**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**







**FORM
      10-K**




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


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**




**For
      fiscal year ended June 30, 2006**




**Commission
      File Number: 0-14712**




_____________


**FOUNTAIN
      POWERBOAT INDUSTRIES, INC.**


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


_____________




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




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


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




**(252)
      975-2000**


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




_____________


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




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




_____________






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





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





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





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





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




As
      of
      December 31, 2005 the aggregate market value of the Registrant’s voting common
      equity held by non-affiliates was $13,030,353.




As
      of
      September 22, 2006, the number of outstanding shares of Registrant’s Common
      Stock was 4,834,275.




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.




1




**Part
      I** ****




**Item 1.
      Business.**




**Background.**




Fountain
      Powerboat Industries, Inc. (the “Company”), through its wholly owned subsidiary,
      Fountain Powerboats, Inc. (the “Subsidiary”), designs, manufactures and sells
      internationally recognized, recreational offshore sport boats, sport fishing
      boats and sport cruisers that target a segment of the recreational powerboat
      market where speed, performance, quality and safety are the primary purchase
      criteria. The Company sells its boats and ancillary products through a worldwide
      network of 62 dealers.




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




**Products.**




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




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




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




Fountain
      Powerboats has captured approximately 50 percent of the sport boat market and
      offers nine different sport boat models ranging from the 27’ Fever to the 47’
Lightning. These V-bottom boats carve turns at all speeds, even when being
      propelled at over 100 MPH by twin Mercury 525 engines.




Fountain
      Powerboats has become well known for its upscale, high performance and elegant
      Express Cruisers which redefine the term “performance cruiser”. The cruiser
      market is exploding as the populace ages and begins to look for not only speed
      but luxurious amenities for the entire family. Fountain Powerboats, with its
      38’
and 48’ Express Cruisers, and the 52’ Sport Fish Cruiser that will be introduced
      to the market October/November 2006, is poised with the right products to
      capitalize on this growth market.




While
      the
      sport cruiser market is on the increase, a long established water sport is
      escalating - tournament fishing. With the advent of popular sport fishing
      television shows and two quality sport fishing competition programs, the
      American Striper Association Tournaments and the Southern Kingfish Association
      Tournaments, the Company has significantly expanded its line of sport fishing
      boats, building a competitive edge in this fast growing market.




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




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




During
      2006, the Company introduced enhanced sport boat models and a new fish boat
      model at the Miami International Boat Show in February and delivered a
      redesigned 38’ express cruiser in the spring.


2








The
      cockpit layout and cockpit seating was redesigned for the 38’, 42’ and 47’ sport
      boat models, design changes were made to the cabins and striking new paint
      schemes were introduced , thus stimulating excitement in the new look of these
      models and boosted sales for the Company’s sport boat line. The redesigned 47’
Lightning captured the 2006 Offshore Boat of the Year award from Powerboat
      Magazine.





A
      new
      open bow 38’ center console fish boat was launched at the Miami Boat Show. This
      is an open version of the Company’s popular 38’ Tournament Edition and is a
      serious fishing machine with plenty of walk around space. With triple 275HP
      Mercury Verado engines this boat will cruise at 50 mph while getting 1.5 mpg
      and
      run at a top speed of 68+ mph.





The
      38’
express cruiser underwent a major redesign of its running surface to
      significantly improve handling and performance and the cabin was completely
      redesigned to provide a more spacious and luxurious interior.




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




**Fiscal**
              **2006**
            
            **Fiscal**
              **2005**
            
            **Fiscal**
              **2004**Sport
                boats
            
            
            167
            
            
            206
            
            
            244Express
                cruisers
            
            
            42
            
            
            41
            
            
            31Sport
                fishing boats
            
            
            190
            
            
            154
            
            
            136Other
            
            
            1
            
            
            4
            
            
            0Total
            
            
            400
            
            
            405
            
            
            411




As
      of
      June 30, 2006, and after completing the most revenue-producing quarter in
      the history of the Company, Fountain Powerboats has a backlog of firm orders
      for
      200 boats, totaling sales of $43 million, all of which are expected to be
      completed during Fiscal 2007. At June 30, 2005, the sales backlog was 255
      boats, totaling $52 million.




Staying
      ahead of its competition, Fountain’s employees conduct ongoing research and
      development pertaining to the design of its boats’ hulls and decks and its small
      parts production. The Company invested approximately $1.1 million on the design,
      research and development of new plugs and molds during fiscal 2006. Over the
      past three fiscal years, the investments into R&D were as follows:




**Fiscal**
              **2006**
            
            **Fiscal**
              **2005**
            
            **Fiscal**
              **2004**Design,
                Research & Development
            
            $
            780,520
            
            $
            786,129
            
            $
            871,386Construction
                of New Plugs and Molds
            
            
            1,092,994
            
            
            1,636,621
            
            
            1,060,533




For
      fiscal 2007, design, research and development planned expenses are estimated
      to
      be $856,255, and plug and mold construction expenditures are estimated to be
      $950,000. Primarily, these expenditures will go to upgrading the Company’s line
      of sport boats in an effort to maintain its market share and enhancing its
      line
      of sport fish cruisers to continue to expand its presence in that profitable
      and
      more stable market.




Manufacturing
      capacity was increased and processes were enhanced during the first and second
      quarters of fiscal 2005. The added manufacturing capacity can accommodate 40
      to
      45 boats in various stages of construction at any one time. Construction time
      is
      approximately three to eight weeks, dependent on the product mix.




To
      support the Company’s increased production in fiscal 2006, 29 additional
      personnel were hired, bringing the total number of employees to approximately
      448. The Company currently has the capacity to manufacture approximately 450
      sport and fish boats, and 70 cruisers per year of a comparable product mix
      as
      was manufactured in fiscal 2006.




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




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


3







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




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




Recreational
      powerboats must be certified by the manufacturer to meet U.S. Coast Guard
      specifications. Their safety is subject to federal regulation under the Boat
      Safety Act of 1971, as amended, pursuant to which boat manufacturers may be
      required to recall products for replacement of parts or components that have
      demonstrated defects affecting safety. The Company has never had to conduct
      a
      product recall. Boats manufactured for sale in the European Community must
      meet
      CE Certification Standards.




**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
      $1,346,521, or 1.7 percent of sales, were incurred in fiscal 2006 and $1,473,026
      of expense, or 2.1 percent of sales, were incurred in fiscal 2005. A $632,357
      reserve for warranty expenses estimated to be incurred in future years had
      been
      established at June 30, 2006.




**Sales
      and Marketing.**




The
      Company sells its products through a worldwide network of 50 domestic dealers
      and 12 international dealers. While most of these dealers are not exclusive,
      the
      company uses discretion in locating new dealers in an effort to protect the
      interests of its existing dealer network. To attract and keep the highest
      producing dealers, Fountain Powerboats recently initiated a sales training
      program at its Fountain University.




The
      Fountain University program invites salespersons from around the world for
      three
      days of interactive product and sales workshops with a curriculum that includes:
      How to Apply Features and Benefits, Selling in Today’s Environment, How to
      Overcome Objections and Close the Sale, and How to Properly Deliver a Boat.
      The
      program also includes in-water, high performance boat training for all
      attendees, as well as product-specific classes conducted by Fountain Powerboat
      partners, such as Mercury Marine, Polycor Resins, G&T Vinyl, Interplastics
      Resins and Sign Zoo.




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




**Fiscal**
              **2006**
            
            **Fiscal**
              **2005**
            
            **Fiscal**
              **2004**United
                States
            
            $
            70,934,584
            
            $
            65,790,034
            
            $
            57,035,932Canada,
                Mexico, Central/South America
            
            
            1,849,529
            
            
            2,474,619
            
            
            1,441,308Europe
            
            
            2,722,920
            
            
            1,417,819
            
            
            384,402Middle
                East
            
            
            2,753,281
            
            
            1,088,838
            
            
            435,322Africa
            
            
            965,910
            
            
            410,758
            
            
            —Total
            
            $
            79,226,224
            
            $
            71,182,068
            
            $
            59,296,964




Fountain
      Powerboats targets a significant portion of revenue for its branding and
      advertising programs in the U.S. and internationally. The Company continues
      to
      expand its dealer network into Europe, South America and the Middle East, and
      has seen a ramp-up of sales in the Middle East. The Company’s International
      sales were $8,291,640 for fiscal 2006 and $5,446,034 for fiscal 2005. The
      Company requires payment in full or an irrevocable letter of credit from a
      domestic bank before it will ship a boat out of the U.S.




In
      fiscal
      2006, one dealer accounted for 10.9 percent of sales, one accounted for 8.5
      percent of sales and four each accounted for 5.8 to 6.3 percent of sales. In
      fiscal 2005, one dealer accounted for 10.5 percent of sales, one accounted
      for 6
      percent of sales and three each accounted for 5.4 percent of sales. For fiscal
      2004, one dealer accounted for 10.5 percent of sales, one for 10.2 percent
      of
      sales and two each accounted for 5 percent of sales.


4







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




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




Fountain
      Powerboats does not manufacture to inventory, as 100 percent of its boats are
      pre-sold to a dealer before entering the production line. The Company can ship
      to dealers on a cash-on-delivery basis or through floor plan financing programs
      in which the Company participates on behalf of its dealers. For Fiscal years
      2006, 2005 and 2004, the Company has paid the interest on the floor plan, for
      a
      certain period of time, as a sales promotion program.




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




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




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




**Competition.**




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


Sport
        Boats
 ·
              Formula,
                  a Division of Thunderbird Products Corporation
 ·
              Baja
                  Boats, a Division of Brunswick Corporation
 ·
              Cigarette
                  Racing Team, Inc.
 ·
              Donzi,
                  American Marine Holdings
 ·
              Outer
                  Limits
 ·
              Velocity
 ·
              Hustler
 Fish
        Boats
 ·
              Contender
                  Boats
 ·
              Donzi,
                  American Marine Holdings
 ·
              Wellcraft
 ·
              Hydrasports
 ·
              Grady
                  White
 ·
              Triton
  5
  
 ·
              Jupiter
 ·
              Yellowfin
 ·
              Boston
                  Whaler, a Division of Brunswick
                  Corporation
 Cruisers
 ·
              Formula,
                  a Division of Thunderbird Products Corporation
 ·
              Donzi,
                  American Marine Holdings
 ·
              SeaRay,
                  a Division of Brunswick Corporation
 ·
              Sunseeker




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




Market
      demographics and industry experts indicate the fish boat market offers the
      best
      growth potential within the boating industry. Fountain Powerboats continues
      to
      expand its family of fish boats to meet the rising demand in this significant
      high-growth market. The Company introduced a new model in 2006 and plans to
      introduce two new models in 2007.




The
      Company is also experiencing greater demand for its higher priced cruisers.
      This
      is due in part to a populace that not only wants speed but requires the
      additional space to bring along the family. The Company believes that a large
      number of current product owners, many of whom have purchased multiple and
      increasingly larger boats from the Company, provide a target market for the
      fast-growing cruiser segment.




**Employees.**




As
      of
      June 30, 2006, the Company had 448 employees, of which nine were executive
      and management personnel. Eighteen were engaged primarily in administrative
      positions, such as accounting, human resources, marketing and sales. None of
      the
      Company’s employees are party to a collective bargaining agreement. The Company
      considers its employee relations to be excellent. The Company is an affirmative
      action, equal opportunity employer.





**Item 1A.
      Risk Factors.**





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





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





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





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





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





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


6








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





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





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





Not
      applicable.








**Item 2.
      Properties.**




The
      Company’s executive offices and manufacturing facilities are located on 65 acres
      along the Pamlico River in Beaufort County, North Carolina. All of the land,
      buildings and improvements are owned by the Company and were held as collateral
      on notes and mortgages payable at June 30, 2006. (See Note 5). The
      operating facility contains buildings totaling 237,360 square feet located
      on
      fifteen acres. The buildings consist of the following:




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




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, 2006, the Company’s only operating subsidiary was a defendant in
      in lawsuits arising in the ordinary course of its business, including six
      alleged breach of warranty or product liability suits. In the Company’s opinion
      these lawsuits are without merit and, therefore, the Company intends to
      vigorously defend its interest in such suits. The Company carries sufficient
      liability and product liability insurance to cover attorney’s fees and any
      losses that may occur from a product liability or breach of contract suit,
      over
      and above applicable insurance deductibles. The management of the Company
      believes that none of such current proceedings will have a material adverse
      effect.




The
      Company’s subsidiary was notified by the United States Environmental Protection
      Agency (“EPA”) that it had been identified as a potentially responsible party
      (“PRP”) in the remediation of contamination at a clean up site. The Group
      administrator estimated the Company’s share of future remediation cost to be
      $28,105. The Company is eligible for a *de
      Minimus* Settlement Agreement, which is expected to be finalized in 2006.




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




None
      applicable





7







**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 American Stock Exchange
      (under the symbol “FPB”). The following table lists the high and low closing
      prices for the Company’s common stock as reported on the American Stock Exchange
      and Nasdaq for each calendar quarter during its fiscal years ended June 30,
      2005 and 2006.




**Quarter
                Ending**
            
            **High**
            
            **Low**September
                2004
            
            $
            5.50
            
            $
            3.50December
                2004
            
            
            5.60
            
            
            3.60March
                2005
            
            
            6.31
            
            
            4.72June
                2005
            
            
            6.10
            
            
            4.70September
                2005
            
            
            5.12
            
            
            3.70December
                2005
            
            
            6.03
            
            
            3.45March
                2006
            
            
            8.62
            
            
            5.50June
                2006
            
            
            6.70
            
            
            4.05




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




On
      June 30, 2006 there were 217 holders of record for the Company’s common
      stock.




During
      Fiscal 2006, the Company did not sell any shares of its common
      stock.


8







**Item
      6. Selected Financial Data.**




**Fiscal
      Years 2002 through 2006**


**Years
      ended June 30**




**Operations
      Statement Data**




**2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****Sales**
            
            **$**
            **79,226,224**
            
            **$**
            **71,182,069**
            
            **$**
            **59,296,964**
            
            **$**
            **52,557,084**
            
            **$**
            **36,950,581****Net
                Income (loss)**
            
            
            **2,404,912**
            
            
            **756,212**
            
            
            **609,087**
            
            
            **879,996**
            
            
            **(7,031,593**
            **)****Basic
                earnings (loss) per share**
            
            
            **.50**
            
            
            **.16**
            
            
            **.13**
            
            
            **.19**
            
            
            **(1.49**
            **)****Weighted
                average shares outstanding**
            
            
            **4,819,275**
            
            
            **4,815,188**
            
            
            **4,761,460**
            
            
            **4,744,457**
            
            
            **4,732,608****Diluted
                earnings (loss) per share**
            
            
            **.49**
            
            
            **.15**
            
            
            **.13**
            
            
            **.18**
            
            
            **(1.49**
            **)****Diluted
                weighted average shares outstanding**
            
            
            **4,903,949**
            
            
            **4,890,124**
            
            
            **4,825,179**
            
            
            **4,818,806**
            
            
            **4,732,608****Balance
                Sheet Data****2006**
            
            
            **2005**
            
            
            **2004**
            
            
            **2003**
            
            
            **2002****Current
                assets**
            
            **$**
            **17,134,7868**
            
            **$**
            **13,023,588**
            
            **$**
            **12,460,218**
            
            **$**
            **7,648,996**
            
            **$**
            **7,885,047****Total
                assets**
            
            
            **37,860,360**
            
            
            **33,034,252**
            
            
            **30,621,143**
            
            
            **25,929,594**
            
            
            **26,534,696****Current
                liabilities**
            
            
            **13,232,828**
            
            
            **11,062,016**
            
            
            **6,782,584**
            
            
            **11,646,433**
            
            
            **11,775,953****Long
                term debt**
            
            
            **15,228,700**
            
            
            **15,433,446**
            
            
            **17,869,178**
            
            
            **9,010,527**
            
            
            **9,827,161****Stockholder’s
                equity*****(1)***
            
            
            **9,093,699**
            
            
            **6,538,790**
            
            
            **5,721,726**
            
            
            **4,968,811**
            
            
            **3,968,702**






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




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




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





The
      Company 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, for a limited
      time, to repurchase boats repossessed by the third-party lenders if the dealer
      defaults under his credit arrangement. The Company has no repurchase liability
      for the balance of shipments. This is the method of sales recognition believed
      to be in use by most boat manufacturers.




At
      June 30, 2006, 2005, and 2004, 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, 2006, 2005, and 2004.




The
      Company has a contingent liability to repurchase boats where it participates
      in
      the floor plan financing made available to its dealers by third-party finance
      companies, aggregating to $35,212,412  and
      $21,443,054  at
      June 30, 2006 and 2005, 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.**




The
      Company has achieved its strategic goal of increasing revenue and broadening
      its
      presence in the high performance fish boat market and retaining its predominance
      in the high performance sport boat market. With revenue of $79,226,224 for
      Fiscal 2006 the Company has increased its revenue 34% over the past two
      years.


9








Accomplishments
      in support of the Company’s strategic goals for 2006 include:


·
            Expansion
                of the fish boat product line, marketing emphasis on fish boat products
                and increased support of the Southern King Fish Association and American
                Striper Association tournament programs boosted the Company’s revenue from
                fish boats by 38% over 2005.


·
            Redesign
                of the 38’ express cruiser and expanded production of the 48’ express
                cruiser increased revenue for cruisers by 18% over
                2005.


·
            Enhancing
                the top of the line sport boat models and offering promotional programs
                for other sport boat models enabled the Company to maintain its
                predominant share of the high performance sport boat
                market.


·
            The
                Company strengthened its distribution channel by training its dealer’s
                sales force through its “Fountain University” program and establishing
                strong dealers who are capable of representing the Company’s products in
                regions that were previously producing weak
                sales.





The
      Company’s strategic goals for Fiscal 2007 include:


·
            Redirect
                the Company’s focus from double-digit revenue growth to improving net
                income. The Company anticipates its revenue to be approximately at
                the
                same level as Fiscal 2006 with potentially a 4 - 5%
                increase.


·
            Continue
                to enhance the fish boat product line with new and improved
                models.


·
            Introduce
                a high performance 52’ sport fish cruiser to fill a niche in the lucrative
                sport fishing market.


·
            Implement
                Lean Manufacturing in the Company’s production facility using the Toyota
                Production System (TPS) concepts. The main goal of TPS is to eliminate
                seven types of waste: defects, overproduction, transportation, waiting,
                inventory, motion and over
                processing.








Fiscal
      2006 was a year of significant growth in revenue with a 11% increase over 2005
      and 34% increase over the past two year span. Firm order backlog remained strong
      at June 30, 2006 at $43 million even though revenue for the fourth quarter
      was a record at $23,332,064.




Net
      Sales
      for Fiscal 2006 of $79,226,224 were up 11% from Fiscal 2005 sales of
      $71,182,069. Sales for Fiscal 2004 were $59,296,964. The Company attributes
      the
      sales increase to increased sales of larger fish boat models, and increased
      cruiser production.







Net
      Sales
      by product line for the Fiscal years of 2006, 2005 and 2004 are:




**Fiscal
                2006**
              **Net
                Sales**
            
            **%
                of**
              **Sales**
            
            **Fiscal
                2005**
              **Net
                Sales**
            
            **%
                of**
              **Sales**
            
            **Fiscal
                2004**
              **Net
                Sales**
            
            **%
                of**
              **Sales**Product
                LineSport
                boats
            
            $
            31,799,204
            
            
            40%
            
            $
            33,819,857
            
            
            47%
            
            $
            32,509,664
            
            
            55%Express
                cruisers
            
            
            15,760,240
            
            
            20%
            
            
            13,395,691
            
            
            19%
            
            
            9,508,545
            
            
            16%Sport
                fishing boats
            
            
            29,194,785
            
            
            37%
            
            
            21,123,893
            
            
            30%
            
            
            15,805,238
            
            
            26%Service,
                parts, sportswear
            
            
            2,471,995
            
            
            3%
            
            
            2,842,627
            
            
            4%
            
            
            1,473,517
            
            
            3%Net
                sales total
            
            $
            79,226,224
            
            
            
            
            $
            71,182,068
            
            
            
            
            $
            59,296,964




Gross
      profit on sales for Fiscal 2006 was $13,073,800, 16.5% of net sales, as compared
      to $10,910,563, 15.3% of net sales, for Fiscal 2005. Gross profit for Fiscal
      2004 was $10,049,221, 16.9% of net sales. Productivity and labor efficiency
      were
      improved in 2006 as compared to 2005. Material cost increases were partially
      offset by price increases on certain boat models and did not have an adverse
      affect on gross margins. Margin gains from productivity improvements were
      partially offset by promotional programs and pricing concessions employed to
      maintain sales volume.




No
      boats
      were repurchased in Fiscal 2006 or Fiscal 2005 in connection with floor plan
      arrangements. Two boats were repurchased on floor plan arrangements during
      Fiscal 2004 and were re-sold to other dealers. At June 30, 2006, the
      Company had recorded a $15,459 reserve for losses which may be reasonably
      expected to be incurred on boat repurchases in future years. At June 30,
      2005 and at June 30, 2004 the reserve was $75,000.




The
      Company introduced a new fish boat model in Fiscal 2006 to increase its range
      of
      fish boat models in that product market that has experienced significant growth
      in sales. The Company also upgraded three sport boat models to continue its
      strong presence in that product market. The Company completed a major redesign
      of its 38’ express cruiser in the fourth quarter of Fiscal 2006.




**Results
      of Operations.**




Operating
      profit was $2,275,355 for Fiscal 2006, as compared to $1,766,347 in 2005 and
      $1,830,080 in Fiscal 2004. Operating profit for Fiscal 2006 was affected by
      the
      circumstances outlined above in the gross margin discussion of this report
      and
      increased selling and administrative expenses.


10







Fiscal
      2006 net income for the Company was $2,404,912 or $.50 per share. This compares
      to a net income of $756,212 or $.16 per share for Fiscal 2005 and net income
      of
      $609,087 or $.13 per share for Fiscal 2004.




Depreciation
      expense was $2,020,860 for Fiscal 2006, $1,840,168 for Fiscal 2005, and
      $2,052,314 for Fiscal 2004.





Overall
      selling and general and administrative expense for Fiscal 2006 was $10,798,445,
      a $1,654,229 increase from $9,144,216 in Fiscal 2005.




Selling
      expenses were $6,765,871 for Fiscal 2006, $5,726,283 for Fiscal 2005 and
      $5,558,709 for Fiscal 2004. The increase in selling expense was primarily from
      an increase in advertising expenses, including an expanded international
      advertising program, and increased expenses for the Company’s support of
      offshore racing and fishing tournament programs.




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




**2006**
            
            **2005**
            
            **2004**Fishing
                & racing
            
            $
            1,918,598
            
            $
            1,213,686
            
            $
            1,053,134Advertising
            
            
            1,412,435
            
            
            1,264,368
            
            
            1,508,773Salaries
                & commissions
            
            
            1,098,662
            
            
            1,043,363
            
            
            1,091,174Boat
                shows
            
            
            526,381
            
            
            563,810
            
            
            477,407Dealer
                support
            
            
            550,138
            
            
            294,092
            
            
            139,838Other
                selling expenses
            
            
            1,259,657
            
            
            1,346,964
            
            
            1,288,383Total
            
            $
            6,765,871
            
            $
            5,726,283
            
            $
            5,558,709




General
      and administrative expenses include the executive, finance, human resources,
      information technology, legal and administrative operating expenses of the
      Company. These expenses were $4,032,574 for Fiscal 2006, $3,417,933 for Fiscal
      2005, and $2,660,432 for Fiscal 2004. Increased administrative expenses for
      2006
      were generally attributable to expenses related to the restatement of 2004
      and
      2005 financial statements, legal expenses related to breach of warranty suits,
      of which the more costly suits have been settled, and consulting services for
      preparation of internal controls and procedures to comply with Sarbanes-Oxley
      Act: Section 404, all of which are non-recurring expenses. There were also
      increased expenses for the Company’s investor awareness program and for airplane
      lease expenses due to increased travel to the Company’s dealer network.




Interest
      expense net of amounts capitalized was $1,417,874 for Fiscal 2006, $1,011,860
      for Fiscal 2005, and $1,210,477 for Fiscal 2004. Interest expense increased
      in
      Fiscal 2006 as a result of the Company expensing $229,801 of capitalized loan
      costs from the previous Bank of America loan when it was refinanced by the
      new
      $16,500,000 loan from Regions Bank.




Current
      tax benefit is $0 for the year ending June 30, 2006, $21,232 for the year
      ended June 30, 2005 and $0 for the year ended June 30, 2004. Deferred tax
      benefit is $1,283,746 for the year ended June 30, 2006 and $0 for the years
      ended June 30, 2005 and 2004. As
      of
      June 30, 2005 the Company had net deferred tax assets of $1,744,004 that were
      fully offset by a valuation allowance because, as of that date, it was
      Management’s conclusion that there continued to be doubt as to whether those
      deferred tax assets were more likely than not to be realized in the future.
      The
      deferred tax assets principally related to the potential future benefits of
      tax
      net operating loss carryforwards, most of which had been generated during the
      year ended June 30, 2002 when the Company underwent a major restructuring of
      its
      operations. During the year ended June 30, 2006 the Company performed an
      evaluation, in accordance with Statement of Financial Accounting Standard No.
      109, *Accounting
      for Income Taxes* ,
      of the
      likelihood of realization of its deferred tax assets. As a result of this
      evaluation, Management concluded that it was more likely than not that these
      deferred tax assets would be realized. This conclusion was based on various
      factors, the most significant of which were (1) the Company’s record of
      generation of taxable income over the four years since June 30, 2002, during
      which years the Company has generated federal taxable income that has reduced
      its federal net operating loss carryforward from $8.1 million to approximately
      $4.6 million , (2) the Company’s consistency in generating net income during
      each of those four years, and (3) Management’s belief that the Company is well
      positioned to generate profits on an ongoing basis such that all tax net
      operating losses will be utilized prior to any applicable expiration dates.
      There remains approximately $4.6 million for Federal and $3.7 million for State
      tax purposes of net operating loss carryovers which expire in various years
      through 2023 to offset current tax expenses.




The
      ultimate realization of the benefits from the deferred tax assets is dependent
      upon the Company’s future earnings, the future tax laws in effect, and other
      unknown factors; all of which are uncertain. In recent years the Company had
      elected to provide for a tax asset valuation allowance of $0 at June 30,
      2006, $1,709,951 at June 30, 2005 and $2,065,541 at June 30, 2004. As
      operating results and the economy have stabilized and forecasts of future sales
      volumes and profitability have improved, the Company has chosen to eliminate
      the
      valuation allowance.


11







**Liquidity
      and Financial Resources.**





Net
      cash
      provided by operations was $2,772,320 in 2006 and primarily resulted from net
      income adjusted for non-cash provisions, including depreciation expense of
      $2,020,860, as well as an increase in Accrued Dealer Incentives of $2,664,491.
      These were partially offset by an increase of $1,294,057 Accounts Receivable.




Net
      cash
      provided by operations was $6,513,768 in 2005 and resulted primarily from net
      income adjusted for non-cash provisions, including depreciation expense of
      $1,840,168, as well as a $1,143,255 decrease in Accounts Receivable, a
      $1,001,236 increase in Accounts Payable and a $2,499,216 increase in dealer
      incentives. These were partially offset by a $1,842,297 increase in inventories.




Net
      cash
      used by operations was $4,164,759 in 2004 and 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 adjusted for non-cash
      provisions .





Investing
      activities in 2006 required cash of $1,962,008 and primarily consisted of
      purchases of property, plant and equipment of $872,897 and additional plugs
      and
      molds of $1,092,994.




Investing
      activities in 2005 required cash of $3,443,865 and primarily consisted of
      purchases of property, plant and equipment of $1,463,523 and for additional
      plugs and molds of $1,641,238.




Investing
      activities in 2004 required cash of $2,270,207 and primarily consisted of
      purchases of property, plant and equipment of $776,787 and for additional plugs
      and molds of $1,060,533.





Financing
      activities in 2006 used $348,985, primarily for debt repayment to Regions Bank
      and others.





Financing
      activities in 2005 used $2,423,739 primarily for repayment of notes payable
      to
      Northwestern Mutual Life on the cash surrender value of key man life insurance
      policies of $1,295,449 and debt repayment to Bank of America and others in
      the
      amount of $1,199,080.




Net
      cash
      provided by financing activities in 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.




The
      net
      increase in cash in 2006 was $461,327 and was solely attributable to operating
      activities. The ending cash balance for 2006 was $4,474,552. The Company has
      key
      man life insurance policies on its Chief Executive Officer and the cash
      surrender value on those policies was $2,552,682 at June 30, 2006. Cash
      surrender value of life insurance policies is not a current asset, however
      it is
      available immediately to be withdrawn by the Company as a loan using the cash
      value as collateral. The combined total of cash on hand and life insurance
      cash
      surrender value at the end of 2006 provided the Company $7,027,234 available
      cash and additional borrowings.





The
      net
      increase in cash in 2005 was $646,164 and was attributable to operating
      activities and the proceeds, approximately $260,000, of liquidating of a
      Certificate of Deposit. The ending cash balance for 2005 was $4,013,225. The
      Company has key man life insurance policies on its Chief Executive Officer
      and
      the cash surrender value on those policies was $2,179,617 at June 30, 2005.
      The combined total of cash on hand and life insurance cash surrender value
      at
      the end of Fiscal 2005 provided the Company $6,192,842 available cash and
      additional borrowings.




The
      net
      increase in cash in Fiscal 2004 of $2,142,126 was primarily the result the
      Bank
      of America loan. The ending cash balance was $3,367,061.




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
      robust sales backlog through the date of this report .




**Effects
      of Inflation.**




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


12







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




**Contractual
      Obligations.**




The
      following table sets forth a summary of the Company’s contractual cash
      obligations as of June 30, 2006:




**Payments
                due by period****Total**
            
            **Less than**
              **1
                year**
            
            **2-3 years**
            
            **4-5 years**
            
            **Over**
              **5 years****(In
                thousands)**Contractual
                Obligations:Long-term
                debt
            
            $
            15,941
            
            $
            712
            
            $
            1,569
            
            $
            13,660
            
            
            —Interest
                payments on long-term debt
            
            
            4,178
            
            
            1,069
            
            
            1,983
            
            
            1,126
            
            
            —Purchase
                obligations
            
            
            86
            
            
            22
            
            
            39
            
            
            24
            
            
            —Total
                contractual obligations
            
            $
            20,205
            
            $
            1,803
            
            $
            3,591
            
            $
            14,810
            
            
            —




The
      Company has an agreement with Mercury Marine, a division of Brunswick
      Corporation, that the Company will purchase from Mercury all of the Company’s
      requirements for marine engines and other power components that Mercury
      manufactures. The term of this agreement is through June 30, 2011.




**Off-Balance
      Sheet Arrangements.**




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






**Environmental
      Regulation.**




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




**Critical
      Accounting Policies.**




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




Revenue
      Recognition and Sales Incentives. The Company’s revenue is derived primarily
      from the sale of boats. Revenue is recognized in accordance with the terms
      of
      the sale, primarily upon shipment to dealers, once the sales price is fixed
      or
      determinable, and the ability to collect is reasonably assured. The Company
      offers discounts and sales incentives. The estimated liability for sales
      incentives is recorded at the later of the time of program communication to
      the
      customer or at the time of sale in accordance with Emerging Issues Task Force
      (EITF) No. 01-9, “Accounting for Consideration Given by a Vendor to a
      Customer (Including a Reseller of a Vendor’s Products).” The liability is
      estimated based on the costs for the incentive program, the planned duration
      of
      the program and historical experience. If actual costs are different from
      estimated costs, the recorded value of the liability would be adjusted.




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


13







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




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




Income
      Taxes. Deferred taxes are recognized for the future tax effects of temporary
      differences between financial and income tax reporting using tax rates in effect
      for the years in which the differences are expected to reverse. The Company
      estimates its probable tax obligations based on historical experience and
      current tax laws and litigation. The judgments made at any point in time may
      change based on the outcome of tax audits and settlements of tax litigation,
      as
      well as changes due to new tax laws and regulations and the Company’s
      interpretations of those laws and regulations. These factors may cause the
      tax
      rate for the Company to increase or decrease. As of June 30, 2005 the Company
      had net deferred tax assets of $1,744,004 that were fully offset by a valuation
      allowance because, as of that date, it was Management’s conclusion that there
      continued to be doubt as to whether those deferred tax assets were more likely
      than not to be realized in the future. The deferred tax assets principally
      related to the potential future benefits of tax net operating loss
      carryforwards, most of which had been generated during the year ended June
      30,
      2002 when the Company underwent a major restructuring of its operations. During
      the year ended June 30, 2006 the Company performed an evaluation, in accordance
      with Statement of Financial Accounting Standard No. 109, *Accounting
      for Income Taxes* ,
      of the
      likelihood of realization of its deferred tax assets. As a result of this
      evaluation, Management concluded that it was more likely than not that these
      deferred tax assets would be realized. This conclusion was based on various
      factors, the most significant of which were (1) the Company’s record of
      generation of taxable income over the four years since June 30, 2002, during
      which years the Company has generated federal taxable income that has reduced
      its federal net operating loss carryforward from $8.1 million to approximately
      $4.6 million , (2) the Company’s consistency in generating net income during
      each of those four years, and (3) Management’s belief that the Company is well
      positioned to generate profits on an ongoing basis such that all tax net
      operating losses will be utilized prior to any applicable expiration
      dates.




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




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





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




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




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





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







14








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









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




To
      the
      Stockholders and the Board of Directors


Fountain
      Powerboat Industries, Inc.


Washington,
      North Carolina




We
      have
      audited the accompanying consolidated balance sheets of Fountain Powerboat
      Industries, Inc. and subsidiary as of June 30, 2006 and 2005, and the
      related consolidated statements of operations, stockholders’ equity, cash flows
      and the schedule of valuation and qualifying accounts for the years then ended.
      These consolidated financial statements and schedules are the responsibility
      of
      the Company’s management. Our responsibility is to express an opinion on these
      consolidated financial statements based on our audit.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. We were not engaged to perform
      an
      audit of the Company’s internal control over financial reporting. Our audit
      included consideration of internal control over financial reporting as a basis
      for designing audit procedures that are appropriate in the circumstances, but
      not for the purpose of expressing an opinion on the effectiveness of the
      Company’s internal control over financial reporting. Accordingly, we express no
      such opinion. An audit also includes examining, on a test basis, evidence
      supporting the amounts and disclosures in the financial statements, assessing
      the accounting principles used and significant estimates made by management,
      and
      evaluating the overall financial statement presentation. We believe that our
      audits provide a reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Fountain Powerboat
      Industries, Inc. and subsidiary at June 30, 2006 and 2005 and the results
      of their operations and their cash flows for the years then ended in conformity
      with accounting principles generally accepted in the United States of America.
      Also, in our opinion, the related financial statement schedules, when considered
      in relation to the 2005 and 2006 basic consolidated financial statements taken
      as a whole, presents fairly in all material respects the information set forth
      therein.




*Greenville,
      North Carolina*


*September
      22, 2006*





15







**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 statements of operations, stockholders'
      equity and cash flows of Fountain Powerboat Industries, Inc. and Subsidiary
      as
      of June 30, 2004 and the related schedule of valuation and qualifying accounts
      for the year ended June 30, 2004. 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 audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether 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 audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated results of operations and cash flows of
      Fountain Powerboat Industries, Inc. and Subsidiary the for the year ended June
      30, 2004, 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.





The
      financial statements for 2004 were previously restated (See Note 14 to the
      financial statements included in the June 30, 2005 Form 10-K) to correct certain
      errors primarily resulting in the overstatement of previously reported sales
      and
      accounts receivable.




















PRITCHETT,
      SILER & HARDY, P.C.








Salt
      Lake
      City, Utah


July
      29,
      2004, except for Note 14 to the financial


statements
      as included in the June 30, 2005 Form 10-K


as
      to
      which the date is September 16, 2005








16










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


**CONSOLIDATED
      BALANCE SHEETS**


**JUNE
      30, 2006 AND 2005**




**ASSETS**




**2006**
            
            **2005**ASSETSCURRENT
                ASSETSCash
                and cash equivalents
            
            $
            4,474,552
            
            $
            4,013,225Accounts
                receivable, net
            
            
            3,405,868
            
            
            2,195,357Inventories
            
            
            6,959,188
            
            
            6,473,017Prepaid
                expenses
            
            
            849,160
            
            
            341,989Deferred
                tax assets
            
            
            1,446,018
            
            
            —Total
                Current Assets
            
            
            17,134,786
            
            
            13,023,588PROPERTY,
                PLANT AND EQUIPMENT
            
            
            47,898,410
            
            
            46,067,797Less:
                Accumulated depreciation
            
            
            (30,790,537
            )
            
            (28,889,410
            )17,107,873
            
            
            17,178,387CASH
                SURRENDER VALUE LIFE INSURANCE, NET
            
            
            2,552,682
            
            
            2,179,617OTHER
                ASSETS
            
            
            1,065,019
            
            
            652,660TOTAL
                ASSETS
            
            $
            37,860,360
            
            $
            33,034,252






**LIABILITIES
      AND STOCKHOLDERS’ EQUITY**


**2006**
            
            **2005**LIABILITIES
                AND STOCKHOLDERS’ EQUITYCURRENT
                LIABILITIES:Current
                maturities of long-term debt
            
            $
            711,984
            
            $
            760,739Accounts
                payable
            
            
            3,861,061
            
            
            3,844,102Accrued
                expenses
            
            
            1,253,714
            
            
            1,079,558Dealer
                incentives
            
            
            6,367,229
            
            
            3,702,738Customer
                deposits
            
            
            391,024
            
            
            859,879Allowance
                for boat repurchases
            
            
            15,459
            
            
            75,000Warranty
                reserve
            
            
            632,357
            
            
            740,000Total
                Current Liabilities
            
            
            13,232,828
            
            
            11,062,016LONG-TERM
                DEBT, less current portion
            
            
            15,228,700
            
            
            15,433,446DEFERRED
                TAX LIABILITY
            
            
            305,133
            
            
            —Total
                Liabilities
            
            
            28,766,661
            
            
            26,495,462COMMITMENTS
                AND CONTINGENCIES*[NOTE
                8]*STOCKHOLDERS’
                EQUITYCommon
                stock, $.01 par value, 200,000,000 shares authorized, 4,834,275 shares
                issued and outstanding as of June 30, 2006 and June 30,
                2005
            
            
            48,342
            
            
            48,342Additional
                paid-in capital
            
            
            10,558,853
            
            
            10,558,853Accumulated
                deficit
            
            
            (1,630,472
            )
            
            (4,035,384
            )Less:
                Treasury stock, at cost, 15,000 shares
            
            
            (110,748
            )
            
            (110,748
            )Accumulated
                other comprehensive income from interest rate swap
            
            
            227,724
            
            
            77,727Total
                Stockholders’ Equity
            
            
            9,093,699
            
            
            6,538,790Total
                Liabilities and Stockholders’ Equity
            
            $
            37,860,360
            
            $
            33,034,252




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


17







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




**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**YEARS
      ENDED JUNE 30, 2006, 2005 AND 2004**




**2006**
            
            **2005**
            
            **2004**NET
                SALES
            
            $
            79,226,224
            
            $
            71,182,069
            
            $
            59,296,964COST
                OF SALES
            
            
            66,152,424
            
            
            60,271,506
            
            
            49,247,743Gross
                Profit
            
            
            13,073,800
            
            
            10,910,563
            
            
            10,049,221EXPENSESSelling
                Expense
            
            
            6,765,871
            
            
            5,726,283
            
            
            5,558,709General
                and Administrative
            
            
            4,032,574
            
            
            3,417,933
            
            
            2,660,432Total
                Expense
            
            
            10,798,445
            
            
            9,144,216
            
            
            8,219,141OPERATING
                INCOME
            
            
            2,275,355
            
            
            1,766,347
            
            
            1,830,080Other
                (Income) Expense
            
            
            9,944
            
            
            23,507
            
            
            (1,380
            )Interest
                Expense
            
            
            1,132,584
            
            
            1,011,860
            
            
            1,210,477(Gain)
                loss on disposal of assets
            
            
            11,661
            
            
            (4,000
            )
            
            11,896TOTAL
                NON-OPERATING EXPENSE
            
            
            1,154,189
            
            
            1,031,367
            
            
            1,220,993INCOME
                BEFORE INCOME TAXES
            
            
            1,121,166
            
            
            734,980
            
            
            609,087TAX
                BENEFIT
            
            
            (1,283,746
            )
            
            (21,232
            )
            
            —NET
                INCOME
            
            $
            2,404,912
            
            $
            756,212
            
            $
            609,087BASIC
                EARNINGS PER SHARE
            
            $
            .50
            
            $
            .16
            
            $
            .13WEIGHTED
                AVERAGE SHARES OUTSTANDING
            
            
            4,819,275
            
            
            4,815,188
            
            
            4,761,460DILUTED
                EARNINGS PER SHARE
            
            $
            .49
            
            $
            .15
            
            $
            .13DILUTED
                WEIGHTED AVERAGE SHARES OUTSTANDING
            
            
            4,903,949
            
            
            4,890,124
            
            
            4,825,179




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







18


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


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


**FROM
      JUNE 30, 2003 THROUGH JUNE 30, 2006**






**Common
                Stock**
            
            
            **Additional**
              **Paid
                in**
            
            
            **Retained**
              **Earnings**
            
            
            **Other Com-**
              **prehensive**
            
            
            **Treasury
                Stock**
            
            
            **Deferred**
              **Compen-**
            
            
            **Total**
              **Stock-holders’****Shares**
            
            
            **Amount**
            
            
            **Capital**
            
            
            **(Deficit)**
            
            
            **Income**
            
            
            **Shares**
            
            
            **Amount**
            
            
            **sation**
            
            
            **Equity**BALANCE,
                June 30, 2003
            
            
            4,757,608
            
            $
            47,576
            
            $
            10,436,551
            
            $
            (5,400,683
            )
            $
            —
            
            
            (15,000
            )
            $
            (110,748
            )
            $
            (3,885
            )
            $
            4,968,811Issuance
                of common stock upon exercise of options
            
            
            50,000
            
            
            500
            
            
            80,900
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            81,400Vesting
                of options granted for consulting services
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            3,885
            
            
            3,885Other
                comprehensive income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            58,543
            
            
            —
            
            
            —
            
            
            —
            
            
            58,543Net
                income for the year ended June 30, 2004
            
            
            —
            
            
            —
            
            
            —
            
            
            609,087
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            609,087BALANCE,
                June 30, 2004
            
            
            4,807,608
            
            
            48,076
            
            
            10,517,451
            
            
            (4,791,596
            )
            
            58,543
            
            
            (15,000
            )
            
            (110,748
            )
            
            —
            
            
            5,721,726Issuance
                of common stock upon exercise of options
            
            
            26,667
            
            
            266
            
            
            41,402
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            41,668Other
                comprehensive income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            19,184
            
            
            —
            
            
            —
            
            
            —
            
            
            19,184Net
                income for the year ended June 30, 2005
            
            
            —
            
            
            —
            
            
            —
            
            
            756,212
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            756,212BALANCE,
                June 30, 2005
            
            
            4,834,275
            
            
            48,342
            
            
            10,558,853
            
            
            (4,035,384
            )
            
            77,727
            
            
            (15,000
            )
            
            (110,748
            )
            
            —
            
            
            6,538,790Other
                comprehensive income, net of taxes of $142,861
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            149,997
            
            
            —
            
            
            —
            
            
            —
            
            
            149,997Net
                income for the year ended June 30, 2006
            
            
            —
            
            
            —
            
            
            —
            
            
            2,404,912
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,404,912BALANCE,
                June 30 2006
            
            
            4,834,275
            
            $
            48,342
            
            $
            10,558,853
            
            $
            (1,630,472
            )
            $
            227,724
            
            
            (15,000
            )
            $
            (110,748
            )
            $
            —
            
            $
            9,093,699





19


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




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**YEARS
      ENDED JUNE 30, 2006, 2005 AND 2004**




**2006**
            
            **2005**
            
            **2004**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                Income
            
            $
            2,404,912
            
            $
            756,212
            
            $
            609,087Adjustments
                to reconcile net income to net cash provided (used) by operating
                activities:Inventory
                valuation adjustment
            
            
            —
            
            
            22,682
            
            
            3,885Depreciation
                expense
            
            
            2,020,860
            
            
            1,840,168
            
            
            2,052,314Net
                Increase in cash surrender value of life insurance
            
            
            (373,064
            )
            
            (598,301
            )
            
            (202,690
            )Deferred
                loan costs expensed
            
            
            229,801
            
            
            —
            
            
            —Gain
                on termination of interest rate swap
            
            
            (84,524
            )
            
            —
            
            
            —(Gain)
                loss on disposal of equipment
            
            
            11,661
            
            
            (4,000
            )
            
            11,896Bad
                debt expense
            
            
            83,546
            
            
            168,634
            
            
            55,000Amortization
                of deferred loan costs
            
            
            43,323
            
            
            79,932
            
            
            286,946Deferred
                income tax benefit
            
            
            (1,283,746
            )
            
            —
            
            
            —Change
                in assets and liabilities:(Increase)
                decrease in accounts receivable
            
            
            (1,294,057
            )
            
            1,143,255
            
            
            (1,546,876
            )Increase
                in inventories
            
            
            (486,171
            )
            
            (1,842,297
            )
            
            (1,193,116
            )(Increase)
                decrease in prepaid expenses
            
            
            (507,171
            )
            
            87,668
            
            
            160,190Increase
                in other assets
            
            
            (212,617
            )
            
            (47,593
            )
            
            (30,379
            )Increase
                (decrease) in accounts payable
            
            
            16,959
            
            
            1,001,236
            
            
            (4,824,939
            )Increase
                (decrease) in accrued expenses
            
            
            174,156
            
            
            4,853
            
            
            (244,091
            )Increase
                in dealer incentives
            
            
            2,664,491
            
            
            2,499,216
            
            
            1,014,905Increase
                (decrease) in customer deposits
            
            
            (468,855
            )
            
            773,802
            
            
            (204,581
            )Increase
                (decrease) in warranty reserve
            
            
            (107,643
            )
            
            30,000
            
            
            (190,000
            )Decrease
                in allowance for boat repurchases
            
            
            (59,541
            )
            
            —
            
            
            (125,000
            )Net
                Cash Provided (Used) by Operating Activities
            
            
            2,772,320
            
            
            5,915,467
            
            
            (4,367,449
            )CASH
                FLOWS FROM INVESTING ACTIVITIESProceeds
                from sale of equipment
            
            
            3,883
            
            
            4,000
            
            
            25,000Investment
                in molds and related plugs
            
            
            (1,092,994
            )
            
            (1,641,238
            )
            
            (1,060,533
            )Purchase
                of property, plant and equipment
            
            
            (872,897
            )
            
            (1,463,523
            )
            
            (776,787
            )(Purchase)
                maturity of certificate of deposit
            
            
            —
            
            
            255,197
            
            
            (255,197
            )Net
                Cash Used by Investing Activities
            
            
            (1,962,008
            )
            
            (2,845,564
            )
            
            (2,067,517
            )CASH
                FLOWS FROM FINANCING ACTIVITIESProceeds
                from notes payable and long term debt
            
            
            16,545,878
            
            
            —
            
            
            18,000,000Proceeds
                from termination of interest rate swap
            
            
            84,524
            
            
            —
            
            
            —Payments
                of deferred loan costs
            
            
            (180,009
            )
            
            —
            
            
            (148,129
            )Payments
                of long term debt
            
            
            (16,799,378
            )
            
            (2,441,040
            )
            
            (9,336,061
            )Proceeds
                from issuance of common stock
            
            
            —
            
            
            41,668
            
            
            81,400Payments
                on long term capital lease
            
            
            —
            
            
            (24,367
            )
            
            (20,118
            )Net
                Cash Provided (Used) by Financing Activities
            
            
            (348,985
            )
            
            (2,423,739
            )
            
            8,577,092Net
                increase in cash and cash equivalents
            
            
            461,327
            
            
            646,164
            
            
            2,142,126Beginning
                cash and cash equivalents balance
            
            
            4,013,225
            
            
            3,367,061
            
            
            1,224,935Ending
                cash and cash equivalents balance
            
            $
            4,474,552
            
            $
            4,013,225
            
            $
            3,367,061




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





20







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




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


**YEARS
      ENDED JUNE 30, 2006, 2005 AND 2004**




**2006**
            
            **2005**
            
            **2004**Supplemental
                Disclosures of Cash Flow Information:Cash
                paid during the period for:Interest
                to unrelated parties, net of amounts capitalized
            
            $
            1,417,874
            
            $
            1,123,293
            
            $
            923,531Supplemental
                Schedule of Non-cash Investing and Financing Activities:Unrealized
                gain on interest rate swap
            
            $
            149,997
            
            $
            19,184
            
            $
            58,543Amortization
                of deferred compensation
            
            $
            —
            
            $
            —
            
            $
            3,885




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




21








**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 50 domestic and 12 international dealers. The
      Company’s offices and manufacturing facilities are located in Washington, North
      Carolina, and the Company has been in business since 1979. The Company employs
      approximately 448 people.




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




•
            The
                reported amounts of assets and liabilities,




•
            The
                disclosure of contingent assets and liabilities at the date of the
                financial statements, and




•
            The
                reported amounts of revenues and expenses during the reporting periods.




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




•
            Allowances
                for doubtful accounts;




•
            Inventory
                obsolescence reserves;




•
            Reserves
                for dealer incentives and allowances;




•
            Warranty
                related reserves;




•
            Losses
                on litigation and other contingencies;




•
            Environmental
                liability reserves;




•
            Insurance
                reserves;




•
            Income
                tax reserves.




**Cash
      and Cash Equivalents:** For
      purposes of the statement of cash flows, the Company considers all highly liquid
      debt instruments purchased with a maturity of three months or less to be cash
      equivalents. At June 30, 2006 and 2005, the Company had $4,591,738 and
      $3,733,804, respectively, in excess of federally insured amounts held in
      cash. ****




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




**Inventories:** Inventories are stated at the lower of cost or market. Cost is determined by
      the
      first-in, first-out method (See Note 2). The Company records a reserve for
      obsolete inventories in order to ensure inventories are carried at the lower
      of
      cost or fair market value. Fair market value can be affected by assumptions
      about market demand and conditions, historical usage rates, model changes and
      new product introductions. If model changes or new product introductions create
      more or less than favorable market conditions, the reserve for obsolete
      inventories may need to be adjusted.


22







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




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




**Dealer
      Incentive Accruals:** The
      Company has 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 $6,367,229
      and $3,702,738 at June 30, 2006 and 2005, respectively. Dealer incentive
      accruals are recorded as a reduction to net sales. These amounts also include
      an
      accrual for dealer interest as discussed in Note 8, “Commitments and
      Contingencies”.




**Allowance
      for Boat Repurchases:** The
      Company provides an allowance for boats financed by dealers under floor plan
      finance arrangements that may be repurchased from finance companies under
      certain circumstances where the Company has a repurchase agreement with the
      lender. The amount of the allowance is determined based upon the current
      financial status of the Company’s dealers. The Company has accrued allowance for
      boat repurchases of $15,459 and $75,000 at June 30, 2006 and June 30, 2005
      respectively.




**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.




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.




In
      addition to other dealer incentives, the Company offers a sales incentive plan
      where floor plan interest expense for each eligible 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, along with the related expense, 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.




**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 $1,412,435, $1,264,368 and
      $1,508,773 for the years ended 2006, 2005 and 2004, 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).


23







**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 the year ended June 30,
      2006 have been reclassified to conform with headings and classifications used
      in
      the June 30, 2006 financial statements. The reclassifications had no effect
      on net income or shareholder’s equity as previously reported.




**Cash
      Surrender Value of life insurance policies** **:**  **-** At
      June 30, 2006 and 2005, the Company owns six life insurance policies on
      Reginald M. Fountain, Jr., the Company’s Chairman and Chief Executive Officer
      for a total of $7,780,253 and $7,494,446 in coverage and $2,552,682 and
      $2,179,617 cash value, respectively. At June 30, 2006 and 2005, the Company
      has no outstanding loans against the policies.




**Research
      and Development** **:** The
      Company expenses the costs of research and development for new products and
      components as the costs are incurred. Research and development costs are
      included in the cost of sales and amounted to $780,520 for Fiscal 2006, $786,129
      for Fiscal 2005, and $871,386 for Fiscal 2004.




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





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




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




In
      December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
      No. 123 (Revised 2004), “ *Share-Based
      Payments”* (SFAS
      No. 123R). SFAS No. 123R requires an entity to measure the cost of
      employee services received in exchange for an award of equity instruments based
      on the grant-date fair value of the award with the cost to be recognized over
      the period during which an employee is required to provide service in exchange
      for the award. We adopted the provisions of SFAS No. 123R as of the
      July 1, 2005, the effect of which did not have a material impact on our
      Consolidated Financial Statements.




In
      November 2004, the FASB issued SFAS No. 151, *“Inventory
      Costs* — *an
      amendment of ARB No. 43, Chapter 4”* (SFAS
      No. 151). SFAS No. 151 clarifies the accounting for abnormal amounts
      of idle facility expense, freight, handling costs and wasted material by
      requiring that these items be recognized as current-period expenses regardless
      of circumstances. We adopted the provisions of SFAS No. 151 as of the
      July 1, 2005, the effect of which did not have a material impact on our
      Consolidated Financial Statements.




In
      December 2004, the FASB issued SFAS No. 153, *“Exchanges
      of Nonmonetary Assets—an amendment of APB Opinion No. 29”* (SFAS
      No. 153). SFAS No. 153 amends Opinion 29 to eliminate the exception
      for nonmonetary exchanges of similar productive assets and replaces it with
      a
      general exception for exchanges of nonmonetary assets that do not have
      commercial substance. A nonmonetary exchange has commercial substance if the
      future cash flows of the entity are expected to change significantly as a result
      of the exchange. We adopted the provisions of SFAS No. 153 s of the
      July 1, 2005, the effect of which did not have a material impact on our
      Consolidated Financial Statements.


24









In
      May
      2005, the FASB issued SFAS No. 154, *“Accounting
      Changes and Error Corrections - a replacement of APB Opinion No. 20 and
      FASB Statement No. 3”* (SFAS
      No. 154). SFAS No. 154 replaces APB Opinion No. 20, *“Accounting
      Changes”* (Opinion
      20), and SFAS No. 3, *“Reporting
      Accounting Changes in Interim Financial Statements,”* changes
      the requirements for the accounting for and reporting of a change in accounting
      principle. Opinion 20 previously required that most voluntary changes in
      accounting principle be recognized by including in net income of the period
      of
      the change the cumulative effect of changing to the new accounting principle.
      SFAS No. 154 requires retrospective application to prior periods’ financial
      statements of changes in accounting principle. SFAS No. 154 defines
      retrospective application as the application of a different accounting principle
      to prior accounting periods as if that principle had always been used or as
      the
      adjustment of previously issued financial statements to reflect a change in
      the
      reporting entity. SFAS No. 154 also requires that a change in depreciation,
      amortization, or depletion method for long-lived, nonfinancial assets be
      accounted for as a change in accounting estimate effected by a change in
      accounting principle. We are required to adopt the provisions of SFAS
      No. 154 during the fiscal year beginning July 1, 2007. The adoption of
      SFAS No. 154 is not expected to significantly impact our Consolidated
      Financial Statements.




In
      January 2006, the FASB issued Staff Position (FSP) No. 109-1, *“Application
      of FASB Statement No. 109 to the Tax Deduction on Qualified Production
      Activities Provided by the American Jobs Creation Act of 2004.”* This FSP
      clarifies that the tax deduction related to the new law should be accounted
      for
      as a special deduction under SFAS No. 109, which would reduce tax expense
      for the periods in which such deductions are claimed, rather than as a tax
      rate
      reduction in the calculation of deferred tax assets and liabilities. The FSP
      was
      effective upon issuance and did not have a material impact on our Consolidated
      Financial Statements.




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





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





**Comprehensive
      Income** - The
      Company reports as comprehensive income all changes in stockholders’ equity
      during the year from sources other than shareholders. Other comprehensive income
      refers to all components (revenues, expenses, gains, and losses) of
      comprehensive income that are excluded from net income. The Company’s only
      component of other comprehensive income is unrealized gains and losses related
      to interest rate swap arrangements. For the years ended June 30, 2006, 2005
      and 2004, the Company’s other comprehensive income was $149,997, $19,184, and
      $58,543, respectively, resulting in total comprehensive income of $2,554,909,
      $775,396, and $667,630 respectively for those years.




**Stock
      Based Compensation** - The
      Company has stock incentive plans that provide for stock-based employee
      compensation, including the granting of stock options, to certain key employees
      and other individuals. The plans are more fully described in Note 6. Prior
      to
      the year ended June 30, 2006 the Company accounted for stock options issued
      to
      employee, officers and directors under the stock incentive plan in accordance
      with the recognition and measurement principles of APB Opinion No. 25,
“Accounting for Stock Issued to Employees”, and related Interpretations. Under
      this method, compensation expense is recorded on the date of grant only if
      the
      current market price of the underlying stock exceeded the exercise price. Under
      the Company’s stock incentive plan, stock options are granted at exercise prices
      that equal or exceed the market value of the underlying common stock on the
      date
      of grant. Therefore, no compensation expense related to stock options is
      recorded in the Consolidated Statements of Income for the years 2005 and 2004.




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


25







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 2005 and 2004 consistent with the provisions of SFAS
      No. 123, the Company’s net earnings before taxes and earnings per share
      would have been reduced to the pro forma amounts indicated below:













**Year Ended June 30,****2005**
            
            **2004**Net
                IncomeAs reported
            
            $
            756,212
            
            $
            609,087Less:
                total stock-based compensation expense determined under fair market
                value
                method for all awards, net of tax
            
            
            5,083
            
            
            16,885Pro forma
            
            
            751,129
            
            
            592,202Basic
                net income per shareAs
                reported
            
            
            .16
            
            
            .13Pro forma
            
            
            .16
            
            
            .13Diluted
                net income per shareAs
                reported
            
            
            .15
            
            
            .13Pro forma
            
            
            .15
            
            
            .12







**Note
      2. Accounts Receivable**





Accounts
      Receivable consists of the following:


**Year
                Ended June 30,****2006**
            
            **2005**Trade
                receivables
            
            $
            3,098,978
            
            $
            2,214,150Other
                receivables
            
            
            344,221
            
            
            202,779Subtotal
            
            $
            3,443,199
            
            $
            2,416,929Less
                Allowance for doubtful accounts
            
            
            (37,331
            )
            
            (221,572
            )Net
                accounts receivable
            
            $
            3,405,868
            
            $
            2,195,357








**Note
      3. Inventories.**




Inventories
      consist of the following:




**Year
                Ended June 30,****2006**
            
            **2005**Parts
                and supplies
            
            $
            2,916,893
            
            $
            3,059,465Work-in-process
            
            
            3,189,007
            
            
            3,243,068Finished
                goods
            
            
            885,339
            
            
            243,1666,991,239
            
            
            6,545,699Reserve
                for obsolescence
            
            
            (32,051
            )
            
            (72,682
            )$
            6,959,188
            
            $
            6,473,017




All
      of
      the inventory is owned by the Company and pledged as collateral on notes and
      mortgages payable at June 30, 2006.




26







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




Property,
      plant, and equipment consists of the following:






**Estimated**
              **Useful Lives**
            
            
            **June 30,****in
                Years**
            
            
            **2006**
            
            
            **2005**Land
                and related improvements
            
            
            10-30
            
            $
            4,697,418
            
            $
            4,697,418Buildings
                and related improvements
            
            
            10-30
            
            
            10,023,630
            
            
            9,698,715Construction-in-progress
            
            
            N/A
            
            
            369,259
            
            
            1,041,396Production
                molds and related plugs
            
            
            8-10
            
            
            24,685,048
            
            
            23,212,883Machinery
                and equipment
            
            
            3-5
            
            
            6,078,588
            
            
            5,510,330Furniture
                and fixtures
            
            
            5
            
            
            760,800
            
            
            628,889Computer
                equipment
            
            
            5
            
            
            1,003,404
            
            
            940,237Transportation
                equipment
            
            
            5
            
            
            280,263
            
            
            337,92947,898,410
            
            
            46,067,797Accumulated
                depreciation
            
            
            
            
            
            (30,790,537
            )
            
            (28,889,410
            )$
            17,107,873
            
            $
            17,178,387








Depreciation
      expense by asset category was as follows:





**2006**
            
            **2005**
            
            **2004**Land
                improvements
            
            $
            132,009
            
            $
            129,372
            
            $
            127,464Buildings
            
            
            309,695
            
            
            278,563
            
            
            301,885Molds &
                plugs
            
            
            1,214,869
            
            
            1,111,953
            
            
            1,188,614Machinery &
                equipment
            
            
            219,210
            
            
            218,440
            
            
            310,835Furniture &
                fixtures
            
            
            30,597
            
            
            16,518
            
            
            13,862Transportation
                equipment
            
            
            23,580
            
            
            33,422
            
            
            32,880Computer
                equipment
            
            
            90,900
            
            
            51,900
            
            
            76,774Total
            
            $
            2,020,860
            
            $
            1,840,168
            
            $
            2,052,314








All
      of
      the land, buildings and improvements are owned by the Company and are held
      as
      collateral on notes and mortgages payable at June 30, 2006.




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.





In
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets,” the Company continually evaluates whether events and
      circumstances have occurred that indicate the remaining estimated useful lives
      of its long-lived assets may warrant revision or that the remaining balance
      of
      such assets may not be recoverable. During 2006 and 2005, the Company tested
      its
      long-lived asset balances for impairment and no adjustments were recorded as
      a
      result of those reviews.








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




On
      September 19, 2005, the Company entered into a $16,500,000 term loan
      agreement with Regions Bank. The proceeds from this newly obtained long-term
      loan were used to repay, and concurrently cancel, the long-term loan with Bank
      of America.  Upon cancellation of the Bank of America loan, the Company
      expensed that portion of the deferred costs paid to acquire the loan which
      had
      not been amortized during the term of the loan. The amount of the deferred
      loan
      costs expensed is $229,801. The Company’s term loan agreement (the “Loan”) with
      Regions Bank matures September 19, 2010 and is secured by accounts
      receivable, inventories, property, plant and equipment, death proceeds under
      certain life insurance policies, and common stock. Principal payments, beginning
      at approximately $55,000 and escalating over time, are due monthly, commencing
      September 30, 2005, with a final principal payment of $12,286,254 due
      September 19, 2010. Interest is payable monthly. The Loan includes
      $4,125,000 that bears interest, at the Company’s option, under one of two
      available methods. The first available interest computation method provides
      for
      interest at the higher of the Prime Rate or the Federal Funds rate plus 1/2%.
      The second available interest computation method bears interest at the sum
      of
      (i) the one month LIBOR rate divided by 1.0 minus the Eurodollar Reserve
      Percentage, and (ii) 1.75%. The Company may select either of the two
      interest rate methodologies by providing written notification to Regions Bank.
      The balance of the Loan ($12,375,000 at inception) bears interest that has
      been
      set at a fixed annual rate of 6.45% through the use of an interest rate swap.
      The fixed annual rate of 6.45% is a blended rate that combines the 1.75% premium
      over one month LIBOR listed above with a fixed interest rate of 4.70% paid
      by
      the Company to the counterparty under the terms of our interest rate swap
      agreement, described below.


27








The
      Company utilizes an interest rate swap agreement to hedge exposure to
      fluctuations in market interest rates. Under United States GAAP, an interest
      rate swap agreement is considered a derivative financial instrument. Due to
      the
      nature of the derivative and the intended use by the Company, the derivative
      qualifies as a Cash Flow Hedge. As such, SFAS No. 133, Accounting for Derivative
      Instruments and Hedging Activities, requires that the value of the derivative
      be
“marked-to-market” periodically and any change in the market value of the swap
      be reflected in the financial statements of the Company. The market value of
      the
      derivative is calculated as of the last day of the period and any change since
      the end of the previous period is reflected in an adjustment to Stockholders’
Equity in the Consolidated Balance Sheet. During the quarter ended September
      30,
      2005, the Company terminated a then extant interest rate swap agreement with
      Bank of America related to the Bank of America loan, which was repaid during
      the
      period. At termination, that swap agreement with Bank of America resulted in
      a
      gain to the Company of $84,524. The Company entered into a new interest rate
      swap agreement with Regions Bank related to the new Regions Bank loan, taken
      during the period. The swap agreement with Regions Banks has a notional amount
      of $12,375,000, a term of five years and a fixed annual rate of 4.70% due to
      Regions Bank. The swap agreement with Regions Bank has a floating interest
      rate
      due to the Company which is based on LIBOR and is reset monthly. As of June
      30,
      2006 the market value adjustment for this swap results in an unrealized gain
      totaling $370,585.





The
      Loan
      contains certain restrictive covenants setting forth minimum fixed charge
      coverage, tangible net worth, and debt to tangible net worth ratio requirements.
      These covenants also include a number of other limitations, including
      restrictions on capital expenditures, mergers or consolidations, disposal of
      assets, investments, incurrence of other indebtedness and payment of dividends.
      The Company expects to maintain compliance with these restrictive covenants,
      and
      believes that these restrictions will not have a material effect on the
      Company’s ability to maintain and improve its facilities and compete with other
      companies in the boating industry. As of June 30, 2006 the Company was in
      compliance with all covenants.





On
      July
      12, 2006, the Company entered into a Loan Agreement with Regions Bank (the
      lender) that provides for a secured, non-revolving line of credit under which
      the Company may obtain up to an aggregate of $5 million in loans from the lender
      during the one-year term of the agreement. The Company will use loans it obtains
      under the Loan Agreement to finance its production of boats for display or
      demonstration at dealer meetings, boat shows, performance trials and factory
      demonstrations and that are of a configuration that are not available from
      a
      dealer’s stock. Boats financed with loans under the Loan Agreement will be sold
      to dealers after they are no longer needed by the Company.





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





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





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


28







Following
      is a summary of long-term debt at June 30, 2006, with current maturities
      determined based upon the net reduction of debt during the year ending
      June 30, 2007 that will occur under terms of the above described new loan
      with Regions Bank:




**2006**
            
            **2005**Credit
                agreement with a financial corporation dated September 19,
                2005.
            
            $
            15,940,684
            
            $
            16,183,5384.00%
                loan payable to a financial institution for the purchase of a vehicle,
                monthly payments of $726 through September 2006, secured by the vehicle
                purchased.
            
            
            —
            
            
            10,647Total
                long term debt
            
            
            15,940,684
            
            
            16,194,185Less:
                Current maturities included in current liabilities:
            
            
            (711,984
            )
            
            (760,739
            )$
            15,228,700
            
            $
            15,433,446






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




2007
            
            
            711,9842008
            
            
            759,2902009
            
            
            809,7382010
            
            
            863,5382011
            
            
            12,796,134$
            15,940,684




**Note
      6. Stock Options.**




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





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





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





The
      company has Stock Option Plans in effect at June 30, 2006. All options
      outstanding as of June 30, 2005 were fully vested and no new options were issued
      during the year ended June 30, 2006, therefore no option related compensation
      cost has been charged against income for the year ended June 30,
      2006





On
      June 21, 1995, the shareholders voted to adopt the 1995 stock option plan.
      The plan provided 450,000 options to purchase the common stock to be granted
      by
      the Board of Directors to employees or directors of the Company. On
      August 4, 1995, the Board of Directors voted to grant the 450,000 stock
      options to Mr. Reginald M. Fountain, Jr. at $4.67 per share,
      exercisable for 10 years from the date granted, on a non-qualified basis. On
      November 9, 2004, the shareholders of Fountain Powerboats, Inc. approved an
      amendment to this plan to permit the Board of Directors to extend the term
      of
      this plan to August 4, 2008. As of June 30, 2006, none of these
      options have been exercised.


29







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, 2006, 88,333 options are
      available for grant under the plan.




The
      fair
      market value of each option award is estimated on the date of grant using the
      Black-Scholes option pricing model. No options were granted during the years
      ended June 30, 2006 and 2005.





The
      risk
      free rate is based upon a U.S. Treasury instrument with a life that is similar
      to the expected life of the option grant. Expected volatility is based upon
      the
      historical volatility of the Company as reflected in the previous 10 years
      trading history. The expected term of the options is based upon the average
      life
      of previously issued stock options. The expected dividend yield is based upon
      current yield on date of grant. No post-vesting restrictions exist for these
      options.





A
      summary
      of the status of the options granted under the Company’s 1995 and 1999 stock
      option plans and other agreements at June 30, 2006, 2005 and 2004, and
      changes during the periods then ended is presented in the table below:




**2006**
            
            **2005**
            
            **2004****Shares**
            
            **Weighted Average**
              **Exercise
                Price**
            
            **Shares**
            
            **Weighted Average**
              **Exercise
                Price**
            
            **Shares**
            
            **Weighted Average**
              **Exercise
                Price**Outstanding
                at beginning of period
            
            
            500,000
            
            $
            4.36
            
            
            560,000
            
            $
            4.16
            
            
            610,000
            
            $
            3.96Exercised
            
            
            —
            
            
            —
            
            
            26,667
            
            $
            1.56
            
            
            50,000
            
            
            1.63Forfeited
            
            
            30,000
            
            
            1.60
            
            
            33,333
            
            $
            3.37
            
            
            —
            
            
            —Outstanding
                at end of period
            
            
            470,000
            
            $
            4.53
            
            
            500,000
            
            $
            4.36
            
            
            560,000
            
            $
            4.16Exercisable
                at end of period
            
            
            470,000
            
            $
            4.53
            
            
            500,000
            
            $
            4.36
            
            
            546,667
            
            $
            4.23




A
      summary
      of the status of the options outstanding under the Company’s stock option plans
      and other agreements at June 30, 2006 is presented below:




**Options
                Outstanding**
            
            **Options
                Exercisable****Range of**
              **Exercise Prices**
            
            **Number**
              **Outstanding**
            
            **Weighted Average**
              **Remaining**
              **Contractual
                Life**
            
            **Weighted Average**
              **Exercise**
              **Price**
            
            **Number**
              **Exercisable**
            
            **Weighted Average**
              **Exercise**
              **Price**$1.34 
                to 1.60
            
            
            20,000
            
            
            1.25
                years
            
            $
            1.47
            
            
            20,000
            
            $
            1.47$4.67
            
            
            450,000
            
            
            2.17
                years
            
            
            4.67
            
            
            450,000
            
            
            4.67470,000
            
            
            
            
            
            
            
            
            470,000










As
      of
      June 30, 2006, the aggregate intrinsic value of options outstanding was
      approximately $9,000. No options were exercised during the year ended June
      30,
      2006.





Had
      compensation costs for the Company’s stock option plan been determined using the
      fair value method, the Company’s pro forma net income would not have changed as
      there were no options granted or vested during the year ended June 30,
      2006.


30







**Note
      7. Income Taxes.**




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




The
      significant components of the provision for income taxes for the years ended
      June 30, 2006, 2005 and 2004 are as follows:




**2006**
            
            **2005**
            
            **2004**Current
                tax provisionFederal
            
            $
            —
            
            $
            (20,263
            )
            $
            —State
            
            
            —
            
            
            (969
            )
            
            —Total
                current tax provision
            
            
            —
            
            
            (21,232
            )
            
            —Deferred
                tax provisionFederal
            
            
            383,221
            
            
            292,283
            
            
            241,811State
            
            
            77,037
            
            
            63,307
            
            
            35,561Total
                deferred tax provision
            
            
            460,258
            
            
            355,590
            
            
            277,372Provision
                for income tax expense before adjustment to deferred tax asset valuation
                allowance
            
            
            460,258
            
            
            334,358
            
            
            277,372Increase
                (decrease) in valuation allowance
            
            
            (1,744,004
            )
            
            (355,590
            )
            
            (277,372
            )Net
                provision (benefit) for income taxes
            
            $
            (1,283,746
            )
            $
            (21,232
            )
            $
            —




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




**2006**
            
            **2005**
            
            **2004**Expected
                income tax expense (benefit)
            
            $
            381,197
            
            $
            249,893
            
            $
            207,090Increase
                (decrease) resulting from:State
                income taxes, net of federal tax effect
            
            
            51,058
            
            
            41,165
            
            
            35,561Nondeductible
                expenses
            
            
            28,004
            
            
            43,300
            
            
            34,721Adjustment
                to deferred tax asset valuation allowance
            
            
            (1,744,004
            )
            
            (355,590
            )
            
            (277,372
            )Provision
                for income taxes
            
            $
            (1,283,746
            )
            $
            (21,232
            )
            $
            —





31






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




Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. Significant components of deferred
      taxes at June 30, 2006 and 2005 are as follows:




**2006**
            
            **2005**Deferred
                tax assets relating to:Inventory
                capitalization difference
            
            $
            180,881
            
            $
            185,233Bad
                debt allowance
            
            
            14,391
            
            
            85,416Reserve
                for obsolete inventory
            
            
            12,356
            
            
            28,019Reserve
                for buy backs
            
            
            5,960
            
            
            28,913Warranty
                reserve
            
            
            243,774
            
            
            285,270Accrued
                dealer incentives
            
            
            299,906
            
            
            609,454Reserve
                for health insurance
            
            
            62,451
            
            
            64,764Accrued
                executive compensation
            
            
            60,170
            
            
            72,971Net
                operating loss carryforward
            
            
            1,744,639
            
            
            1,714,599Charitable
                contributions carryforward
            
            
            892
            
            
            —Alternative
                minimum tax credit carryforward
            
            
            41,524
            
            
            41,524Investment
                tax credits
            
            
            86,294
            
            
            86,294Total
                deferred tax assets
            
            
            2,753,238
            
            
            3,202,457Less
                valuation allowance
            
            
            —
            
            
            (1,744,004
            )Deferred
                tax assets net of valuation allowance
            
            
            2,753,238
            
            
            1,458,453Deferred
                tax liabilities relating to:Property
                and equipment
            
            
            (1,469,492
            )
            
            (1,458,453
            )Unrealized
                gain on swap
            
            
            (142,861
            )
            
            —Total
                deferred tax liability
            
            
            (1,612,353
            )
            
            (1,458,453
            )Net
                recorded deferred tax asset
            
            $
            1,140,885
            
            $
            —











Deferred
      income taxes are presented in the accompanying consolidated balance sheets
      as
      follows at June 30, 2006 and 2005:


**2006**
            
            **2005**Current
                deferred tax asset.
            
            $
            1,446,018
            
            $
            —Noncurrent
                deferred tax liability.
            
            
            (305,133
            )
            
            —$
            1,140,885
            
            $
            —








As
      of
      June 30, 2005 the Company had net deferred tax assets of $1,744,004 that were
      fully offset by a valuation allowance because, as of that date, it was
      Management’s conclusion that there continued to be doubt as to whether those
      deferred tax assets were more likely than not to be realized in the future.
      The
      deferred tax assets principally related to the potential future benefits of
      tax
      net operating loss carryforwards, most of which had been generated during the
      year ended June 30, 2002 when the Company underwent a major restructuring of
      its
      operations. During the year ended June 30, 2006 the Company performed an
      evaluation, in accordance with Statement of Financial Accounting Standard No.
      109, *Accounting
      for Income Taxes* ,
      of the
      likelihood of realization of its deferred tax assets. As a result of this
      evaluation, Management concluded that it was more likely than not that these
      deferred tax assets would be realized. This conclusion was based on various
      factors, the most significant of which were (1) the Company’s record of
      generation of taxable income over the four years since June 30, 2002, during
      which years the Company has generated federal taxable income that has reduced
      its federal net operating loss carryforward from $8.1 million to approximately
      $4.6 million , (2) the Company’s consistency in generating net income during
      each of those four years, and (3) Management’s belief that the Company is well
      positioned to generate profits on an ongoing basis such that all tax net
      operating losses will be utilized prior to any applicable expiration dates.
      There remains approximately $4.6 million for Federal and $3.7 million for State
      tax purposes of net operating loss carryovers which expire in various years
      through 2023 to offset current tax expenses. Accordingly, the Company does
      not
      believe valuation allowances are necessary as of June 30, 2006 because
      deductible temporary differences will be utilized primarily through charges
      against reversals of future taxable temporary differences.


32








The
      Company has available federal and state operating loss carry forwards at
      June 30, 2006 of approximately $4,600,000 and $3,700,000, respectively,
      which expire at various dates through 2023.






**Note
      8. Commitments and Contingencies.**




**Employment
      Agreement:** The
      Company entered into a one-year employment agreement in 1989 with its Chairman,
      Reginald M. Fountain, Jr. The agreement provides for automatic one-year
      renewals at the end of each year subject to Mr. Fountain’s continued
      employment.




During
      Fiscal 2005 the Company entered into a one-year employment agreement with R.
      David Knight, its President. The agreement provides for automatic one-year
      renewals at the end of each year, subject to Mr. Knight’s continued
      employment, and compensation for three years in event of termination or change
      in status without cause due to change in control.




**Dealer
      Interest:** The
      Company regularly pays a portion of dealers’ interest charges for floor plan
      financing. These interest charges amounted to $1,462,821 for Fiscal 2006,
      $1,238,274 for Fiscal 2005 and $756,336 for Fiscal 2004. They are included
      in
      the accompanying consolidated statements of operations as part of net sales.
      At
      June 30, 2006, 2005 and 2004 the estimated unpaid dealer incentive interest
      included in accrued dealer incentives amounted to $257,050, $223,542 and
      $62,894, respectively.




**Product
      Liability and Other Litigation:** There
      were various warranty lawsuits against the Company extant at June 30, 2006.
      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, 2006 and 2005, the Company had a contingent liability to
      repurchase boats in the event of dealer defaults and if repossessed by the
      commercial lenders amounting to $35,212,412 and $21,443,054,
      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, 2006 and 2005, the allowance for boat repurchases was $15,459 and
      $75,000, 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 $131,626 for Fiscal year 2006,
      $113,633 for Fiscal 2005 and $86,825 for Fiscal 2004.




**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 was defined by the Group administrator to
      be
      $28,105. The Company is likely to be eligible for a *de
      Minimus* Settlement Agreement, which is expected to be finalized in 2006.


33







**Note
      9. Export Sales.**




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




**Year
                Ended June 30,****2006**
            
            **2005**
            
            **2004**Canada,
                Central and South America
            
            $
            1,849,529
            
            $
            2,474,619
            
            $
            1,441,308Europe
            
            
            2,722,920
            
            
            1,417,819
            
            
            384,402Middle
                East
            
            
            2,753,281
            
            
            1,088,838
            
            
            435,322Africa
            
            
            965,910
            
            
            410,758
            
            
            —$
            8,291,640
            
            $
            5,392,034
            
            $
            2,261,032




**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: in Fiscal 2006, $25,435; in Fiscal 2005, $32,358; and in
      Fiscal 2004, $18,592. At June 30, 2006, the Company owed Reginald M.
      Fountain, Jr. $0 for these rentals.




The
      Company expensed the following amounts for aircraft services and rentals to
      an
      entity controlled by Reginald M. Fountain, Jr.: in Fiscal 2006, $255,339; in
      Fiscal 2005, $178,383; and in Fiscal 2004, $259,189. At June 30, 2006 the
      Company owed $0 in unpaid services to this entity.




Two
      Directors of the Company together purchased a single boat in Fiscal 2006 for
      $211,174, which is standard wholesale price for that boat model and its optional
      features.





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





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




The
      Company paid $0, $0 and $15,029 for the years ended June 30, 2006, 2005 and
      2004 for advertising and public relations services from an entity owned by
      a
      director of the Company. At June 30, 2006, the Company had no payable due
      to the entity for these services.




**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 2006 one dealer accounted for
      10.9
      percent of sales, one accounted for 8.5 percent of sales and four each accounted
      for 5.8 to 6.3 percent of sales. In Fiscal 2005, one dealer accounted for 10.5
      percent of sales, one for 6 percent of sales, and three dealers for 5 percent
      of
      sales individually. In Fiscal 2004, one dealer accounted for 10.5 percent of
      sales, one for 10.2 percent of sales, and two dealers for 5.0 percent of sales
      individually.




**Note
      12. - Earnings per Share.**




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




**2006**
            
            **2005**
            
            **2004**Weighted
                average number of common shares outstanding used in basic earnings
                per
                share
            
            
            4,819,275
            
            
            4,815,188
            
            
            4,761,460Effect
                of dilutive stock options
            
            
            84,674
            
            
            74,936
            
            
            63,719Weighted
                number of common shares and potential dilutive common shares outstanding
                used in dilutive earnings per share
            
            
            4,903,949
            
            
            4,890,124
            
            
            4,825,179




34


There
      were no adjustments required to be made to net income in the computation of
      diluted earnings per share. For the years ended June 30, 2006 and June 30,
      2005, there were no antidilutive options outstanding . For
      the
      year ended June 30, 2004, there were 450,000 options that were antidilutive
      since the exercise price exceeded the average market price of the Company’s
      common stock for the year. These antidilutive options have been omitted from
      the
      calculation of diluted earnings per share for that year.




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




The
      Company’s net sales resulted from the following product lines for the years
      ended June 30, 2006, 2005 and 2004:




**2006**
            
            **2005**
            
            **2004**Sports
                boats
            
            $
            31,799,204
            
            $
            33,819,857
            
            $
            32,509,664Express
                cruisers
            
            
            15,760,240
            
            
            13,395,691
            
            
            9,508,545Sport
                fishing boats
            
            
            29,194,785
            
            
            21,123,893
            
            
            15,805,238Non-boat
                sales including (Service, Parts, Sportswear)
            
            
            2,471,995
            
            
            2,842,627
            
            
            1,473,517Net
                sales
            
            $
            79,226,224
            
            $
            71,182,068
            
            $
            59,296,964








35








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




**SCHEDULES
      TO THE FINANCIAL STATEMENTS**




SCHEDULE
      II - VALUATION AND QUALIFYING ACCOUNTS




**Fiscal
                2006**
              **Valuation
                and Qualifying Account Description**
            
            **Balance**
              **June 30, 2005**
            
            **Charge**
              **(Credit)
                to**
              **Expense**
              **Adjustments**
            
            **Payments/**
              **Deductions**
            
            **Balance**
              **June 30,**
              **2006**Allowance
                for Doubtful accounts
            
            $
            221,572
            
            $
            83,546
            
            $
            267,787
            
            $
            37,331Inventory
                Obsolescence Reserve
            
            
            72,682
            
            
            42,060
            
            
            82,691
            
            
            32,051Deferred
                Tax Valuation Allowance
            
            
            1,744,004
            
            
            (1,744,004
            )
            
            —
            
            
            —Warranty
                Expense Reserve
            
            
            740,000
            
            
            26,579
            
            
            134,222
            
            
            632,357Allowance
                for Boat Repurchases
            
            
            75,000
            
            
            61,719
            
            
            121,260
            
            
            15,459**Fiscal
                2005**
              **Valuation
                and Qualifying Account Description**
            
            
            **Balance**
              **June
                30, 2004**
            
            
            **Charge**
              **(Credit)
                to**
              **Expense**
              **Adjustments**
            
            
            **Payments/**
              **Deductions**
            
            
            **Balance**
              **June
                30,**
              **2005**Allowance
                for Doubtful accounts
            
            $
            82,841
            
            $
            168,634
            
            $
            29,903
            
            $
            221,572Inventory
                Valuation Reserve
            
            
            50,000
            
            
            22,682
            
            
            —
            
            
            72,682Deferred
                Tax Valuation Allowance
            
            
            2,065,541
            
            
            (321,537
            )
            
            —
            
            
            1,744,004Warranty
                Expense
            
            
            710,000
            
            
            892,480
            
            
            862,480
            
            
            740,000Allowance
                for Boat Repurchases
            
            
            75,000
            
            
            —
            
            
            —
            
            
            75,000**Fiscal
                2004**
              **Valuation
                and Qualifying Account Description**
            
            
            **Balance**
              **June
                30, 2003**
            
            
            **Charge**
              **(Credit)
                to**
              **Expense**
              **Adjustments**
            
            
            **Payments/**
              **Deductions**
            
            
            **Balance**
              **June
                30,**
              **2004**Allowance
                for Doubtful accounts
            
            $
            27,841
            
            $
            55,000
            
            $
            —
            
            $
            82,841Inventory
                Valuation Reserve
            
            
            50,000
            
            
            —
            
            
            —
            
            
            50,000Deferred
                Tax Valuation Allowance
            
            
            2,342,912
            
            
            (277,371
            )
            
            —
            
            
            2,065,541Warranty
                Expense
            
            
            900,000
            
            
            357,507
            
            
            547,507
            
            
            710,000Allowance
                for Boat Repurchases
            
            
            200,000
            
            
            —
            
            
            125,000
            
            
            75,000





36







**FOUNTAIN
      POWERBOATS INDUSTRIES, INC.**


**SUPPLEMENTARY
      DATA**


**UNAUDITED
      SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA**




**First**
              **Quarter**
            
            **Second**
              **Quarter**
            
            **Third**
              **Quarter**
            
            **Fourth**
              **Quarter****Fiscal
                2006**Revenue
            
            $
            19,157,736
            
            $
            18,210,092
            
            $
            18,526,332
            
            $
            23,332,064Gross
                profit
            
            
            3,676,114
            
            
            2,897,702
            
            
            2,764,533
            
            
            3,735,452Income
                before taxes
            
            
            697,058
            
            
            319,296
            
            
            22,410
            
            
            82,402Net
                income
            
            
            697,058
            
            
            319,296
            
            
            22,410
            
            
            1,366,148Net
                income per share:Basic
            
            
            .14
            
            
            .07
            
            
            .00
            
            
            .29Diluted
            
            
            .14
            
            
            .07
            
            
            .00
            
            
            .28**Fiscal
                2005**Revenue
            
            $
            16,742,309
            
            $
            17,256,520
            
            $
            16,714,140
            
            $
            20,469,100Gross
                profit
            
            
            1,993,148
            
            
            2,375,903
            
            
            2,891,593
            
            
            3,649,919Income
                (loss) before taxes
            
            
            (373,338
            )
            
            137,404
            
            
            359,492
            
            
            611,422Net
                income (loss)
            
            
            (373,338
            )
            
            137,404
            
            
            360,460
            
            
            631,686Net
                income (loss) per share:Basic
            
            
            (.08
            )
            
            .03
            
            
            .07
            
            
            .13Diluted
            
            
            (.08
            )
            
            .03
            
            
            .07
            
            
            .13**Fiscal
                2004**Revenue
            
            $
            12,885,232
            
            $
            13,361,811
            
            $
            15,790,650
            
            $
            17,259,271Gross
                profit
            
            
            2,032,181
            
            
            2,027,100
            
            
            3,119,068
            
            
            2,870,872Income
                (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/ADiluted
            
            
            (.07
            )
            
            .05
            
            
            .16
            
            
            (.01
            )




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




The
      information contained under the section captioned “Relationship with Independent
      Registered Public Accounting Firm” in the Company’s definitive proxy statement
      for the Company’s 2006 Annual Meeting of the Stockholders (the “Proxy
      Statement”) is incorporated herein by reference.




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




Disclosure
      Controls and Procedures




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





There
      have been no changes in the Company’s internal control over financial reporting
      identified in connection with the evaluation required under paragraph (d) of
      the
      Securities and Exchange Commission Rule 13a-15 that occurred during the
      Company’s last fiscal quarter, that has materially affected, or is reasonably
      likely to materially affect, the Company’s internal control over financial
      reporting.


37





**Item
      9B. Other Information.**




None.




**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 is 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.




***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) ”Executive Compensation - Cash Compensation,” (3) “Executive
      Compensation - Employment Agreements and Change in Control Arrangements,” and
      (4) “Executive Compensation - Employee Stock Options,” in the Company’s
      definitive Proxy Statement to be filed with the Commission in connection with
      the Company’s next Annual Meeting of Shareholders is incorporated herein by
      reference.




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




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




***Securities
      Authorized for Issuance Under Equity Compensation
      Plans.*** The
      following table summarizes all compensation plans and individual compensation
      arrangements that were in effect on June 30, 2006, and under which shares
      of the Company’s common stock were authorized for issuance.





38







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




**Plan
                category**
            
            **(a)**
              **Number of shares**
              **to
                be issued upon**
              **exercise
                of**
              **outstanding options**
            
            **(b)**
              **Weighted-average**
              **exercise
                price of**
              **outstanding options**
            
            **(c)**
              **Number of shares remaining**
              **available for future issuance under**
              **equity compensation plans (excluding**
              **shares
                reflected in column (a))**Equity
                compensation plans approved by security holders
            
            
            460,000
            
            $
            4.60
            
            
            88,333Equity
                compensation plans not approved by security holders
            
            
            10,000
            
            
            1.34
            
            
            —Total
            
            
            470,000
            
            $
            4.53
            
            
            88,333






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




**Item
      13. Certain Relationships and Related Transactions.**




Information
      appearing under the caption “Transactions with Related Parties” 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
      14. Principal Accountant Fees and Services.**




Information
      appearing under the caption “Proposal 3. Ratification of Appointment of
      Independent Accountants - Services and Fees During Fiscal 2006 and Fiscal 2005”
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.**




**(a)**
            **Documents
                filed with Report:****(1)**
            **Financial
                Statements.**The following consolidated financial statements of the Company are
                contained in Item 8 of this Report.PageReport
                of Dixon Hughes PLLC
            15Report
                of Pritchett, Siler & Hardy, P. C.
            16Consolidated
                balance sheets at June 30, 2006 and 2005
            17Consolidated
                statements of operations for the years ended June 30, 2006, 2005 and
                2004
            18Consolidated
                statements of stockholder’s equity for the years ended June 30, 2006,
                2005 and 2004
            19Consolidated
                statements of cash flows for the years ended June 30, 2006, 2005 and
                2004
            20Notes
                to consolidated financial statements
            22**(2)**
            **Financial
                Statement Schedules**.Schedule
                II - Valuation and Qualifying Accounts
            36**(3)**
            **Exhibits**.
                An index of exhibits that is a part of this Form 10-K appears following
                the signature page and is incorporated herein by reference.




39








**Signatures**




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




**FOUNTAIN
                POWERBOAT INDUSTRIES, INC.**By:
            /S/*Reginald
                M. Fountain, Jr.*September
                22, 2006
            
            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
                and Chief Executive Officer
              (Principal
                Executive Officer)
            
            September
                22, 2006/S/*A.
                Myles Cartrette*
              
              A.
                Myles Cartrette
            
            Director
            
            September
                22, 2006/S/*George
                L. Deichmann, III*
              George
                L. Deichmann, III
            
            Director
            
            September
                22, 2006/S/*Guy
                L. Hecker, Jr.*
              
              Guy
                L. Hecker, Jr.
            
            Director
            
            September
                22, 2006/S/*David
                C. Miller*
              David C. Miller
            
            Director
            
            September
                22, 2006/S/*Anthony
                J. Romersa*
              
              Anthony
                J. Romersa
            
            Director
            
            September
                22, 2006/S/*Anthony
                A. Sarandes*
              
              Anthony
                A. Sarandes
            
            Director
            
            September
                22, 2006/S/*Mark
                L. Spencer*
              
              Mark
                L. Spencer
            
            Director
            
            September
                22, 2006/S/*Robert
                L. Stallings III*
              
              Robert
                L. Stallings
            
            Director
            
            September
                22, 2006/S/*Irving
                L. Smith*
              
              Irving
                L. Smith
            
            Chief
                Financial Officer
            
            September
                22, 2006





40







**EXHIBIT
      INDEX**


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






41




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






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





42