**Washington,
      D.C. 20549**







**FORM
      10-Q**









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




**For
      the quarterly period ended March 31, 2007**




**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***









**FOUNTAIN
      POWERBOAT INDUSTRIES, INC.**


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









**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**






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 a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.





Large
      accelerated filer  ̈ Accelerated
      filer  ̈ Non-accelerated filer x




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




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




**Class**
            
            **Outstanding
                at March 31, 2007**Common
                Stock, $.01 par value
            
            4,844,275
                shares




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




**Page No.****Part I**
            **Financial
                Information**Item
                1. Financial StatementsUnaudited
                Condensed Consolidated Balance Sheets, March 31, 2007 and June 30,
                2006
            3
                -
                4Unaudited
                Condensed Consolidated Statements of Operations, for the three months
                and
                nine months ended March 31, 2007 and 2006
            5
                -
                6Unaudited
                Condensed Consolidated Statements of Cash Flows, for the nine months
                ended
                March 31, 2007 and 2006
            7Notes
                to Unaudited Condensed Consolidated Financial Statements
            8
                -
                12Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            13
                - 16Item
                3. Quantitative and Qualitative Disclosures of Market Risk
            16Item
                4. Controls and Procedures
            17**Part II**
            **Other
                Information**Items
                1, 1.A, 2, 3, 4, 5 & 6
            17Signature
            18Exhibits
            19
                - 22





2
 **FOUNTAIN
          POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**


**PART
      I.** **FINANCIAL INFORMATION.**


**ITEM 1:** **Financial Statements.**




**UNAUDITED
      CONDENSED CONSOLIDATED BALANCE SHEETS**




**March
                  31,**
                **2007**
              
              **June 30,**
                **2006****ASSETS**CURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              1,048,609
              
              $
              4,474,552Accounts
                  receivable, net
              
              
              6,035,369
              
              
              3,405,868Inventories
              
              
              6,358,884
              
              
              6,959,188Prepaid
                  expenses
              
              
              721,601
              
              
              849,160Deferred
                  tax assets
              
              
              —
              
              
              1,446,018Total
                  Current Assets
              
              
              14,164,463
              
              
              17,134,786Property,
                  Plant & Equipment
              
              
              49,591,238
              
              
              47,898,410Less:
                  Accumulated Depreciation
              
              
              (32,513,258
              )
              
              (30,790,537
              )17,077,980
              
              
              17,107,873CASH
                  SURRENDER VALUE LIFE INSURANCE
              
              
              2,737,587
              
              
              2,552,682OTHER
                  ASSETS
              
              
              511,590
              
              
              1,065,019TOTAL
                  ASSETS
              
              $
              34,491,620
              
              $
              37,860,360





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


3
 **FOUNTAIN
          POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**




(Continued)




**UNAUDITED
      CONDENSED CONSOLIDATED BALANCE SHEETS**




**March
                    31,**
                  **2007**
                
                **June 30,**
                  **2006****LIABILITIES
                    AND STOCKHOLDERS’ EQUITY**CURRENT
                    LIABILITIESCurrent
                    maturities - long-term debt
                
                $
                747,177
                
                $
                711,984Notes
                    payable
                
                
                1,791,239
                
                
                —Accounts
                    payable - trade
                
                
                2,909,532
                
                
                3,861,061Accrued
                    expenses and other liabilities
                
                
                1,154,797
                
                
                1,253,714Dealer
                    incentives
                
                
                6,991,040
                
                
                6,367,229Customer
                    deposits
                
                
                555,795
                
                
                391,024Allowance
                    for boat repurchases
                
                
                98,331
                
                
                15,459Warranty
                    reserve
                
                
                613,685
                
                
                632,357Total
                    Current Liabilities
                
                
                14,861,596
                
                
                13,232,828OTHER
                    LONG-TERM LIABILITIES
                
                
                4,827
                
                
                —LONG-TERM
                    DEBT, less current maturities
                
                
                16,163,833
                
                
                15,228,700DEFERRED
                    TAX LIABILITY
                
                
                22,203
                
                
                305,133COMMITMENTS
                    AND CONTINGENCIES (Note 4)Total
                    Liabilities
                
                
                31,052,459
                
                
                28,766,661STOCKHOLDERS’
                    EQUITYCommon
                    stock, $.01 par value, 200,000,000 shares authorized, 4,844,275
                    and
                    4,834,275 shares issued and outstanding as of March 31, 2007
                    and
                    June 30, 2006, respectively
                
                
                48,442
                
                
                48,342Additional
                    paid-in capital
                
                
                10,574,753
                
                
                10,558,853Accumulated
                    deficit
                
                
                (7,108,640
                )
                
                (1,630,472
                )Less:
                    Treasury stock, at cost 15,000 shares
                
                
                (110,748
                )
                
                (110,748
                )Accumulated
                    other comprehensive income from interest rate swap
                
                
                35,354
                
                
                227,724Total
                    Stockholders’ Equity
                
                
                3,439,161
                
                
                9,093,699**TOTAL
                    LIABILITIES AND STOCKHOLDERS’ EQUITY**
                
                $
                34,491,620
                
                $
                37,860,360




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




4
 **FOUNTAIN
          POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**








**UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**




**For
                      the Three Months Ended****March
                      31,**
                    **2007**
                  
                  **March
                      31,**
                    **2006**NET
                      SALES
                  
                  $
                  16,475,688
                  
                  $
                  18,526,332COST
                      OF SALES
                  
                  
                  15,140,031
                  
                  
                  15,761,799Gross
                      Profit
                  
                  
                  1,335,657
                  
                  
                  2,764,533EXPENSES:Selling
                  
                  
                  1,869,486
                  
                  
                  1,484,647General
                      and administrative
                  
                  
                  852,457
                  
                  
                  1,063,484Total
                      Expenses
                  
                  
                  2,721,943
                  
                  
                  2,548,131OPERATING
                      INCOME (LOSS)
                  
                  
                  (1,386,286
                  )
                  
                  216,402NON-OPERATING
                      INCOME (EXPENSE):Other
                  
                  
                  26
                  
                  
                  25,429Interest
                  
                  
                  (293,095
                  )
                  
                  (219,421
                  )Total
                      Non-operating (Expense)
                  
                  
                  (293,069
                  )
                  
                  (193,992
                  )INCOME
                      (LOSS) BEFORE INCOME TAXES
                  
                  
                  (1,679,355
                  )
                  
                  22,410DEFERRED
                      TAX EXPENSE
                  
                  
                  2,232,834
                  
                  
                  —NET
                      INCOME (LOSS)
                  
                  $
                  (3,912,189
                  )
                  $
                  22,410BASIC
                      EARNINGS (LOSS) PER SHARE
                  
                  $
                  (0.81
                  )
                  $
                  0.00WEIGHTED
                      AVERAGE SHARES OUTSTANDING
                  
                  
                  4,835,164
                  
                  
                  4,834,275DILUTED
                      EARNINGS (LOSS) PER SHARE
                  
                  $
                  (0.81
                  )
                  $
                  0.00WEIGHTED
                      AVERAGE SHARES OUTSTANDING ASSUMING DILUTION
                  
                  
                  4,835,164
                  
                  
                  4,993,041




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




5
 **FOUNTAIN
          POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**


**UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**








**For
                  the Nine Months Ended****March
                  31,**
                **2007**
              
              **March
                  31,**
                **2006**NET
                  SALES
              
              $
              48,922,327
              
              $
              55,894,161COST
                  OF SALES
              
              
              43,460,645
              
              
              46,555,812Gross
                  Profit
              
              
              5,461,682
              
              
              9,338,349EXPENSES:Selling
                  expenses
              
              
              6,045,455
              
              
              4,211,356General
                  and administrative expenses
              
              
              2,730,149
              
              
              3,034,937Total
                  Expenses
              
              
              8,775,604
              
              
              7,246,293OPERATING
                  INCOME (LOSS)
              
              
              (3,313,922
              )
              
              2,092,056NON-OPERATING
                  INCOME (EXPENSE):Other
              
              
              (49,985
              )
              
              (25,671
              )Interest
              
              
              (830,534
              )
              
              (1,027,621
              )Total
                  Non-operating (Expense)
              
              
              (880,519
              )
              
              (1,053,292
              )INCOME
                  (LOSS) BEFORE INCOME TAXES
              
              
              (4,194,441
              )
              
              1,038,764DEFERRED
                  TAX EXPENSE
              
              
              1,283,727
              
              
              —NET
                  INCOME (LOSS)
              
              $
              (5,478,168
              )
              $
              1,038,764BASIC
                  EARNINGS (LOSS) PER SHARE
              
              $
              (1.13
              )
              $
              0.21WEIGHTED
                  AVERAGE SHARES OUTSTANDING
              
              
              4,834,567
              
              
              4,834,275DILUTED
                  EARNINGS (LOSS) PER SHARE
              
              $
              (1.13
              )
              $
              0.21WEIGHTED
                  AVERAGE SHARES OUTSTANDING ASSUMING DILUTION
              
              
              4,834,567
              
              
              4,910,072




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




6
 **FOUNTAIN
          POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**








**UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**


**For
                  the Nine Months Ended****March
                  31,**
                **2007**
              
              **March
                  31,**
                **2006**CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income (loss)
              
              $
              (5,478,168
              )
              $
              1,038,764Adjustments
                  to reconcile net income (loss) to net cash used by operating
                  activities:Depreciation
              
              
              1,722,848
              
              
              1,477,923Earnings
                  on cash surrender value of life insurance
              
              
              (184,906
              )
              
              (172,596
              )Deferred
                  loan costs expensed
              
              
              —
              
              
              229,801Gain
                  on termination of interest rate swap
              
              
              —
              
              
              (84,524
              )Loss
                  on disposal of assets
              
              
              —
              
              
              11,875Bad
                  debt expense
              
              
              49,469
              
              
              66,615Amortization
              
              
              27,001
              
              
              34,323Deferred
                  taxes
              
              
              1,283,727
              
              
              —Change
                  in assets and liabilities:Accounts
                  receivable
              
              
              (2,678,970
              )
              
              (1,939,063
              )Inventories
              
              
              600,304
              
              
              (1,420,358
              )Prepaid
                  expenses
              
              
              127,559
              
              
              (966,186
              )Other
                  assets
              
              
              213,419
              
              
              (208,016
              )Accounts
                  payable
              
              
              (951,529
              )
              
              (346,819
              )Accrued
                  expenses
              
              
              (98,917
              )
              
              254,503Dealer
                  incentives
              
              
              623,811
              
              
              2,030,840Customer
                  deposits
              
              
              164,771
              
              
              (27,372
              )Warranty
                  reserve
              
              
              (18,672
              )
              
              26,579Buyback
                  allowance
              
              
              82,872
              
              
              (45,867
              )Other
                  long-term liabilities
              
              
              4,828
              
              
              —Net
                  Cash Used by Operating Activities
              
              
              (4,510,553
              )
              
              (36,578
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchase
                  of property, plant and equipment
              
              
              (552,941
              )
              
              (728,347
              )Investment
                  in molds and related plugs
              
              
              (1,140,013
              )
              
              (786,875
              )Net
                  Cash Used by Investing Activities
              
              
              (1,692,954
              )
              
              (1,515,222
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from notes payable
              
              
              4,044,918
              
              
              —Payments
                  of notes payable
              
              
              (2,253,679
              )
              
              —Proceeds
                  from long-term debt
              
              
              1,500,000
              
              
              16,111,638Proceeds
                  received upon termination of interest rate swap
              
              
              —
              
              
              84,524Payment
                  of loan origination fees
              
              
              —
              
              
              (180,009
              )Payments
                  of long-term debt
              
              
              (529,675
              )
              
              (16,194,184
              )Proceeds
                  from the exercise of stock options
              
              
              16,000
              
              
              —Net
                  Cash Provided (Used) by Financing Activities
              
              
              2,777,564
              
              
              (178,031
              )Net
                  decrease in cash and cash equivalents
              
              
              (3,425,943
              )
              
              (1,732,831
              )Cash
                  and cash equivalents at the beginning of period
              
              
              4,474,552
              
              
              4,013,225Cash
                  and cash equivalents at the end of period
              
              $
              1,048,609
              
              $
              2,280,394







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





7
 **FOUNTAIN
          POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**




**NOTES
      TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      1. BASIS OF PRESENTATION**




The
      accompanying unaudited financial statements have been prepared by Fountain
      Powerboat Industries, Inc. (the “Company”) in accordance with accounting
      principles generally accepted in the United States of America for interim
      financial information and the instructions to Form 10-Q and Article 10 of
      Regulation S-X. Accordingly, they do not include all of the information and
      footnotes required by generally accepted accounting principles for complete
      financial statements. In the opinion of management, all adjustments (which
      include normal recurring adjustments) considered necessary to present fairly
      the
      financial position, results of operations and cash flows at March 31, 2007
      and
      for all periods presented have been made.




Certain
      information and footnote disclosures normally included in financial statements
      prepared in accordance with accounting principles generally accepted 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 audited consolidated financial statements and notes thereto included in
      the
      Company’s Annual Report on Form 10-K for the year ended June 30, 2006. The
      results of operations for the three and nine month periods ended March 31,
      2007
      are not necessarily indicative of the operating results for the full year.




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, or legal title and all other incidents of ownership have passed
      to
      the dealer or to the Government. Prior to shipment to the dealer or the
      Government, the Company must have received a signed Sales Order Acknowledgement
      from the dealer or the Government specifying the terms of the sale, including
      the sales price. All boat sales are Cash on Delivery basis, or with prior
      approval of the buyer’s third party commercial lender, thus assuring the ability
      to collect.




**NOTE
      2. RECENT ACCOUNTING PRONOUNCEMENTS**





**FIN
      48:** In
      July
      2006, the FASB issued Financial Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes-an interpretation of FASB Statement
      No. 109* (“FIN
      48”), which is a change in accounting for income taxes. FIN 48 specifies how tax
      benefits for uncertain tax positions are to be recognized, measured, and
      derecognized in financial statements; requires certain disclosures of uncertain
      tax matters; specifies how reserves for uncertain tax positions should be
      classified on the balance sheet; and provides transition and interim period
      guidance, among other provisions. FIN 48 is effective for fiscal years beginning
      after December 15, 2006 and as a result, is effective for the Company in
      the first quarter of Fiscal 2008. The Company is currently evaluating the impact
      of FIN 48 on its Consolidated Financial Statements.





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




**FAS
      158:** In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No. 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement Plans (an
      amendment of FASB Statements No. 87, 88, 106, and 132R)* (FAS
      158), requires an employer to: (a) Recognize in its statement of financial
      position an asset for a plan’s overfunded status or a liability for a plan’s
      underfunded status; (b) measure a plan’s assets and its obligations that
      determine its funded status as of the end of the employer’s fiscal year (with
      limited exceptions); and (c) recognize changes in the funded status of a
      defined benefit postretirement plan in the year in which the changes occur.
      Those changes will be reported in comprehensive income of a business entity
      and
      in changes in net assets of a not-for-profit organization. The requirement
      by
      FAS 158 to recognize the funded status of a benefit plan and the disclosure
      requirements of FAS 158 are effective as of the end of the fiscal year ending
      after December 15, 2006 for entities with publicly traded equity
      securities. The requirement to measure plan assets and benefit obligations
      as of
      the date of the employer’s fiscal year-end statement of financial position is
      effective for fiscal years ending after December 15, 2008. The Company does
      not expect the adoption of FAS 158 to have a material effect on its financial
      position at June 30, 2007.


8
 **FOUNTAIN
          POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**





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





**SAB
      108:** In
      September 2006, the SEC staff issued SAB No. 108, ****** *Considering
      the Effects of Prior Year Misstatements When Quantifying Misstatements in the
      Current Year Financial Statements (SAB No. 108)* .
      SAB No. 108 addresses the diversity in practice by registrants when
      quantifying the effect of an error on the financial statements.
      SAB No. 108 provides guidance on the consideration of the effects of
      prior year misstatements in quantifying current year misstatements and is
      effective for annual periods ending after November 15, 2006. The Company will
      be
      required to adopt the provisions of SAB No. 108 effective June 30,
      2007. We currently believe that the adoption of SAB No. 108 will not
      have a material financial impact on the Company’s consolidated financial
      statements.





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




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





**NOTE
      3. LONG-TERM DEBT AND PLEDGED ASSETS**




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


9
 **FOUNTAIN
          POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**


The
      Loan
      contains certain restrictive covenants setting forth minimum fixed charge
      coverage, tangible net worth, and debt to tangible net worth ratio requirements.
      These covenants also include a number of other limitations, including
      restrictions on capital expenditures, mergers or consolidations, disposal of
      assets, investments, incurrence of other indebtedness and payment of dividends.
      Should the Company fail to observe or perform any covenant the Bank may, in
      its
      sole discretion, declare all or any part of the obligations immediately due
      and
      payable. As of March 31, 2007 the Company was not in compliance with the fixed
      charge coverage ratio, tangible net worth and debt to tangible net worth ratio
      covenants. The minimum fixed charge coverage ratio permitted is 1.75 to 1.00;
      the actual fixed charge coverage ratio existing at March 31, 2007 was 0.68
      to
      1.00. The minimum tangible net worth permitted is $6,836,650; the actual
      tangible net worth at March 31, 2007 was $3,258,561. The maximum debt to
      tangible net worth ratio is 3.00 to 1.00; the actual debt to tangible net worth
      ratio at March 31, 2007 was 5.74 to 1.00. The Company has obtained from Regions
      Bank an agreement to temporarily waive their right to demand payment due to
      violation of these covenants. The Company has obtained a commitment from Regions
      Bank to restructure the covenants prior to June 30, 2007 based on the Company’s
      forecasts. The Company expects to comply with all covenant requirements at
      June
      30, 2007.




The
      Company utilizes an interest rate swap agreement to hedge exposure to
      fluctuations in market interest rates. An interest rate swap agreement is
      considered a derivative financial instrument. Due to the nature of the
      derivative and the intended use by the Company, the derivative qualifies as
      a
      Cash Flow Hedge. SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      requires that the value of the derivative be “marked-to-market” periodically and
      any change in the market value of the swap be reflected in the financial
      statements of the Company as an adjustment to Other Comprehensive Income. The
      market value of the derivative is calculated as of the last day of the period
      and any change since the end of the previous period is reflected in an
      adjustment to Stockholders’ Equity in the Consolidated Balance Sheet. During the
      period ended September 30, 2005, the Company terminated an existing interest
      rate swap agreement with Bank of America related to the Bank of America loan,
      which was repaid during the period. At termination, that swap agreement with
      Bank of America resulted in a gain to the Company of $84,524. The Company
      entered into a new interest rate swap agreement (the “Swap) with Regions Bank
      related to the new Regions Bank loan, taken during the period. The Swap has
      a
      notional amount of $12,375,000, a term of five years and a fixed annual rate
      of
      4.70% due to Regions Bank. The Swap has a floating interest rate due to the
      Company which is based on LIBOR and is reset monthly. As of March 31, 2007
      the
      market value adjustment for this swap results in an unrealized gain totaling
      $35,354, net of tax. SFAS No. 133 also requires periodic assessment of the
      effectiveness of any instrument designated as a hedge. If the assessment
      indicates the hedge is less than highly effective in offsetting the gains or
      losses incurred by the hedged transaction, the ineffective portion of the hedge
      must be reported currently in the Statement of Operations. The assessment
      results as of March 31, 2007 indicate that the hedge is highly effective, and
      we
      have determined that the impact to the Company’s Consolidated Statement of
      Operations is immaterial.




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




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




At
      the
      Company’s option, and subject to the terms and conditions of the Credit
      Facility, each loan will bear interest from the loan date on its unpaid balance
      at a rate equal to (1) the higher of the federal funds rate, as in effect from
      time to time, plus one-half of one percent per annum, or the lender’s prime
      lending rate as in effect from time to time, or (2) a rate calculated as
      provided in the Credit Facility based on LIBOR. The Credit Facility contains
      the
      same covenants specified in the Loan and discussed elsewhere in Note
      3.




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


10
 **FOUNTAIN
          POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**


**NOTE
      4. 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),
      under certain circumstances the Company may be required to repurchase the
      repossessed boats if it has executed a repurchase agreement with the lender(s).
      At March 31, 2007, 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 $36,238,600. At March 31, 2007, the allowance
      for boat repurchases was $98,331.




**Dealer
      Interest** - The
      Company regularly pays a portion of dealers’ interest charges for floor plan
      financing. These interest charges amounted to approximately $512,000 and
      $1,232,000, respectively, for the three and nine months ended March 31, 2007
      and
      $393,000 and $1,172,000, respectively, for the three and nine months ended
      March
      31, 2006. The estimated unpaid dealer interest included in accrued dealer
      incentives amounted to approximately $319,000 at March 31, 2007 and $384,000
      at
      March 31, 2006. For the three and nine months ended March 31, 2007, the changes
      in the estimated unpaid dealer interest accrual were a reduction of
      approximately $122,000 and an increase of $62,000, respectively.




**Interest
      Rate Risk** - At
      March 31, 2007, the Company owed $15,411,009 on
      the
      $16,500,000 Loan agreement with Regions Bank. The loan agreement has $3,036,009
      at the one month LIBOR plus 1.75% and $12,375,000 under an interest rate swap
      to
      provide a fixed rate of 6.45%. **** In
      addition, the Company owed $1,791,239 under the Credit Facility with Regions
      Bank. A hypothetical 50 basis point increase in interest rates would result
      in
      an approximately $24,000 increase in annual interest expense.




**Engine
      Supply Agreement** -
      The
      Company has an Engine Supply agreement with Brunswick Corporation to purchase
      all marine engines from Mercury Marine, a division of Brunswick, except for
      products in categories in which Mercury does not manufacture or are unavailable
      from Mercury due to production shortages.




**NOTE
      5. TRANSACTIONS WITH RELATED PARTIES**




At
      March
      31, 2007, the Company had receivables from its employees amounting to $21,177.




During
      the three and nine months ended March 31, 2007, the Company paid $211,126 and
      $507,271 respectively, to entities owned or controlled by the Company’s Chairman
      and Chief Executive Officer.




**NOTE
      6. EARNINGS (LOSS) PER SHARE**




Statement
      of Financial Accounting Standard (“SFAS”) 128 *Earnings
      per Share* requires
      a basic earnings per share and a diluted earnings per share presentation. This
      presentation is located on the face of the Statements of Operations for the
      three and nine months ended March 31, 2007. The computations of basic earnings
      (loss) per share and diluted earnings (loss) 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. For the three and nine months ended March 31, 2007 options
      to
      purchase 460,000 shares were considered anti-dilutive due to the net loss
      incurred by the Company.




The
      weighted average common shares and common equivalent shares outstanding for
      the
      three and nine month periods ended March 31, 2007 and 2006 for purposes of
      calculating earnings per share was as follows:







**For
                the Three Months Ended****March
                31,**
              **2007**
            
            **March
                31,**
              **2006**Weighted
                average common shares outstanding used in basic earnings per share
                for the
                three months ending
            
            
            4,835,164
            
            
            4,834,275Effect
                of dilutive stock options
            
            
            —
            
            
            158,766Weighted
                average common shares and potential dilutive common equivalent shares
                outstanding used in dilutive earnings per share
            
            
            4,835,164
            
            
            4,993,041





11
 **FOUNTAIN
          POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**




**For
                the Nine Months Ended****March
                31,**
              **2007**
            
            **March
                31,**
              **2006**Weighted
                average common shares outstanding used in basic earnings per share
                for the
                three and six months ending
            
            
            4,834,567
            
            
            4,834,275Effect
                of dilutive stock options
            
            
            —
            
            
            75,797Weighted
                average common shares and potential dilutive common equivalent shares
                outstanding used in dilutive earnings per share
            
            
            4,834,567
            
            
            4,910,072








**NOTE
      7. COMPREHENSIVE INCOME**





The
      Company reports as comprehensive income all changes in shareholders’ equity
      during the year from sources other than shareholders. Other comprehensive income
      refers to all components (revenues, expenses, gains, and losses) of
      comprehensive income that are excluded from net income. The Company’s only
      component of other comprehensive income is unrealized gains and losses related
      to the interest rate swap agreement. For the three and nine months ended March
      31, 2007, the Company’s other comprehensive income was a loss of $34,655 and a
      loss of $192,370, respectively. For the three and nine months ended March 31,
      2006, the Company’s other comprehensive income was a gain of $198,281 and
      $151,055, respectively. These amounts, together with net income or loss during
      the three and nine months ended March 31, 2007 result in total comprehensive
      income being a loss of $3,946,844 and a loss of $5,670,538, respectively. Total
      comprehensive income for the three and nine months ended March 31, 2006 was
      $220,691 and $1,189,819, respectively.





**NOTE
      8. STOCK BASED COMPENSATION**





The
      Company has one stock option compensation plan in effect at March 31, 2007.
      There were no options issued during the three months ended March 31, 2007.
      Furthermore, the compensation expense for all options issued and outstanding
      under the plan at March 31, 2007 had been charged against income in prior
      periods. Thus, no compensation expense was recorded during the three months
      ended March 31, 2007 and none was recorded for the three months ended March
      31,
      2006.





A
      summary
      of stock option activity during the three months ended March 31, 2007 and the
      status of the remaining stock options under the plan at March 31, 2007 is
      presented below:





Options
            
            Weighted
                Average Exercise Price
            
            Weighted
                Average Remaining Term
            
            Aggregate
                Intrinsic ValueOutstanding
                at December 31, 2006
            
            
            470,000
            
            $
            4.53Exercised
            
            
            10,000
            
            
            1.60Authorized
            
            
            —
            
            
            —Forfeited
            
            
            —
            
            
            —Granted
            
            
            —
            
            
            —Outstanding
                at March 31, 2007
            
            
            460,000
            
            $
            4.60
            
            
            1.33
                years
            
            $
            24,100Exercisable
                at March 31, 2007
            
            
            460,000
            
            $
            4.60
            
            
            1.33
                years
            
            $
            24,100





Options
      to purchase 10,000 shares were exercised during the three months ended March
      31,
      2007 and none in 2006. For the three months ended March 31, 2007, the intrinsic
      value of options exercised was approximately $21,500.





12
 **FOUNTAIN
          POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**


**ITEM
      2:** **Management’s Discussion and Analysis of Financial Condition and Results of
      Operation**





**Overview**





Fountain
      Powerboat Industries, Inc., through its wholly owned subsidiary Fountain
      Powerboats, Inc., is a leading manufacturer of high performance sport boats,
      sport fishing boats and express cruisers. Our sales are generated from selling
      the boats that we manufacture through a domestic and international network
      of
      independent dealers who market our boats to retail customers. A majority of
      these dealers finance their inventory through third-party floorplan finance
      companies, who pay Fountain Powerboats, Inc. generally within seven to ten
      days
      after delivery of the boats to the dealers.





The
      discussion on business and financial strategies and directions set forth in
      the
      Company’s annual report on Form 10-K for the fiscal year ended June 30, 2006 is
      incorporated herein by reference.





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





The
      recreational boating market began to soften during the 2005 retail buying season
      and continued through the 2006 retail season. Industry projections are that
      this
      downturn trend will continue through the 2007 retail season. Initially the
      market segment that purchases smaller boat models was impacted more than larger
      model segments. We experienced lower sales of our smaller boat models as well,
      as is evidenced by our Fiscal 2006 average selling price being 13.7% higher
      than
      in Fiscal 2005 with approximately the same number of boats sold. Our gross
      margin for sport boats was eroded in Fiscal 2006 by pricing concessions that
      we
      instituted to maintain sales volume for our smaller sport boats. These programs
      were discontinued at June 30, 2006 but the pricing concessions carried over
      in
      the order backlog to the first quarter of Fiscal 2007 and affected margins
      in
      that quarter.





Sales
      of
      our larger sport boats, express cruisers and some sport fish boat models
      declined in the second quarter of Fiscal 2007 and this reduction in sales has
      persisted through the third quarter, ended March 31, 2007. We have reduced
      our
      production levels in response to the current market conditions while further
      developing our dealer support programs to further expand sales penetration
      in a
      soft retail market.





The
      selling prices of some of our boat models were increased for the 2007 Model
      Year
      to compensate for raw material cost increases from increased prices for
      petrochemical products, metal products and material price increases resulting
      from rebuilding projects for Iraq and 2005 hurricanes in the Gulf of Mexico
      states.





The
      Company’s Sales Organization increased their participation and assistance of our
      dealers in the winter boat shows with much success. We experienced record boat
      show sales at most every regional and international winter show and during
      the
      Miami International Boat Show, held in mid February 2007, we had record sales
      of
      approximately $20 million for new boats and boats from dealer inventories.
      Orders for new boats have been placed into the production schedule and boats
      sold from dealer inventories generate replacement orders when the retail sale
      is
      consummated.





**Outlook**





The
      Company’s production levels have been lower through the third fiscal quarter,
      ended March 31, 2007, as compared to the third fiscal quarter of Fiscal 2006,
      and we expect to continue at a reduced production rate through the fourth
      quarter of Fiscal 2007.





Our
      international sales have not been affected by this downturn and are expected
      to
      be at a level comparable to Fiscal 2006. Our boats in dealer inventories are
      down by 18.5% compared to this time last year, which will be favorable to our
      production during the 2007 retail season and when the market recovers. Our
      winter boat show results are a positive indicator for retail sales in the 2007
      season. As of March 31, 2007 our confirmed order backlog was approximately
      $30
      million. A dealer council group was formed to improve communications and market
      reactions to products within the dealer network. The factory and dealer
      relationships with market penetration to improve sales and profitability are
      key
      strategies for future development of the sales channel.





The
      Company has reduced total headcount since the beginning of the fiscal year
      by
      29%, primarily from attrition. This is a result of lean enterprise with the
      elimination of non-value added content and the restructuring of operations.
      Labor efficiency improvements will have a positive effect on gross margins
      as
      the market improves and production levels increase.





13
 **FOUNTAIN
          POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**








**Results
      of Operations**





Key
      operating and financial statistics for the three and nine months ended March
      31,
      2007 and 2006 are:





**Three
                Months Ended**
            
            **Nine
                Months Ended****March
                31,**
            
            **March
                31,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Total
                number of boats sold
            
            
            72
            
            
            97
            
            
            243
            
            
            282Net
                sales
            
            $
            16,475,688
            
            $
            18,526,332
            
            $
            48,922,327
            
            $
            55,894,161Gross
                margin percent
            
            
            8.1
            %
            
            14.9
            %
            
            11.2
            %
            
            16.7
            %SG&A
                expense
            
            $
            2,721,943
            
            $
            2,548,131
            
            $
            8,775,604
            
            $
            7,246,293Operating
                income(loss)
            
            
            ($
                1,386,286
            )
            $
            216,402
            
            
            ($
                3,313,922
            )
            $
            2,092,056





Three
      Months ended March 31, 2007 compared to Three Months ended March 31,
      2006





Net
      sales
      - Net sales for the three months ended March 31, 2007 were $16,475,688, as
      compared to $18,526,332 for the three months ended March 31, 2006, a decrease
      of
      $2,050,644 or 11 percent. The decrease in sales is a reflection of our dealers’
failure to commit to orders over the fall/winter cycle based on a lack of
      confidence in the outlook for the recreational powerboat market.





Gross
      profit - Gross profit for the three months ended March 31, 2007 was $1,335,657,
      8.1 percent of net sales, as compared to $2,764,533, 14.9 percent of net sales,
      for the three months ended March 31, 2006. The decrease of 6.8 percentage points
      in gross margin was primarily attributable to production inefficiencies due
      to
      lower production volumes, reduced fixed cost absorption from production cuts
      of
      2.2 percentage points, and higher material costs of 2.2 percentage points due
      to
      product mix and raw material cost increases.





Selling
      expense - Selling related expenses were $1,869,486 for the three months ended
      March 31, 2007, as compared to $1,484,647 for the three months ended March
      31,
      2006. The increase was primarily attributable to expenses related to the
      expanded number of winter boat shows attended and the level of assistance
      provided to our dealers at those shows, advertising expenses correlated with
      the
      boat show season, dealer training, dealer development, new dealer recruitment,
      sales support programs and increases in other promotional expenses.





General
      and administrative expenses - General and administrative expenses were $852,457
      for the three months ended March 31, 2007, as compared to $1,063,484 for the
      three months ended March 31, 2006, a reduction of $211,027 or 20 percent. The
      decrease in expenses was principally from reduction in legal related expenses,
      investor relations expenses and consulting fees.





Interest
      expense - Interest expense for the three months ended March 31, 2007 was
      $293,095, as compared to $219,421 for the three months ended March 31, 2006,
      an
      increase of $73,674. The increase was from short term funding of boats in
      inventory.





Net
        income(loss) – Net loss for the three months ended March 31, 2007 was
        ($3,912,189), as compared to a profit of $22,410 for the three months ended
        March 31, 2006. The net loss was a result of a decrease in sales, an increase
        in
        cost of goods sold, an increase in selling expense and the establishment
        of a
        Valuation Allowance related to Deferred Tax Assets which resulted in a Deferred
        Tax Expense of $2,232,834.


14
 **FOUNTAIN
          POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**


Nine
      months ended March 31, 2007 compared to Nine months ended March 31,
      2006.





Net
      sales
      - Net sales for the nine months ended March 31, 2007 was $48,922,327, as
      compared to $55,894,161 for the nine months ended March 31, 2006. The number
      of
      boats sold during the period was 14 percent lower than were sold in the
      comparable period of the prior year.





Net
      sales
      by Product Line for the nine months ending March 31:


**2007**
            
            **Percentage**
            
            **2006**
            
            **Percentage**Sport
                boats
            
            $
            18,952,884
            
            
            39%
            
            $
            20,849,811
            
            
            37%Express
                cruisers
            
            $
            6,644,869
            
            
            13%
            
            $
            11,414,288
            
            
            21%Sport
                fishing boats
            
            $
            21,952,556
            
            
            45%
            
            $
            21,866,421
            
            
            39%Service,
                parts, sportswear
            
            $
            1,372,018
            
            
            3%
            
            $
            1,763,641
            
            
            3%$
            48,922,327
            
            
            
            
            $
            55,894,161





Gross
      profit - Gross profit for the nine months ended March 31, 2007 was $5,461,682,
      11.2 percent of net sales, as compared to $9,338,349 for the nine months ended
      March 31, 2006, 16.7 percent of net sales. The decrease of 5.5 percentage points
      was primarily attributable to production inefficiencies due to lower production
      volumes, reduced fixed cost absorption from production cuts, and higher
      materials costs of 3 percentage points due to product mix and raw materials
      cost
      increases.





Selling
      expense - Selling related expenses for the nine months ended March 31, 2007
      were
      $6,045,455, as compared to $4,211,356 for the nine months ended March 31, 2006.
      The increase was primarily from an increase in advertising expenses due to
      increased magazine advertising targeted for the boat show season and the launch
      of an international magazine advertising program, higher dealer meeting
      expenses, expenses for our support of the Southern Kingfish Association (SKA)
      and American Striper Association (ASA) tournament programs to promote our
      expanding sport fish boat product line, and expense of supporting Super Boat
      International (SBI) and American Power Boat Association (APBA) off-shore racing
      programs.





General
      and administrative - General and administrative expenses for the nine months
      ended March 31, 2007 was $2,730,149, as compared to $3,034,937 for the nine
      months ended March 31, 2006, a decrease of $304,788 which is primarily
      attributable to reduction of legal related services and expenses due to
      intensive management of potential claims and warranty matters.





Interest
      expense - Interest expense for the nine months ended March 31, 2007 was
      $830,534, as compared to $1,027,621 for the nine months ended March 31, 2006,
      a
      decrease of $197,087. The decrease in interest expense is attributable to the
      write-off of unamortized closing costs of $229,801 related to the Bank of
      America loan that was refinanced during the nine months ended March 31,
      2006.





Net
      income(loss) - Net loss for the nine months ended March 31, 2007 was
      ($5,478,168), as compared to a net income of $1,038,764 for the nine months
      ended March 31, 2006. The net loss was a result of a decrease in sales, increase
      in cost of goods sold, and an increase in selling expense.





Income
      tax - The Deferred Tax Expense for the nine months ended March 31, 2007 is
      $1,283,727 as compared to a Deferred Tax Expense of $0 for the same period
      last
      year. During the nine months ended March 31, 2006, the Company utilized a
      Valuation Allowance to completely offset any tax provision or benefit due to
      the
      uncertainty surrounding the ability to fully realize the net operating loss
      carryforwards the company has. The profits achieved by the Company during Fiscal
      Years 2005 and 2006 led management to conclude that the Valuation Allowance
      was
      no longer appropriate and full realization of the carryforwards seemed likely.
      The Valuation Allowance was reversed during the fourth quarter of Fiscal 2006.
      The losses incurred during the nine months ended March 31, 2007 have led to
      renewed uncertainty regarding the Company’s ability to fully realize the
      benefits of the net operating loss carryforwards. As a result the Valuation
      Allowance has been reestablished and a tax expense of $1,283,747 has been
      recorded for the nine months ended March 31, 2007.




Liquidity
      and capital resources - As disclosed on the Unaudited Condensed Consolidated
      Statements of Cash Flows, the cash balance decreased by $3,425,943 during the
      nine month period ended March 31, 2007 (the current period). By comparison,
      during the nine months ended March 31, 2006 (the previous period), the cash
      balance decreased $1,732,831.





The
      use
      of cash during the current period is attributable mostly to operations, which
      used $4,510,553. The activities driving this use of cash:


15
 **FOUNTAIN
          POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**





·
            The
                Company’s Net Loss for the current period, $5,478,168, is the most
                significant use of cash by operations and is discussed elsewhere
                in this
                document.


·
            The
                Accounts Receivable ledger registered an increase because the Company
                invoiced and shipped several boats during the last few days of the
                period
                but had not yet received payment for those boats as of March 31,
                2007.
                Furthermore, two of the boats in the Accounts Receivable ledger at
                the end
                of the current period were 48 foot Cruisers, our highest priced model,
                and
                together they account for approximately $1.2 million of the total
                in
                Accounts Receivable.


·
            The
                Accounts Payable ledger decreased during the current period by
                approximately $1.0 million. The decrease in Accounts Payable is
                commensurate with the decreased level of manufacturing activity discussed
                elsewhere in this document.


Each
      of
      the items referenced above as a driver of the use of Cash by Operations is
      correlated with the level of sales and/or manufacturing activity during the
      period and each item may become a source of cash as sales and profitability
      improve.





The
      use
      of cash during the current period attributable to investing is $1,692,954,
      a 12
      % increase over the cash used for investing in the previous period. The cash
      spent on the development of new molds and plugs increased approximately $353,000
      in the current period while the cash spent on other fixed assets decreased
      approximately $175,000. The Company’s investment in molds and plugs during the
      current period increased more than in the previous period due to the
      construction of new molds and plugs for new models of production
      boats.





The
      cash
      provided by financing during the current period was $2,777,564, a substantial
      increase over the cash used by financing in the previous period, $178,031.
      There
      were two primary sources of cash for the Company during the current period.
      The
      Company borrowed $1,500,000 against the Cash Surrender Value of Key Man Life
      Insurance Policies it owns insuring the life our Founder, Chairman and CEO,
      Reginald M. Fountain, Jr. The Company also had outstanding debt at March 31,
      2007 of approximately $1,800,000 under the “Credit Facility” disclosed in Note 3
      of this document.





Management
      is of the opinion that cash flows and existing credit facilities will satisfy
      its current and future liquidity demands. Management is realigning operating
      costs and expenses for the reduced level of production to return the Company
      to
      profitability. As of March 31, 2007 the confirmed sales order backlog was
      approximately $30 million.






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




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




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




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





**ITEM 3:** **Quantitative and Qualitative Disclosures about Market Risk.**




**Interest
      Rate Risk** - At
      March 31, 2007, the Company owed $15,411,009 on a $16,500,000 loan agreement
      with Regions Bank. The loan agreement has $3,036,009 at the one month LIBOR
      plus
      1.75% and $12,375,000 under an interest rate swap to provide a fixed rate of
      6.45%. **** In
      addition, the Company owed $1,791,239 under the Credit Facility with Regions
      Bank. A hypothetical 50 basis point increase in interest rates would result
      in
      an approximately $24,000 increase in annual interest expense.


16
 **FOUNTAIN
          POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**







**ITEM 4** **.
      Controls and Procedures**




As
      of
      March 31, 2007, the Company’s management, with the participation of the Chief
      Executive Officer and the Chief Financial Officer, performed an evaluation
      of
      the effectiveness of the design and operation of the Company’s disclosure
      controls and procedures pursuant to Exchange Act Rule 13a-15. Based on that
      evaluation, the Chief Executive Officer and the Chief Financial Officer have
      concluded that the design and operation of these disclosure controls and
      procedures were effective as of the end of the period covered by this report.
      In
      connection with the above evaluation, no change in the Company’s internal
      control over financial reporting was identified that occurred during the period
      covered by this report that has materially affected, or is reasonably likely
      to
      materially affect, the Company’s internal control over financial
      reporting.




**PART
      II.** **OTHER INFORMATION.**




**ITEM 1:** **Legal Proceedings.**




There
      were no legal proceedings of a material nature during the quarter ending March
      31, 2007.





**ITEM 1
      A:** **Risk Factors**





Along
      with the other information set forth in this report, you should carefully
      consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual
      Report on Form 10-K for the fiscal year ended June 30, 2006, which could
      materially affect our business, financial condition or future results. In
      addition to the risks described in our Annual Report on Form 10-K and investment
      risks that apply in the case of any boat manufacturer, our business, financial
      condition and operating results could be harmed by other risks, including risks
      we have not yet identified or that we may believe are immaterial or
      unlikely.




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




The
      Company repurchased none of its own securities during the quarter ending March
      31, 2007. 10,000 shares of unregistered common stock were tendered at an average
      price of $1.60 per share during the quarter ended March 31, 2007 in connection
      with the exercise of stock options.




**ITEM 3:** **Defaults Upon Senior Securities.**




There
      were no defaults upon senior securities during the quarter ending March 31,
      2007.




**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 ended March 31, 2007.





**ITEM 5:** **Other Information.**




None.




**ITEM 6:** **Exhibits.**




An
      index
      of exhibits that is a part of this Form 10-Q appears following the signature
      page and is incorporated herein by reference.





17
 **FOUNTAIN
          POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**





**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
              Irving
                L. Smith
            Date: May
                15, 2007Chief
                Financial Officer





By:
            /s/
                Roger F. Scott
              Roger
                F. Scott
            Date: May
                15, 2007Principal
                Accounting Officer


18
 **FOUNTAIN
          POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY**







**EXHIBIT
      INDEX**




**Exhibit No.**
            
            **Exhibit
                Description**31.1
            
            Certification
                pursuant to Rule 13a-14(a) by the Chief Executive
                Officer31.2
            
            Certification
                pursuant to Rule 13a-14(a) by the Chief Financial
                Officer32
            
            Certifications
                Pursuant to 18 U.S.C.
                Section 1350




19