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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended March 31, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission File Number 0-14712



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FOUNTAIN POWERBOAT INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Nevada                                                         |  | 56-1774895                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. employer identification No.)



Whichards
Beach Road, P.O. Drawer 457, Washington, NC 27889

(Address of principal executive offices)



Registrants telephone no. including area code: (252) 975-2000



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



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



Indicate the number of shares outstanding of each of the issuers classes of common
stock as of the latest practicable date.



|                             |  |                              
|---------------------------- |  | -----------------------------
|Class                        |  | Outstanding at March 31, 2005
|Common Stock, $.01 par value |  | 4,814,275 shares             



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



INDEX



|        |  |                                                                                                                               |  |         
|------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | --------
|        |  |                                                                                                                              
|        |  |                                                                                                                               |  | Page No.
|Part I  |  | Financial Information                                                                                                         |  |         
|        |  |                                                                                                                              
|        |  | Item 1.
Financial Statements                                                                                                  |  |         
|        |  |                                                                                                                              
|        |  | Unaudited Condensed Consolidated Balance Sheets, March 31, 2005 and June 30, 2004                                             |  | 3 - 4   
|        |  |                                                                                                                              
|        |  | Unaudited Condensed Consolidated Statements of Operations, for the three months and nine months ended March 31, 2005 and 2004 |  | 5       
|        |  |                                                                                                                              
|        |  | Unaudited Condensed Consolidated Statements of Cash Flows, for the nine months ended March 31, 2005 and 2004                  |  | 6 - 7   
|        |  |                                                                                                                              
|        |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                                |  | 8 - 19  
|        |  |                                                                                                                              
|        |  | Item 2.
Managements Discussion and Analysis of Results of Operations and Financial Condition                                 |  | 20 - 22 
|        |  |                                                                                                                              
|        |  | Item 3.
Quantitative and Qualitative Disclosures of Market Risk                                                               |  | 22      
|        |  |                                                                                                                              
|        |  | Item 4.
Controls and Procedures                                                                                               |  | 22      
|        |  |                                                                                                                              
|Part II |  | Other Information                                                                                                             |  |         
|        |  |                                                                                                                              
|        |  | Items
1, 2, 3, 4, 5 & 6                                                                                                       |  | 23      
|        |  |                                                                                                                              
|        |  | Signature                                                                                                                     |  | 24      
|        |  |                                                                                                                              
|        |  | Exhibits                                                                                                                      |  |         



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PART I. FINANCIAL INFORMATION.



ITEM 1: Financial Statements.



FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS



|                                         |  |                |             |   |               |   |             |  
|---------------------------------------- |  | -------------- | ----------- | - | ------------- | - | ----------- | -
|                                         |  | March 31, 2005 |             |   | June 30, 2004 |  
|ASSETS                                   |  |                |             |   |               |   |             |  
|CURRENT ASSETS                           |  |                |             |   |               |   |             |  
|Cash and cash equivalents                |  | $              | 2,407,326   |   |               | $ | 3,713,789   |  
|Accounts receivable, net                 |  |                | 4,164,870   |   |               |   | 4,137,484   |  
|Inventories                              |  |                | 6,329,511   |   |               |   | 4,653,402   |  
|Prepaid expenses                         |  |                | 575,910     |   |               |   | 429,657     |  
|Current tax assets                       |  |                | 279,876     |   |               |   | 268,903     |  
|                                         |  |                |             |   |               |   |             |  
|Total Current Assets                     |  |                | 13,757,493  |   |               |   | 13,203,236  |  
|                                         |  |               
|PROPERTY, PLANT AND EQUIPMENT            |  |                | 45,607,976  |   |               |   | 43,183,460  |  
|Less: Accumulated depreciation           |  |                | (28,450,117 | ) |               |   | (27,269,666 | )
|                                         |  |                |             |   |               |   |             |  
|                                         |  |                | 17,157,859  |   |               |   | 15,913,794  |  
|                                         |  |               
|CASH SURRENDER VALUE LIFE INSURANCE, NET |  |                | 2,013,094   |   |               |   | 1,581,316   |  
|                                         |  |               
|OTHER ASSETS                             |  |                | 584,232     |   |               |   | 665,815     |  
|                                         |  |                |             |   |               |   |             |  
|TOTAL ASSETS                             |  | $              | 33,512,678  |   |               | $ | 31,364,160  |  
|                                         |  |                |             |   |               |   |             |  



[Continued]



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS



[Continued]



|                                                                                                                                                            |  |                |            |   |               |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ---------- | - | ------------- | - | ---------- | -
|                                                                                                                                                            |  | March 31, 2005 |            |   | June 30, 2004 |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                        |  |                |            |   |               |   |            |  
|CURRENT LIABILITIES:                                                                                                                                        |  |                |            |   |               |   |            |  
|Current maturities of long-term debt                                                                                                                        |  | $              | 792,388    |   |               | $ | 772,704    |  
|Current maturities of capital lease                                                                                                                         |  |                | 28,336     |   |               |   | 17,710     |  
|Accounts payable                                                                                                                                            |  |                | 3,955,699  |   |               |   | 2,821,866  |  
|Accounts payable  Related Party                                                                                                                            |  |                | 27,826     |   |               |   | 21,000     |  
|Accrued expenses                                                                                                                                            |  |                | 1,173,366  |   |               |   | 1,172,210  |  
|Dealer incentives                                                                                                                                           |  |                | 3,099,984  |   |               |   | 1,203,522  |  
|Customer deposits                                                                                                                                           |  |                | 884,180    |   |               |   | 86,077     |  
|Allowance for boat repurchases                                                                                                                              |  |                | 75,000     |   |               |   | 75,000     |  
|Warranty reserve                                                                                                                                            |  |                | 710,000    |   |               |   | 710,000    |  
|                                                                                                                                                            |  |                |            |   |               |   |            |  
|Total Current Liabilities                                                                                                                                   |  |                | 10,746,779 |   |               |   | 6,880,089  |  
|                                                                                                                                                            |  |               
|LONG-TERM DEBT, less current portion                                                                                                                        |  |                | 15,748,027 |   |               |   | 17,870,041 |  
|                                                                                                                                                            |  |               
|CAPITAL LEASE, less current maturities                                                                                                                      |  |                | 17,265     |   |               |   | 6,657      |  
|                                                                                                                                                            |  |               
|DEFERRED TAX LIABILITY                                                                                                                                      |  |                | 279,876    |   |               |   | 268,903    |  
|                                                                                                                                                            |  |               
|COMMITMENTS AND CONTINGENCIES [NOTE 6]                                                                                                                      |  |                |           |   |               |   |           |  
|                                                                                                                                                            |  |                |            |   |               |   |            |  
|Total Liabilities                                                                                                                                           |  |                | 26,791,947 |   |               |   | 25,025,690 |  
|                                                                                                                                                            |  |               
|SHAREHOLDERS EQUITY                                                                                                                                        |  |                |            |   |               |   |            |  
|Common stock, $.01 par value, 200,000,000 shares authorized, 4,814,275 shares issued and outstanding as of March 31, 2005 and 4,807,608 as of
June 30, 2004 |  |                | 48,142     |   |               |   | 48,076     |  
|Additional paid-in capital                                                                                                                                  |  |                | 10,527,055 |   |               |   | 10,517,451 |  
|Accumulated deficit                                                                                                                                         |  |                | (3,598,798 | ) |               |   | (4,099,540 | )
|                                                                                                                                                            |  |                |            |   |               |   |            |  
|                                                                                                                                                            |  |                | 6,976,399  |   |               |   | 6,465,987  |  
|                                                                                                                                                            |  |               
|Less: Treasury stock, at cost, 15,000 shares                                                                                                                |  |                | (110,748   | ) |               |   | (110,748   | )
|Accumulated other comprehensive loss from interest rate swap                                                                                                |  |                | (144,920   | ) |               |   | (16,769    | )
|                                                                                                                                                            |  |                |            |   |               |   |            |  
|Total Stockholders Equity                                                                                                                                  |  |                | 6,720,731  |   |               |   | 6,338,470  |  
|                                                                                                                                                            |  |                |            |   |               |   |            |  
|Total Liabilities and Stockholders Equity                                                                                                                  |  |                | 33,512,678 |   |               | $ | 31,364,160 |  
|                                                                                                                                                            |  |                |            |   |               |   |            |  



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



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                      |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|----------------------------------------------------- |  | -------------------------- | ---------- | - | ------------------------- | - | ---------- | ------------- |  | - | ------------- | - |  | - | ---------- | -
|                                                      |  | For the Three Months Ended |            |   | For the Nine Months Ended |  
|                                                      |  | March 31,2005              |            |   | March 31,2004             |   |            | March 31,2005 |  |   | March 31,2004 |  
|NET SALES                                             |  | $                          | 16,564,276 |   |                           | $ | 15,790,650 |               |  | $ | 50,820,178    |   |  | $ | 42,037,693 |  
|                                                      |  |                            |            |  
|COST OF SALES                                         |  |                            | 13,804,547 |   |                           |   | 12,671,582 |               |  |   | 43,232,875    |   |  |   | 34,859,344 |  
|                                                      |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Gross Profit                                          |  |                            | 2,759,729  |   |                           |   | 3,119,068  |               |  |   | 7,587,303     |   |  |   | 7,178,349  |  
|                                                      |  |                            |            |  
|EXPENSES:                                             |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Selling Expense                                       |  |                            | 1,418,760  |   |                           |   | 1,593,717  |               |  |   | 3,957,570     |   |  |   | 3,999,981  |  
|General and Administrative                            |  |                            | 824,396    |   |                           |   | 487,891    |               |  |   | 2,353,473     |   |  |   | 1,573,103  |  
|                                                      |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Total Expenses:                                       |  |                            | 2,243,156  |   |                           |   | 2,081,608  |               |  |   | 6,311,043     |   |  |   | 5,573,084  |  
|                                                      |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|OPERATING INCOME                                      |  |                            | 516,573    |   |                           |   | 1,037,460  |               |  |   | 1,276,260     |   |  |   | 1,605,265  |  
|                                                      |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|NON-OPERATING INCOME (EXPENSE):                       |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Other income                                          |  |                            | 3,966      |   |                           |   | 5,524      |               |  |   | 4,758         |   |  |   | 6,621      |  
|Interest expense                                      |  |                            | (290,948   | ) |                           |   | (288,619   | )             |  |   | (781,245      | ) |  |   | (974,809   | )
|                                                      |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|Total Non-operating Expense                           |  |                            | (286,982   | ) |                           |   | (283,095   | )             |  |   | (776,487      | ) |  |   | (968,188   | )
|                                                      |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|INCOME BEFORE INCOME TAXES                            |  |                            | 229,591    |   |                           |   | 754,365    |               |  |   | 499,773       |   |  |   | 637,077    |  
|                                                      |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|INCOME TAX (BENEFIT)                                  |  |                            | (969       | ) |                           |   |           |               |  |   | (969          | ) |  |   |           |  
|                                                      |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|NET INCOME                                            |  | $                          | 230,560    |   |                           | $ | 754,365    |               |  | $ | 500,742       |   |  | $ | 637,077    |  
|                                                      |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|BASIC EARNINGS PER SHARE                              |  | $                          | 0.05       |   |                           | $ | 0.16       |               |  | $ | 0.10          |   |  | $ | 0.13       |  
|                                                      |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|WEIGHTED AVERAGE SHARES OUTSTANDING                   |  |                            | 4,814,275  |   |                           |   | 4,757,608  |               |  |   | 4,812,255     |   |  |   | 4,757,608  |  
|                                                      |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|DILUTED EARNINGS PER SHARE                            |  | $                          | 0.05       |   |                           | $ | 0.16       |               |  | $ | 0.10          |   |  | $ | 0.13       |  
|                                                      |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  
|WEIGHTED AVERAGE SHARES OUTSTANDING ASSUMING DILUTION |  |                            | 4,927,051  |   |                           |   | 4,833,092  |               |  |   | 4,878,400     |   |  |   | 4,825,605  |  
|                                                      |  |                            |            |   |                           |   |            |               |  |   |               |   |  |   |            |  



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



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

UNAUDITED CONDNSED CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                         |  |                           |            |   |                |   |            |  
|---------------------------------------------------------------------------------------- |  | ------------------------- | ---------- | - | -------------- | - | ---------- | -
|                                                                                         |  | For the Nine Months Ended |           
|                                                                                         |  | March 31, 2005            |            |   | March 31, 2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |  |                           |            |   |                |   |            |  
|Net income                                                                               |  | $                         | 500,742    |   |                | $ | 637,077    |  
|                                                                                         |  |                          
|Adjustments to reconcile net income to net cash provided (used) by operating activities: |  |                           |            |   |                |   |            |  
|Depreciation Expense                                                                     |  |                           | 1,397,680  |   |                |   | 1,545,395  |  
|(Gain)/Loss on sale of fixed asset                                                       |  |                           | (4,000     | ) |                |   | 11,696     |  
|Amortization of deferred loan cost                                                       |  |                           | 59,949     |   |                |   | 266,963    |  
|Provision for inventory obsolescence                                                     |  |                           | 14,907     |   |                |   | 9,085      |  
|Decrease in allowance for boat repurchases                                               |  |                           |           |   |                |   | (125,000   | )
|Change in assets and liabilities:                                                        |  |                           |            |   |                |   |            |  
|Increase in accounts receivable                                                          |  |                           | (27,386    | ) |                |   | (1,570,486 | )
|Increase in inventories                                                                  |  |                           | (1,691,016 | ) |                |   | (1,177,448 | )
|Increase in prepaid expenses                                                             |  |                           | (146,253   | ) |                |   | (4,742     | )
|(Increase) decrease in other assets                                                      |  |                           | 21,634     |   |                |   | (210,555   | )
|Increase (decrease) in accounts payable                                                  |  |                           | 1,140,659  |   |                |   | (5,627,029 | )
|Increase (decrease) in accrued expenses                                                  |  |                           | 1,156      |   |                |   | (271,691   | )
|Increase in dealer incentives                                                            |  |                           | 1,896,462  |   |                |   | 850,792    |  
|Increase in customer deposits                                                            |  |                           | 798,103    |   |                |   | 231,549    |  
|                                                                                         |  |                           |            |   |                |   |            |  
|Net cash flow provided (used) by operating activities                                    |  |                           | 3,962,637  |   |                |   | (5,434,394 | )
|                                                                                         |  |                           |            |   |                |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |  |                           |            |   |                |   |            |  
|Purchase of property, plant and equipment                                                |  |                           | (1,209,167 | ) |                |   | (153,463   | )
|Investment in molds and related plugs                                                    |  |                           | (1,432,576 | ) |                |   | (774,384   | )
|Proceeds from sale of fixed assets                                                       |  |                           | 4,000      |   |                |   | 25,000     |  
|Net Increase in Life Insurance  Cash Value                                              |  |                           | (431,778   | ) |                |   |           |  
|                                                                                         |  |                           |            |   |                |   |            |  
|Cash used by investing activities                                                        |  |                           | (3,069,521 | ) |                |   | (902,847   | )
|                                                                                         |  |                           |            |   |                |   |            |  
|CASHFLOWS FROM FINANCING ACTIVITIES:                                                     |  |                           |            |   |                |   |            |  
|Proceeds from long-term debt                                                             |  |                           |           |   |                |   | 18,067,841 |  
|Payments of long-term debt                                                               |  |                           | (2,209,248 | ) |                |   | (9,222,781 | )
|Payment of deferred loan cost                                                            |  |                           |           |   |                |   | (148,129   | )
|Proceeds from stock options exercised                                                    |  |                           | 9,669      |   |                |   |           |  
|                                                                                         |  |                           |            |   |                |   |            |  
|Cash provided (used) by financing activities                                             |  |                           | (2,199,579 | ) |                |   | 8,696,931  |  
|                                                                                         |  |                           |            |   |                |   |            |  
|Net increase (decrease) in cash and cash equivalents                                     |  |                           | (1,306,463 | ) |                |   | 2,359,690  |  
|                                                                                         |  |                          
|Cash and cash equivalents at beginning of period                                         |  |                           | 3,713,789  |   |                |   | 1,224,935  |  
|                                                                                         |  |                           |            |   |                |   |            |  
|Cash and cash equivalents at end of period                                               |  | $                         | 2,407,326  |   |                | $ | 3,584,625  |  
|                                                                                         |  |                           |            |   |                |   |            |  



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

UNUADITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



(Continued)



|                                                   |  |                           |         |                |   |        
|-------------------------------------------------- |  | ------------------------- | ------- | -------------- | - | -------
|                                                   |  | For the Nine Months Ended
|                                                   |  | March 31, 2005            |         | March 31, 2004
|Supplemental Disclosures of Cash Flow Information: |  |                           |         |                |   |        
|Cash paid during the period for:                   |  |                           |         |                |   |        
|Interest, net of amounts capitalized               |  | $                         | 816,846 |                | $ | 977,171
|                                                   |  |                          
|Income Taxes                                       |  | $                         |        |                | $ |       



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



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1  BASIS OF PRESENTATION



The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows at March 31, 2005 and for all periods presented have been made.



Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or
omitted for purposes of filing interim financial statements with the Securities and Exchange Commission. It is suggested that these condensed financial statements be read in conjunction with the consolidated financial statements and notes thereto
included in the Companys annual report on Form 10-K for the year ended June 30, 2004. The results of operations for the three and nine month periods ended March 31, 2005 are not necessarily indicative of the operating results for the full
year.



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.



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 operating results could differ from those estimated by management.



Cash and Cash Equivalents: For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments with
a maturity of three months or less to be cash equivalents. At March 31, 2005 and June 30, 2004, the Company had $2,307,326 and $3,613,789, respectively, in excess of federally insured amounts held in cash.



Derivative Financial Instruments: The Company uses derivative financial instruments
for the purpose of reducing its exposure to adverse fluctuations in interest rates. While these hedging instruments are subject to fluctuations in value, such fluctuations are generally offset by the value of the underlying exposures being hedged.
The Company accounts for these derivative financial instruments as an effective cash flow hedge under the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities and it has the effect of converting the interest rate paid on the notional amount of $9,000,000 of the Companys variable debt to a fixed rate of 6.02%. The difference between the Companys actual variable interest rate
and 6.02% on the notional amount for the next twelve months is reclassified from other comprehensive income and recognized as interest expense. The Company is not a party to leveraged derivatives and does not hold or issue financial instruments for
speculative purposes.



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 Government, and
an accounts receivable is recorded or payment received from the dealer, the Government, or the dealers third-party commercial lender. This method of sales recognition is in use by most boat manufacturers.



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1  BASIS OF PRESENTATION (continued)



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 incidents of ownership have passed to the dealer or to the
Government, and that there is no direct or indirect commitment to the dealer or to the Government to repurchase the boat except those manufacturers repurchase agreements with lending institutions which are more fully discussed in Note 6 to
these financial statements.



The sales incentive interest payment program for
each boat sale is accrued for the entire 6 month interest period in the same fiscal accounting period that the related sale is recorded (see Note 6 to these financial statements). The amount of interest accrued is subsequently adjusted to reflect
the actual number of days of remaining liability for floor plan interest for each individual boat remaining in the dealers inventory and on floor plan.



Stock Options: 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 5. The Company accounts for stock options issued to employee, officer and directors under the stock incentive plan in accordance with the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock
exceeded the exercise price. Under the Companys stock incentive plan, stock options are granted at exercise prices that equal or exceed the market value of the underlying common stock on the date of grant. Therefore, no compensation expense
related to stock options is recorded in the Consolidated Statements of Operations.



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



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##### Table of Contents

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 the nine months ended March 31, 2005 and 2004 consistent with the provisions of SFAS No. 123, the Companys net income and earnings per share would have been reduced to the
pro forma amounts indicated below:



FOUNTAIN POWERBOAT
INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO THE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1  BASIS OF
PRESENTATION (continued)



|                                                                                                 |  |                            |         |   |                           |         |   |               |         |   |                |         |  
|------------------------------------------------------------------------------------------------ |  | -------------------------- | ------- | - | ------------------------- | ------- | - | ------------- | ------- | - | -------------- | ------- | -
|                                                                                                 |  | For the Three Months Ended |         |   | For the Nine Months Ended |        
|                                                                                                 |  | March 31, 2005             |         |   | March 31, 2004            |         |   | March 31 2005 |         |   | March 31, 2004 |        
|Net Income (Loss) as Reported                                                                    |  | $                          | 230,560 |   |                           | 754,365 |   |               | 500,742 |   |                | 637,077 |  
|Add: Stock-based non-employee compensation expense included in reported net income               |  |                            |        |   |                           |        |   |               |        |   |                | 1,795   |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method |  |                            | (4221   | ) |                           | (5,193  | ) |               | (12,663 | ) |                | (15,579 | )
|                                                                                                 |  |                            |         |   |                           |         |   |               |         |   |                |         |  
|Net Income Pro forma                                                                             |  | $                          | 226,329 |   |                           | 749,172 |   |               | 488,079 |   |                | 623,293 |  
|                                                                                                 |  |                            |         |   |                           |         |   |               |         |   |                |         |  
|Basic earnings per share:                                                                        |  |                            |         |   |                           |         |   |               |         |   |                |         |  
|As reported                                                                                      |  | $                          | 0.05    |   |                           | 0.16    |   |               | 0.10    |   |                | 0.13    |  
|                                                                                                 |  |                            |         |   |                           |         |   |               |         |   |                |         |  
|Pro forma                                                                                        |  | $                          | 0.05    |   |                           | 0.16    |   |               | 0.10    |   |                | 0.13    |  
|                                                                                                 |  |                            |         |   |                           |         |   |               |         |   |                |         |  
|Diluted earnings (loss) per share:                                                               |  |                            |         |   |                           |         |   |               |         |   |                |         |  
|As reported                                                                                      |  | $                          | 0.05    |   |                           | 0.16    |   |               | 0.10    |   |                | 0.13    |  
|                                                                                                 |  |                            |         |   |                           |         |   |               |         |   |                |         |  
|Pro forma                                                                                        |  | $                          | 0.05    |   |                           | 0.16    |   |               | 0.10    |   |                | 0.13    |  
|                                                                                                 |  |                            |         |   |                           |         |   |               |         |   |                |         |  



NOTE 2 - ACCOUNTS RECEIVABLE



As of March 31, 2005, accounts receivable were $4,164,870 net of the
allowance for bad debts of $82,841. Accounts Receivable, as of June 30, 2004, were $4,137,484 net of the allowance for bad debts which amounted to $82,841. The Company reviews its receivables on a regular basis and adjusts its allowance for doubtful
accounts based upon its best judgment. The Company believes these amounts (net of the allowance for doubtful accounts) to be fully realizable and has pledged its receivables as collateral for its promissory note with Bank of America.



NOTE 3 - INVENTORIES



Inventories at March 31, 2005 and June 30, 2004 consisted of the following:



|                           |  |                |           |   |               |   |           |  
|-------------------------- |  | -------------- | --------- | - | ------------- | - | --------- | -
|                           |  | March 31, 2005 |           |   | June 30, 2004 |  
|Parts and supplies         |  | $              | 2,684,281 |   |               | $ | 1,920,860 |  
|Work-in-process            |  |                | 3,659,516 |   |               |   | 1,999,076 |  
|Finished Goods             |  |                | 50,621    |   |               |   | 783,466   |  
|                           |  |                |           |   |               |   |           |  
|                           |  |                | 6,394,418 |   |               |   | 4,703,402 |  
|Obsolete inventory reserve |  |                | (64,907   | ) |               |   | (50,000   | )
|                           |  |                |           |   |               |   |           |  
|Total Inventory            |  | $              | 6,329,511 |   |               | $ | 4,653,402 |  
|                           |  |                |           |   |               |   |           |  



The Company has pledged its
inventories as collateral for its promissory note with Bank of America.



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##### Table of Contents

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 4 - LONG-TERM DEBT AND PLEDGED ASSETS



The following is a summary of long-term debt:



|      |  |                                                                                                                                                               |  |                |            |   |               |   |            |  
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ---------- | - | ------------- | - | ---------- | -
|      |  |                                                                                                                                                               |  | March 31, 2005 |            |   | June 30, 2004 |  
|9.99% |  | Loans payable to a financial institution for the purchase of vehicles, monthly payments totaling $1,383 through August 2005 secured By the vehicles purchased |  | $              | 6,775      |   |               | $ | 18,216     |  
|      |  |                                                                                                                                                               | 
|4.00% |  | Loan payable to a financial institution for the purchase of a vehicle, monthly payments of $726 through September 2006, secured by the vehicle purchased      |  | $              | 12,626     |   |               | $ | 18,522     |  
|      |  |                                                                                                                                                               | 
|7.93% |  | to 8% loans payable borrowed against the cash surrender value of key-man life insurance policies 1998, 2001, and 2002, monthly payments of $25,004            |  | $              |           |   |               | $ | 1,295,449  |  
|      |  |                                                                                                                                                               | 
|      |  | $18,000,000 credit agreement with a financial corporation (See below)                                                                                         |  | $              | 16,521,015 |   |               | $ | 17,310,558 |  
|      |  |                                                                                                                                                               |  |                |            |   |               |   |            |  
|      |  |                                                                                                                                                               |  |                | 16,540,416 |   |               |   | 18,642,745 |  
|      |  |                                                                                                                                                               | 
|Less: |  | Current portions included incurrent liabilities                                                                                                               |  |                | (792,388   | ) |               |   | (772,704   | )
|      |  |                                                                                                                                                               |  |                |            |   |               |   |            |  
|      |  |                                                                                                                                                               |  | $              | 15,748,027 |   |               | $ | 17,870,041 |  
|      |  |                                                                                                                                                               |  |                |            |   |               |   |            |  



On July 17, 2003, the Company obtained
$18,000,000 of long-term borrowings, in the form of two $9,000,000 notes, from Bank of America which mature in five years. The agreement with Bank of America has a $9,000,000 note with a rate that is variable with the Wall Street LIBOR one month
floating rate as the index plus the applicable margin. The applicable margin is based on funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA). The applicable margin is as follows:



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



The applicable margin is currently
2.50%.



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##### Table of Contents

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 4 - LONG-TERM DEBT AND PLEDGED ASSETS (Continued)



The agreement with Bank of America further has a $9,000,000 note under an interest rate
swap to provide a fixed rate of 6.02%. The interest rate swap is designated as a cash flow hedge and is deemed effective pursuant to SFAS 133. These Bank of America loans have a fifteen year amortization with a five year balloon payment and are
secured by certain assets of the Company and real estate of the Companys President, Chief Executive Officer and majority shareholder, Reginald M. Fountain, Jr. Obligations are guaranteed by the Company, an unlimited unconditional guarantee of
Mr. Fountain and by Brunswick Corporation, pursuant to a master funding agreement with the Company. Combined monthly payments to Bank of America currently are approximately $137,000.



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



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



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



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



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



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



|                                |  |                |  |                |  |                    |  |                   |  |                |  |               
|------------------------------- |  | -------------- |  | -------------- |  | ------------------ |  | ----------------- |  | -------------- |  | --------------
|                                |  | March 31, 2004 |  | June 30, 2004  |  | September 30, 2004 |  | December 31, 2004 |  | March 31, 2005 |  | June 30, 2005 
|Tangible Net Worth Floor        |  | $4.300 Million |  | $4.475 Million |  | $4.500 Million     |  | $4.800 Million    |  | $4.950 Million |  | $5.225 Million
|                                |  |                |  |                |  |                   
|Current Maturity Coverage Ratio |  | 1.25 to 1.00   |  | 1.30 to 1.00   |  | 1.40 to 1.00       |  | 1.50 to 1.00      |  | 1.50 to 1.00   |  | 1.50 to 1.00  
|                                |  |                |  |                |  |                   
|Funded Debt To EBITDA           |  | 6.25 to 1.00   |  | 6.00 to 1.00   |  | 5.25 to 1.00       |  | 5.00 to 1.00      |  | 4.35 to 1.00   |  | 4.30 to 1.00  
|                                |  |                |  |                |  |                   
|Gross Margin Floor %            |  | 13.50%         |  | 14.50%         |  | 14.50%             |  | 14.50%            |  | 14.50%         |  | 14.50%        



The Company is required to renegotiate
these covenants prior to June 30, 2005.



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 4 - LONG-TERM DEBT AND PLEDGED ASSETS (Continued)



The Companys performance under the loan covenants for the current quarter ended
March 31, 2005 was as follows:



| | 1. | The applicable tangible net worth floor required by the Companys lender for the current quarter ended March 31, 2005 was a tangible net worth not less than $4.95 million. The
Companys tangible net worth for purposes of determining compliance was $6.7 million.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | The current maturity coverage ratio required by the Companys lender for the current quarter ended March 31, 2005 was a ratio not less than 1.50 to 1.00. The Companys
current maturity coverage ratio for purposes of determining compliance was 2.27 to 1.00.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | The funded debt to EBITDA ratio required by the Companys lender for the current quarter ended March 31, 2005 was a ratio not more than 4.35 to 1.00. The Companys funded
debt to EBITDA ratio for purposes of determining compliance was 4.11 to 1.00.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | The gross margin percentage floor required by the Companys lender for the current quarter ended March 31, 2005 was a gross margin percentage of not less than 14.5%. The
Companys gross margin percentage for purposes of determining compliance was 16.7%.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of March 31, 2005 the Company was in compliance with all required covenants.



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



Prepayment - The Company is obligated to pay, in addition to required monthly principal payments, an additional 50% of the excess earnings after debt service within 120 days after the close of the
Companys fiscal year end.



If the Company prepays the balance of the note
after one year from the date of the note, the Company must pay a half of a percent (.5%) of the unpaid balance on the date before the date the prepayment is made.



Should the Company default on the provision of timely payments, a delinquency charge of four percent (4%) of the unpaid portion of the
payment that is more than fifteen days late will be applied. Should the Company remain in a default status, the interest rate charged to the Company shall be an additional two percent (2%) above the rates listed above.



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 4 - LONG-TERM DEBT AND PLEDGED ASSETS (Continued)



Loan Guarantee  On July 17, 2003 the Company entered into an agreement with
Brunswick Corporation, a division of which supplies marine engines used in the Companys product, wherein Brunswick Corporation agreed to guarantee the $18,000,000 in debt financing. In return the Company President granted Brunswick the option
to purchase his common shares and his options to purchase common shares of the Company. The Companys President further agreed to indemnify Brunswick for all amounts in excess of $14,700,000. On July 17, 2003 the Company issued to Brunswick
Corporation 273,146 options to acquire common shares at $.05 per share that are exercisable in the event of a default by the Company on its loan. In the event Brunswick Corporation exercises its option to purchase the Company Presidents shares
the Company has agreed to issue additional shares of common stock, which would result in Brunswick owning, together with the shares purchased from the Company President, 50.1% of the Companys outstanding shares at the weighted average market
closing price for the previous 30 days. The Company further entered into an exclusive supply agreement and agreed to restrictions on the Company issuing any equity securities that would dilute Brunswicks potential equity interest in the
Company upon exercise of their options with the Company and Companys President without Brunswicks prior approval. Brunswick Corporations option to purchase vests upon the earlier of the repayment of $18,000,000 notes payable, or
July 1, 2007. Brunswick Corporations option expires no earlier than approximately 180 days after vesting.



NOTE 5 - COMMON STOCK



During July 2003, the Company issued 273,146 options to purchase common stock to Brunswick Corporation as a condition of guarantying the Bank of America loan. The options are exercisable only under conditions of
default by the Company of its loan and Brunswick having exercised its guarantee of the loan. Should Brunswick Corporation exercise its option to purchase the Company Presidents stock, the Company has agreed to issue additional common shares
which would result in Brunswick owning, together with the shares purchased from the Company President, 50.1% of the Companys outstanding shares at the weighted average market closing price for the previous 30 days. The Company also agreed not
to issue any equity instruments without prior approval of Brunswick Corporation.



If Brunswick Corporation exercised fully their options with the Company and Company President under the loan guarantee they would own 50.1 % of the outstanding stock of the Company.



NOTE 6 - COMMITMENTS AND CONTINGENCIES



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 March 31, 2005, the Company had a total contingent liability to repurchase boats in the event of dealer defaults and if repossessed by the commercial lenders amounting to approximately $26,907,087. At March 31, 2005 the
allowance for boat repurchases was $75,000.



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 6 - COMMITMENTS AND CONTINGENCIES (Continued)



The Company vigilantly monitors all its dealers for solvency issues by examining dealer
inventory levels and amounts carried under floor plan financing. At present the Company has no dealers that it believes to be at risk of default under their floor plan arrangements.



Dealer Interest  The Company regularly pays a portion of dealers interest charges for floor plan financing. These
interest charges amounted to approximately $502,402 and $839,895, respectively for the three and nine months ended March 31, 2005 and the estimated unpaid dealer interest included in accrued dealer incentives at March 31, 2005 amounted to $127,354.



Interest Rate Risk - At March 31, 2005 the Company owed $16,521,015 on
an $18,000,000 credit agreement with Bank of America. The credit agreement has $9,000,000 at the one month LIBOR plus 2.50% or 5.35% as of March 31, 2005 and $9,000,000 under an interest rate swap to provide a fixed rate of 6.02%.An increase
in the LIBOR rate would have a negative effect on the results of operations of the Company. A hypothetical 50 basis point increase in interest rates would result in an approximately $41,000 increase in interest expense.



Engine Supply Agreement The Company entered into an Engine Supply agreement
with Brunswick Corporation, as a condition for guaranteeing the Bank of America loan, to purchase all marine engines from Mercury Marine division of Brunswick except for products in categories in which Mercury does not manufacture or are unavailable
from Mercury due to production shortages.



NOTE 7 - TRANSACTIONS WITH
RELATED PARTIES



At March 31, 2005 the Company had receivables and
advances from its employees amounting to $27,826.



During the three and nine
month period ended March 31, 2005, the Company paid $54,464 and $151,934 respectively, for services rendered to entities owned or controlled by the Companys Chairman, President, and Chief Executive Officer.



The Companys Chairman, President, and Chief Executive Officer has guaranteed and
personally pledged certain of his assets as collateral in connection with the $18,000,000 loan with Bank of America and the Brunswick Corporation agreement to guarantee said loan. The president further agreed to sell certain of his common shares and
options to purchase common shares to Brunswick Corporation in connection with their guarantee (See Note 4).



NOTE 8 - INCOME TAXES



The Company has
provided for deferred income taxes in accordance with SAFS 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.



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 8 - INCOME TAXES (Continued)



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



|                                                     |  |                           |          |   |                |   |          |  
|---------------------------------------------------- |  | ------------------------- | -------- | - | -------------- | - | -------- | -
|                                                     |  | For the Nine Months Ended |         
|                                                     |  | March 31, 2005            |          |   | March 31, 2004 |  
|Current income tax expense                           |  | $                         |         |   |                | $ |         |  
|Federal                                              |  |                           |         |   |                |   |         |  
|State                                                |  |                           | (969     | ) |                |   |         |  
|                                                     |  |                           |          |   |                |   |          |  
|Net current tax (benefit)                            |  |                           | (969     | ) |                |   |         |  
|                                                     |  |                           |          |   |                |   |          |  
|Deferred tax expense (benefit) resulted from:        |  |                           |          |   |                |   |          |  
|Excess of tax over financial accounting depreciation |  |                           | (16,127  | ) |                |   | (58,893  | )
|Donations                                            |  |                           | (1,477   | ) |                |   |         |  
|Reserve for Obsolete Inventory                       |  |                           | (5,814   | ) |                |   |         |  
|Accrued vacation  current                           |  |                           | (4,198   | ) |                |   |         |  
|Accrued dealer incentive interest                    |  |                           | (28,326  | ) |                |   | (46,795  | )
|Accrued profit sharing  executive                   |  |                           | 20,800   |   |                |   | 51,620   |  
|Accrued dealer service incentive                     |  |                           | (247,502 | ) |                |   | 11,310   |  
|Alternative Minimum Tax Credits                      |  |                           | 77,525   |   |                |   |         |  
|Reserve for boat repurchases                         |  |                           |         |   |                |   | 48,750   |  
|Bad debt reserves                                    |  |                           |         |   |                |   | (21,450  | )
|Health insurance reserve                             |  |                           |         |   |                |   | (4,680   | )
|Inventory adjustment  Section 263A                  |  |                           | (20,879  | ) |                |   | (37,505  | )
|Decrease (increase) in NOL carryforwards             |  |                           | 533,150  |   |                |   | 338,111  |  
|Valuation allowance                                  |  |                           | (307,152 | ) |                |   | (280,468 | )
|                                                     |  |                           |          |   |                |   |          |  
|Net deferred tax expense (benefit)                   |  | $                         |         |   |                | $ |         |  
|                                                     |  |                           |          |   |                |   |          |  



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



|                                                    |  |                           |    |  |                |   
|--------------------------------------------------- |  | ------------------------- | -- |  | -------------- | --
|                                                    |  | For the Nine Months Ended |   
|                                                    |  | March 31, 2005            |    |  | March 31, 2004 |   
|Computed tax at the expected federal statutory rate |  | 34.00                     | %  |  | 34.00          | % 
|State income taxes, net of federal benefit          |  | 5.00                      | %  |  | 5.00           | % 
|Valuation allowance                                 |  | (43.15                    | )% |  | (44.02         | )%
|Compensation from stock options                     |  | 0.00                      | %  |  | 0.11           | % 
|Officers life insurance                            |  | 0.00                      | %  |  | 0.66           | % 
|Other                                               |  | 4.15                      | %  |  | 4.25           | % 
|                                                    |  |                           |    |  |                |   
|Effective income tax rates                          |  | 0.00                      | %  |  | 0.00           | % 
|                                                    |  |                           |    |  |                |   



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 8 - INCOME TAXES (Continued)



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



|                                                     |  |                |            |   |               |   |            |  
|---------------------------------------------------- |  | -------------- | ---------- | - | ------------- | - | ---------- | -
|                                                     |  | March 31, 2005 |            |   | June 30, 2004 |  
|Deferred tax assets:                                 |  |                |            |   |               |   |            |  
|Warranty reserve                                     |  | $              | 276,900    |   |               | $ | 351,000    |  
|Obsolete inventory reserve                           |  |                | 25,314     |   |               |   | 19,500     |  
|Allowance for boat repurchases                       |  |                | 29,250     |   |               |   | 29,250     |  
|Bad debt reserve                                     |  |                | 32,308     |   |               |   | 32,308     |  
|Accrued dealer incentive interest                    |  |                | 52,855     |   |               |   | 72,173     |  
|Inventory adjustments  Section 263A                 |  |                | 152,892    |   |               |   | 147,725    |  
|State NOL carryforwards                              |  |                | 362,475    |   |               |   | 443,508    |  
|Federal NOL carryforwards                            |  |                | 1,410,920  |   |               |   | 1,961,938  |  
|Alternative minimum tax credits                      |  |                | 41,524     |   |               |   | 119,049    |  
|Donations carryforwards                              |  |                | 8,529      |   |               |   | 4,608      |  
|Health insurance reserve                             |  |                | 49,140     |   |               |   | 45,240     |  
|Investment tax credits                               |  |                | 86,294     |   |               |   | 86,294     |  
|Accrued vacation current                             |  |                | 4,198      |   |               |   | 73,685     |  
|Accrued profit sharing  executive                   |  |                | 32,609     |   |               |   | 3,764      |  
|Accrued dealer service incentive                     |  |                | 274,314    |   |               |   | 26,812     |  
|                                                     |  |                |            |   |               |   |            |  
|Total deferred assets                                |  |                | 2,839,521  |   |               |   | 3,416,854  |  
|Less: Valuation allowance for deferred tax assets    |  |                | (1,501,239 | ) |               |   | (2,062,446 | )
|                                                     |  |                |            |   |               |   |            |  
|Net deferred tax assets                              |  |                | 1,338,282  |   |               |   | 1,354,408  |  
|                                                     |  |               
|Deferred tax liabilities                             |  |                |            |   |               |   |            |  
|Excess of financial accounting depreciation over tax |  |                | (1,338,282 | ) |               |   | (1,354,408 | )
|                                                     |  |                |            |   |               |   |            |  
|Net deferred tax assets (liabilities)                |  | $              |           |   |               | $ |           |  
|                                                     |  |                |            |   |               |   |            |  



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 8 - INCOME TAXES (Continued)



Net deferred tax assets (liabilities) are presented as follows:



|                                      |  |                           |          |   |                |   |          |  
|------------------------------------- |  | ------------------------- | -------- | - | -------------- | - | -------- | -
|                                      |  | For the Nine Months ended |         
|                                      |  | March 31, 2004            |          |   | March 31, 2004 |  
|Current deferred tax assets           |  | $                         | 279,876  |   |                | $ | 319,517  |  
|Deferred tax liabilities              |  |                           | (279,876 | ) |                |   | (319,517 | )
|                                      |  |                           |          |   |                |   |          |  
|Net deferred tax assets (liabilities) |  | $                         |         |   |                | $ |         |  
|                                      |  |                           |          |   |                |   |          |  



The Company has unused federal
operating loss carry forwards at March 31, 2005 and 2004 of approximately $4,149,764 and $5,770,406, respectively, which expire in various years through 2023. The Company has unused state operating loss carry forwards at March 31, 2005 and 2004 of
approximately $7,249,493 and $8,8870,136, respectively, which expire in various years through 2023.



NOTE 9 - EARNINGS PER SHARE



The
computations of earnings per share and diluted earnings per share amounts are based upon the weighted average number of outstanding common shares during the periods, plus, when their effect is dilutive, additional shares assuming the exercise of
certain vested stock options, reduced by the number of shares which could be purchased from the proceeds from the exercise of the stock options assuming they were exercised.



The weighted average common shares and common equivalent shares outstanding for the nine month periods ended March 31, 2005 and 2004 for
purposes of calculating earnings per share was as follows:



|                                                                                                                               |  |                            |  |                           |  |               |  |              
|------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------- |  | ------------------------- |  | ------------- |  | -------------
|                                                                                                                               |  | For the Three Months Ended |  | For the Nine Months Ended
|                                                                                                                               |  | March 31,2005              |  | March 31,2004             |  | March 31,2005 |  | March 31,2004
|Weighted average common shares outstanding used in basic earnings per share for the three and nine months ending               |  | 4,814,275                  |  | 4,757,608                 |  | 4,812,255     |  | 4,757,608    
|                                                                                                                               |  |                            |  |                          
|Effect of dilutive stock options                                                                                               |  | 112,776                    |  | 75,484                    |  | 66,144        |  | 67,997       
|                                                                                                                               |  |                            |  |                           |  |               |  |              
|Weighted average common shares and potential Dilutive common equivalent shares outstanding used in dilutive earnings per share |  | 4,927,051                  |  | 4,833,092                 |  | 4,878,400     |  | 4,825,605    
|                                                                                                                               |  |                            |  |                           |  |               |  |              



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 10  VALUATION AND QUALIFYING ACCOUNTS



The balance in the following valuation and qualifying accounts at March 31, 2005 and change
from the year ended June 30, 2004 are as follows:



|                                             |  |               |           |                    |        |                      |          |   |                |   |          
|-------------------------------------------- |  | ------------- | --------- | ------------------ | ------ | -------------------- | -------- | - | -------------- | - | ---------
|Valuation and Qualifying Account
Description |  | June 30, 2004 |           | Expense Adjustment |        | And Other Reductions |          |   | March 31, 2005
|Allowance for doubtful accounts              |  | $             | 82,841    |                    |        |                      |          |   |                | $ | 82,841   
|Inventory valuation reserve                  |  |               | 50,000    |                    | 14,907 |                      |          |   |                |   | 64,907   
|Deferred tax valuation allowance             |  |               | 2,062,446 |                    |        |                      | (561,207 | ) |                |   | 1,501,239
|Warranty reserve                             |  |               | 710,000   |                    |        |                      |          |   |                |   | 710,000  
|Allowance for boat repurchases               |  |               | 75,000    |                    |        |                      |          |   |                |   | 75,000   



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ITEM 2: Managements Discussion and Analysis of Results of Operations and Financial Condition



Results of Operations.



Net Sales  Net sales for the three months ended March 31, 2005 were $16,564,276, an increase of $773,626 or 4.9%, as compared to net sales of $15,790,650 for the three months ended March 31, 2004. Net
sales for the nine months ended March 31, 2005 were $50,820,178, an increase of $8,782,485 or 20.9%, as compared to net sales of $42,037,693 for the nine months ended March 31, 2004. The increase in net sales is primarily attributable to increased
unit sales of fish boats and express cruisers.



Gross Profit 
Gross profit for the three months ended March 31, 2005 was $2,759,729 as compared to $3,119,068 for the three months ended March 31, 2004. Gross profit for the nine months ended March 31, 2005 was $7,587,303 as compared to $7,178,349 for the nine
months ended March 31, 2004. The increase in gross profits is attributable to the increase in the number of units sold.



Our products require the use and/or consumption of petroleum based and metal products. The rise in petroleum prices and metal product prices during the nine months ending
March 31, 2005 has negatively impacted our Gross Profit by increasing the Cost of Sales. Prices of our boats have now been adjusted to offset these increases in materials prices. During the nine months ending March 31, 2005 we have undertaken and/or
completed capital projects which will ultimately result in improved efficiency of the manufacturing process. During the construction period, however, the disruption of the manufacturing process has adversely affected productivity with a commensurate
increase in the Cost of Sales. Construction is now complete and the manufacturing operation is achieving productivity and efficiency improvements as expected.



Selling Expenses  Selling expenses for the three months ended March 31, 2005 were $1,418,760 as compared to $1,593,717 for the three months ended March
31, 2004. Selling expenses for the nine months ended March 31, 2005 were $3,957,570 as compared to $3,999,981 for the nine months ended March 31, 2004.



General and Administrative Expenses  General and administrative expenses for the three months ended March 31, 2005 were $824,396 as compared to $487,891 for
the three months ended March 31, 2004. General and administrative expenses for the nine months ended March 31, 2005 were $2,353,473 as compared to $1,573,103 for the nine months ended March 31, 2004. The increase in general and administrative
expenses is attributable to augmentation of the executive and finance staffs, increased expenditures for investor relations and professional service fees.



Operating Income  Operating income for the three months ended March 31, 2005 was $516,573 as compared to $1,034,460 for the three months ended March 31,
2004. Operating income for the nine months ended March 31, 2005 was $1,276,260 as compared to $1,605,265 for the nine months ended March 31, 2004.



Interest Expense  Interest expense for the three months ended March 31, 2005 was $290,948 as compared to $288,619 for the three months ended March 31, 2004.
Interest expense for the nine months ended March 31, 2005 was $781,245 as compared to $974,809 for the nine months ended March 31, 2004. The $193,563 reduction in interest expense, for the nine months ended March 31, 2005, is attributable to the
write-off of the unamortized closing costs of a loan with G. E. Capital that occurred during the quarter ended September 30, 2003 which was not duplicated in the current period.



Net Income  Net Income for the three months ended March 31, 2005 was $230,560 as compared to $754,365 for the three months
ended March 31, 2004. Net income for the nine months ended March 31, 2005 was $500,742 as compared to a net income of $637,077 for the nine months ended March 31, 2004.



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Income Tax - Current tax expense is a current income tax benefit of $969 for the three months ended March 31, 2005 and
2004, and is $0 for the nine months ended March 31, 2005 and 2004, respectively. Deferred tax expense is $0 for the three months ended March 31, 2005 and 2004, and is $0 for the nine months ended March 31, 2005 and 2004, respectively. The
Companys lack of income tax expense is a result of net operating loss carryovers from the year ended June 30, 2002. There remains $4,149,764 for federal and $7,249,493 for state tax purposes of net operating loss carryovers available until the
years 2022 and 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. For these reasons and because the Company has generated
operating tax losses in recent years, the Company has elected to provide for a tax asset valuation allowance to fully reserve its net deferred tax asset at March 31, 2005.



Management estimates, based on the Companys increased backlog of orders, that sales volumes will continue to improve in the near
future thus resulting in improved earnings and partial or full absorption of the net operating tax loss carryovers. However, the Company has not reduced the tax asset valuation allowance since, with the exception of order backlog, it is very
difficult to predict future sales volumes in an uncertain economy. Management regularly reviews the Companys need for the valuation allowance and expects that it will not be required in its entirety in the coming years. As operating results
and the economy stabilize and future sales volumes increase, management will give increasing consideration to reducing the valuation allowance or eliminating it altogether.



Liquidity and Capital Resources.



Cash decreased by $1,306,463 to $2,407,326 at March 31, 2005 from $3,713,789 at June 30, 2004. The decrease in cash is primarily attributable to paying off the
outstanding loan against the life insurance policies.



During the three months
ended March 31, 2005, $1,880,350.33 was transferred from the Bank of America savings account to Northwest Mutual Life Insurance to pay off loans on key man insurance policies and deposit additional funds in the cash value of the policies. This was
done in order to earn 8% interest from Northwestern Mutual vs. 1.25% interest earned from the Bank of America savings account. The balance sheet reflects a decrease in Current Assets of $1,880,350.33 and an increase of the same amount in Other
Assets. The cash value of the life insurance policies can be obtained within a few days and is effectively the same as a savings account, however, GAAP rules require that it be reported in other assets.



Cash provided by operations for the nine months ended March 31, 2005 was $3,941,003 and was
primarily attributable to the net income of the Company as adjusted by depreciation and an increase in customer deposits.



Cash used in investing activities for the nine months ended March 31, 2005 was $3,047,886 and was primarily attributable to boat mold and tooling expenditures
($1,432,576) to support the Companys new fish boat designs that are to be introduced in the current fiscal year and improvements to the Companys manufacturing line and facilities ($1,209,167) intended to increase manufacturing capacity
and efficiency. An additional $431,778 was purchased on the key man life insurance policy, in this quarter.



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. The Company
has maintained a record sales backlog through the date of this report and is currently enjoying an increasingly favorable business climate for its products. The backlog of orders for our boats has increased from $31.7 million on March 31, 2004 to
$45.6 million as of March 31, 2005.



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



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



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



Risks
that are specific to the Company and its markets include but are not limited to compliance with increasingly stringent environmental laws and regulations; the cyclical nature of the industry; competition in pricing and new product development from
larger companies with substantial resources; the concentration of a substantial percentage of the Companys sales with a few major customers, the loss of, or change in demand from, any of which could have a material impact upon the Company;
labor relations at the Company and at its customers and suppliers; and the Companys single-source supply and just-in-time inventory strategies for some critical boat components, including high performance engines, which could adversely affect
production if a single-source supplier is unable for any reason to meet the Companys requirements on a timely basis.



Recent Accounting Pronouncements:



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 as amended on August 14, 2005 are effective for the fiscal year that begins after June 15, 2005. Accordingly, we will adopt SFAS No. 123(R) commencing with the quarter ending September 30, 2005. If we had
included the cost of employee stock option compensation in our consolidated financial statements, our net income (loss) for the three months ended March 31, 2005 and 2004 would have been $226,329 and $749,172, respectively. Our net income (loss) for
the nine months ended March 31, 2005 and 2004 would have been $488,079 and $623,293, respectively. The adoption of SFAS No. 123(R) is not expected to have a material effect on our consolidated financial statements.



ITEM 3: Quantitative and Qualitative Disclosures about Market Risk.



Interest Rate Risk - At March 31, 2005, the Company owed $16,521,015 on a $18,000,000 credit agreement with Bank of America. The credit agreement has $9,000,000 at one month LIBOR plus 2.50% or 5.35% as of March 31,
2005, and $9,000,000 under an interest rate swap to provide a fixed rate of 6.02%. A hypothetical 50 basis point increase in interest rates would result in an approximately $41,000 increase in interest expense, resulting in a negative impact on the
Companys liquidity and results of operations.



ITEM 4: Controls and Procedures



As of March
31, 2005, the Companys management, with the participation of the Chief Executive Officer and the Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of the Companys disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the design and operation of these disclosure controls and procedures were effective as of the
end of the period covered by this report. In connection with this evaluation, no change in the Companys internal control over financial reporting was identified that occurred during the period covered by this report that has materially
affected, or is reasonably likely to affect the Companys internal control over financial reporting



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##### Table of Contents

PART II. OTHER INFORMATION.



ITEM 1: Legal Proceedings.



Not Applicable



ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds.



Not Applicable



Item 3: Defaults Upon Senior Securities.



Not Applicable



ITEM 4: Submission of Matters to a Vote of Security Holders.



Not Applicable



ITEM 5: Other Information.



On April 13, 2005, the Companys Board of Directors passed a resolution to transfer the listing of the Companys common stock from NASDAQ to the American Stock
Exchange. The Companys common stock became listed and began trading on the American Stock Exchange effective April 14, 2005.



ITEM 6: Exhibits.



Exhibits:



Exhibit 31.1, Certification pursuant to Rule 13a-14(a) by the Chief Executive Officer



Exhibit 31.2, Certification pursuant to Rule 13a-14(a) by the Chief Financial Officer



Exhibit 32, Certifications Pursuant to 18 U.S.C. Section 1350



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SIGNATURE



Pursuant to the requirements of the
Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                                    |  |                         |  |                  
|----------------------------------- |  | ----------------------- |  | -----------------
|FOUNTAIN POWERBOAT INDUSTRIES, INC. |  |                        
|(Registrant)                        |  |                        
|                                    |  |                        
|By:                                 |  | /s/ Irving L. Smith     |  | Date: May 9,
2005
|                                    |  | Irving L. Smith         |  |                  
|                                    |  | Chief Financial Officer |  |                  



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