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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 September 30, 2004



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 September 30, 2004
|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, September 30, 2004 and June 30, 2004                             |  | 3 - 4   
|        |  |                                                                                                                  
|        |  | Unaudited Condensed Consolidated Statements of Operations, for the three months ended September 30, 2004 and 2003 |  | 5       
|        |  |                                                                                                                  
|        |  | Unaudited Condensed Consolidated Statements of Cash Flows, for the three months ended September 30, 2004 and 2003 |  | 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                                                                                           |  | 22 - 23 
|        |  |                                                                                                                  
|        |  | Signature                                                                                                         |  | 24      
|        |  |                                                                                                                  
|        |  | Exhibits                                                                                                          |  |         



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##### Table of Contents

PART I. FINANCIAL INFORMATION.

ITEM 1: Financial Statements.



FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS



|                                    |  |                    |             |   |               |   |             |  
|----------------------------------- |  | ------------------ | ----------- | - | ------------- | - | ----------- | -
|                                    |  | September 30, 2004 |             |   | June 30, 2004 |  
|ASSETS                              |  |                    |             |   |               |   |             |  
|                                    |  |                   
|CURRENT ASSETS:                     |  |                    |             |   |               |   |             |  
|Cash and cash equivalents           |  | $                  | 3,761,233   |   |               | $ | 3,713,789   |  
|Accounts receivable, net            |  |                    | 4,177,598   |   |               |   | 4,137,484   |  
|Inventories                         |  |                    | 4,913,053   |   |               |   | 4,653,402   |  
|Prepaid Expenses                    |  |                    | 513,116     |   |               |   | 429,657     |  
|Current tax assets                  |  |                    | 279,876     |   |               |   | 268,903     |  
|                                    |  |                    |             |   |               |   |             |  
|Total Current Assets                |  |                    | 13,644,876  |   |               |   | 13,203,235  |  
|                                    |  |                    |             |   |               |   |             |  
|PROPERTY, PLANT AND EQUIPMENT       |  |                    | 43,866,187  |   |               |   | 43,183,460  |  
|                                    |  |                   
|Less: Accumulated depreciation      |  |                    | (27,671,682 | ) |               |   | (27,269,666 | )
|                                    |  |                    |             |   |               |   |             |  
|                                    |  |                    | 16,194,505  |   |               |   | 15,913,794  |  
|                                    |  |                    |             |   |               |   |             |  
|CASH SURRENDER VALUE LIFE INSURANCE |  |                    | 1,635,939   |   |               |   | 1,581,316   |  
|                                    |  |                   
|OTHER ASSETS                        |  |                    | 740,794     |   |               |   | 665,815     |  
|                                    |  |                    |             |   |               |   |             |  
|TOTAL ASSETS                        |  | $                  | 32,216,114  |   |               | $ | 31,364,160  |  
|                                    |  |                    |             |   |               |   |             |  



(Continued)



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##### Table of Contents

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS



(Continued)

|                                                                                                                                                                |  |                   |            |   |               |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ---------- | - | ------------- | - | ---------- | -
|                                                                                                                                                                |  | September 30,2004 |            |   | June 30, 2004 |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                            |  |                   |            |   |               |   |            |  
|                                                                                                                                                                |  |                  
|CURRENT LIABILITIES:                                                                                                                                            |  |                   |            |   |               |   |            |  
|Current maturities - long-term debt                                                                                                                             |  | $                 | 767,720    |   |               | $ | 772,704    |  
|Current maturities - capital lease                                                                                                                              |  |                   | 22,694     |   |               |   | 17,710     |  
|Accounts payable                                                                                                                                                |  |                   | 3,801,378  |   |               |   | 2,821,866  |  
|Accounts payable - related party                                                                                                                                |  |                   | 26,875     |   |               |   | 21,000     |  
|Accrued expenses                                                                                                                                                |  |                   | 718,184    |   |               |   | 1,172,210  |  
|Dealer incentives                                                                                                                                               |  |                   | 1,310,765  |   |               |   | 1,203,522  |  
|Customer deposits                                                                                                                                               |  |                   | 146,420    |   |               |   | 86,077     |  
|Allowance for boat repurchases                                                                                                                                  |  |                   | 75,000     |   |               |   | 75,000     |  
|Warranty reserve                                                                                                                                                |  |                   | 710,000    |   |               |   | 710,000    |  
|                                                                                                                                                                |  |                   |            |   |               |   |            |  
|Total Current Liabilities                                                                                                                                       |  |                   | 7,579,036  |   |               |   | 6,880,089  |  
|                                                                                                                                                                |  |                  
|LONG-TERM DEBT, less current maturities                                                                                                                         |  |                   | 17,693,868 |   |               |   | 17,870,041 |  
|CAPITAL LEASE, less current maturities                                                                                                                          |  |                   |           |   |               |   | 6,657      |  
|DEFERRED TAX LIABILITY                                                                                                                                          |  |                   | 279,876    |   |               |   | 268,903    |  
|                                                                                                                                                                |  |                  
|COMMITMENTS AND CONTINGENCIES (NOTE 5)                                                                                                                          |  |                   |            |   |               |   |            |  
|                                                                                                                                                                |  |                   |            |   |               |   |            |  
|Total Liabilities                                                                                                                                               |  |                   | 25,552,780 |   |               |   | 25,025,690 |  
|                                                                                                                                                                |  |                   |            |   |               |   |            |  
|STOCKHOLDERS EQUITY:                                                                                                                                           |  |                   |            |   |               |   |            |  
|Common stock, $.01 par value, 200,000,000 shares authorized, 4,814,275 shares issued and outstanding as of September 30, 2004 and 4,807,608 as
of June 30, 2004 |  |                   | 48,142     |   |               |   | 48,076     |  
|Additional paid-in capital                                                                                                                                      |  |                   | 10,527,053 |   |               |   | 10,517,451 |  
|Accumulated earnings (deficit)                                                                                                                                  |  |                   | (3,785,614 | ) |               |   | (4,099,540 | )
|                                                                                                                                                                |  |                   |            |   |               |   |            |  
|                                                                                                                                                                |  |                   | 6,789,581  |   |               |   | 6,465,987  |  
|Less: Treasury stock, at cost, 15,000 shares                                                                                                                    |  |                   | (110,748   | ) |               |   | (110,748   | )
|Accumulated other comprehensive income from interest rate swap                                                                                                  |  |                   | (15,499    | ) |               |   | (16,769    | )
|                                                                                                                                                                |  |                   |            |   |               |   |            |  
|Total Stockholders Equity                                                                                                                                      |  |                   | 6,663,334  |   |               |   | 6,338,470  |  
|                                                                                                                                                                |  |                   |            |   |               |   |            |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                      |  | $                 | 32,216,114 |   |               | $ | 31,364,160 |  
|                                                                                                                                                                |  |                   |            |   |               |   |            |  



The accompanying notes
are an integral part of these unaudited condensed

consolidated financial statements



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##### Table of Contents

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                      |  |                            |            |   |                   |   |            |  
|----------------------------------------------------- |  | -------------------------- | ---------- | - | ----------------- | - | ---------- | -
|                                                      |  | For the Three Months Ended |           
|                                                      |  | September 30,2004          |            |   | September 30,2003 |  
|NET SALES                                             |  | $                          | 16,803,907 |   |                   | $ | 12,885,232 |  
|                                                      |  |                           
|COST OF SALES                                         |  |                            | 14,320,056 |   |                   |   | 10,853,051 |  
|                                                      |  |                            |            |   |                   |   |            |  
|Gross Profit                                          |  |                            | 2,483,851  |   |                   |   | 2,032,181  |  
|                                                      |  |                            |            |   |                   |   |            |  
|EXPENSES:                                             |  |                            |            |   |                   |   |            |  
|Selling expense                                       |  |                            | 1,387,924  |   |                   |   | 1,355,570  |  
|General and administrative                            |  |                            | 586,788    |   |                   |   | 565,859    |  
|                                                      |  |                            |            |   |                   |   |            |  
|Total Expenses                                        |  |                            | 1,974,712  |   |                   |   | 1,921,429  |  
|                                                      |  |                            |            |   |                   |   |            |  
|OPERATING INCOME (LOSS)                               |  |                            | 509,139    |   |                   |   | 110,752    |  
|                                                      |  |                            |            |   |                   |   |            |  
|NON-OPERATING INCOME (EXPENSE):                       |  |                            |            |   |                   |   |            |  
|Other income                                          |  |                            | 698        |   |                   |   | 3,059      |  
|Interest expense                                      |  |                            | (195,912   | ) |                   |   | (470,158   | )
|                                                      |  |                            |            |   |                   |   |            |  
|Total Non-operating Income (Expense)                  |  |                            | (195,214   | ) |                   |   | (467,099   | )
|                                                      |  |                            |            |   |                   |   |            |  
|INCOME (LOSS) BEFORE INCOME TAXES                     |  |                            | 313,925    |   |                   |   | (356,347   | )
|                                                      |  |                           
|CURRENT TAX EXPENSE (BENEFIT)                         |  |                            |           |   |                   |   |           |  
|                                                      |  |                           
|DEFERRED TAX EXPENSE (BENEFIT)                        |  |                            |           |   |                   |   |           |  
|                                                      |  |                            |            |   |                   |   |            |  
|NET INCOME (LOSS)                                     |  | $                          | 313,925    |   |                   | $ | (356,347   | )
|                                                      |  |                            |            |   |                   |   |            |  
|BASIC EARNINGS (LOSS) PER SHARE                       |  | $                          | 0.07       |   |                   | $ | (0.08      | )
|                                                      |  |                            |            |   |                   |   |            |  
|WEIGHTED AVERAGE SHARES OUTSTANDING                   |  |                            | 4,808,260  |   |                   |   | 4,757,608  |  
|                                                      |  |                            |            |   |                   |   |            |  
|DILUTED EARNINGS (LOSS) PER SHARE                     |  | $                          | 0.06       |   |                   | $ | (0.08      | )
|                                                      |  |                            |            |   |                   |   |            |  
|WEIGHTED AVERAGE SHARES OUTSTANDING ASSUMING DILUTION |  |                            | 4,862,420  |   |                   |   | 4,824,089  |  
|                                                      |  |                            |            |   |                   |   |            |  



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 CASH FLOWS



Increase (Decrease) in Cash and Cash Equivalents



|                                                                                                |  |                            |           |   |                   |   |            |  
|----------------------------------------------------------------------------------------------- |  | -------------------------- | --------- | - | ----------------- | - | ---------- | -
|                                                                                                |  | For the Three Months Ended |          
|                                                                                                |  | September 30,2004          |           |   | September 30,2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                           |  |                            |           |   |                   |   |            |  
|Net income (loss)                                                                               |  | $                          | 313,925   |   |                   | $ | (356,347   | )
|                                                                                                |  |                           
|Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: |  |                            |           |   |                   |   |            |  
|Depreciation                                                                                    |  |                            | 499,162   |   |                   |   | 521,041    |  
|Amortization of deferred loan cost                                                              |  |                            | 19,986    |   |                   |   | 226,997    |  
|Non-cash expense                                                                                |  |                            |          |   |                   |   | 42,783     |  
|Change in assets and liabilities:                                                               |  |                            |           |   |                   |   |            |  
|(Increase) in accounts receivable                                                               |  |                            | (40,114   | ) |                   |   | (1,273,241 | )
|(Increase) decrease in inventories                                                              |  |                            | (259,651  | ) |                   |   | 132,124    |  
|(Increase) in prepaid expenses                                                                  |  |                            | (83,459   | ) |                   |   | (161,639   | )
|Increase (decrease) in accounts payable                                                         |  |                            | 985,387   |   |                   |   | (5,733,283 | )
|Increase (decrease) in accrued expenses                                                         |  |                            | (454,026  | ) |                   |   | 39,419     |  
|Increase (decrease) in dealer incentives                                                        |  |                            | 107,243   |   |                   |   | (113,525   | )
|Increase (decrease) in customer deposits                                                        |  |                            | 60,343    |   |                   |   | (181,711   | )
|                                                                                                |  |                            |           |   |                   |   |            |  
|Net Cash Provided (Used) by Operating Activities                                                |  |                            | 1,148,796 |   |                   |   | (6,857,382 | )
|                                                                                                |  |                            |           |   |                   |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                           |  |                            |           |   |                   |   |            |  
|Purchase of property, plant and equipment                                                       |  |                            | (325,064  | ) |                   |   | (34,700    | )
|Investment in molds and related plugs                                                           |  |                            | (484,503  | ) |                   |   | (202,700   | )
|(Increase) decrease in other assets                                                             |  |                            | (119,891  | ) |                   |   | 199,882    |  
|                                                                                                |  |                            |           |   |                   |   |            |  
|Net Cash Used by Investing Activities                                                           |  |                            | (929,458  | ) |                   |   | (37,518    | )
|                                                                                                |  |                            |           |   |                   |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                           |  |                            |           |   |                   |   |            |  
|Proceeds from long-term debt                                                                    |  |                            |          |   |                   |   | 17,909,320 |  
|Payments of long-term debt                                                                      |  |                            | (181,562  | ) |                   |   | (8,980,049 | )
|Payment of deferred loan cost                                                                   |  |                            |          |   |                   |   | (148,129   | )
|Proceeds from stock options exercised                                                           |  |                            | 9,668     |   |                   |   |           |  
|                                                                                                |  |                            |           |   |                   |   |            |  
|Net Cash Provided (Used) by Financing Activities                                                |  |                            | (171,894  | ) |                   |   | 8,781,142  |  
|                                                                                                |  |                            |           |   |                   |   |            |  
|Net increase in cash and cash equivalents                                                       |  |                            | 47,444    |   |                   |   | 1,886,242  |  
|                                                                                                |  |                           
|Cash and cash equivalents at beginning of year                                                  |  |                            | 3,713,789 |   |                   |   | 1,224,935  |  
|                                                                                                |  |                            |           |   |                   |   |            |  
|Cash and cash equivalents at end of period                                                      |  | $                          | 3,761,233 |   |                   | $ | 3,111,177  |  
|                                                                                                |  |                            |           |   |                   |   |            |  



(Continued)



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



Increase (Decrease) in Cash and Cash Equivalents

(Continued)



|                                                   |  |                            |         |                   |   |        
|-------------------------------------------------- |  | -------------------------- | ------- | ----------------- | - | -------
|                                                   |  | For the Three Months Ended
|                                                   |  | September 30,2004          |         | September 30,2003
|Supplemental Disclosures of Cash Flow Information: |  |                            |         |                   |   |        
|Cash paid during the period for:                   |  |                            |         |                   |   |        
|Interest, net of amounts capitalized               |  | $                          | 229,108 |                   | $ | 248,092
|                                                   |  |                           
|Income taxes                                       |  | $                          |        |                   | $ |       



Supplemental Disclosures of Noncash
Investing and Financing Activities:



For the three month
period ended September 30, 2003:



The Company recorded
consulting expense of $1,795 as a result of amortization of deferred compensation from 40,000 options issued to purchase common stock during Fiscal 2002, vesting through January 2004 and expiring through January 2009.



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 September 30, 2004 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. The results of operations for the three month periods ended September 30, 2004 and 2003 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 September 30, 2004 and June 30, 2004, the Company had $3,661,233 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 save 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 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.



The Company has entered into arrangements that license other foreign companies to manufacture boats utilizing the Companys concepts and designs in exchange for
royalties received for each boat manufactured. The Company accounts for these royalties as sales revenue in the period when earned.



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



FOUNTAIN POWERBOAT
INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO THE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1  BASIS OF
PRESENTATION (continued)



Had compensation cost for stock options issued to
employees under the Companys stock option plans and agreements been determined based on the fair value at the grant date for awards in the three months ended September 30, 2004 and 2003 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:



|                                                                                                 |  |                            |         |   |                   |   |          |  
|------------------------------------------------------------------------------------------------ |  | -------------------------- | ------- | - | ----------------- | - | -------- | -
|                                                                                                 |  | For the Three Months Ended |        
|                                                                                                 |  | September 30,2004          |         |   | September 30,2003 |  
|Net income (loss) as reported                                                                    |  | $                          | 313,925 |   |                   | $ | (356,347 | )
|Add: Stock-based nonemployee compensation expense included in reported net income                |  |                            |        |   |                   |   | 1,795    |  
|                                                                                                 |  |                           
|Deduct: Total stock-based employee compensation expense determined under fair value based method |  |                            | (4,221  | ) |                   |   | (5,193   | )
|                                                                                                 |  |                            |         |   |                   |   |          |  
|Net Income (Loss) Proforma                                                                       |  | $                          | 309,704 |   |                   | $ | (359,745 | )
|                                                                                                 |  |                            |         |   |                   |   |          |  
|Basic earnings (loss) per share: As reported                                                     |  | $                          | 0.07    |   |                   | $ | (0.08    | )
|                                                                                                 |  |                            |         |   |                   |   |          |  
|Proforma                                                                                         |  | $                          | 0.06    |   |                   | $ | (0.08    | )
|                                                                                                 |  |                            |         |   |                   |   |          |  
|Diluted earnings (loss) per share: As reported                                                   |  | $                          | 0.06    |   |                   | $ | (0.08    | )
|                                                                                                 |  |                            |         |   |                   |   |          |  
|Proforma                                                                                         |  | $                          | 0.06    |   |                   | $ | (0.08    | )
|                                                                                                 |  |                            |         |   |                   |   |          |  



NOTE 2 - ACCOUNTS RECEIVABLE



Accounts receivable at September 30, 2004 and June 30, 2004 consisted of
the following:



|                                |  |                   |           |   |              |   |           |  
|------------------------------- |  | ----------------- | --------- | - | ------------ | - | --------- | -
|                                |  | September 30,2004 |           |   | June 30,2004 |  
|Trade accounts receivable       |  | $                 | 4,260,439 |   |              | $ | 4,220,325 |  
|Allowance for doubtful accounts |  |                   | (82,841   | ) |              |   | (82,841   | )
|                                |  |                   |           |   |              |   |           |  
|Net accounts receivable         |  | $                 | 4,177,598 |   |              | $ | 4,137,484 |  
|                                |  |                   |           |   |              |   |           |  



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 September 30, 2004 and June 30, 2004 consisted of the
following:



|                           |  |                   |           |   |              |   |           |  
|-------------------------- |  | ----------------- | --------- | - | ------------ | - | --------- | -
|                           |  | September 30,2004 |           |   | June 30,2004 |  
|Parts and supplies         |  | $                 | 2,155,032 |   |              | $ | 1,920,860 |  
|Work-in-process            |  |                   | 2,211,819 |   |              |   | 1,999,076 |  
|Finished Goods             |  |                   | 596,202   |   |              |   | 783,466   |  
|                           |  |                   |           |   |              |   |           |  
|                           |  |                   | 4,963,053 |   |              |   | 4,703,402 |  
|Obselete inventory reserve |  |                   | (50,000   | ) |              |   | (50,000   | )
|                           |  |                   |           |   |              |   |           |  
|Total                      |  | $                 | 4,913,053 |   |              | $ | 4,653,402 |  
|                           |  |                   |           |   |              |   |           |  



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



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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



The following is a summary of long-term debt:



|                                                                                                                                                                   |  |                   |            |   |               |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ---------- | - | ------------- | - | ---------- | -
|                                                                                                                                                                   |  | September 30,2004 |            |   | June 30, 2004 |  
|9.99% loans payable to a financial institution for the purchase of vehicles, monthly payments totaling $1,383 through May 2005, secured by the
vehicles purchased. |  | $                 | 14,492     |   |               | $ | 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.    |  |                   | 17,212     |   |               |   | 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.          |  |                   | 1,308,419  |   |               |   | 1,295,449  |  
|                                                                                                                                                                   |  |                  
|$18,000,000 credit agreement with a financial Corporation (See Below).                                                                                             |  |                   | 17,121,465 |   |               |   | 17,310,558 |  
|                                                                                                                                                                   |  |                   |            |   |               |   |            |  
|                                                                                                                                                                   |  |                   | 18,461,588 |   |               |   | 18,642,745 |  
|                                                                                                                                                                   |  |                  
|Less: Current maturities included in current liabilities                                                                                                           |  |                   | (767,720   | ) |               |   | (772,704   | )
|                                                                                                                                                                   |  |                   |            |   |               |   |            |  
|                                                                                                                                                                   |  | $                 | 17,693,868 |   |               | $ | 17,870,041 |  
|                                                                                                                                                                   |  |                   |            |   |               |   |            |  



On July 17, 2003, the Company obtained
$18,000,000 of long-term borrowings from Bank of America which matures 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 income taxes and depreciation adjustment (EBITDA). The applicable margin is as follows:



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



The applicable margin is currently
2.50%.



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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 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 $126,000.



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



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



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



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



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



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  |   |  |   | 3.75 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
September 30, 2004 was as follows:



| | 1. | The applicable tangible net worth floor required by the Companys lender for the current quarter ended September 30, 2004 was a tangible net worth not less than $4.50 million.
The Companys tangible net worth for purposes of determining compliance was $6.6 million.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | The current maturity coverage ratio required by the Companys lender for the current quarter ended September 30, 2004 was a ratio not less than 1.40 to 1.00. The Companys
current maturity coverage ratio for purposes of determining compliance was 2.87 to 1.00.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | The funded debt to EBITDA ratio required by the Companys lender for the current quarter ended September 30, 2004 was a ratio not more than 5.25 to 1.00. The Companys
funded debt to EBITDA ratio for purposes of determining compliance was 3.82 to 1.00.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | The gross margin percentage floor required by the Companys lender for the current quarter ended September 30, 2004 was a gross margin percentage of not less than 14.5%. The
Companys gross margin percentage for purposes of determining compliance was 14.8%.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of September 30, 2004 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.



Should the Company prepay the balance of the note within one
year of the date of the note, the Company must pay one percent (1%) of the unpaid balance on the date before the date the prepayment is made. If the Company prepays the balance of the note after one year of 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 options to purchase vest upon the earlier of the repayment or default 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 January 2002, the Company issued 10,000 options to purchase common stock to a consultant for services to be rendered valued at $14,254. The options are exercisable at $1.67 per share, are fully vested and
expire January 2009. During the three months ended September 30, 2004 and 2003, the Company recorded consulting expense of $0 and $1,795, respectively, related to these options.



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 September 30, 2004, 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
$19,828,260. At September 30, 2004, 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 $178,233 for the three months ended September 30, 2004 and the estimated unpaid dealer interest included in accrued dealer incentives at September 30, 2004 amounted to $171,813.



Interest Rate Risk - At September 30, 2004, the Company owed $17,121,465 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 3.95% as of September 30, 2004, 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 $45,000 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 September 30, 2004, the Company had receivables and
advances from its employees amounting to $19,712.



During the three month
period ended September 30, 2004, the Company paid $56,046 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 Three Months Ended |         
|                                                     |  | September 30,2004          |          |   | September 30,2003 |  
|Current income tax expense:                          |  |                            |          |   |                   |   |         |  
|Federal                                              |  | $                          |         |   |                   | $ |        |  
|State                                                |  |                            |         |   |                   |   |        |  
|                                                     |  |                            |          |   |                   |   |         |  
|Net current tax (benefit)                            |  | $                          |         |   |                   | $ |        |  
|                                                     |  |                            |          |   |                   |   |         |  
|Deferred tax expense (benefit) resulted from:        |  |                            |          |   |                   |   |         |  
|Excess of tax over financial accounting depreciation |  | $                          | (11,328  | ) |                   | $ | (17,937 | )
|Donations                                            |  |                            | (307     | ) |                   |   | (936    | )
|Bad debt reserves                                    |  |                            | 64,617   |   |                   |   |        |  
|Accrued dealer incentive interest                    |  |                            | (42,478  | ) |                   |   | (16,518 | )
|Accrued executive compensation                       |  |                            | (12,046  | ) |                   |   | 19,845  |  
|Accrued dealer service incentives                    |  |                            | 26,812   |   |                   |   |        |  
|Inventory adjustment-Sec.263A                        |  |                            | (35,682  | ) |                   |   | 4,209   |  
|Decrease (increase) in NOL carryforwards             |  |                            | 148,562  |   |                   |   | (84,549 | )
|Valuations allowance                                 |  |                            | (138,150 | ) |                   |   | 95,886  |  
|                                                     |  |                            |          |   |                   |   |         |  
|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 Three Months Ended |   
|                                                    |  | September 30,2004          |    |  | September 30,2003 |   
|Computed tax at the expected federal statutory rate |  | 34.00                      | %  |  | 34.00             | % 
|State income taxes, net of federal benefit          |  | 5.00                       | %  |  | 5.00              | % 
|Valuations allowance                                |  | (44.01                     | )% |  | (26.91            | )%
|Compensation from stock options                     |  | 0.00                       | %  |  | (4.68             | )%
|Officers life insurance                            |  | 0.00                       | %  |  | (6.14             | )%
|Other                                               |  | 5.01                       | %  |  | (1.27             | )%
|                                                    |  |                            |    |  |                   |   
|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:



|                                                     |  |                    |            |   |               |   |            |  
|---------------------------------------------------- |  | ------------------ | ---------- | - | ------------- | - | ---------- | -
|                                                     |  | September 30, 2004 |            |   | June 30, 2004 |  
|Deferred tax assets:                                 |  |                    |            |   |               |   |            |  
|Warranty reserve                                     |  | $                  | 276,900    |   |               | $ | 276,900    |  
|Obsolete inventory reserve                           |  |                    | 19,500     |   |               |   | 19,500     |  
|Allowance for boat repurchases                       |  |                    | 29,250     |   |               |   | 29,250     |  
|Bad debt reserve                                     |  |                    | (32,308    | ) |               |   | 32,308     |  
|Accrued Dealer incentive interest                    |  |                    | 67,007     |   |               |   | 25,072     |  
|Inventory adjustments - Sec. 263A                    |  |                    | 167,694    |   |               |   | 132,013    |  
|State NOL carryforwards                              |  |                    | 411,781    |   |               |   | 442,763    |  
|Federal NOL carryforwards                            |  |                    | 1,746,200  |   |               |   | 1,956,881  |  
|Alternative minimum tax credits                      |  |                    | 119,049    |   |               |   | 41,524     |  
|Accrued executive compensation                       |  |                    | 65,456     |   |               |   | 53,410     |  
|Donations carryforwards                              |  |                    | 7,359      |   |               |   | 4,608      |  
|Health insurance reserve                             |  |                    | 49,140     |   |               |   | 49,140     |  
|Investment tax credits                               |  |                    | 86,294     |   |               |   | 86,294     |  
|                                                     |  |                    |            |   |               |   |            |  
|Total deferred assets                                |  |                    | 3,013,322  |   |               |   | 3,149,663  |  
|Less: Valuation allowance for deferred tax assets    |  |                    | (1,670,241 | ) |               |   | (1,788,441 | )
|                                                     |  |                    |            |   |               |   |            |  
|Net deferred tax assets                              |  |                    | 1,343,081  |   |               |   | 1,361,222  |  
|                                                     |  |                   
|Deferred tax liabilities:                            |  |                    |            |   |               |   |            |  
|Excess of financial accounting depreciation over tax |  |                    | (1,343,081 | ) |               |   | (1,361,222 | )
|                                                     |  |                    |            |   |               |   |            |  
|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:



|                                      |  |                   |          |   |               |   |          |  
|------------------------------------- |  | ----------------- | -------- | - | ------------- | - | -------- | -
|                                      |  | September 30,2004 |          |   | June 30, 2004 |  
|Current deferred tax assets           |  | $                 | 279,876  |   |               | $ | 268,903  |  
|Deferred tax liabilities              |  |                   | (279,876 | ) |               |   | (268,903 | )
|                                      |  |                   |          |   |               |   |          |  
|Net deferred tax assets (liabilities) |  | $                 |         |   |               | $ |         |  
|                                      |  |                   |          |   |               |   |          |  



The Company has unused federal
operating loss carryforwards at September 30, 2004 and 2003 of approximately $5,135,883 and $6,854,148, respectively, which expire in various years through 2023. The Company has unused state operating loss carryforwards at September 30, 2004 and
2003 of approximately $8,235,612 and $9,953,878, respectively, which expire in various years through 2023.



NOTE 9 - EARNINGS (LOSS) PER SHARE



The
computations of earnings (loss) 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 three month month periods ended September 30, 2004 and
2003 for purposes of calculating earnings per share was as follows:



|                                                                                                                               |  |                            |  |                  
|------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------- |  | -----------------
|                                                                                                                               |  | For the Three Months Ended
|                                                                                                                               |  | September 30,2004          |  | September 30,2003
|Weighted average common shares outstanding used in basic earnings per share for the three and six months ending                |  | 4,808,260                  |  | 4,757,608        
|                                                                                                                               |  |                           
|Effect of dilutive stock options                                                                                               |  | 54,160                     |  | 66,481           
|                                                                                                                               |  |                            |  |                  
|Weighted average common shares and potential dilutive common equivalent shares outstanding used in dilutive earnings per share |  | 4,862,420                  |  | 4,824,089        
|                                                                                                                               |  |                            |  |                  



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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 9 - EARNINGS (LOSS) PER SHARE (Continued)



At September 30, 2004 there were 553,333 unexercised stock options, of which 450,000 were
held by an officer and member of the board of directors of the Company at a strike price of $4.67 per share that were not included in the computation of earnings per share because the effect is anti-dilutive.



At September 30, 2003 there were 610,000 unexercised stock options, of which 480,000 were
held by officers and directors of the Company at prices ranging from $3.58 to $4.67 per share that were not included in the computation of earnings per share because the effect is anti-dilutive.



NOTE 10  VALUATION AND QUALIFYING ACCOUNTS



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



|                                             |  |              |           |                    |   |                     |  |   |                   |   |  |   |          
|-------------------------------------------- |  | ------------ | --------- | ------------------ | - | ------------------- |  | - | ----------------- | - |  | - | ---------
|Valuation and Qualifying Account
Description |  | June 30,2004 |           | ExpenseAdjustments |   | and OtherReductions |  |   | September30, 2004
|Allowance for doubtful accounts              |  | $            | 82,841    |                    |   |                    |  |   |                  |   |  | $ | 82,841   
|Inventory valuation reserve                  |  | $            | 50,000    |                    |   |                    |  |   |                  |   |  | $ | 50,000   
|Deferred tax valuation allowance             |  | $            | 1,788,441 |                    |   |                    |  | $ | (118,200          | ) |  | $ | 1,670,241
|Warranty reserve                             |  | $            | 710,000   |                    | $ | 487,210             |  | $ | (487,210          | ) |  | $ | 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



The following tables should be read in conjunction with managements discussion and set forth, for the periods and dates indicated, certain financial, operating and balance sheet data including, as applicable,
the percentages of net sales:



|                               |  |                            |            |  |                             |   |  |   |            |   |  |       |   |  |   |           |   |  |      |  
|------------------------------ |  | -------------------------- | ---------- |  | --------------------------- | - |  | - | ---------- | - |  | ----- | - |  | - | --------- | - |  | ---- | -
|                               |  | For the Three Months Ended |            |  | Change over thePrior Period |  
|                               |  | September 30, 2004         |            |  | September 30, 2003          |   |  |   |            |   |  |      
|Net sales                      |  | $                          | 16,803,907 |  | 100.0                       | % |  | $ | 12,885,232 |   |  | 100.0 | % |  | $ | 3,918,675 |   |  | 30.4 | %
|                               |  |                            |            |  |                             |  
|Cost of sales                  |  |                            | 14,320,056 |  | 85.2                        | % |  |   | 10,853,051 |   |  | 84.2  | % |  |   | 3,467,005 |   |  | 31.9 | %
|                               |  |                            |            |  |                             |   |  |   |            |   |  |       |   |  |   |           |   |  |      |  
|Gross profit                   |  | $                          | 2,483,851  |  | 14.8                        | % |  | $ | 2,032,181  |   |  | 15.8  | % |  | $ | 451,670   |   |  | 22.2 | %
|                               |  |                            |            |  |                             |   |  |   |            |   |  |       |   |  |   |           |   |  |      |  
|Selling expense                |  | $                          | 1,387,924  |  |                             |   |  | $ | 1,355,570  |   |  |       |   |  | $ | 32,354    |   |  |      |  
|General and administrative     |  | $                          | 586,788    |  |                             |   |  | $ | 565,859    |   |  |       |   |  | $ | 20,929    |   |  |      |  
|Interest expense               |  | $                          | 195,912    |  |                             |   |  | $ | 470,158    |   |  |       |   |  | $ | (274,246  | ) |  |      |  
|                               |  |                            |            |  |                             |  
|Net income (loss)              |  | $                          | 313,925    |  |                             |   |  | $ | (356,347   | ) |  |       |   |  | $ | 670,272   |   |  |      |  
|                               |  |                            |            |  |                             |  
|Boat shipments (Units shipped) |  |                            | 107        |  |                             |   |  |   | 92         |   |  |       |   |  |   | 15        |   |  |      |  



Net Sales  The increase in net
sales of $3,918,675 during the three months ended September 30, 2004, from the comparable period during the previous year was primarily attributable to changes in the mix of the Companys products sold and an increase in the number of the boats
sold by the Company.



Gross Profit  The increase in gross profit of
$451,670 for the three months ended September 30, 2004, as compared to the comparable period in the previous year is primarily attributable to the increase in the number of units sold coupled with changes in the mix of boats sold as discussed above.
The decrease in gross profit as a percentage of sales is primarily attributable to increased material costs charged by the Companys material vendors with no offsetting increase in unit selling prices. The Company is currently reviewing its
unit selling prices and anticipates that it will be able to raise them.



Selling Expenses  Selling expenses for the three months ended September 30, 2004 were $32,354 more than the amounts incurred during the comparable period in the previous year and represent normal expenditures for sales and marketing
activities of the Company.



General and Administrative Expenses  General
and administrative expenses increased $20,929 for the three months ended September 30, 2004, over the comparable period in the previous year and represent normal expenditures for the administrative activities of the Company.



Interest Expense  The interest expense during the three months ended September 30, 2004
of $195,912 was $274,246 less than the interest expense during the comparable quarter in the previous year and represents normal debt service for the Company. The $274,246 reduction in interest expense 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  The increase in net income of $670,272 resulting in net income of $313,925 versus a net loss of $(356,347) during the three months ended September
30, 2004 and 2003, respectively is primarily attributable to the factors enumerated above and an increasingly favorable business climate being enjoyed by the Company.



Income Tax  Current tax expense is $0 and $0 for the three months ended September 30, 2004 and 2003, respectively. Deferred tax
expense is $0 and $0 for the three months ended September 30, 2004 and 2003, 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 $5,135,883 for
Federal and $8,235,612 for State tax purposes of net operating loss carryovers available till the years 2022 and 2023, to offset current tax expenses.



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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 September 30, 2004 and June 30, 2004.



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



The
following table sets forth certain items relating to the measurement of liquidity and capital resources from the Companys condensed consolidated financial statements for the dates indicated:



|                          |  |                   |              |               |   |                    |  |   |          |  
|------------------------- |  | ----------------- | ------------ | ------------- | - | ------------------ |  | - | -------- | -
|                          |  | Balances as of    |              |               |  
|                          |  | September 30,2004 |              | June 30, 2004 |   | Increase(Decrease) | 
|Cash and cash equivalents |  | $                 | 3,761,233    |               | $ | 3,713,789          |  | $ | 47,444   |  
|                          |  |                   |             
|Working capital           |  | $                 | 6,065,840    |               | $ | 6,323,146          |  | $ | (257,306 | )
|                          |  |                   |             
|Current Ratio             |  | $                 | 1.80 to 1.00 |               | $ | 1.92 to 1.00       |  |   |          |  



Cash increased by $47,444 to
$3,761,233 during the three months ended September 30, 2004 from $3,713,789 at June 30, 2003. The increase in cash can generally be attributed to normal operations of the Company.



Cash provided by operations for the three months ended September 30, 2004 was $1,148,796 and was primarily attributable to the net income of
the Company as adjusted by depreciation and an increase in trade payables.



Cash used in investing activities was $929,458 and was primarily attributable to boat mold and tooling expenditures ($484,503) 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 ($310,372) intended to increase manufacturing efficiency.



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.



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.



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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.



ITEM 3: Quantitative and Qualitative Disclosures about Market Risk.



Interest Rate Risk - At September 30, 2004, the Company owed $17,121,465 on a $18,000,000 credit agreement with Bank of America. The credit agreement has $9,000,000 at one month LIBOR plus 2.50% or 3.95% as of
September 30, 2004, 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 $45,000 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
September 30, 2004 an evaluation was performed under the supervision and with the participation of the Companys management, including the Chief Executive Officer and Chief Financial Officer, 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 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. Managements review and evaluation of disclosure and internal controls and procedures is an ongoing and continual process. There have been no significant changes
in the Companys internal controls or in other factors that could significantly affect these controls during the period covered by this report.



PART II. OTHER INFORMATION.



ITEM 1: Legal Proceedings.



There were no
legal proceedings of a material nature during the quarter ending September 30, 2004.



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



The Company repurchased none of its own securities, nor issued or sold any unregistered securities during the quarter ending September 30, 2004.



Item 3: Defaults Upon Senior Securities.



There were no defaults upon senior securities during the quarter ending September 30, 2004.



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



There were no matters submitted to a vote of the Companys security holders during the
quarter ending September 30, 2004.



ITEM 5: Other Information.



None.



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ITEM 6: Exhibits.



| | (1). | Exhibits:
| | ---- | ---------



| | (a). | 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



| | (b). | A Current Report on Form 8-K was filed on October 4, 2004 announcing the Companys appointment of the firm of Dixon Hughes PLLC as the Companys independent accountants
and auditors for the coming fiscal year. The Form 8-K is incorporated herein by reference.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c). | A Current Report on Form 8-K was filed on September 10, 2004 announcing the Companys fourth quarter and year to date earnings for the fiscal year ended June 30, 2004.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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: November 4, 2004
|                                                 |  | Irving L. Smith         |  |                       
|                                                 |  | Chief Financial Officer |  |                       



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