs and molds in recent years were:



|            |  |                             |         |                                   |   |          
|----------- |  | --------------------------- | ------- | --------------------------------- | - | ---------
|            |  | DesignResearch &Development |         | Constructionof New Plugsand Molds
|Fiscal 2004 |  | $                           | 871,386 |                                   | $ | 1,060,533
|Fiscal 2003 |  | $                           | 552,072 |                                   | $ | 1,056,852
|Fiscal 2002 |  | $                           | 952,332 |                                   | $ | 1,370,526



For Fiscal 2005, design, research and
development planned expenses are estimated to be $958,000 and plug and mold construction expenditures are estimated to be $1,507,000. These expenditures will be used primarily to enhance and upgrade our line of fish boats to give us a more
predominant presence in the very active fish boat market.



Manufacturing
capacity is sufficient to accommodate approximately 30 to 40 boats in various stages of construction at any one time. Construction of a current model boat, depending on size, takes approximately three to ten weeks. The Company, with additional
personnel, currently has the capacity to manufacture approximately 500 sport and fishing boats, and 75 cruisers per year.



The manufacturing process for the hulls and decks consists primarily of the hand lay-up of vinylester resins and high quality stitched, bi-directional and
quad-directional fiberglass over a foam core in the molds designed and constructed by the Companys engineering and tooling department. This creates a composite structure with strong outer and inner skins with a thicker, light core in between.
The lay-up of fiberglass by hand rather than



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using chopped fiberglass and mechanical blowers, results in superior strength and appearance. The resin used to bind the composite structure together is
vinylester, which is stronger, better bonding, and more flexible than the polyester resins used by most other fiberglass boat manufacturers. Decks are bonded to the hulls using bonding agents, rivets, screws and fiberglass to achieve a strong,
unitized construction.



As one of the most highly integrated manufacturers in
the marine industry, the Company 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 quality standards are met. In
addition, 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. However, the Company purchases certain supplies and materials from a limited number of suppliers in order to obtain the benefit of volume discounts.



Certain materials used in boat manufacturing, including the resins used to
make the decks and hulls, are toxic, flammable, corrosive, or reactive and are classified by the federal and state governments as hazardous materials. Control of these substances is regulated by the Environmental Protection Agency and
state pollution control agencies which require reports and inspect facilities to monitor compliance with their regulations. The Companys cost of compliance with environmental regulations has not been material. The Companys manufacturing
facilities are regularly inspected by the Occupational Safety and Health Administration and by state and local inspection agencies and departments. The Company believes that its facilities comply with substantially all regulations. The Company,
however, has been informed that it may incur or may have incurred liability for re-mediation of ground water contamination at a hazardous waste disposal site resulting from the disposal of a hazardous substance at those sites by a third-party
contractor of the Subsidiary. (See Legal Proceedings.)



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. The Company has never had to conduct a product recall. In addition, boats manufactured for sale in the European Community must meet CE Certification Standards.



Sales and Marketing.



Sales are made through approximately 55 dealer shipping locations throughout the United
States. Most of these dealers are not exclusive to the Company and carry the boats of other companies, including some boats that may be competitive with the Companys products. The territories served by any dealer are not exclusive to the
dealer. However, the Company uses discretion in locating new dealers in an effort to protect the interests of the existing dealers.



Following is a table of sales by geographic area for the last three fiscal years:



|                                          |  |                     |            |             |   |             |  |   |           
|----------------------------------------- |  | ------------------- | ---------- | ----------- | - | ----------- |  | - | ----------
|                                          |  | Fiscal 2004Restated |            | Fiscal 2003 |   | Fiscal 2002
|United States                             |  | $                   | 57,035,932 |             | $ | 50,796,277  |  | $ | 35,450,436
|Canada, Mexico, Central and South America |  | $                   | 1,441,308  |             | $ | 929,481     |  | $ | 1,500,145 
|Europe and the Middle East                |  | $                   | 819,724    |             | $ | 595,777     |  | $ |          
|Asia                                      |  | $                   |           |             | $ | 235,549     |  | $ |          
|                                          |  |                     |            |             |   |             |  |   |           
|Total                                     |  | $                   | 59,296,964 |             | $ | 52,557,084  |  | $ | 36,950,581
|                                          |  |                     |            |             |   |             |  |   |           



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The Company targets a portion of its advertising program into foreign countries through various advertising media. It
continues to seek new dealers throughout Europe, South America, the Far East and the Middle East. In general, the Company requires payment in full or an irrevocable letter of credit from a domestic bank before it will ship a boat overseas.
Consequently, there is no credit risk associated with its foreign sales or risk related to foreign currency fluctuation.



For Fiscal 2004, one dealer accounted for 10.5% of sales, one accounted for 10.2% of sales and two each accounted for 5% of sales. For Fiscal 2003, one dealer accounted
for 10.3% of sales, one for 8.0% of sales and one accounted for 6.7% of sales. For Fiscal 2002 one dealer accounted for 11.8% of sales, one for 11.7% of sales and two each for 8% of sales. The Company believes that the loss of any particular dealer
could have an adverse affect on sales, yet the Company believes they could find other dealers within the same geographical area to replace any that are lost. The Company is actively pursuing the addition of new, quality dealers. As sales continue to
grow through dealer additions, it is reasonable to assume the Company will grow less dependent on any one dealer.



Field sales representatives call upon existing dealers and develop new dealers. The field sales force is headed by the Vice President of Sales who is responsible for
developing a full dealer organization for sport boats, sport fishing boats and express cruisers. The Company is seeking to establish separate sport boat, fishing boat, and cruiser dealers in most marketing areas due to the specialization of each
type of boat and the different sales programs required.



Although a sales order
can be cancelled at any time, most boats are pre-sold to a dealer before entering the production line. To date, cancellations have not had a material effect on the Company. The Company normally does not manufacture boats for its own inventory.



The Company ships boats to some dealers on a cash-on-delivery basis. However,
the majority of the Companys shipments are made pursuant to commercial dealer floor plan financing programs in which the Company participates on behalf of its dealers. Under these arrangements, a dealer establishes lines of credit
with one or more third-party lenders for the purchase of showroom inventory. When a dealer purchases a boat pursuant to a floor plan arrangement, it draws against its line of credit and the lender pays the invoice cost of the boat directly to the
Company. Generally, payment is made to the Company within five business days. When the dealer sells the boat to a retail customer, the dealer repays the lender, thereby restoring its available credit line. The dealers make curtailment payments
(principal payments) on the boats when required by their particular commercial lenders. As part of this sales promotion program the Company agrees to pay interest on the floor plan for a certain period of time. Similar sales promotion programs were
in effect during fiscal years 2004, 2003 and 2002.



Each dealers floor
plan credit facilities are secured by the dealers inventory, letters of credit, and perhaps other personal and real property. In connection with the dealers floor plan arrangements, the Company (together with substantially all other
major manufacturers) has agreed to repurchase any of its boats which a lender repossesses from a dealer and returns to the Company in a new or like new condition. In the event that a dealer defaults under a credit line, the lender may then invoke
the manufacturers repurchase agreements with respect to that dealer. In that event, all repurchase agreements of all manufacturers supplying a defaulting dealer are generally invoked regardless of the boat or boats with respect to which the
dealer has defaulted (See also Managements Discussion and Analysis of Financial Condition and Results of Operations). The Company participates in floor plan arrangements with several major third-party lenders on behalf of its dealers, most of
whom have financing arrangements with more than one lender. Except as described above, or where it has a direct repurchase agreement with a dealer, the Company is under no material obligation to repurchase boats from its dealers. From time to time
the Company will voluntarily repurchase a boat for the convenience of the dealer or for another dealer who needs a particular model not readily available from the factory. The marketing of boats to retail customers is primarily the responsibility of
the dealer, whose efforts are supplemented by the Company through advertising in boating magazines, and by participation in boat shows.



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Additionally, in order to further promote its products over the years, the Company has developed racing programs to
participate in the major classes of offshore powerboat races, many of which are regularly televised on networks such as Outdoor Channel. Additionally, Fountain single, twin and triple engine racing boats continue to hold their respective world speed
records. The result of these racing programs and world speed records has established the Companys products as the highest performing and safest designed offshore boats. The Company believes that the favorable publicity generated by these
performance programs contributes to its sales volume and brand recognition. The Company Founder and C.E.O., Reggie Fountain, has won numerous races in both factory and customer owned boats; he has also set numerous world speed records in both
factory and customer owned boats.



As part of the marketing program for its
line of sport fishing boats, the Company sponsors several outstanding sport fishermen. Fountain fishermen have won the coveted SKA Angler of the Year title in 1991, 1992, 1994, 1995 and 1997, which is more than any other boat
manufacturer. Currently, Fountain has an eleven (11) member team comprised of world class anglers who own Fountain boats. These fishermen can afford any boat but they choose to run a Fountain. Fountain is also a dominant force in the newly formed
American Striper Association (ASA). ASA tournaments are held throughout the northeast in areas ranging from Virginia to Maine. The Fountain fishing teams winning records have given the sport fishing boats favorable exposure to serious sport
fishermen, in particular with respect to the superior performance of Fountains fishing boat line.



Domestic retail demand for pleasure boats is seasonal with sales generally highest in the fourth quarter. A number of factors can influence demand for the Companys products, including, but not limited to:



| |  |  | Economic conditions and consumer confidence in the United States and certain international regions;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | Adverse weather in key geographic areas, including excessive rain, prolonged below average temperatures and severe heat or drought, particularly during the key selling season;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The level of inventories maintained by the dealers;
| | - |  | ---------------------------------------------------



| |  |  | The Companys ability to provide competitive products;
| | - |  | ------------------------------------------------------



| |  |  | Availability of effective distribution;
| | - |  | ---------------------------------------



| |  |  | Fuel costs;
| | - |  | -----------



| |  |  | Prevailing interest rates and the availability of retail financing;
| | - |  | -------------------------------------------------------------------



| |  |  | Consumer interest in recreational boating.
| | - |  | ------------------------------------------



Product Warranty.



The Company warrants its boat hull and deck structure against defects in material and workmanship for a period of six years. Other boat components are covered in accordance with the manufacturers warranty
through the Company. The engine manufacturer warrants engines installed in the boats. Warranty expenses of $547,507 or .9% of sales were incurred in Fiscal 2004, and $645,344 of expense or 1.2% of sales were incurred in Fiscal 2003 and charged
against net income. These amounts exclude expenses for new models that are attributable to research and development and model revision costs. A $710,000 reserve for warranty expenses net of the research and development costs estimated to be incurred
in future years had been established at June 30, 2004.



Competition.



Competition within the powerboat manufacturing industry is intense. While
the high performance sports boat market comprises only a small segment of all boats manufactured, the higher prices commanded by these boats



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##### Table of Contents

make it a significant market in terms of total dollars spent. The manufacturers that compete directly with the Company in its market segment include:



Formula, a Division of Thunderbird Products Corporation

Baja Boats, a Division of Brunswick Corporation

Cigarette Racing Team, Inc.

Donzi, American Marine Holdings

Contender Boats

Wellcraft

Hydra Sports

Grady White



The Company believes that in its market segment, speed, performance, quality, image, and
safety are the main competitive factors, with style and price also being a consideration.



Market demographics and industry experience indicate that the fishing boat market is the best potential growth market. We are expanding our fishing boat offerings to meet the rising demand in this market.



In addition, the Company believes the current product owners, many of whom have purchased
multiple and increasingly larger boats from the Company, provide a market ready for expansion into the cruiser segment.



Employees.



As of September 2004 the Company had 413 employees, of whom nine were executive and management personnel. Fifteen were engaged primarily in administrative positions including accounting, personnel, marketing and sales
activities. 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 affirmative action, equal opportunity employer.



Item 2. Properties.



The Companys executive offices and manufacturing facilities are located on 66 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 having a balance of $17,303,038 at June 30, 2004. (See Note 5). The operating facility contains buildings
totaling 235,040 square feet located on fifteen acres. The buildings consist of the following:



|            |  |                           |  |                                                        
|----------- |  | ------------------------- |  | -------------------------------------------------------
|            |  | ApproximateSquare Footage |  | Principal Use                                          
|Building 1  |  | 13,200                    |  | Executive offices, shipping, receiving, and paint shop.
|Building 2  |  | 7,200                     |  | Final prep.                                            
|Building 3  |  | 75,800                    |  | Lamination, upholstery, assembly, inventory, cafeteria.
|Building 4  |  | 14,250                    |  | Woodworking.                                           
|Building 5  |  | 26,800                    |  | Mating, small parts lamination.                        
|Building 6  |  | 23,800                    |  | Metal fabrication.                                     
|Building 7  |  | 15,720                    |  | Racing, service, and warranty.                         
|Building 8  |  | 8,750                     |  | Lamination extension area.                             
|Building 9  |  | 4,800                     |  | Mold storage.                                          
|Building 10 |  | 26,960                    |  | Fabrication, sportswear sales.                         
|Building 11 |  | 12,000                    |  | Cruiser manufacturing.                                 
|Building 12 |  | 5,760                     |  | Maintenance and storage.                               
|            |  |                           |  |                                                        
|Total       |  | 235,040                   |  |                                                        
|            |  |                           |  |                                                        



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##### Table of Contents

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, 2004, the Companys chief operating subsidiary was a defendant in 8 alleged breach of warranty 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 in the $40,000 to $60,000 range. The Company is likely to be eligible for a de Minimus Settlement Agreement, which is expected to be finalized in the spring of 2005.



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



None applicable



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##### Table of Contents

Part II



Item 5. Market for Registrants Common Equity and Related Stockholder Matters.



The Companys common stock, $.01 par value, trades on the NASDAQ
National Market System (under the symbol FPWR). The following table lists the high and low prices for the Companys common stock as reported on The NASDAQ National Market for each calendar quarter during our fiscal years ended June
30, 2003 and 2004.



|               |  |      |  |     
|-------------- |  | ---- |  | ----
|Quarter Ending |  | High |  | Low 
|September 2002 |  | 3.79 |  | 1.15
|December 2002  |  | 4.15 |  | 2.80
|March 2003     |  | 4.08 |  | 2.09
|June 2003      |  | 4.80 |  | 2.96
|               |  |     
|September 2003 |  | 4.55 |  | 2.85
|December 2003  |  | 3.94 |  | 2.50
|March 2004     |  | 3.65 |  | 2.85
|June 2004      |  | 6.33 |  | 3.15



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, any 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 August 27, 2004, there were 207 holders of record for the Companys common stock.



During Fiscal 2004, the Company sold an aggregate of 50,000 shares of its common stock to five officers, employees or consultants 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. The shares sold and consideration received was as follows:



|          |  |                  |  |                         |       
|--------- |  | ---------------- |  | ----------------------- | ------
|Date      |  | Number of Shares |  | Aggregate Consideration
|May 2004  |  | 20,000           |  | $                       | 33,400
|June 2004 |  | 30,000           |  | $                       | 48,000



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##### Table of Contents

Item 6. Selected Financial Data



Fountain Powerboat Industries, Inc. and Subsidiary

Selected Financial Data

Fiscal Years 2000 through 2004



|                                            |               |                     |            |  |      |            |  |      |            |   |      |   |            |   |  |   |           
|------------------------------------------- | ------------- | ------------------- | ---------- |  | ---- | ---------- |  | ---- | ---------- | - | ---- | - | ---------- | - |  | - | ----------
|Operations Statement Data:                  |               | Years Ended June 30
|                                            | 2004 Restated |                     | 2003       |  | 2002 |            |  | 2001 |            |   | 2000
|                                            |               |                     |            |  |     
|Sales                                       |               | $                   | 59,296,964 |  | $    | 52,557,084 |  | $    | 36,950,581 |   |      | $ | 45,128,034 |   |  | $ | 56,367,899
|Net Income (loss)                           |               | $                   | 609,087    |  | $    | 879,996    |  | $    | (7,031,593 | ) |      | $ | (899,526   | ) |  | $ | 1,258,342 
|Income (loss) per share                     |               | $                   | .13        |  | $    | .19        |  | $    | (1.49      | ) |      | $ | (.19       | ) |  | $ | .27       
|Weighted average shares outstanding         |               |                     | 4,761,460  |  |      | 4,744,457  |  |      | 4,732,608  |   |      |   | 4,732,608  |   |  |   | 4,732,608 
|Diluted earnings per share                  |               | $                   | .13        |  | $    | .18        |  | $    | (1.49      | ) |      | $ | (.19       | ) |  | $ | .27       
|Diluted weighted average shares outstanding |               |                     | 4,825,179  |  |      | 4,818,806  |  |      | 4,732,608  |   |      |   | 4,732,608  |   |  |   | 4,732,651 
|                                            |               |                     |            |  |     
|Balance Sheet Data (At Period
End)          |               |                     |            |  |      |            |  |      |            |   |      |  
|Current Assets                              |               | $                   | 12,460,218 |  | $    | 7,648,996  |  | $    | 7,885,047  |   |      | $ | 8,934,936  |   |  | $ | 13,621,499
|Total Assets                                |               | $                   | 30,621,143 |  | $    | 25,929,594 |  | $    | 26,534,696 |   |      | $ | 28,947,752 |   |  | $ | 33,431,084
|Current Liabilities                         |               | $                   | 6,782,584  |  | $    | 11,646,433 |  | $    | 11,775,953 |   |      | $ | 10,567,139 |   |  | $ | 12,144,123
|Long-term debt                              |               | $                   | 17,869,178 |  | $    | 9,010,527  |  | $    | 9,827,161  |   |      | $ | 6,629,904  |   |  | $ | 8,215,486 
|Stockholders equity (1)                    |               | $                   | 5,721,726  |  | $    | 4,968,811  |  | $    | 3,968,702  |   |      | $ | 10,991,132 |   |  | $ | 11,890,658

---

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



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##### Table of Contents

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



The Company has developed criteria for determining whether a shipment should be recorded as
a sale or as a deferred sale (a balance sheet liability). The 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 shipped to a
dealer or to the Government, 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 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, 2004, 2003, and 2002, 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, 2004, 2003, and 2002.



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. This liability amounted to approximately $18,177,586, $16,378,985 and $16,066,953 at June 30, 2004, 2003, and 2002, 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.



Fiscal 2004 was a year of continued growth in sales and profits, with the highest net sales
in the history of the Company. Firm order backlog was at an all time high at June 30, 2004. With the exception of the quarter ended September 30, 2003, the Company achieved positive net earnings from the remaining quarters during Fiscal 2004 at or
near quarterly records for the Company.



Net Sales for Fiscal 2004 of
$59,296,964 were up 12.8% from Fiscal 2003 sales of $52,557,084. Sales for Fiscal 2002 were $36,950,581. The Company attributes the sales increase to an improving economy, strong sales at retail, introduction of new boat models and strengthening of
the dealer network. The Company experienced increased sales in its wide-body fish boat and sport boat product segments.



Net Sales by product segment for the Fiscal years of 2004, 2003 and 2002 are:



|                                     |  |                              |            |           |    |   |                      |   |            |  |    |                      |  |           |            |  |    |  
|------------------------------------ |  | ---------------------------- | ---------- | --------- | -- | - | -------------------- | - | ---------- |  | -- | -------------------- |  | --------- | ---------- |  | -- | -
|Product Segment                      |  | Fiscal 2004Net SalesRestated |            | % ofSales |    |   | Fiscal 2003Net Sales |   | % ofSales  |  |    | Fiscal 2002Net Sales |  | % ofSales |           
|Sport Boats                          |  | $                            | 32,509,664 |           | 55 | % |                      | $ | 26,612,517 |  | 51 | %                    |  | $         | 21,191,672 |  | 57 | %
|Wide Beam Cruiser                    |  |                              | 9,508,545  |           | 16 | % |                      |   | 9,923,547  |  | 19 | %                    |  |           | 5,387,449  |  | 15 | %
|Fish Boats                           |  |                              | 4,770,596  |           | 8  | % |                      |   | 5,302,763  |  | 10 | %                    |  |           | 3,181,585  |  | 8  | %
|Wide Beam Fish                       |  |                              | 11,034,642 |           | 18 | % |                      |   | 9,291,260  |  | 17 | %                    |  |           | 5,404,056  |  | 15 | %
|Service, Parts, Sportswear, Trucking |  |                              | 1,473,517  |           | 3  | % |                      |   | 1,426,997  |  | 3  | %                    |  |           | 1,785,819  |  | 5  | %
|                                     |  |                              |            |           |    |   |                      |   |            |  |    |                      |  |           |            |  |    |  
|Net Sales Total                      |  | $                            | 59,296,964 |           |    |   |                      | $ | 52,557,084 |  |    |                      |  | $         | 36,950,581 |  |    |  



Gross margin on sales for Fiscal 2004
was $10,049,221, 17% of net sales, as compared to $8,519,127, 16.2% of net sales, for Fiscal 2003. Gross margin for Fiscal 2002 was $959,748, 2.6% of net sales.



Two boats were repurchased on floor plan arrangements during Fiscal 2004 and are being re-sold to other dealers; no discounts have been given at June 30, 2004. No
boats were repurchased in Fiscal 2003 and 2002 in connection with floor plan arrangements. At June 30, 2004, the Company had recorded a $75,000 reserve for losses which may be reasonably expected to be incurred on boat repurchases in future years.
At June 30, 2003 and 2002 the reserve was $200,000.



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On July 17, 2003 the Company obtained an $18,000,000 long-term loan from Bank of America that was guaranteed by
Brunswick, a division of which supplies marine engines used in the Companys products. Proceeds from the loan were used to refinance existing long-term debt, pay current liabilities, and provide additional working capital funds.



The Company is developing new wide beam fish boat models to be introduced in Fiscal 2005 to
provide a full range of models in that product segment that has experienced significant growth in sales.



The Company has begun a project to enhance the process flow and efficiency of the factory. A new state of the art ventilation and dust collection system is being installed that meets the best engineering
controls criteria of the Air Quality MACT standard and OSHA work place environment regulations. This project will be completed and operational in Fiscal 2005 and will facilitate cost reduction and increased production.



Results of Operations.



Operating profit was $1,830,080 for Fiscal 2004, as compared to $2,089,110 in 2003 and an operating loss of ($6,420,458) in Fiscal 2002,
which included a $1,182,320 charge for the impairment of certain long-lived assets in 2002. Operating profits declined in Fiscal 2004. Gross profit grew by almost .75% as a percentage of Net sales or $1,530,094. The drop in operating income was
primarily due to increases in Selling and Administrative, and General and Administrative Expenses. The increases to Selling Expenses were due to Managements focus on increasing support for product promotions, more emphasis on fish boats such
as the new 38 Sport Fish LX triple engine, and the need to increase the Companys presence in the tournament fishing programs during 2004. General and Administrative expenses grew from increases in support personnel, and higher legal
expenses.



In Fiscal 2004 reserves were reduced by a net of $448,935 due to
improvements in product warranty costs as a percentage of sales and an improving dealer network (see Note 1).



Fiscal 2004 net profit for the Company was $609,087 or $.13 per share. This compares to a net profit of $879,996 or $.19 per share for Fiscal 2003, and net loss of ($7,031,593) or ($1.49) per share for Fiscal 2002.



Depreciation expense was $2,052,314 for Fiscal 2004, $2,112,051 for Fiscal
2003, and $2,294,254 for Fiscal 2002. The decrease in depreciation for the year 2003, is attributable to the $1,182,320 impairment charge of certain long-lived assets in Fiscal 2002 and the sale of certain transportation equipment during 2003.
Depreciation expense by asset category was as follows:



|                         |  |      |           |      |   |           |  |   |          
|------------------------ |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|Fiscal Year:             |  | 2004 |           | 2003 |   | 2002     
|Land improvements        |  | $    | 127,464   |      | $ | 126,424   |  | $ | 126,035  
|Buildings                |  | $    | 301,885   |      | $ | 295,922   |  | $ | 294,921  
|Molds & plugs            |  | $    | 1,188,614 |      | $ | 1,197,669 |  | $ | 1,350,466
|Machinery & Equipment    |  | $    | 310,835   |      | $ | 356,333   |  | $ | 378,225  
|Furniture & fixtures     |  | $    | 13,862    |      | $ | 37,414    |  | $ | 41,408   
|Transportation equipment |  | $    | 32,880    |      | $ | 45,633    |  | $ | 56,531   
|Computer equipment       |  | $    | 76,774    |      | $ | 52,656    |  | $ | 46,668   
|                         |  |      |           |      |   |           |  |   |          
|Total                    |  | $    | 2,052,314 |      | $ | 2,112,051 |  | $ | 2,294,254
|                         |  |      |           |      |   |           |  |   |          



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Net fixed asset additions (deletions) are as follows:



|                         |  |      |           |   |      |   |          |  
|------------------------ |  | ---- | --------- | - | ---- | - | -------- | -
|Fiscal Year:             |  | 2004 |           |   | 2003 |  
|Buildings                |  | $    | (64,675   | ) |      | $ | 78,986   |  
|Land and Improvements    |  | $    | 46,541    |   |      | $ | 20,245   |  
|Molds and plugs          |  | $    | 830,718   |   |      | $ | 962,912  |  
|Construction in Progress |  | $    | 448,126   |   |      | $ | 93,940   |  
|Machinery & equipment    |  | $    | 100,542   |   |      | $ | 43,188   |  
|Furniture & fixtures     |  | $    | 31,217    |   |      | $ | 10,274   |  
|Transportation equipment |  | $    | 29,000    |   |      | $ | (217,215 | )
|Computer Equipment       |  | $    | 85,208    |   |      | $ | 38,665   |  
|Racing equipment         |  | $    |          |   |      | $ | (242,095 | )
|                         |  |      |           |   |      |   |          |  
|Total                    |  | $    | 1,506,677 |   |      | $ | 788,900  |  
|                         |  |      |           |   |      |   |          |  



Overall selling and administrative
expenses for Fiscal 2004 was $8,219,141 a $1,789,124 increase from $6,430,017 in Fiscal 2003.



Selling expenses were $5,558,709 for Fiscal 2004, $4,609,253 for Fiscal 2003 and $4,162,273 for Fiscal 2002. The Company increased its product promotions in Fiscal 2004, with an increased focus on fish boats and the
new 38 Sport Fish LX triple engine fish boat, and increased its presence in the tournament fishing programs during 2004.



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



|                       |  |      |           |      |   |           |  |   |          
|---------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|Fiscal Year:           |  | 2004 |           | 2003 |   | 2002     
|Fishing & racing       |  | $    | 1,053,134 |      | $ | 828,741   |  | $ | 1,011,007
|Advertising            |  | $    | 1,508,773 |      | $ | 1,031,661 |  | $ | 775,524  
|Salaries & commissions |  | $    | 1,091,174 |      | $ | 910,090   |  | $ | 599,337  
|Boat shows             |  | $    | 477,407   |      | $ | 508,811   |  | $ | 634,767  
|Dealer incentives      |  | $    | 139,838   |      | $ | 66,438    |  | $ | 88,200   
|Other selling expenses |  | $    | 1,288,383 |      | $ | 1,263,512 |  | $ | 1,053,438
|                       |  |      |           |      |   |           |  |   |          
|Total                  |  | $    | 5,558,709 |      | $ | 4,609,253 |  | $ | 4,162,273
|                       |  |      |           |      |   |           |  |   |          



General and administrative expenses
include the executive, finance, human resources, information technology, legal and administrative operating expenses of the Company. These expenses were $2,660,432 for Fiscal 2004, $1,820,764 for Fiscal 2003, and $2,035,613 for Fiscal 2002.



For Fiscal 2002, the Company recorded an impairment loss and wrote down
certain long-lived assets to realizable values for $1,182,320.



Interest
expense net of amounts capitalized was $1,210,477 for Fiscal 2004, $1,037,002 for Fiscal 2003, and $809,571 for Fiscal 2002. Interest expense increased in Fiscal 2004 as a result of the Company expensing $210,354 of capitalized loan costs from the
previous General Electric financing when it was refinanced by the new $18,000,000 loan from Bank of America.



Current tax expense is $0 for the years ended June 30, 2004 and 2003 and a benefit of $(717,983) for the year ended June 30, 2002. Deferred tax expense is $0 for the year ended June 30, 2004 and $169,301, and $541,059
at June 30, 2003 and 2002. Current tax expense for the year ended June 30, 2004 results from the net operating loss



17



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##### Table of Contents

carryover from the year ended June 30, 2002. There remains approximately $6,463,000 for Federal and $9,563,000 for State tax purposes of net operating loss
carryovers available till the years 2022 and 2023, respectively, to offset current tax expenses. The deferred tax charge for the year ended June 30, 2002 resulted from changes to the various temporary timing differences between book and tax as
outlined in Note 7 to the financial statements.



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. For these reasons and because the Company has generated operating
tax losses in recent years, the Company has elected to provide for a tax asset valuation allowance of $2,065,541 at June 30, 2004 and $2,342,912 at June 30, 2003.



Management is of the opinion the tax asset valuation allowance will not be required in its entirety in the coming years. Management
estimates, based on the Companys increased backlog of orders, that sales volumes will continue to improve in the near future thus resulting in improved earnings and partial absorption of the net operating tax loss carryovers. However, at this
time the Company has chosen not to reduce the tax asset valuation allowance for the following reasons: 1.) with the exception of order backlog, it is very difficult to predict future sales volumes in an uncertain economy that exists at the present
time; and 2.) the Companys inconsistent earnings history in recent years, which includes significant losses in fiscal 2001 and 2002. Currently, the tax asset valuation allowance is adjusted to the extent that total deferred tax assets exceed
total deferred tax liabilities. As operating results and the economy stabilize and future sales volumes increase, consideration will be given to reducing or eliminating the valuation allowance.



Liquidity and Financial Resources.



On July 17, 2003, the Company obtained an $18,000,000 long-term loan from Bank of America.
The proceeds were used to refinance the two loans with General Electric Capital Corporation at origination totaling $10,000,000 with a total remaining balance of $8,648,341 and a variable interest rate of prime plus 2% or 6.25% as of June 30, 2003.
Proceeds from the Bank of America loan were also used to pay trade payables to current status and provide additional operating funds. The new agreement with Bank of America has a $9,000,000 variable interest note accruing at one month LIBOR plus
2.25% or 3.77% at July 17, 2003, and a $9,000,000 note under an interest rate swap to provide a fixed rate of 6.02%. The interest rate swap is designated as a cash flow hedge and is deemed effective pursuant to SFAS 133. The Bank of America loan has
a fifteen year amortization with a five year balloon payment and is secured by certain assets of the Company and President, Chief Executive Officer and majority shareholder, Reginald M. Fountain, Jr. Obligations are guaranteed by the Company and Mr.
Fountain and by Brunswick Corporation, a division of which supplies marine engines used in the Companys products. Combined monthly payments to Bank of America are approximately $126,000.



At the year ended June 30, 2003 and 2002, the Company had negative working capital of
$3,997,437 and $3,890,906, respectively. Subsequent to applying the proceeds of the loan on July 17, 2003, the Company had positive working capital of approximately $6,500,000 and at June 30, 2004 the Company had positive working capital of
$5,677,634.



Net cash used by operations in Fiscal 2004 amounted to $4,134,380
was primarily the result of using a portion of the proceeds of the Bank of America loan to reduce accounts payable by $4,824,939 partially offset by net income plus other adjustments to reconcile net income to cash used by operations.



Net cash provided by operations in Fiscal 2003 amounted to $3,345,801 resulting from net
income plus adjustments to reconcile net income to net cash provided by operating activities including depreciation expense of $2,112,051, changes in deferred taxes of $169,301 and loss on sales of assets of $8,378 before changes in asset and
liability accounts. $369,834 was used to fund an increase in inventories. The ending cash balance was $1,224,935.



Net cash used by operations in Fiscal 2002 amounted to $1,734,962. Net loss plus adjustments to reconcile net loss to net cash used by operating activities including
depreciation expense of $2,294,254 and an impairment on



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##### Table of Contents

the long-lived assets of $1,182,320 and other non-cash transactions provided $2,635,695 before other changes in assets and liability accounts. $1,395,518 was
provided by decrease in inventories. The ending cash balance was $329,640.



Investing activities in Fiscal 2004 required cash of $2,300,586 and primarily consisted of purchases of property, plant and equipment of $776,787 and for additional plugs and molds of $1,060,533 and increasing the cash surrender value of an
officers life insurance by $202,690.



Investing activities for Fiscal
2003 required $1,561,651, including $268,410 for property, plant and equipment, $1,056,852 for additional plugs and molds, $199,403 for payments increasing the cash surrender value of certain key man life insurance policies, $190,796 for payments
increasing other assets and proceeds of $153,810 on sales of property.



Investing activities for Fiscal 2002 required $1,820,959, of which $1,370,526 was used to complete construction of new molds and plugs, $231,080 was used to purchase property, plant and equipment, and $219,536 was used for payments
increasing the cash surrender value of certain key man life insurance policies.



Net cash provided by financing activities in Fiscal 2004 of $8,577,092 primarily resulted from the Bank of America loan of $18,000,000 partially offset by repayments of the existing indebtedness due to GE Capital of $8,648,341 and
repayments of loan principal of $763,031.



Financing activities for Fiscal 2003
used $888,855. Included in this amount are proceeds from issuance of notes payable from Northwestern Mutual Life on key man life insurance policies for $343,074 and debt repayment to General Electric Capital Corporation and others in the amount of
$1,014,001. Payments of deferred loan costs for the Bank of America loan were $251,528 at June 30, 2003



Financing activities for Fiscal 2002 provided $3,088,955. During November 2001, the Company refinanced the 7.02% fixed $10,000,000 General Electric Capital Corporation credit agreement with a remaining balance of
$6,655,656. The agreement with General Electric Capital Corporation involved $3,000,000 and $7,000,000 notes with a variable interest rate of prime plus 2% or 6.75% as of June 30, 2002. Combined monthly payments on these notes were approximately
$128,005. The proceeds from the notes payable and long term debt contributed $3,955,644. Payments on long-term debt used $560,181, and payments of deferred loan costs were $306,508.



The net increase in cash in Fiscal 2004 of $2,142,126 was primarily the result the Bank of America loan. The net increase in cash for Fiscal
2003 was $895,295, primarily from operating profits and issuance of notes payable from Northwestern Mutual Life Insurance. The net decrease in cash for Fiscal 2002 was $466,966, primarily attributed to cash paid for the development of the new
wide-beam 34 fish boat and 48 express cruiser and losses from operations due to decreased sales volume.



Management is of the opinion that cash flows will be sufficient to satisfy its current and future liquidity demands because of the increase in sales volumes and sales
backlogs at the date of this filing. Additionally the Company has maintained a historical sales backlog through the date of this report.



Effects of Inflation.



The Company has not been materially affected by the moderate inflation of recent years. Since most of the Companys plant and its equipment are relatively new, expenditures for replacements are not expected to be
a factor in the near-term future.



When raw material costs increase because of
inflation, the Company attempts to minimize the effect of these increases by using alternative, less costly materials, or by finding less costly sources for the materials it uses. When the foregoing measures are not possible, selling prices are
increased to recover the cost increases.



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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.



Cautionary Statement for Purposes of Safe Harbor Under the Private Securities
Reform Act of 1995.



The Company may from time to time make
forward-looking statements, including statements projecting, forecasting, or estimating the Companys performance and industry trends. The achievement of the projections, forecasts, or estimates contained in these statements is subject to
certain risks and uncertainties, and actual results and events may differ materially from those projected, forecast, or estimated.



The applicable risks and uncertainties include general economic and industry conditions that affect all businesses, as well as matters that are specific to the Company
and the markets it serves. For example, the achievement of projections, forecasts, or estimates contained in the Companys forward-looking statements may be impacted by national and international economic conditions; compliance with
governmental laws and regulations; accidents and acts of God; and all of the general risks associated with doing business.



Risks that are specific to the Company and its markets include but are not limited to compliance with increasingly stringent environmental laws and regulations; the
cyclical nature of the industry; competition in pricing and new product development from larger companies with substantial resources; the concentration of a substantial percentage of the Companys sales with a few major customers, the loss of,
or change in demand from dealers, any of which could have a material impact upon the Company; labor relations at the Company and at its customers and suppliers; and the Companys single-source supply and just-in-time inventory strategies for
some critical boat components, including high performance engines, which 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 7A. Quantitative and Qualitative Disclosures About Market Risk



Interest Rate Risk - At June 30, 2004, the Company owed $17,303,038 on a $18,000,000 credit
agreement with Bank of America. The credit agreement has $9,000,000 at one month LIBOR plus 2.50% or 3.87% as of June 30, 2004, and $9,000,000 under an interest rate swap to provide a fixed rate of 6.02%. A hypothetical 100 basis point increase in
interest rates would result in an approximately $90,000 increase in interest expense, resulting in a negative impact on the Companys liquidity and results of operations.



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##### Table of Contents

Item 8. Financial Statements and Supplementary Data.



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

Washington, North Carolina



We have audited the
accompanying consolidated balance sheets of Fountain Powerboat Industries, Inc. and Subsidiary as of June 30, 2004 and 2003 and the related consolidated statements of operations, stockholders equity and cash flows and the schedule of valuation
and qualifying accounts for the years ended June 30, 2004, 2003 and 2002. These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and
schedule 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fountain Powerboat Industries,
Inc. and Subsidiary as of June 30, 2004 and 2003 and the consolidated results of their operations and their cash flows for the years ended June 30, 2004, 2003 and 2002, in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, the related schedule of valuation and qualifying accounts, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.



As discussed in Note 14 to the financial statements, certain errors primarily
resulting in the overstatement of previously reported sales and accounts receivables at June 30, 2004, were subsequently discovered by management of the Company. Accordingly, the 2004 financial statements have been restated.



PRITCHETT, SILER & HARDY, P.C.



Salt Lake City, Utah

July 29, 2004, except for Note 14 as

to which the date is September 16, 2005



21



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                     |  |               |            |   |      |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                     |  | June 30,      |           
|                                                                                                                                     |  | 2004 Restated |            |   | 2003 |  
|ASSETS                                                                                                                               |  |               |            |   |      |   |            |  
|                                                                                                                                     |  |              
|CURRENT ASSETS:                                                                                                                      |  |               |            |   |      |   |            |  
|Cash & cash equivalents                                                                                                              |  | $             | 3,367,061  |   |      | $ | 1,224,935  |  
|Certificate of deposit                                                                                                               |  |               | 255,197    |   |      |   |           |  
|Accounts receivable, less allowance for doubtful accounts of $82,841 for 2004 and $27,841 for 2003                                   |  |               | 3,507,246  |   |      |   | 2,015,371  |  
|Inventories                                                                                                                          |  |               | 4,653,402  |   |      |   | 3,460,286  |  
|Prepaid expenses                                                                                                                     |  |               | 429,657    |   |      |   | 644,581    |  
|Current tax assets                                                                                                                   |  |               | 247,655    |   |      |   | 303,823    |  
|                                                                                                                                     |  |               |            |   |      |   |            |  
|Total Current Assets                                                                                                                 |  |               | 12,460,218 |   |      |   | 7,648,996  |  
|                                                                                                                                     |  |              
|PROPERTY, PLANT AND EQUIPMENT, net                                                                                                   |  |               | 15,913,794 |   |      |   | 16,165,684 |  
|                                                                                                                                     |  |              
|CASH SURRENDER VALUE OF LIFE INSURANCE                                                                                               |  |               | 1,581,316  |   |      |   | 1,378,626  |  
|                                                                                                                                     |  |              
|OTHER ASSETS                                                                                                                         |  |               | 665,815    |   |      |   | 736,288    |  
|                                                                                                                                     |  |               |            |   |      |   |            |  
|                                                                                                                                     |  | $             | 30,621,143 |   |      | $ | 25,929,594 |  
|                                                                                                                                     |  |               |            |   |      |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                 |  |               |            |   |      |   |            |  
|                                                                                                                                     |  |              
|CURRENT LIABILITIES:                                                                                                                 |  |               |            |   |      |   |            |  
|Current maturities of long-term debt                                                                                                 |  | $             | 772,704    |   |      | $ | 1,060,444  |  
|Current maturities of capital lease                                                                                                  |  |               | 17,710     |   |      |   | 20,118     |  
|Accounts payable                                                                                                                     |  |               | 2,821,866  |   |      |   | 7,498,762  |  
|Accounts payable-related party                                                                                                       |  |               | 21,000     |   |      |   | 169,043    |  
|Accrued expenses                                                                                                                     |  |               | 1,074,705  |   |      |   | 1,317,398  |  
|Dealer incentives                                                                                                                    |  |               | 1,203,522  |   |      |   | 190,010    |  
|Customer deposits                                                                                                                    |  |               | 86,077     |   |      |   | 290,658    |  
|Allowance for boat repurchases                                                                                                       |  |               | 75,000     |   |      |   | 200,000    |  
|Warranty reserve                                                                                                                     |  |               | 710,000    |   |      |   | 900,000    |  
|                                                                                                                                     |  |               |            |   |      |   |            |  
|Total Current Liabilities                                                                                                            |  |               | 6,782,584  |   |      |   | 11,646,433 |  
|                                                                                                                                     |  |              
|LONG-TERM DEBT, less current maturities                                                                                              |  |               | 17,862,521 |   |      |   | 8,986,160  |  
|CAPITAL LEASE, less current maturities                                                                                               |  |               | 6,657      |   |      |   | 24,367     |  
|DEFERRED TAX LIABILITY                                                                                                               |  |               | 247,655    |   |      |   | 303,823    |  
|COMMITMENTS AND CONTINGENCIES(See Note 8)                                                                                            |  |               |           |   |      |   |           |  
|                                                                                                                                     |  |               |            |   |      |   |            |  
|Total Liabilities                                                                                                                    |  |               | 24,899,417 |   |      |   | 20,960,783 |  
|                                                                                                                                     |  |               |            |   |      |   |            |  
|STOCKHOLDERS EQUITY                                                                                                                 |  |               |            |   |      |   |            |  
|Common stock, $.01 par value, 200,000,000 shares authorized, 4,807,608 shares for 2004 and 4,757,608 for 2003 issued and
outstanding |  |               | 48,076     |   |      |   | 47,576     |  
|Additional paid-in capital                                                                                                           |  |               | 10,517,451 |   |      |   | 10,436,551 |  
|Retained earnings (deficit)                                                                                                          |  |               | (4,791,596 | ) |      |   | (5,400,683 | )
|                                                                                                                                     |  |               |            |   |      |   |            |  
|                                                                                                                                     |  |               | 5,773,931  |   |      |   | 5,083,444  |  
|Less: Treasury Stock, at cost, 15,000 shares                                                                                         |  |               | (110,748   | ) |      |   | (110,748   | )
|Deferred compensation for stock options issued                                                                                       |  |               |           |   |      |   | (3,885     | )
|Accumulated other comprehensive income from interest rate swap                                                                       |  |               | 58,543     |   |      |   |           |  
|                                                                                                                                     |  |               |            |   |      |   |            |  
|                                                                                                                                     |  |               | 5,721,726  |   |      |   | 4,968,811  |  
|                                                                                                                                     |  |               |            |   |      |   |            |  
|                                                                                                                                     |  | $             | 30,621,143 |   |      | $ | 25,929,594 |  
|                                                                                                                                     |  |               |            |   |      |   |            |  



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



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF OPERATIONS



|                                            |  |                     |            |   |      |   |            |      |  |   |            |  
|------------------------------------------- |  | ------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                            |  | Year Ended June 30, |           
|                                            |  | 2004 Restated       |            |   | 2003 |   |            | 2002 | 
|NET SALES                                   |  | $                   | 59,296,964 |   |      | $ | 52,557,084 |      |  | $ | 36,950,581 |  
|COST OF SALES                               |  |                     | 49,247,743 |   |      |   | 44,037,957 |      |  |   | 35,990,833 |  
|                                            |  |                     |            |   |      |   |            |      |  |   |            |  
|Gross Profit                                |  |                     | 10,049,221 |   |      |   | 8,519,127  |      |  |   | 959,748    |  
|                                            |  |                     |            |   |      |   |            |      |  |   |            |  
|EXPENSES:                                   |  |                     |            |   |      |   |            |      |  |   |            |  
|Selling expense                             |  |                     | 5,558,709  |   |      |   | 4,609,253  |      |  |   | 4,162,273  |  
|General and administrative                  |  |                     | 2,660,432  |   |      |   | 1,820,764  |      |  |   | 2,035,613  |  
|Impairment of long-lived assets             |  |                     |           |   |      |   |           |      |  |   | 1,182,320  |  
|                                            |  |                     |            |   |      |   |            |      |  |   |            |  
|Total expenses                              |  |                     | 8,219,141  |   |      |   | 6,430,017  |      |  |   | 7,380,206  |  
|                                            |  |                     |            |   |      |   |            |      |  |   |            |  
|OPERATING INCOME (LOSS)                     |  |                     | 1,830,080  |   |      |   | 2,089,110  |      |  |   | (6,420,458 | )
|                                            |  |                     |            |   |      |   |            |      |  |   |            |  
|NON-OPERATING INCOME (EXPENSE):             |  |                     |            |   |      |   |            |      |  |   |            |  
|Other income (expense)                      |  |                     | 1,380      |   |      |   | 5,567      |      |  |   | 21,512     |  
|Interest expense                            |  |                     | (1,210,477 | ) |      |   | (1,037,002 | )    |  |   | (809,571   | )
|Gain (loss) on disposal of assets           |  |                     | (11,896    | ) |      |   | (8,378     | )    |  |   |           |  
|                                            |  |                     |            |   |      |   |            |      |  |   |            |  
|TOTAL NON-OPERATING INCOME (EXPENSE)        |  |                     | (1,220,993 | ) |      |   | (1,039,813 | )    |  |   | (788,059   | )
|                                            |  |                     |            |   |      |   |            |      |  |   |            |  
|INCOME (LOSS) BEFORE INCOME TAXES           |  |                     | 609,087    |   |      |   | 1,049,297  |      |  |   | (7,208,517 | )
|CURRENT TAX EXPENSE (BENEFIT)               |  |                     |           |   |      |   |           |      |  |   | (717,983   | )
|DEFERRED TAX EXPENSE (BENEFIT)              |  |                     |           |   |      |   | 169,301    |      |  |   | 541,059    |  
|                                            |  |                     |            |   |      |   |            |      |  |   |            |  
|NET INCOME (LOSS)                           |  | $                   | 609,087    |   |      | $ | 879,996    |      |  | $ | (7,031,593 | )
|                                            |  |                     |            |   |      |   |            |      |  |   |            |  
|BASIC EARNINGS (LOSS) PER SHARE:            |  | $                   | 13         |   |      | $ | 19         |      |  | $ | (1.49      | )
|                                            |  |                     |            |   |      |   |            |      |  |   |            |  
|WEIGHTED AVERAGE SHARES OUTSTANDING         |  |                     | 4,761,460  |   |      |   | 4,744,457  |      |  |   | 4,732,608  |  
|                                            |  |                     |            |   |      |   |            |      |  |   |            |  
|DILUTED EARNINGS (LOSS) PER SHARE:          |  | $                   | 13         |   |      | $ | 18         |      |  | $ | (1.49      | )
|                                            |  |                     |            |   |      |   |            |      |  |   |            |  
|DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING |  |                     | 4,825,179  |   |      |   | 4,818,806  |      |  |   | 4,732,608  |  
|                                            |  |                     |            |   |      |   |            |      |  |   |            |  



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



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

FROM JUNE 30, 2001 THROUGH JUNE 30, 2004



|                                                                                                                                    |  |              |  |                           |        |                                     |   |            |                                    |   |                |        |  |                      |        |  |                                  |   |  |   |          |   |  |   |         |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | ------------------------- | ------ | ----------------------------------- | - | ---------- | ---------------------------------- | - | -------------- | ------ |  | -------------------- | ------ |  | -------------------------------- | - |  | - | -------- | - |  | - | ------- | - |  | - | ---------- | -
|                                                                                                                                    |  | Common Stock |  | Additional Paid-inCapital |        | Retained Earnings(Deficit) Restated |   |            | OtherComprehensive Income Restated |   | Treasury Stock |        |  | DeferredCompensation |        |  | TotalStockholdersEquityRestated |  
|                                                                                                                                    |  | Shares       |  | Amount                    |        |                                     |   |            | Shares                             |   |                | Amount |  |                      |       
|BALANCE,June 30, 2001                                                                                                               |  | 4,732,608    |  | $                         | 47,326 |                                     | $ | 10,303,640 |                                    | $ | 750,914        |        |  | $                    |       |  | (15,000                          | ) |  | $ | (110,748 | ) |  | $ |        |   |  | $ | 10,991,132 |  
|Issuance of options to purchase 30,000 shares common stock at $1.67 per share for consulting services vesting through December
2004 |  |             |  |                           |       |                                     |   | 40,295     |                                    |   |               |        |  |                      |       |  |                                 |   |  |   |         |   |  |   | (31,132 | ) |  |   | 9,163      |  
|Net income for the year ended June 30, 2002                                                                                         |  |             |  |                           |       |                                     |   |           |                                    |   | (7,031,593     | )      |  |                      |       |  |                                 |   |  |   |         |   |  |   |        |   |  |   | (7,031,593 | )
|                                                                                                                                    |  |              |  |                           |        |                                     |   |            |                                    |   |                |        |  |                      |        |  |                                  |   |  |   |          |   |  |   |         |   |  |   |            |  
|BALANCE,June 30, 2002                                                                                                               |  | 4,732,608    |  | $                         | 47,326 |                                     | $ | 10,343,935 |                                    | $ | (6,280,679     | )      |  | $                    |       |  | (15,000                          | ) |  | $ | (110,748 | ) |  | $ | (31,132 | ) |  | $ | 3,968,702  |  
|Issuance of common stock upon exercise of options                                                                                   |  | 25,000       |  |                           | 250    |                                     |   | 33,350     |                                    |   |               |        |  |                      |       |  |                                 |   |  |   |         |   |  |   |        |   |  |   | 33,600     |  
|Payroll obligations forgiven by an officer and shareholder                                                                          |  |             |  |                           |       |                                     |   | 46,158     |                                    |   |               |        |  |                      |       |  |                                 |   |  |   |         |   |  |   |        |   |  |   | 46,158     |  
|Issuance of options to purchase 10,000 shares common stock at $1.60 per share for consulting services vesting through December
2003 |  |             |  |                           |       |                                     |   | 13,108     |                                    |   |               |        |  |                      |       |  |                                 |   |  |   |         |   |  |   | 27,247  |   |  |   | 40,355     |  
|Net income for the year ended June 30, 2003                                                                                         |  |             |  |                           |       |                                     |   |           |                                    |   | 879,996        |        |  |                      |       |  |                                 |   |  |   |         |   |  |   |        |   |  |   | 879,996    |  
|                                                                                                                                    |  |              |  |                           |        |                                     |   |            |                                    |   |                |        |  |                      |        |  |                                  |   |  |   |          |   |  |   |         |   |  |   |            |  
|BALANCE,June 30, 2003                                                                                                               |  | 4,757,608    |  | $                         | 47,576 |                                     | $ | 10,436,551 |                                    | $ | (5,400,683     | )      |  | $                    |       |  | (15,000                          | ) |  | $ | (110,748 | ) |  | $ | (3,885  | ) |  | $ | 4,968,811  |  
|Issuance of common stock upon exercise of options                                                                                   |  | 50,000       |  |                           | 500    |                                     |   | 80,900     |                                    |   |               |        |  |                      |       |  |                                 |   |  |   |         |   |  |   |        |   |  |   | 81,400     |  
|Vesting of options to purchase 10,000 shares common stock at $1.60 per share for consulting services vesting through December
2003  |  |             |  |                           |       |                                     |   |           |                                    |   |               |        |  |                      |       |  |                                 |   |  |   |         |   |  |   | 3,885   |   |  |   | 3,885      |  
|Other comprehensive income as a result of a cash flow hedge of $9,000,000 of the Bank of America note payable                       |  |             |  |                           |       |                                     |   |           |                                    |   |               |        |  |                      | 58,543 |  |                                 |   |  |   |         |   |  |   |        |   |  |   | 58,543     |  
|Net income for the year ended June 30, 2004                                                                                         |  |             |  |                           |       |                                     |   |           |                                    |   | 609,087        |        |  |                      |       |  |                                 |   |  |   |         |   |  |   |        |   |  |   | 609,087    |  
|                                                                                                                                    |  |              |  |                           |        |                                     |   |            |                                    |   |                |        |  |                      |        |  |                                  |   |  |   |          |   |  |   |         |   |  |   |            |  
|BALANCE,June 30, 2004                                                                                                               |  | 4,807,608    |  | $                         | 48,076 |                                     | $ | 10,517,451 |                                    | $ | (4,791,596     | )      |  | $                    | 58,543 |  | (15,000                          | ) |  | $ | (110,748 | ) |  | $ |        |   |  | $ | 5,721,726  |  
|                                                                                                                                    |  |              |  |                           |        |                                     |   |            |                                    |   |                |        |  |                      |        |  |                                  |   |  |   |          |   |  |   |         |   |  |   |            |  



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



24



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##### Table of Contents

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                |  |                     |            |   |      |   |            |      |  |   |            |  
|----------------------------------------------------------------------------------------------- |  | ------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                |  | Year Ended June 30, |           
|                                                                                                |  | 2004 Restated       |            |   | 2003 |   |            | 2002 | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                           |  |                     |            |   |      |   |            |      |  |   |            |  
|Net income (loss)                                                                               |  | $                   | 609,087    |   |      | $ | 879,996    |      |  | $ | (7,031,593 | )
|Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: |  |                     |            |   |      |   |            |      |  |   |            |  
|Non-cash expense                                                                                |  |                     | 3,885      |   |      |   | 86,512     |      |  |   | 9,162      |  
|Amortization of deferred loan costs                                                             |  |                     | 286,946    |   |      |   | 61,800     |      |  |   | 89,098     |  
|Depreciation expense                                                                            |  |                     | 2,052,314  |   |      |   | 2,112,051  |      |  |   | 2,294,254  |  
|Impairment of long-lived assets                                                                 |  |                     |           |   |      |   |           |      |  |   | 1,182,320  |  
|Loss on disposal of equipment                                                                   |  |                     | 11,896     |   |      |   | 8,378      |      |  |   |           |  
|Warranty reserve                                                                                |  |                     | (190,000   | ) |      |   | 30,000     |      |  |   | 280,000    |  
|Allowance for boat repurchases                                                                  |  |                     | (125,000   | ) |      |   |           |      |  |   |           |  
|Allowance for doubtful accounts                                                                 |  |                     | 55,000     |   |      |   |           |      |  |   |           |  
|Decrease in net tax asset                                                                       |  |                     |           |   |      |   | 169,301    |      |  |   | 541,059    |  
|Change in assets and liabilities:                                                               |  |                     |            |   |      |   |            |      |  |   |            |  
|(Increase) decrease in accounts receivable                                                      |  |                     | (1,546,876 | ) |      |   | 988,621    |      |  |   | (1,064,107 | )
|(Increase) decrease in inventories                                                              |  |                     | (1,193,116 | ) |      |   | (369,834   | )    |  |   | 1,395,518  |  
|(Increase) decrease in prepaid expenses                                                         |  |                     | 160,190    |   |      |   | (315,798   | )    |  |   | (161,286   | )
|Increase (decrease) in accounts payable                                                         |  |                     | (4,824,939 | ) |      |   | 643,152    |      |  |   | 1,341,929  |  
|Increase (decrease) in accrued expenses                                                         |  |                     | (244,091   | ) |      |   | 123,726    |      |  |   | 2,654      |  
|Increase (decrease) in dealer incentives                                                        |  |                     | 1,014,905  |   |      |   | (731,672   | )    |  |   | (923,885   | )
|Increase (decrease) in customer deposits                                                        |  |                     | (204,581   | ) |      |   | (340,432   | )    |  |   | 309,915    |  
|                                                                                                |  |                     |            |   |      |   |            |      |  |   |            |  
|Net Cash Provided (Used) by Operating Activities                                                |  |                     | (4,134,380 | ) |      |   | 3,345,801  |      |  |   | (1,734,962 | )
|                                                                                                |  |                     |            |   |      |   |            |      |  |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                           |  |                     |            |   |      |   |            |      |  |   |            |  
|Proceeds from sale of equipment                                                                 |  |                     | 25,000     |   |      |   | 153,810    |      |  |   |           |  
|Investment in molds and related plugs                                                           |  |                     | (1,060,533 | ) |      |   | (1,056,852 | )    |  |   | (1,370,526 | )
|Purchase of property, plant and equipment                                                       |  |                     | (776,787   | ) |      |   | (268,410   | )    |  |   | (231,080   | )
|Increase in cash surrender value of life Insurance                                              |  |                     | (202,690   | ) |      |   | (199,403   | )    |  |   | (219,536   | )
|Purchase of certificate of deposit                                                              |  |                     | (255,197   | ) |      |   |           |      |  |   |           |  
|(Increase) decrease in other assets                                                             |  |                     | (30,379    | ) |      |   | (190,796   | )    |  |   | 183        |  
|                                                                                                |  |                     |            |   |      |   |            |      |  |   |            |  
|Net Cash (Used) by Investing Activities                                                         |  |                     | (2,300,586 | ) |      |   | (1,561,651 | )    |  |   | (1,820,959 | )
|                                                                                                |  |                     |            |   |      |   |            |      |  |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                           |  |                     |            |   |      |   |            |      |  |   |            |  
|Proceeds from notes payable & long-term debt                                                    |  |                     | 18,000,000 |   |      |   | 343,074    |      |  |   | 3,955,644  |  
|Proceeds from issuance of common stock                                                          |  |                     | 81,400     |   |      |   | 33,600     |      |  |   |           |  
|Payments of long-term debt                                                                      |  |                     | (9,336,061 | ) |      |   | (1,008,836 | )    |  |   | (545,788   | )
|Payments on capital lease                                                                       |  |                     | (20,118    | ) |      |   | (5,165     | )    |  |   | (14,393    | )
|Payments of deferred loan cost                                                                  |  |                     | (148,129   | ) |      |   | (251,528   | )    |  |   | (306,508   | )
|                                                                                                |  |                     |            |   |      |   |            |      |  |   |            |  
|Net Cash Provided (Used) by Financing Activities                                                |  |                     | 8,577,092  |   |      |   | (888,855   | )    |  |   | 3,088,955  |  
|                                                                                                |  |                     |            |   |      |   |            |      |  |   |            |  
|Net increase (decrease) in cash & cash equivalents                                              |  |                     | 2,142,126  |   |      |   | 895,295    |      |  |   | (466,966   | )
|Beginning cash & cash equivalents balance                                                       |  |                     | 1,224,935  |   |      |   | 329,640    |      |  |   | 796,606    |  
|                                                                                                |  |                     |            |   |      |   |            |      |  |   |            |  
|Ending cash & cash equivalents balance                                                          |  | $                   | 3,367,061  |   |      | $ | 1,224,935  |      |  | $ | 329,640    |  
|                                                                                                |  |                     |            |   |      |   |            |      |  |   |            |  



[Continued]



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF CASH FLOWS



[CONTINUED]



|                                                   |  |                     |         |      |   |           |  |   |        
|-------------------------------------------------- |  | ------------------- | ------- | ---- | - | --------- |  | - | -------
|                                                   |  | Year Ended June 30,
|                                                   |  | 2004Restated        |         | 2003 |   | 2002     
|Supplemental Disclosures of Cash Flow Information: |  |                     |         |      |   |           |  |   |        
|Cash paid during the period for:                   |  |                     |         |      |   |           |  |   |        
|Interest:                                          |  |                     |         |      |   |           |  |   |        
|Unrelated parties, net of amounts capitalized      |  | $                   | 923,531 |      | $ | 1,035,553 |  | $ | 798,700
|Income taxes                                       |  | $                   |        |      | $ |          |  | $ | 45,424 



Supplemental Schedule of Non-cash
Investing and Financing Activities:



For the year ended
June 30, 2004:



The Company recorded consulting expense of $3,885 as a result
of amortization of deferred compensation from 40,000 options issued to purchase stock during Fiscal 2002, vesting through January 2004 and expiring through January 2009.



For the year ended June 30, 2003:



The Company recorded consulting expense of $40,355 as a result of amortization of deferred compensation from 40,000 options issued to purchase stock during Fiscal
2002, vesting through January 2004 and expiring through January 2009.



The
Company recorded a $46,158 contribution to additional paid in capital as a result of payroll obligations forgiven by an officer and shareholder of the Company.



For the year ended June 30, 2002:



The Company issued 20,000 options to purchase common stock to a consultant for services to be rendered valued at $25,450. The options are exercisable at $1.60 per share,
vest through June 2003 and expire June 2008. As of June 30, 2002, the Company has recorded consulting expense of $2,313.



The Company issued 20,000 options to purchase common stock to a consultant for services to be rendered valued at $27,953. The options are exercisable at $1.67 per share,
vest through January 2004 and expire January 2009. As of June 30, 2002, the Company has recorded consulting expense of $6,850.



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



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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 wide beam cruisers, wide beam fishing boats, sport fishing boats,
and custom offshore racing boats. These boats are sold worldwide to a network of approximately 55 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 approximately 400 people and is an equal opportunity, affirmative action employer.



Principles of Consolidation: The consolidated financial statements include the accounts of the Company 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 generally accepted accounting principles 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.



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, 2004 and 2003, the Company had $3,267,061 and $1,124,935, respectively, in excess of federally
insured amounts held in cash.



Inventories:
Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method (See Note 2).



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 (See Note 3).



Fair Value of Financial Instruments: Management estimates the carrying value of financial instruments on the consolidated financial
statements approximates their fair values.



Dealer
Incentive Accruals: The Company has in the current and prior periods 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. The Company has accrued dealer incentives
of $1,203,522 and $190,010 at June 30, 2004 and 2003, respectively. 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
based upon the highest number of repurchase events it has experienced in the last five years at an assumed discount of $15,000 per event.



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1. Nature of the Business and Significant Accounting Policies.
[Continued]



Internal Use
Software: The Company accounts for internal use software and development cost in accordance with the Statement of Position (SOP) 98-1, Accounting for Computer Software Developed for or Obtained for Internal Use. The SOP requires
the capitalization of certain cost incurred in connection with developing or obtaining software for internal use.



Revenue Recognition: The Company generally sells boats only to authorized dealers and to the U.S. Government. A sale is recorded when a boat
is shipped to a dealer or to the Government, legal title and all other incidents of ownership have passed from the Company to the dealer or to the Government, and an account receivable is recorded or payment is received from the dealer, from the
Government, or from the dealers third-party commercial lender. This is the method of sales recognition in use by most boat manufacturers.



The Company has developed criteria for determining whether a shipment should be recorded as a sale or as a deferred sale (a balance sheet liability). The
criteria for recording a sale are that the boat has been completed and shipped to a dealer or to the Government, that title and all other incidents of ownership have passed to the dealer or to the Government (title passes at the point of shipment),
and that there is no direct or indirect commitment to the dealer or to the Government to repurchase the boat or to pay floor plan interest for the dealer beyond the normal, published sales program terms.



The sales incentive floor plan interest expense for each individual boat
sale is accrued for the six months (180 days) interest payment period in the same fiscal accounting period that the related boat sale is recorded. The entire six months interest expense is accrued at the time of the sale because the Company
considers it a selling expense (See Note 8). The amount of interest accrued is subsequently adjusted to reflect the actual number of days of remaining liability for floor plan interest for each individual boat remaining in the dealers
inventory and on floor plan.



During the year ended June 30,
2004, the Company entered into arrangements that license other foreign companies to manufacture boats utilizing the Companys concepts and designs in exchange for royalties received for each boat manufactured. The Company accounts for these
royalties as sales revenue in the period when earned. Royalties for the year ended June 30, 2004 were less than 10% of total revenues.



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 $1,508,773, $1,031,661 and $775,524 for the years ended 2004, 2003 and 2002, 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.



Reclassifications: The financial statements and notes for
years prior to June 30, 2004 have been reclassified to conform with headings and classifications used in the June 30, 2004 financial statements.



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1. Nature of the Business and Significant Accounting Policies.
[Continued]



Cash Surrender
Value of life insurance policies: - At June 30, 2004 and 2003, the Company owned six life insurance policies on Reginald M. Fountain, Jr., the Companys Chairman, President and Chief Executive Officer for a total of $6,083,363
and $6,161,287 in coverage and $1,581,316 and $1,378,626 cash value. At June 30, 2004 and 2003 the Company has borrowed $1,295,449 and $1,265,438 against the policies (See Note 5).



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 $871,386 for Fiscal 2004, $552,072 for Fiscal 2003, and $952,332 for Fiscal 2002.



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 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 and it has the effect of converting the interest rate paid on the notional amount of $9,000,000 of the Companys variable debt to a fixed rate of 6.02%. The difference between the Companys actual variable
interest rate and 6.02% on the notional amount for the next twelve months is reclassified from other comprehensive income and recognized as interest expense. The Company is not a party to leveraged derivatives and does not hold or issue financial
instruments for speculative purposes.



Recently Enacted
Accounting Standards - Statement of Financial Accounting Standards (SFAS) No. 146, Accounting for Costs Associated with Exit or Disposal Activities, SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, and SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, were recently issued. SFAS No. 146 and 150 have no current applicability to the
Company or their effect on the financial statements would not have been significant. SFAS No. 149 has become applicable (as well as SFAS No. 133 as discussed above) and has been adopted by the Company as discussed above as a result of its use of a
cash flow hedge related to its loan from Bank of America (See Note 5).



Stock-based compensation  In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure, an amendment of FASB Statement No. 123 (SFAS 148). This
Statement amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial
statements.



The Company has stock incentive plans that
provides 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. The Company accounts for stock options issued to employee, officer
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.



During the periods presented in the accompanying financial statements the Company has granted options under the 1995 and
1999 Stock Options Plans and executive and other employment agreements (See Note 6). The Corporation has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Accordingly, compensation cost under SFAS No. 123 has been recognized for certain stock options issued under other agreements to non-employee and recorded in the accompanying statement of operations, but no compensation cost
under SFAS No. 123 has been recognized for stock options issued under plan and other agreement to employees.



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1. Nature of the Business and Significant Accounting Policies.
[Continued]



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 in 2004, 2003 and 2002 consistent with the provisions of SFAS No. 123, the
Companys net earnings net of taxes and earnings per share would have been reduced to the pro forma amounts indicated below:



|                          |  |             |  |                     |         |      |   |         |  |   |            |  
|------------------------- |  | ----------- |  | ------------------- | ------- | ---- | - | ------- |  | - | ---------- | -
|                          |  |             |  | Year Ended June 30, |        
|                          |  |             |  | 2004Restated        |         | 2003 |   | 2002    | 
|Net Income (loss)         |  | As reported |  | $                   | 609,087 |      | $ | 879,996 |  | $ | (7,031,593 | )
|                          |  | Pro forma   |  | $                   | 592,202 |      | $ | 434,186 |  | $ | (7,115,697 | )
|Earnings (loss) per share |  | As reported |  | $                   | 13      |      | $ | 19      |  | $ | (1.49      | )
|                          |  | Pro forma   |  | $                   | 13      |      | $ | 09      |  | $ | (1.50      | )



Note 2. Inventories.



Inventories consist of the following:



|                         |  |          |           |   |      |   |           |  
|------------------------ |  | -------- | --------- | - | ---- | - | --------- | -
|                         |  | June 30, |          
|                         |  | 2004     |           |   | 2003 |  
|Parts and supplies       |  | $        | 1,920,860 |   |      | $ | 1,593,057 |  
|Work-in-process          |  |          | 1,999,076 |   |      |   | 1,702,533 |  
|Finished goods           |  |          | 783,466   |   |      |   | 214,696   |  
|                         |  |          |           |   |      |   |           |  
|                         |  |          | 4,703,402 |   |      |   | 3,510,286 |  
|Reserve for obsolescence |  |          | (50,000   | ) |      |   | (50,000   | )
|                         |  |          |           |   |      |   |           |  
|                         |  | $        | 4,653,402 |   |      | $ | 3,460,286 |  
|                         |  |          |           |   |      |   |           |  



All of the inventory are owned by the
Company and are held as collateral on notes and mortgages payable having a balance of $17,303,038 at June 30, 2004.



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 3. Property, Plant, and Equipment.



Property, plant, and equipment consists of the following:



|                                   |  |                               |      |          |             |      |  |   |             |  
|---------------------------------- |  | ----------------------------- | ---- | -------- | ----------- | ---- |  | - | ----------- | -
|                                   |  | EstimatedUseful Livesin Years |      | June 30, |            
|                                   |  |                               | 2004 |          |             | 2003 | 
|Land and related improvements      |  | 10-30                         |      | $        | 4,611,064   |      |  | $ | 4,564,523   |  
|Buildings and related improvements |  | 10-30                         |      |          | 8,763,057   |      |  |   | 8,827,731   |  
|Construction-in-progress           |  | N/A                           |      |          | 935,092     |      |  |   | 486,966     |  
|Production molds and related plugs |  | 8-10                          |      |          | 21,486,150  |      |  |   | 20,655,432  |  
|Machinery and equipment            |  | 3-5                           |      |          | 5,492,864   |      |  |   | 5,384,323   |  
|Furniture and fixtures             |  | 5                             |      |          | 587,744     |      |  |   | 556,527     |  
|Computer Equipment                 |  | 5                             |      |          | 965,778     |      |  |   | 880,570     |  
|Transportation equipment           |  | 5                             |      |          | 341,711     |      |  |   | 320,711     |  
|                                   |  |                               |      |          |             |      |  |   |             |  
|                                   |  |                               |      | $        | 43,183,460  |      |  | $ | 41,676,783  |  
|Accumulated depreciation           |  |                               |      |          | (27,269,666 | )    |  |   | (25,511,099 | )
|                                   |  |                               |      |          |             |      |  |   |             |  
|                                   |  |                               |      | $        | 15,913,794  |      |  | $ | 16,165,684  |  
|                                   |  |                               |      |          |             |      |  |   |             |  



All of the land,
buildings and improvements are owned by the Company and are held as collateral on notes and mortgages payable having a balance of $17,303,038 at June 30, 2004. Depreciation expense was $2,052,314, $2,112,051, and $2,294,254, for the years ended June
30, 2004, 2003 and 2002, respectively. During Fiscal 2002, the Company recorded a loss on impairment of $1,182,320 in accordance with SFAS No. 121 Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of on
certain molds and racing boats to adjust the respective assets to their net realizable value.



Construction costs of production molds for new and existing product lines are capitalized and depreciated over an estimated useful life of eight to ten 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.



Note 4. Capital Lease.



The Company is the lessee of equipment under capital leases expiring in May 2004 and April 2006. The assets and liabilities under the capital leases were
recorded at the lower of the present value of the minimum lease payments or the fair value of the assets at the time of purchase. Equipment under capital lease obligation is as follows:



|                               |  |          |         |   |      |   |         |  
|------------------------------ |  | -------- | ------- | - | ---- | - | ------- | -
|                               |  | June 30, |        
|                               |  | 2004     |         |   | 2003 |  
|Equipment                      |  | $        | 118,556 |   |      | $ | 92,774  |  
|Less: Accumulated amortization |  |          | (99,817 | ) |      |   | (63,179 | )
|                               |  |          |         |   |      |   |         |  
|                               |  | $        | 18,739  |   |      | $ | 29,595  |  
|                               |  |          |         |   |      |   |         |  



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 4. Capital Lease. [Continued]



Total future minimum lease payments, executory costs and current portion of
capital lease obligations are as follows:



|                                                                                   |  |                |         |  
|---------------------------------------------------------------------------------- |  | -------------- | ------- | -
|Year ending June 30,                                                               |  | Lease Payments |        
|2005                                                                               |  | $              | 22,884  |  
|2006                                                                               |  |                | 3,358   |  
|                                                                                   |  |                |         |  
|Total future minimum lease payments                                                |  | $              | 26,242  |  
|Less: amounts representing maintenance and usage fee, interest and executory costs |  |                | (1,875  | )
|                                                                                   |  |                |         |  
|Present value of the future minimum lease payments                                 |  |                | 24,367  |  
|Less: Lease current portion                                                        |  |                | (17,710 | )
|                                                                                   |  |                |         |  
|Capital lease obligations - long term                                              |  | $              | 6,657   |  
|                                                                                   |  |                |         |  



Note 5. Long-term Debt and Pledged
Assets.



The following is a summary of long-term debt:



|                                                                                                                                                                                 |  |               |            |   |      |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                                                 |  | June 30,      |           
|                                                                                                                                                                                 |  | 2004 Restated |            |   | 2003 |  
|9.99% loans payable to a financial institution for the purchase of vehicles, monthly payments totaling $1,383 through May 2005, secured by the
vehicles purchased.               |  | $             | 18,216     |   |      | $ | 32,224     |  
|4.00% loan payable to a financial institution (8.25% for 2003) for the purchase of a vehicle, monthly payments of $726 through September 2006,
secured by the vehicle purchased. |  |               | 18,522     |   |      |   | 25,306     |  
|7.93% to 8% loans payable borrowed against the cash surrender value of key-man life insurance policies 1998, 2001, and 2002, monthly payments
of $25,004.                        |  |               | 1,295,449  |   |      |   | 1,265,438  |  
|$10,000,000 credit agreement with a financial corporation (See Below).                                                                                                           |  |               |           |   |      |   | 8,723,636  |  
|$18,000,000 credit agreement with a financial corporation (See Below).                                                                                                           |  |               | 17,303,038 |   |      |   |           |  
|                                                                                                                                                                                 |  |               |            |   |      |   |            |  
|                                                                                                                                                                                 |  |               | 18,635,225 |   |      |   | 10,046,604 |  
|Less: Current maturities included in current liabilities:                                                                                                                        |  |               | (772,704   | ) |      |   | (1,060,444 | )
|                                                                                                                                                                                 |  |               |            |   |      |   |            |  
|                                                                                                                                                                                 |  | $             | 17,862,521 |   |      | $ | 8,986,160  |  
|                                                                                                                                                                                 |  |               |            |   |      |   |            |  



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 5. Long-term Debt and Pledged Assets. [Continued]



The Company had a $10,000,000 credit agreement with
General Electric Capital Corporation. The credit agreement involved two notes, both with an interest rate of prime plus 2%. Combined monthly payments are $128,005. The $7,000,000 note had monthly payments of approximately $85,000 and a ten year
amortization with a five-year balloon payment and is secured by a first lien on the Companys plant and property. The second note of $3,000,000 had monthly payments of approximately $45,000, a seven year amortization with a five-year balloon
payment, and is secured by a second lien on the Companys plant and property. This second note was guaranteed by the United States Department of Agriculture. These notes were further secured by an assignment of a $1,000,000 key man life
insurance policy to the lender and the personal guarantee of the Companys President with real estate valued at approximately $1,000,000.



On July 17, 2003, the Company obtained an $18,000,000 long-term loan from Bank of America which matures in five years. The proceeds were used to refinance
the two loans with General Electric Capital Corporation totaling $10,000,000 with total remaining balance of $8,648,341 and a variable interest rate of prime plus 2% or 6.25% as of June 30, 2003. Proceeds from the Bank of America loan were also used
to pay trade payables to current status and provide additional operating funds. The new agreement with Bank of America has a $9,000,000 note with a rate that is variable with the Wall Street LIBOR one month floating rate as the index plus the
applicable margin. The applicable margin is based on funded debt to earnings before income taxes and depreciation adjustment (EBITDA). The applicable margin is as follows:



|                                         |  |                   |  
|---------------------------------------- |  | ----------------- | -
|Funded Debt to EBITDA ratio              |  | Applicable Margin |  
|Less than or equal to 1.74 to 1.00       |  | 1.90              | %
|1.75 to 1.00, but less than 2.50 to 1.00 |  | 2.10              | %
|2.50 to 1.00, but less than 3.76 to 1.00 |  | 2.25              | %
|Greater than or equal to 3.76 to 1.00    |  | 2.50              | %



The applicable margin
for the first year is deemed to be 2.25% (2.50% for seven months as amended on February 10, 2004).



The agreement with Bank of America further has a $9,000,000 note under an interest rate swap to provide a fixed rate of 6.02%. The interest rate swap is
designated as a cash flow hedge and is deemed effective pursuant to SFAS 133. These Bank of America loans have a fifteen year amortization with a five year balloon payment and are secured by certain assets of the Company and real estate of the
Companys President, Chief Executive Officer and majority shareholder, Reginald M. Fountain, Jr. Obligations are guaranteed by the Company, an unlimited unconditional guarantee of Mr. Fountain and by Brunswick Corporation, pursuant to a master
funding agreement with the Company. Combined monthly payments to Bank of America will be approximately $126,000.



The Company has agreed to observe certain covenants under the terms of its note agreements, the most restrictive of which relates to prepayment of excess
earnings, the sale of assets securing the notes and key financial ratios. Chief among the covenants are:



| | 1. | Maintenance of a tangible net worth floor which the Companys tangible net worth may not fall below.
| | -- | ----------------------------------------------------------------------------------------------------



| | 2. | A current maturity coverage ratio defined as the ratio of the current portion of long-term liabilities plus interest to cash flow which is defined as net income plus
depreciation, amortization, interest and other non-cash expenditures which the Companys ratio may not fall below.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | A funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio which is defined as the ratio of all outstanding debt both current and long-term to
EBITDA which the Companys ratio may not exceed.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | Maintenance of a gross margin (gross profit) percentage floor which the Companys gross margin percentage may not fall below.
| | -- | -----------------------------------------------------------------------------------------------------------------------------



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 5. Long-term Debt and Pledged Assets. [Continued]



These covenants change and generally become more
restrictive in future periods. The following matrix lists the required covenant levels for the periods indicated:



|                                |  |                |  |                   |  |                  |  |                |  |               
|------------------------------- |  | -------------- |  | ----------------- |  | ---------------- |  | -------------- |  | --------------
|                                |  | June 30, 2004  |  | September 30,2004 |  | December 31,2004 |  | March 31, 2005 |  | June 30, 2005 
|Tangible Net Worth Floor        |  | $4.475 Million |  | $4.500 Million    |  | $4.800 Million   |  | $4.950 Million |  | $5.225 Million
|Current Maturity Coverage Ratio |  | 1.30 to 1.00   |  | 1.40 to 1.00      |  | 1.50 to 1.00     |  | 1.50 to 1.00   |  | 1.50 to 1.00  
|Funded Debt To EBITDA           |  | 6.00 to 1.00   |  | 5.25 to 1.00      |  | 5.00 to 1.00     |  | 4.35 to 1.00   |  | 3.75 to 1.00  
|Gross Margin Floor%             |  | 14.50%         |  | 14.50%            |  | 14.50%           |  | 14.50%         |  | 14.50%        



As of June 30, 2004
the Company was in compliance with its mandated covenants.



In
addition to the covenants listed above, the Company may not exceed its budgeted annual listing of fixed asset purchases approved by the loans guarantor, Brunswick Corporation and any non-listed fixed asset purchases greater than $50,000 per
instance must have Brunswick Corporations express approval prior to acquisition. The Company expects this restriction to have no material effect upon its ability to maintain and improve its facilities and compete with other companies in the
boating industry.



The estimated aggregate maturities required
on long-term debt for each of the individual years at June 30, 2004 are as follows:



|           |  |   |            
|---------- |  | - | -----------
|2005       |  | $ | 887,481    
|2006       |  |   | 930,003    
|2007       |  |   | 865,072    
|2008       |  |   | 935,425    
|Thereafter |  |   | 15,017,244 
|           |  |   |            
|           |  |   | $18,635,225
|           |  |   |            



Note 6. Common Stock, Stock
Options, and Treasury Stock.



Common Stock:
The Company has authorized 200,000,000 shares of common stock, $.01 par value. 4,807,608 shares were issued and outstanding at June 30, 2004, 4,757,608 shares were issued and outstanding at June 30, 2003 and 4,732,608 shares were issued and
outstanding at June 30, 2002.



During Fiscal 2004, several
individuals including Company officers exercised their options and purchased 50,000 shares of Common Stock at exercise prices of $1.60 to $1.67 per share. Subsequent to the balance sheet date an employee exercised his options and purchased 6,667
shares of Common Stock at an exercise price of $1.45 per share.



During Fiscal 2003, a director of the Company exercised his options and purchased 25,000 shares of Common stock at $1.34 per share. Also during 2003, the Company recorded a capital contribution of 46,158 when payroll obligations owed an
officer and shareholder of the Company were forgiven.



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 6. Common Stock, Stock Options, and Treasury Stock. [Continued]



Stock Options: 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, 2004, 95,000 options are available for grant under the plan subject to the approval of Brunswick Corporations approval of any option grants as a condition for the
guarantee of the Bank of America loan (See Note 5).



During
2001, the Company granted options to purchase 35,000 shares of common stock, on a non-qualified basis. The options are exercisable at $1.34 per share and vest through December 31, 2002. The options expire December 12, 2007. As of June 30, 2003,
25,000 of the options have been exercised.



During 2002, the
Company granted options to purchase 40,000 shares of common stock for consulting services. The options have been valued at $53,403 and are being expensed ratably over the vesting period. As of June 30, 2004, the Company has recorded deferred
compensation of $53,403 in consulting expense. The options are exercisable at $1.60 to $1.67 per share and vest within two years from the date they were granted. The options expire five years from vesting. During the year ended June 30, 2004, 20,000
of these options were exercised.



On June 21, 1995, the
shareholders voted to adopt the 1995 stock option plan. The plan allowed up to 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. As of June 30, 2004, none of these options have been exercised.



Effective March 23, 1995, the Board of Directors authorized the issuance of
options to purchase up to 30,000 shares of common stock to each of the Companys four outside directors at $3.58 per share on a non-qualified basis, exercisable for 10 years. Through June 30, 2004, 84,000 of the options had been exercised and
30,000 options remain outstanding.



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, 2003, 2002 and 2001, and changes during the periods then ended is presented in the table below:



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 6. Common Stock, Stock Options, and Treasury Stock. [Continued]



|                                               |  |         |  |                                |      |        |         |                                |   |        |  |                                |  |   |     
|---------------------------------------------- |  | ------- |  | ------------------------------ | ---- | ------ | ------- | ------------------------------ | - | ------ |  | ------------------------------ |  | - | ----
|                                               |  | 2004    |  | 2003                           |      | 2002  
|                                               |  | Shares  |  | Weighted AverageExercise Price |      | Shares |         | Weighted AverageExercise Price |   | Shares |  | Weighted AverageExercise Price
|Outstanding at beginning of period             |  | 610,000 |  | $                              | 3.96 |        | 686,000 |                                | $ | 3.85   |  | 551,000                        |  | $ | 4.40
|Granted                                        |  |        |  |                                |     |        |        |                                |   |       |  | 135,000                        |  |   | 1.42
|Exercised                                      |  | 50,000  |  |                                | 1.63 |        | 25,000  |                                |   | 1.34   |  |                               |  |   |    
|Forfeited                                      |  |        |  |                                |     |        | 51,000  |                                |   | 3.79   |  |                               |  |   |    
|Canceled                                       |  |        |  |                                |     |        |        |                                |   |       |  |                               |  |   |    
|                                               |  |         |  |                                |      |        |         |                                |   |        |  |                                |  |   |     
|Outstanding at end of period                   |  | 560,000 |  | $                              | 4.16 |        | 610,000 |                                | $ | 3.96   |  | 686,000                        |  | $ | 3.85
|                                               |  |         |  |                                |      |        |         |                                |   |        |  |                                |  |   |     
|Exercisable at end of period                   |  | 546,667 |  | $                              | 4.23 |        | 576,000 |                                | $ | 4.11   |  | 576,000                        |  | $ | 4.29
|                                               |  |         |  |                                |      |        |         |                                |   |        |  |                                |  |   |     
|Weighted average fair value of options granted |  |        |  |                                |     |        |        |                                |   |       |  | 135,000                        |  | $ | 1.29
|                                               |  |         |  |                                |      |        |         |                                |   |        |  |                                |  |   |     



The fair value of each
option granted is estimated on the date granted using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants during the year ended June 30 2002, and 2001; risk-free interest rates of 4.5%, and 5.3%,
respectively, expected dividend yields of zero for all periods, expected lives of 6.25, and 7.5 years, respectively, and expected volatility of 94% and 132%, respectively.



A summary of the status of the options outstanding under the Companys stock option plans and other agreements at June
30, 2004 is presented below:



|                         |                   |                     |                                           |                     |                                |      |                   |         |                                |     
|------------------------ | ----------------- | ------------------- | ----------------------------------------- | ------------------- | ------------------------------ | ---- | ----------------- | ------- | ------------------------------ | ----
|Range of Exercise Prices |                   | Options Outstanding |                                           | Options Exercisable
|                         | NumberOutstanding |                     | Weighted AverageRemainingContractual Life |                     | Weighted AverageExercise Price |      | NumberExercisable |         | Weighted AverageExercise Price
|$1.34 to 1.60            |                   | 80,000              |                                           | 4 years             |                                | 1.55 |                   | 66,667  |                                | 1.58
|$3.58                    |                   | 30,000              |                                           | 1 year              |                                | 3.58 |                   | 30,000  |                                | 3.58
|$4.67                    |                   | 450,000             |                                           | 1 year              |                                | 4.67 |                   | 450,000 |                                | 4.67
|                         |                   |                     |                                           |                     |                                |      |                   |         |                                |     
|                         |                   | 560,000             |                                           |                     |                                |      |                   | 546,667 |                                |     



Treasury
Stock: The Company holds 15,000 shares of its common stock. This common stock is accounted for as treasury stock at its acquisition cost of $110,748 ($7.38 per share) in the accompanying financial statements.



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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 components of federal income tax expense from continuing operations consist of the following:



|                                                     |  |                     |          |   |      |   |          |      |  |   |            |  
|---------------------------------------------------- |  | ------------------- | -------- | - | ---- | - | -------- | ---- |  | - | ---------- | -
|                                                     |  | Year Ended June 30, |         
|                                                     |  | 2004Restated        |          |   | 2003 |   |          | 2002 | 
|Current income tax expense:                          |  |                     |          |   |      |   |          |      |  |   |            |  
|Federal                                              |  | $                   |         |   |      | $ |         |      |  | $ | (717,983   | )
|State                                                |  |                     |         |   |      |   |         |      |  |   |           |  
|                                                     |  |                     |          |   |      |   |          |      |  |   |            |  
|Net current tax (benefit)                            |  | $                   |         |   |      | $ |         |      |  | $ | (717,983   | )
|                                                     |  |                     |          |   |      |   |          |      |  |   |            |  
|Deferred tax expense (benefit) resulted from:        |  |                     |          |   |      |   |          |      |  |   |            |  
|Excess of tax over financial accounting depreciation |  | $                   | (52,079  | ) |      | $ | 245,079  |      |  | $ | (14,929    | )
|Donations                                            |  |                     |         |   |      |   | (1,227   | )    |  |   | (2,374     | )
|Warranty reserves                                    |  |                     | 74,100   |   |      |   | (11,700  | )    |  |   | (109,200   | )
|Reserve for obsolete inventory                       |  |                     |         |   |      |   | 100,383  |      |  |   | (61,383    | )
|Accrued vacation                                     |  |                     | 73,685   |   |      |   | (14,563  | )    |  |   | 5,945      |  
|Dealer incentive reserves                            |  |                     |         |   |      |   | 97,944   |      |  |   | 230,631    |  
|Reserve for boat repurchases                         |  |                     | 48,750   |   |      |   |         |      |  |   |           |  
|Bad debt reserves                                    |  |                     | (21,450  | ) |      |   |         |      |  |   |           |  
|Accrued dealer incentive interest                    |  |                     | 305      |   |      |   | 32,454   |      |  |   | 9,046      |  
|Accrued executive compensation                       |  |                     | 1,975    |   |      |   | (45,634  | )    |  |   | 6,352      |  
|Accrued dealer service incentives                    |  |                     | 38,122   |   |      |   | 155,232  |      |  |   | 180,492    |  
|Inventory adjustment-Sec.263A                        |  |                     | (23,043  | ) |      |   | 7,296    |      |  |   | (32,048    | )
|Health insurance reserve                             |  |                     | (8,580   | ) |      |   | 4,680    |      |  |   | 17,238     |  
|Decrease (increase) in NOL carryforward              |  |                     | 68,062   |   |      |   | (143,576 | )    |  |   | (2,506,922 | )
|Alternative minimum tax credits                      |  |                     | 77,525   |   |      |   |         |      |  |   | 218,232    |  
|Investment tax credits                               |  |                     |         |   |      |   |         |      |  |   |           |  
|Valuations allowance                                 |  |                     | (277,372 | ) |      |   | (257,067 | )    |  |   | 2,599,979  |  
|                                                     |  |                     |          |   |      |   |          |      |  |   |            |  
|Net deferred tax expense (benefit)                   |  | $                   |         |   |      | $ | 169,301  |      |  | $ | 541,059    |  
|                                                     |  |                     |          |   |      |   |          |      |  |   |            |  



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 7. Income Taxes. [Continued]



The reconciliation of income tax from continuing operations computed at the
U.S. federal statutory tax rate to the Companys effective rate is as follows:



|                                                    |  |                     |   |  |        |   |  |        |  
|--------------------------------------------------- |  | ------------------- | - |  | ------ | - |  | ------ | -
|                                                    |  | Year Ended June 30, |  
|                                                    |  | 2004Restated        |   |  | 2003   |   |  | 2002   |  
|Computed tax at the expected federal statutory rate |  | 34.00               | % |  | 34.00  | % |  | 34.00  | %
|State income taxes, net of federal benefit          |  | 5.00                |   |  | 5.00   |   |  | 5.00   |  
|Valuations allowance                                |  | (45.54              | ) |  | (24.50 | ) |  | (36.07 | )
|Compensation from stock options                     |  | (11.21              | ) |  | (.69   | ) |  |       |  
|Officers life insurance                            |  | (.45                | ) |  | .20    |   |  |       |  
|Net effect of alternative minimum taxes             |  | 12.73               |   |  |       |   |  | (.07   | )
|Other                                               |  | 5.47                |   |  | 2.13   |   |  | (.41   | )
|                                                    |  |                     |   |  |        |   |  |        |  
|Effective income tax rates                          |  | .00                 | % |  | 16.14  | % |  | 2.45   | %
|                                                    |  |                     |   |  |        |   |  |        |  



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 7. Income Taxes. [Continued]



Significant components of the Companys deferred tax assets and
liabilities are as follows:



|                                                                |  |                     |            |   |      |   |            |  
|--------------------------------------------------------------- |  | ------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                |  | Year Ended June 30, |           
|                                                                |  | 2004 Restated       |            |   | 2003 |  
|Deferred tax assets:                                            |  |                     |            |   |      |   |            |  
|Warranty reserve                                                |  | $                   | 276,900    |   |      | $ | 351,000    |  
|Obsolete inventory reserve                                      |  |                     | 19,500     |   |      |   | 19,500     |  
|Accrued vacations                                               |  |                     |           |   |      |   | 73,685     |  
|Allowance for boat repurchases                                  |  |                     | 29,250     |   |      |   | 78,000     |  
|Dealer incentive reserves                                       |  |                     |           |   |      |   |           |  
|Bad debt reserve                                                |  |                     | 32,308     |   |      |   | 10,858     |  
|Accrued Dealer incentive interest                               |  |                     | 25,072     |   |      |   | 25,378     |  
|Inventory adjustments - Sec. 263A                               |  |                     | 133,264    |   |      |   | 110,220    |  
|State NOL carryforward                                          |  |                     | 478,128    |   |      |   | 486,854    |  
|Federal NOL carryforward                                        |  |                     | 2,197,365  |   |      |   | 2,256,701  |  
|Alternative minimum tax credits                                 |  |                     | 41,524     |   |      |   | 119,049    |  
|Accrued executive compensation                                  |  |                     | 53,410     |   |      |   | 55,384     |  
|Donations carryforward                                          |  |                     | 4,608      |   |      |   | 4,608      |  
|Accrued dealer incentives                                       |  |                     |           |   |      |   | 38,122     |  
|Health insurance reserve                                        |  |                     | 49,140     |   |      |   | 40,560     |  
|Investment tax credits                                          |  |                     | 86,294     |   |      |   | 86,294     |  
|                                                                |  |                     |            |   |      |   |            |  
|Gross deferred assets                                           |  | $                   | 3,426,763  |   |      | $ | 3,756,213  |  
|Less: valuation allowance for deferred tax assets               |  |                     | (2,065,541 | ) |      |   | (2,342,912 | )
|                                                                |  |                     |            |   |      |   |            |  
|Net deferred tax assets                                         |  | $                   | 1,361,222  |   |      | $ | 1,413,301  |  
|Deferred tax liabilities:                                       |  |                     |            |   |      |   |            |  
|Excess of financial accounting depreciation over tax            |  | $                   | (1,361,222 | ) |      | $ | (1,413,301 | )
|                                                                |  |                     |            |   |      |   |            |  
|Net deferred tax assets (liabilities)                           |  | $                   |           |   |      | $ |           |  
|                                                                |  |                     |            |   |      |   |            |  
|                                                                |  |                    
|Net deferred tax assets (liabilities) are presented as follows: |  |                     |            |   |      |   |            |  
|                                                                | 
|                                                                |  | Year Ended June 30, |           
|                                                                |  | 2004                |            |   | 2003 |  
|Current deferred tax assets                                     |  | $                   | 247,655    |   |      | $ | 303,823    |  
|Deferred tax liabilities                                        |  |                     | (247,655   | ) |      |   | (303,823   | )
|                                                                |  |                     |            |   |      |   |            |  
|Net deferred tax assets (liabilities)                           |  | $                   |           |   |      | $ |           |  
|                                                                |  |                     |            |   |      |   |            |  





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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 7. Income Taxes. [Continued]



The Company has an unused federal operating loss carryforward at June 30,
2004 and 2003 of approximately $6,463,000 and $6,637,000, respectively, which expires in various years through 2023. The Company has unused state operating loss carryforward at June 30, 2004 and 2003 of approximately $9,563,000 and $9,737,000,
respectively, which expires in various years through 2023.



Note 8.
Commitments and Contingencies.



Employment
Agreement: The Company entered into a one-year employment agreement in 1989 with its Chairman, Mr. 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.



Dealer Interest: The
Company regularly pays a portion of dealers interest charges for floor plan financing. These interest charges amounted to $756,336 for Fiscal 2004, $816,152 for Fiscal 2003 and $596,111 for Fiscal 2002. They are included in the accompanying
consolidated statements of operations as part of net sales. At June 30, 2004 and 2003 the estimated unpaid dealer incentive interest included in accrued dealer incentives amounted to $62,894 and $92,262, respectively.



Product Liability and Other Litigation: There were various
warranty lawsuits brought against the Company at June 30, 2004. 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, 2004 and 2003, the Company had a contingent liability to repurchase boats in the event of dealer defaults and if
repossessed by the commercial lenders amounting to approximately $18,177,586 and $16,378,985, 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, 2004 and 2003, the allowance for boat repurchases was $75,000 and $200,000, 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 $86,825 for
Fiscal year 2004, $93,650 for Fiscal 2003 and $86,958 for Fiscal 2002.



40



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##### Table of Contents

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 8. Commitments and Contingencies. [Continued]



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 potential liability at this site is estimated by the Group administrator to be in the range of $40,000 to $60,000. The Company is
likely to be eligible for a de Minimus Settlement Agreement, which is expected to be finalized in 2005.



Note 9. Export Sales.



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



|                                  |  |                     |           |      |   |           |  |   |          
|--------------------------------- |  | ------------------- | --------- | ---- | - | --------- |  | - | ---------
|                                  |  | Year Ended June 30,
|                                  |  | 2004                |           | 2003 |   | 2002     
|Canada, Central and South America |  | $                   | 1,441,308 |      | $ | 929,481   |  | $ | 1,500,145
|Middle East, and Europe           |  |                     | 819,724   |      |   | 595,777   |  |   |         
|Asia                              |  |                     |          |      |   | 235,549   |  |   |         
|                                  |  |                     |           |      |   |           |  |   |          
|                                  |  | $                   | 2,261,032 |      | $ | 1,760,807 |  | $ | 1,500,145
|                                  |  |                     |           |      |   |           |  |   |          



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, President, and Chief Executive Officer: for Fiscal 2004, $18,592; in Fiscal 2003, $11,489; and in Fiscal 2002, $22,013. At June 30, 2004, the Company
owed Reginald M. Fountain, Jr. $0 for these rentals.



The
Company paid $259,189 during Fiscal 2004 to an entity controlled by Reginald M. Fountain, Jr. for aircraft services and rentals. At June 30, 2004 the Company owed $21,000 in unpaid services to this entity.



For the year ended June 30, 2004 the Company paid an entity controlled by a
director $20,500 for consulting services.



The Company paid
$15,029, $58,000, and $41,361 for the year ended June 30, 2004, 2003 and 2002 for advertising and public relations services from an entity owned by a director of the Company. At June 30, 2004, the Company had no payable due to the entity for these
services.



A Director of the Company is an owner of a marine
dealership, which accounted for 10.2% of the Companys sales in Fiscal 2004.



41



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##### Table of Contents

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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 2004, one dealer accounted for 10.5% of sales, one for 10.2% of sales, and two dealers for 5.0% individually. In Fiscal 2003, one dealer accounted for 10.3% of sales, one for 8.0% of
sales, and one dealer for 6.7%. For Fiscal 2002 one dealer comprised 11.8% of sales, one dealer 11.7% of sales, and two dealers for 8% individually.



Note 12. - Earnings Per Share.



The following data show the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of potential
dilutive common stock for the years ended June 30, 2004, 2003 and 2002:



|                                                                                                                             |  |              |           |      |   |           |  |   |            |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ---- | - | --------- |  | - | ---------- | -
|                                                                                                                             |  | 2004Restated |           | 2003 |   | 2002      | 
|Income (loss) from continuing operations available to common stockholders                                                    |  | $            | 609,087   |      | $ | 879,996   |  | $ | (7,031,593 | )
|                                                                                                                             |  |              |           |      |   |           |  |   |            |  
|Weighted average number of common shares outstanding used in basic earnings (loss) per share                                 |  |              | 4,761,460 |      |   | 4,744,457 |  |   | 4,732,608  |  
|Effect of dilutive stock options                                                                                             |  |              | 63,719    |      |   | 74,349    |  |   |           |  
|Weighted number of common shares and potential dilutive common shares outstanding used in dilutive earnings (loss) per share |  |              | 4,825,179 |      |   | 4,818,806 |  |   | 4,732,608  |  
|                                                                                                                             |  |              |           |      |   |           |  |   |            |  



The Company had at
June 30, 2004 outstanding options to purchase 450,000 shares of common stock at $4.67 per share that were not included in the computation of gain(loss) per share because their effect was anti-dilutive.



Note 13  Segment Reporting.



The Companys net sales resulted from the following product lines for
the years ended June 30, 2004, 2003 and 2002:



|                                                                |  |               |            |      |   |            |  |   |           
|--------------------------------------------------------------- |  | ------------- | ---------- | ---- | - | ---------- |  | - | ----------
|                                                                |  | 2004 Restated |            | 2003 |   | 2002      
|Sports boats                                                    |  | $             | 32,509,664 |      | $ | 26,612,517 |  | $ | 21,191,672
|Wide beam cruiser                                               |  |               | 9,508,545  |      |   | 9,923,547  |  |   | 5,387,449 
|Fish boats                                                      |  |               | 4,770,596  |      |   | 5,302,763  |  |   | 3,181,585 
|Wide beam fish boats                                            |  |               | 11,034,642 |      |   | 9,291,260  |  |   | 5,404,056 
|                                                                |  |               |           
|Non-boat sales including (Service, Parts, Trucking, Sportswear) |  |               | 1,473,517  |      |   | 1,426,997  |  |   | 1,785,819 
|                                                                |  |               |            |      |   |            |  |   |           
|Net sales                                                       |  | $             | 59,296,964 |      | $ | 52,557,084 |  | $ | 36,950,581
|                                                                |  |               |            |      |   |            |  |   |           



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##### Table of Contents

Note 14  Restatement.



The Company has restated its financial statements for the year ended June 30, 2004. The changes made are further described and summarized
below.



Certain customer payments received were misapplied or not applied which
affected the ending balances in three customer accounts. In one additional instance, a customer payment bounced and a partial payment was made, but this payment was also misapplied. The effect of these accounts receivable adjustments was a decrease
in sales of approximately $545,000. This adjustment represents less than 1% of sales.



During the year the Company entered into an interest rate swap agreement related to a loan. The unrealized gain (loss) on the swap agreement was miscalculated resulting in an adjustment of approximately $68,000 to additional interest
expense.



Lastly, in preparing a bank reconciliation, a sequence of ten checks
was left off the listing of outstanding checks. Upon adjusting the general ledger to the reconciliation, an understatement of expense of approximately $78,000 occurred.



The above items also effected the calculation of the deferred tax asset and other related tax accounts by approximately $21,000.



The following table highlights the significant areas of change from those previously
reported:



|                         |  |                                    |            |                        |   |            |  |   |        
|------------------------ |  | ---------------------------------- | ---------- | ---------------------- | - | ---------- |  | - | -------
|                         |  | Year ended June 30, 2004          
|                         |  | As previouslyreported June 30,2004 |            | Restated June 30, 2004 |   | Change    
|Total assets             |  | $                                  | 31,364,160 |                        | $ | 30,621,143 |  | $ | 743,017
|Net sales                |  |                                    | 59,841,760 |                        |   | 59,296,964 |  |   | 544,796
|Net income (Loss)        |  |                                    | 1,301,142  |                        |   | 609,087    |  |   | 692,055
|Basic earnings per share |  |                                    | .27        |                        |   | .13        |  |   | .14    



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##### Table of Contents

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



SCHEDULES TO THE FINANCIAL STATEMENTS



SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS



|                                                         |  |                       |   |  |                                       |   |  |                     |  |                              |  
|-------------------------------------------------------- |  | --------------------- | - |  | ------------------------------------- | - |  | ------------------- |  | ---------------------------- | -
|Fiscal 2004 Valuation and
Qualifying Account Description |  | BalanceJune 30, 2003  |   |  | Charge to ExpenseAdjustments Restated |   |  | Payments/Deductions |  | BalanceJune 30, 2004Restated |  
|Allowance for Doubtful accounts                          |  | 27,841                |   |  | 55,000                                |   |  |                    |  | 82,841                       |  
|Inventory Valuation Reserve                              |  | 50,000                |   |  |                                      |   |  |                    |  | 50,000                       |  
|Deferred Tax Valuation Allowance                         |  | (2,342,912            | ) |  | 277,371                               |   |  |                    |  | (2,065,541                   | )
|Warranty Expense                                         |  | 900,000               |   |  | 357,507                               |   |  | 547,507             |  | 710,000                      |  
|Allowance for Boat Repurchases                           |  | 200,000               |   |  |                                      |   |  | 125,000             |  | 75,000                       |  
|                                                         |  |                       |   | 
|Fiscal 2003 Valuation and
Qualifying Account Description |  | Balance June 30, 2002 |   |  | Charge to ExpenseAdjustments          |   |  | Payments/Deductions |  | Balance June 30, 2003        |  
|Allowance for Doubtful accounts                          |  | 27,841                |   |  |                                      |   |  |                    |  | 27,841                       |  
|Inventory Valuation Reserve                              |  | 307,393               |   |  |                                      |   |  | 257,393             |  | 50,000                       |  
|Deferred Tax Valuation Allowance                         |  | (2,599,979            | ) |  | 257,067                               |   |  |                    |  | (2,342,912                   | )
|Warranty Expense                                         |  | 870,000               |   |  | 675,344                               |   |  | 645,344             |  | 900,000                      |  
|Allowance for Boat Repurchases                           |  | 200,000               |   |  |                                      |   |  |                    |  | 200,000                      |  
|                                                         |  |                       |   | 
|Fiscal 2002 Valuation and
Qualifying Account Description |  | Balance June 30, 2001 |   |  | Charge to ExpenseAdjustments          |   |  | Payments/Deductions |  | Balance June 30, 2002        |  
|Allowance for Doubtful accounts                          |  | 27,841                |   |  |                                      |   |  |                    |  | 27,841                       |  
|Inventory Valuation Reserve                              |  | 150,000               |   |  | 157,393                               |   |  |                    |  | 307,393                      |  
|Deferred Tax Valuation Allowance-                        |  |                       |   |  | (2,599,979                            | ) |  |                    |  | (2,599,979                   | )
|Warranty Expense                                         |  | 590,000               |   |  | 1,346,873                             |   |  | 1,066,873           |  | 870,000                      |  
|Allowance for Boat Repurchases                           |  | 200,000               |   |  |                                      |   |  |                    |  | 200,000                      |  



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##### Table of Contents

FOUNTAIN POWERBOATS INDUSTRIES, INC.

SUPPLEMENTARY DATA

UNAUDITED SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA



|                             |  |              |   |  |               |   |  |              |   |  |                       |  
|---------------------------- |  | ------------ | - |  | ------------- | - |  | ------------ | - |  | --------------------- | -
|                             |  | FirstQuarter |   |  | SecondQuarter |   |  | ThirdQuarter |   |  | FourthQuarterRestated |  
|Fiscal 2004                  |  |              |   |  |               |   |  |              |   |  |                       |  
|Revenue                      |  | 12,885,232   |   |  | 13,361,811    |   |  | 15,790,650   |   |  | 17,259,271            |  
|Gross profit                 |  | 2,032,181    |   |  | 2,027,100     |   |  | 3,119,068    |   |  | 2,870,872             |  
|Income (loss) before taxes   |  | (356,347     | ) |  | 239,059       |   |  | 754,365      |   |  | (27,990               | )
|Net income (loss)            |  | (356,347     | ) |  | 239,059       |   |  | 754,365      |   |  | (27,990               | )
|Net income (loss) per share: |  |              |   |  |               |   |  |              |   |  |                       |  
|Basic                        |  | (.08         | ) |  | .05           |   |  | .16          |   |  | .N/A                  |  
|Diluted                      |  | (.07         | ) |  | .05           |   |  | .16          |   |  | (.01                  | )
|                             |  |              |   | 
|Fiscal 2003                  |  |              |   |  |               |   |  |              |   |  |                       |  
|Revenue                      |  | 12,002,119   |   |  | 12,941,227    |   |  | 12,783,311   |   |  | 14,830,427            |  
|Gross profit                 |  | 1,905,951    |   |  | 2,370,374     |   |  | 1,911,352    |   |  | 2,331,450             |  
|Income (loss) before taxes   |  | 328,335      |   |  | 643,732       |   |  | (91,338      | ) |  | 168,568               |  
|Net income (loss)            |  | 169,244      |   |  | 482,459       |   |  | (177,402     | ) |  | 405,695               |  
|Net income (loss) per share: |  |              |   |  |               |   |  |              |   |  |                       |  
|Basic                        |  | .04          |   |  | .10           |   |  | (.04         | ) |  | .09                   |  
|Diluted                      |  | .04          |   |  | .10           |   |  | N/A          |   |  | .04                   |  
|                             |  |              |   | 
|Fiscal 2002                  |  |              |   |  |               |   |  |              |   |  |                       |  
|Revenue                      |  | 8,238,779    |   |  | 6,456,208     |   |  | 10,626,380   |   |  | 11,629,214            |  
|Gross profit                 |  | 475,472      |   |  | (692,069      | ) |  | 2,035,420    |   |  | (859,075              | )
|Income (loss) before taxes   |  | (814,875     | ) |  | (2,315,742    | ) |  | (280,534     | ) |  | (3,797,366            | )
|Net income (loss)            |  | (506,643     | ) |  | (1,417,651    | ) |  | (189,152     | ) |  | (4,918,147            | )
|Net income (loss) per share: |  |              |   |  |               |   |  |              |   |  |                       |  
|Basic                        |  | (.11         | ) |  | (.30          | ) |  | (.04         | ) |  | (1.04                 | )
|Diluted                      |  | N/A          |   |  | N/A           |   |  | N/A          |   |  | N/A                   |  



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##### Table of Contents

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.



Not applicable.



ITEM 9A. Controls and Procedures



Disclosure Controls and Procedures



In the Original Filing, our Chief Executive Officer and Chief Financial Officer concluded
that as of the end of the period covered by this report, our 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)) were
effective in enabling the Company to record, process, summarize and report in a timely manner the information required to be disclosed in reports it files under the Exchange Act. However, in connection with the additional review done in connection
with the restatement and the preparation of this Form 10K/A, our management, with the participation of our Chief Executive Officer and Chief Financial Officer carried out another evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, because of material weaknesses in internal controls over financial reporting discussed below, as of the end
of the period covered by this report, our disclosure controls and procedures were not effective in ensuring that the information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and forms.



Internal Control over Financial Reporting



As described more fully elsewhere in this Form 10-K/A, the Company, through an internal review process, identified certain accounting errors made during the fiscal year ended June 30, 2004 that had the effect of overstating net income for
the year and stockholders equity at year-end. The errors related primarily to certain general ledger balance sheet accounts that had not been properly reconciled to the appropriate underlying subsidiary records. After an extensive
investigation, the Company has identified the journal entries and transactions that caused the errors in these account balances. The Company concluded as part of its review process that these entries needed to be corrected to properly report its
financial condition and results of operations. The Company has corrected these errors and other insignificant errors in the restatement. See Explanatory Note and Note 14 to the Consolidated Financial Statements for a detailed description
of the corrections of the Companys financial statements made in the restatement.



Based upon the results of our investigation described above, our Chief Executive Officer and Chief Financial Officer determined that the accounting errors referenced above were the result of material weaknesses in internal control over
financial reporting related to (i) its system of entry of certain types of transactions into the general and subsidiary ledgers and (ii) the timely reconciliation of general ledger balance sheet accounts to the appropriate underlying subsidiary
records. The Company has taken steps to remediate the material weaknesses as of the date of this report.



As a result of these material weaknesses, (i) certain cash receipts were misapplied that had the effect of overstating sales and accounts receivable, (ii) certain cash disbursements were not recorded, resulting in an
overstatement of cash and an understatement of expenses, and (iii) the gain (loss) on an interest rate swap agreement was not properly calculated resulting in an understatement of interest expense on long-term debt. The Companys reconciliation
and review processes, which should had detected these errors, were not adequate to do so, with the result that the Companys consolidated financial statements as of and for the year ended June 30, 2004 were materially misstated prior to
restatement.



A material weakness in internal control is a significant
deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements would not be prevented or detected on a timely basis by the company. We have taken steps
to remediate the material weaknesses, including:



| |  |  | an increase in the number of accounting and financial reporting personnel at the Company, which includes a new accounts receivable associate and a new accounting administrative
associate;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | the removal of the Companys former controller, who was principally responsible for ledger entries and oversight of all reconciliations, and the hiring of a replacement
controller;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the hiring of a full-time experienced accounting and financial reporting consultant to assist the accounting and finance staff of the Company in connection with the restatement, the
Companys ongoing financial reporting obligations and the improvement of its internal controls over financial reporting;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the implementation of better record-keeping policies and procedures; and
| | - |  | ------------------------------------------------------------------------



| |  |  | the implementation of new controls to verify and reconcile the entry of items to the general ledger, such as (i) the review by our Chief Financial Officer of all journal entries and
accrual schedules, (ii) new control processes for balancing accounts, such as revenue accounts, dealer discount accounts, accounts receivable, accounts payable, which will be reconciled every month (instead of at quarter end as the Company had
previously done), and (iii) additional review process for accounts receivable and payable accounts by manager level personnel.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company believes that these remedial steps have corrected the material weaknesses described above.



In addition to the evaluation discussed above, we will continue to evaluate our internal control over financial reporting on a regular
basis. If we identify a problem in our internal control over financial reporting during the course of our evaluations, we will consider what revision, improvement and/or correction to make in order to ensure that our internal control over financial
reporting is effective. Accordingly, we intend to continue to refine our internal control over financial reporting on an ongoing basis as we deem appropriate with a view towards making improvements.



Part III



Item 10. Directors and Executive Officers of Registrant.



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 (1)
Audit Committee - Function and (2) Audit Committee - Members, 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 if incorporated herein by reference.



Audit Committee Financial Expert. Information appearing under the caption Audit Committee - Members 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.



47



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##### Table of Contents

Code of Ethics.The Companys Board of Directors has adopted a Code of Ethics that
applies to its directors and to its principal executive officer and principal financial officer. A copy of the Code of Ethics is posted on the Companys Internet website at www.fountainpowerboats.com.



Item 11. Executive Compensation.



Information appearing under the captions (1) Director
Compensation, (2) Corporate Governance Committee - Compensation Committee Interlocks and Insider Participation, (3) Executive Compensation - Cash Compensation, (4) Executive Compensation - Employment
Agreement, (5) Executive Compensation - Employee Stock Options, and (6) Proposal 2: Amendment of 1995 Stock Option Plan, 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.



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.



Beneficial Ownership of securities. Information regarding the beneficial ownership of the Companys equity securities 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, 2004, and under which shares of the Companys common stock were authorized for issuance.



EQUITY COMPENSATION PLAN INFORMATION



|                                                           |  |                                                                       |     |  |                                                            |      |                                                                                                                                        |        |    
|---------------------------------------------------------- |  | --------------------------------------------------------------------- | --- |  | ---------------------------------------------------------- | ---- | -------------------------------------------------------------------------------------------------------------------------------------- | ------ | ---
|Plan category                                              |  | (a) Number of shares to be issued uponexercise of outstanding options |     |  | (b) Weighted-average exercise price of outstanding options |      | (c) Number of shares remaining available for future issuance underequity compensation plans (excluding shares
reflected in column (a)) |       
|Equity compensation plans approved by security holders     |  | 500,000                                                               |     |  | $                                                          | 4.36 |                                                                                                                                        | 95,000 | (1)
|Equity compensation plans not approved by security holders |  | 60,000                                                                | (1) |  |                                                            | 2.55 |                                                                                                                                        | -0-    |    
|Total                                                      |  | 560,000                                                               |     |  |                                                            | 4.17 |                                                                                                                                        | 95,000 |    

---

|(1) | Includes individual options to purchase shares of the Companys common stock held by current or former directors or independent contractors as follows: (i) option for 30,000
shares at an exercise price of $3.58 per share granted during 1995 and expiring during 2005; (ii) option for 10,000 shares at an exercise price of $1.34 per share granted during 2001 and expiring during 2007; and (iii) option for 20,000 shares at an
exercise price of $1.60 per share granted during 2002 and expiring as to 10,000 shares during 2008 and as to the remaining 10,000 shares during 2009.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 13. Certain Relationships and Related Transactions.



Information appearing under the caption Compensation Interlocks and Insider Participation 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.



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##### Table of Contents

Item 14. Principal Accountant Fees and Services.



Information appearing under the caption Proposal 3. Ratification of Appointment of Independent Accountants - Services
and Fees During Fiscal 2004 and 2003 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, Financial Statement
Schedules, and Reports on Form 8-K.



|(a) | Documents filed with Report:
|--- | ----------------------------



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



Report of Independent Registered Public Accounting Firm



Consolidated balance sheets at June 30, 2004 and 2003



Consolidated statements of operations for the years ended June 30, 2004, 2003 and 2002



Consolidated statements of stockholders equity for the years ended June 30, 2004, 2003 and 2002



Consolidated statements of cash flows for the years ended June 30, 2004, 2003 and 2002



Notes to consolidated financial statements



(2) Financial Statement Schedules.



Not
applicable.



(3)The exhibits which are management
contracts or compensatory plans or arrangements are identified on the index of exhibits that is a part of this Form 10-K/A following the signature page and which is incorporated herein by reference.



|(b) | Exhibits.An index of exhibits that is a part of this Form 10-K/A appears following the signature page and is incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------





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Signatures



Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



|                 |  |                                     |  |                                                 
|---------------- |  | ----------------------------------- |  | ------------------------------------------------
|                 |  | FOUNTAIN POWERBOAT INDUSTRIES, INC.
|                 |  |                                    
|                 |  | By:                                 |  | /S/ Reginald M. Fountain, Jr.                   
|October 12, 2005 |  |                                     |  | 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.Reginald M. Fountain, Jr. |                                                       | Chairman, President, and |  | October 12, 2005
|                                                       | Chief Executive Officer (Principal Executive Officer) |                          | 
|                                                       |                                                       |                         
|/S/ A. Myles CartretteA. Myles Cartrette               |                                                       | Director                 |  | October 12, 2005
|                                                       |                                                       |                          | 
|                                                       |                                                       |                         
|/S/ George L. Deichmann, IIIGeorge L. Deichmann, III   |                                                       | Director                 |  | October 12, 2005
|                                                       |                                                       |                          | 
|                                                       |                                                       |                         
|/S/ Guy L. Hecker, Jr.Guy L. Hecker, Jr.               |                                                       | Director                 |  | October 12, 2005
|                                                       |                                                       |                          | 
|                                                       |                                                       |                         
|/S/ David C. MillerDavid C. Miller                     |                                                       | Director                 |  | October 12, 2005
|                                                       |                                                       |                          | 
|                                                       |                                                       |                         
|/S/ Mark L. SpencerMark L. Spencer                     |                                                       | Director                 |  | October 12, 2005
|                                                       |                                                       |                          | 
|                                                       |                                                       |                         
|/S/ Robert L. StallingsRobert L. Stallings             |                                                       | Director                 |  | October 12, 2005
|                                                       |                                                       |                          | 
|                                                       |                                                       |                         
|/S/ David L. WoodsDavid L. Woods                       |                                                       | Director                 |  | October 12, 2005
|                                                       |                                                       |                          | 
|                                                       |                                                       |                         
|/S/ Irving L. SmithIrving L. Smith                     |                                                       | Chief Financial Officer  |  | October 12, 2005
|                                                       |                                                       |                          | 



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##### Table of Contents

EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                          
|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,
2001)                                                            
|              | 
|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, 2001)                                                                               
|              | 
|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 October 1, 1989)                                                                                   
|              | 
|10.1 *        |  | Employment Agreement dated March 31, 1989, between Reginald M. Fountain, Jr. and Fountain Powerboats, Inc. (incorporated herein by reference from Exhibits to Registrants Annual Report
on Form 10-K for the fiscal year ended October 1, 1989)
|              | 
|10.2 *        |  | Stock Option Agreement dated August 4, 1995, 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)                 
|              | 
|10.3 *        |  | 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)                                                                               
|              | 
|10.4 *        |  | Stock Option Agreement dated March 17, 1995, between Registrant and Mark L. Spencer (incorporated herein by reference to exhibits to Registrants Annual Report on Form 10-K for the
fiscal year ended June 30, 2001)                           
|              | 
|10.5          |  | Loan Agreement between Fountain Powerboats, Inc. and Bank of America, N.A. (incorporated herein by reference to exhibits to Registrants Current Report on Form 8-K dated July 17,
2003)                                                        
|              | 
|10.6          |  | Promissory Note between Fountain Powerboats, Inc. and Bank of America, N.A. (incorporated herein by reference to exhibits to Registrants Current Report on Form 8-K dated July 17,
2003)                                                       
|              | 
|10.7          |  | Continuing and Unconditional Guaranty between Registrant and Bank of America, N.A. (incorporated herein by reference to exhibits to Registrants Current Report on Form 8-K dated July 17,
2003)                                                
|              | 
|10.8          |  | Continuing and Unconditional Guaranty between Reginald M. Fountain, Jr. and Bank of America, N.A. (incorporated herein by reference to exhibits to Registrants Current Report on Form 8-K
dated July 17, 2003)                                 
|              | 
|10.9          |  | Security Agreement between Fountain Powerboats, Inc. and Bank of America, N.A. (incorporated herein by reference to exhibits to Registrants Current Report on Form 8-K dated July 17,
2003)                                                    
|              | 
|10.10         |  | Deed of Trust between Fountain Powerboats, Inc. and Bank of America, N.A. (incorporated herein by reference to exhibits to Registrants Current Report on Form 8-K dated July 17,
2003)                                                         



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##### Table of Contents

|      |  |                                                                                                                                                                                                                                  
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.11 |  | 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)
|      | 
|10.12 |  | Security Agreement between 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)                                     
|      | 
|10.13 |  | Deed of Trust between 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)                                          
|      | 
|10.14 |  | 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)                     
|      | 
|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    |  | Registrants definitive proxy statement to be filed with the Commission                                                                                                                                                          

---

|* | Denotes a management compensation plan or compensatory plan or arrangement
|- | --------------------------------------------------------------------------



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