**U.S.
        SECURITIES AND EXCHANGE COMMISSION**
 **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 September 30, 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 September 30, 2007**Common
                Stock, $.01 par value
            
            4,844,275
                shares













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





**INDEX**




**Page No.****Part I**
            **Financial
                Information**Item
                1. Financial StatementsUnaudited
                Condensed Consolidated Balance Sheets as of September 30, 2007 and
                June
                30, 2007
            
            3Unaudited
                Condensed Consolidated Statements of Operations, for the three months
                ended September 30, 2007 and 2006
            
            4Unaudited
                Condensed Consolidated Statements of Cash Flows, for the three months
                ended September 30, 2007 and 2006
            
            5Notes
                to Unaudited Condensed Consolidated Financial Statements
            
            6
                -
                10Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            
            10
                - 13Item
                3. Quantitative and Qualitative Disclosures of Market Risk
            
            13Item
                4T. Controls and Procedures
            
            13**Part II**
            **Other
                Information**Items
                1, 1.A, 2, 3, 4, 5 & 6
            
            13Signature
            
            14Exhibits





2




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





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


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




**UNAUDITED
      CONDENSED CONSOLIDATED BALANCE SHEETS**




**September
                30,**
              **2007**
            
            
            **June 30,**
              **2007
                *****ASSETS**CURRENT
              ASSETS:Cash
                and cash equivalents
            
            $
            781,373
            
            $
            2,379,383Accounts
                receivable, net
            
            
            2,949,453
            
            
            3,688,986Inventories
            
            
            6,635,783
            
            
            6,645,213Prepaid
                expenses
            
            
            563,869
            
            
            668,237Total
                Current Assets
            
            
            10,930,478
            
            
            13,381,819Property,
                Plant & Equipment
            
            
            49,791,438
            
            
            49,533,443Less:
                Accumulated Depreciation
            
            
            (33,692,793
            )
            
            (33,104,217
            )16,098,645
            
            
            16,429,226CASH
                SURRENDER VALUE LIFE INSURANCE
            
            
            3,013,130
            
            
            2,951,010OTHER
                ASSETS
            
            
            522,226
            
            
            654,890TOTAL
                ASSETS
            
            $
            30,564,479
            
            $
            33,416,945





**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**CURRENT
                LIABILITIESCurrent
                maturities - long-term debt
            
            $
            771,599
            
            $
            759,290Notes
                payable
            
            
            —
            
            
            799,333Accounts
                payable
            
            
            2,623,189
            
            
            2,846,303Accrued
                expenses and other liabilities
            
            
            1,207,824
            
            
            1,092,908Dealer
                incentives
            
            
            5,133,196
            
            
            6,342,467Customer
                deposits
            
            
            217,000
            
            
            879,102Allowance
                for boat repurchases
            
            
            81,977
            
            
            64,124Warranty
                reserve
            
            
            954,149
            
            
            941,928Total
                Current Liabilities
            
            
            10,988,934
            
            
            13,725,455OTHER
                LONG-TERM LIABILITIES
            
            
            51,883
            
            
            4,828LONG-TERM
                DEBT, less current maturities
            
            
            15,771,828
            
            
            15,969,407DEFERRED
                TAX LIABILITY
            
            
            —
            
            
            80,896Total
                Liabilities
            
            
            26,812,645
            
            
            29,780,586COMMITMENTS
                AND CONTINGENCIES (Note 4)STOCKHOLDERS’
                EQUITYCommon
                stock, $.01 par value, 200,000,000 shares authorized, 4,844,275 shares
                issued and outstanding as of September 30, 2007 and June 30,
                2007
            
            
            48,442
            
            
            48,442Additional
                paid-in capital
            
            
            10,574,753
            
            
            10,574,753Accumulated
                deficit
            
            
            (6,731,661
            )
            
            (7,005,001
            )Less:
                Treasury stock, at cost 15,000 shares
            
            
            (110,748
            )
            
            (110,748
            )Accumulated
                other comprehensive (loss) income
            
            
            (28,952
            )
            
            128,913Total
                Stockholders’ Equity
            
            
            3,751,834
            
            
            3,636,359**TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY**
            
            $
            30,564,479
            
            $
            33,416,945




*
      Derived
      from audited consolidated financial statements





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





3




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





**UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**




**For
                the Three Months Ended****September
                30,**
              **2007**
            
            
            **September
                30,**
              **2006**NET
                SALES
            
            $
            18,049,430
            
            $
            19,413,852COST
                OF SALES
            
            
            15,344,844
            
            
            16,537,935Gross
                Profit
            
            
            2,704,586
            
            
            2,875,917EXPENSES:Selling
            
            
            1,230,167
            
            
            1,967,096General
                and administrative
            
            
            835,949
            
            
            947,326Total
                Expenses
            
            
            2,066,116
            
            
            2,914,422OPERATING
                INCOME (LOSS)
            
            
            638,470
            
            
            (38,505
            )NON-OPERATING
                INCOME (EXPENSE):Other
            
            
            (101,722
            )
            
            24Interest
            
            
            (263,368
            )
            
            (239,189
            )Total
                Non-operating (Expense)
            
            
            (365,090
            )
            
            (239,165
            )INCOME
                (LOSS) BEFORE INCOME TAXES
            
            
            273,380
            
            
            (277,670
            )INCOME
                TAX EXPENSE
            
            
            40
            
            
            (81,000
            )NET
                INCOME (LOSS)
            
            $
            273,340
            
            $
            (196,670
            )BASIC
                EARNINGS (LOSS) PER SHARE
            
            $
            .06
            
            $
            (.04
            )WEIGHTED
                AVERAGE SHARES OUTSTANDING
            
            
            4,844,275
            
            
            4,834,275DILUTED
                EARNINGS (LOSS) PER SHARE
            
            $
            .06
            
            $
            (.04
            )..WEIGHTED
                AVERAGE SHARES OUTSTANDING ASSUMING DILUTION
            
            
            4,848,461
            
            
            4,834,275




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







4




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




**UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**




**For
                the Three Months
                Ended****September
                30,**
              **2007**
            
            **September
                30,**
              **2006**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income (loss)
            
            $
            273,340
            
            $
            (196,670
            )Adjustments
                to reconcile net income (loss) to net cash used by operating
                activities:Depreciation
            
            
            596,174
            
            
            560,678Inventory
                valuation adjustment
            
            
            137,810
            
            
            28,505Earnings
                on cash surrender value of life insurance
            
            
            (62,120
            )
            
            (58,699
            )(Gain)
                loss on disposal of assets
            
            
            (1,798
            )
            
            —Bad
                debt expense
            
            
            3,859
            
            
            24,574Amortization
            
            
            9,000
            
            
            9,000Deferred
                taxes
            
            
            —
            
            
            (81,000
            )Change
                in assets and liabilities:Accounts
                receivable
            
            
            735,674
            
            
            (4,319,860
            )Inventories
            
            
            (128,380
            )
            
            351,770Prepaid
                expenses
            
            
            104,368
            
            
            (32,853
            )Other
                assets
            
            
            4,035
            
            
            6,440Accounts
                payable
            
            
            (223,114
            )
            
            3,558Accrued
                expenses
            
            
            114,916
            
            
            (178,245
            )Dealer
                incentives
            
            
            (1,209,271
            )
            
            268,012Customer
                deposits
            
            
            (662,102
            )
            
            (49,621
            )Warranty
                reserve
            
            
            12,221
            
            
            22,028Buyback
                allowance
            
            
            17,853
            
            
            11,734Net
                Cash Used by Operating Activities
            
            
            (277,535
            )
            
            (3,630,649
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Proceeds
                from sale of equipment
            
            
            3,600
            
            
            —Purchase
                of property, plant and equipment
            
            
            (163,219
            )
            
            (304,972
            )Investment
                in molds and related plugs
            
            
            (104,176
            )
            
            (584,629
            )Net
                Cash Used by Investing Activities
            
            
            (263,795
            )
            
            (889,601
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Payments
                of notes payable
            
            
            (799,333
            )
            
            —Proceeds
                from long-term debt
            
            
            —
            
            
            1,500,000Payment
                of loan origination fees
            
            
            (72,079
            )Payments
                of long-term debt
            
            
            (185,268
            )
            
            (173,726
            )Net
                Cash Provided (Used) by Financing Activities
            
            
            (1,056,680
            )
            
            1,326,274Net
                decrease in cash and cash equivalents
            
            
            (1,598,010
            )
            
            (3,193,976
            )Cash
                and cash equivalents at the beginning of period
            
            
            2,379,383
            
            
            4,474,552Cash
                and cash equivalents at the end of period
            
            $
            781,373
            
            $
            1,280,576





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








5





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


**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 September 30, 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, 2007. The
      results of operations for the three month period ended September 30, 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 legal title and all other incidents of
      ownership have passed to the dealer or to the Government. Prior to the sale
      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.





The
      Company formed a wholly owned subsidiary, Fountain Dealer’s Factory Super Store
      (“FSS”) effective July 1, 2007 for the principal purpose of selling Fountain
      boats at retail in a territory that can be serviced from the Company’s
      Washington, North Carolina location and to provide retail sales support and
      training to its dealer network. The subsidiary will operate out of facilities
      owned by the Company. The Company’s initial investment in this subsidiary
      totaled $100,000. The financial statements of FSS have been consolidated with
      those of the parent company, Fountain Powerboat Industries, Inc. (“FPI”) and all
      other subsidiaries in accordance with accounting principles generally accepted
      in the United States of America.




**NOTE
      2. RECENT ACCOUNTING PRONOUNCEMENTS**




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





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. We have adopted FIN 48 which did not have a
      material effect on our Consolidated Financial Statements.





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.




6




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





In
      September 2006, the Securities and Exchange Commission (the “SEC”) issued Staff
      Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior
      Years Misstatements when Quantifying Misstatements in Current Year Financial
      Statements.” SAB 108 was issued in order to eliminate the diversity of practice
      surrounding how public companies quantify financial statement misstatements.
      As
      disclosed in our 2007 Annual Report on Form 10-K filed with the SEC on September
      27, 2007, we adopted SAB 108 during the quarter ended June 30, 2007 and elected
      to use the cumulative effect transition method in connection with the
      preparation of our financial statements. Data for Fiscal 2007 presented in
      this
      report on Form 10-Q has been restated to reflect the effect of the adjustments
      resulting from the adoption of SAB 108. This adoption resulted in an increase
      in
      Warranty Reserve of $40,700, an increase in the net loss and a decrease in
      Stockholder’s Equity for the same amount as of and during the three months ended
      September 30, 2006. For additional information regarding the adoption and effect
      of SAB 108, see Note 1 of “Notes to Consolidated Financial Statements” included
      in the Company’s Annual Report on Form 10-K for the year ended June 30,
      2007.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities”, (SFAS 159). SFAS 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 a material effect on its
      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. 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.




7




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





The
      Loan
      contains certain restrictive covenants setting forth earnings before interest,
      taxes and depreciation (EBITDA) and capital expenditures, which were
      restructured by Regions Bank on June 27, 2007. These covenants also include
      a
      number of other limitations, including restrictions on capital expenditures,
      mergers or consolidations, disposal of assets, investments, incurrence of other
      indebtedness and payment of dividends. The Company expects to maintain
      compliance with these restrictive covenants, and believes that these
      restrictions will not have a material effect on the Company’s ability to
      maintain and improve its facilities and compete with other companies in the
      boating industry. As of September 30, 2007 the Company was in compliance with
      all covenants.





The
      Company utilizes an interest rate swap agreement to hedge exposure to
      fluctuations in market interest rates. Under United States GAAP, aAn 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. The Company entered into an interest rate swap agreement (the
      “Swap) with Regions Bank related to the new Regions Bank loan dated September
      19, 2005. 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 September 30, 2007 the market value adjustment for this swap results
      in an
      unrealized loss totaling $28,952, 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 September 30, 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
      September 28, 2007, the Company entered into a Dealer Floor Plan and Security
      Agreement (the “Floor Plan”) with Regions Bank (the “Lender”) which provides for
      a secured, revolving line of credit under which the Company may obtain up to
      an
      aggregate of $5 million in loans from the lender. Each loan constitutes a
      separate note and is to be secured by a new or used boat, acquired by Fountain
      Dealer’s Factory Super Store, Inc. with the proceeds of the loan, with the
      intent to sell the boat to a retail customer. Upon executing the retail sale,
      the entire loan amount is to be immediately repaid to the Lender.





The
      Company must pay interest monthly on the entire unpaid principal balance of
      the
      amounts borrowed under all outstanding notes. Interest is computed at the
      Lender’s Prime Rate + 1%, as determined on the date of each note. Each loan
      under the Floor Plan must be repaid in full within 9 months of the date of
      the
      note. The Floor Plan contains certain restrictive covenants setting forth
      minimum EBITDA and minimum Debt Service Coverage Ratio allowable. There were
      no
      outstanding borrowings at September 30, 2007. The Company expects to maintain
      compliance with these, and all, covenants and believes that these restrictions
      will not have a material effect on the Company’s ability to compete effectively
      in the boating industry.




**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 September 30, 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 $27,300,000. At September 30,
      2007, the allowance for boat repurchases was $81,977.




**Dealer
      Interest** - The
      Company regularly pays a portion of dealers’ interest charges for floor plan
      financing. These interest charges amounted to approximately $278,400 for the
      three months ended September 30, 2007 and $303,434 for the three months ended
      September 30, 2006. The estimated unpaid dealer interest included in accrued
      dealer incentives amounted to approximately $354,500 at September 30, 2007
      and
      $315,834 at September 30, 2006. For the three months ended September 30, 2007,
      the change in the estimated unpaid dealer interest accrual was an increase
      of
      approximately $151,700.





8




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




**Interest
      Rate Risk** - At
      September 30, 2007, the Company owed $15,043,428 on
      the
      $16,500,000 Loan agreement with Regions Bank. The loan agreement has $2,668,428
      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%. **** A
      hypothetical 50 basis point increase in interest rates would result in an
      approximately $13,000 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
      September 30, 2007, the Company had receivables from its employees amounting
      to
      $31,161.




During
      the three months ended September 30, 2007, the Company paid $ 75,547 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
      disclosure of basic earnings per share and diluted earnings per share. This
      presentation is located on the face of the Statements of Operations for the
      three months ended September 30, 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.




The
      weighted average common shares and common equivalent shares outstanding for
      the
      three month periods ended September 30, 2007 and 2006 for purposes of
      calculating earnings per share was as follows:




**For
                the Three Months Ended****September
                30,**
              **2007**
            
            **September
                30,**
              **2006**Weighted
                average common shares outstanding used in basic earnings per share
                for the
                three months ending
            
            
            4,844,275
            
            
            4,834,275Effect
                of dilutive stock options
            
            
            4,186
            
            
            —Weighted
                average common shares and potential dilutive common equivalent shares
                outstanding used in dilutive earnings per share
            
            
            4,848,461
            
            
            4,834,275





For
      the
      three months ended September 30, 2007 there were 450,000 options that were
      anti-dilutive. For the three months ended September 30, 2006, options to
      purchase 470,000 shares were considered anti-dilutive due to the net loss
      incurred by the Company.





**NOTE
      7. COMPREHENSIVE INCOME/(LOSS)**





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 months ended September 30,
      2007, the Company’s other comprehensive income was a loss of $157,865. For the
      three months ended September 30, 2006, the Company’s other comprehensive income
      was a loss of $162,795. These amounts, together with net income or loss during
      the three months ended September 30, 2007 result in total comprehensive income
      being $115,475. Total comprehensive income for the three months ended September
      30, 2006 was a loss of $359,465.





**NOTE
      8. STOCK BASED COMPENSATION**





The
      Company has one stock option compensation plan in effect at September 30, 2007.
      There were no options issued during the three months ended September 30, 2007.
      Furthermore, the compensation expense for all options issued and outstanding
      under the plan at September 30, 2007 had been charged against income in prior
      periods. Thus, no compensation expense was recorded during the three months
      ended September 30, 2007 and none was recorded for the three months ended
      September 30, 2006.




9




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





A
      summary
      of stock option activity during the three months ended September 30, 2007 and
      the status of the remaining stock options under the plan at September 30, 2007
      is presented below:





Options
            
            Weighted
                Average Exercise Price
            
            Weighted
                Average Remaining Term
            
            Aggregate
                Intrinsic ValueOutstanding
                at June 30, 2007
            
            
            460,000
            
            $
            4.59Exercised
            
            
            —
            
            
            —Authorized
            
            
            —
            
            
            —Forfeited
            
            
            —
            
            
            —Granted
            
            
            —
            
            
            —Outstanding
                  at September 30, 2007
            
            
            460,000
            
            $
            4.59
            
            
            0.91
                years
            
            $
            —Exercisable
                at September 30, 2007
            
            
            460,000
            
            $
            4.59
            
            
            0.91
                years
            
            $
            —





There
      were no options exercised during the three months ended September 30, 2007
      or
      2006.





**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. The manufacturer’s sales are generated
      from selling the boats that are manufactured through a domestic and
      international network of independent dealers who market boats to retail
      customers. A majority of these dealers finance their inventory through
      third-party floorplan finance companies, which pay Fountain Powerboats, Inc.
      generally within seven to ten days after delivery of the boats to the
      dealers.





Fountain
      Powerboat Industries, Inc., through its wholly owned subsidiary Fountain
      Dealer’s Factory Super Store, Inc., sells boats produced by Fountain Powerboats,
      Inc., the manufacturing subsidiary, to retail customers who reside in a
      territory that has been assigned by the manufacturer to the retail subsidiary.
      The retail operation will also sell pre-owned boats taken in trade on the sales
      of new Fountain boats and other services to retail customers.





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, 2007 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. Recent
      economical factors negatively affecting consumer confidence and the funds
      available for boating purposes have significantly affected the recreational
      boating market.





The
      recreational boating market has been soft for the past three retail buying
      seasons. This downturn in the fiberglass recreational boat market has continued
      to deepen through this period and analyst are projecting that the market will
      not see an upturn through calendar year 2008.





The
      Company’s revenue for the first quarter of Fiscal 2008, ended September 30,
      2007, is 7% less than the first quarter of Fiscal 2007. This level of revenue
      in
      the first quarter of the fiscal year is line with the Company’s goal of
      maintaining revenue at approximately $68 million for Fiscal 2008. The product
      mix for the first quarter is very comparable to the product mix for the first
      quarter of Fiscal 2007.





The
      selling prices of some of our boat models were increased for the 2008 Model
      Year
      to compensate for increases in material and production costs and to provide
      for
      coherent gross margins throughout all product lines. Pricing concessions and
      discounts to dealers have not been conceded, thus yielding a consistent gross
      margin from boats sold for the quarter.




10




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





The
      Company’s sales organization continued their participation and assistance of
      dealers in the fall boat shows with success. The model of factory sales support
      and organization employed very successfully at the Miami International Boat
      Show
      in February 2007 is being applied to all regional and national boat shows in
      this fiscal year.





**Outlook**





The
      recreational boating market is expected to continue to be down through the
      2008
      retail season. The Company’s objective is to maintain revenue at the same level
      it achieved in Fiscal 2007, approximately $68 million. It will maintain an
      aggressive, cost effective marketing and sales program to achieve that
      goal.





As
      of
      September 30, 2007 the Company’s confirmed order backlog was approximately $27
      million and the number of boats in dealers’ inventory was down 13.7%, as
      compared to September 30, 2006. Results of fall boat shows have generally been
      better than in prior years. These factors are indications that the Company
      should be able to meet its goals for the remainder of the fiscal
      year.





**Results
      of Operations**





Key
      operating and financial statistics for the three months ended September 30,
      2007
      and 2006 are:





**Three
                Months Ended****Consolidated
                Operations**
            
            **September
                30,****2007**
            
            **2006**Total
                number of boats sold
            
            
            82
            
            
            99Net
                sales
            
            $
            18,049,430
            
            $
            19,413,852Gross
                margin percent
            
            
            15
            %
            
            15
            %SG&A
                expense
            
            $
            2,066,116
            
            $
            2,914,422Operating
                income(loss)
            
            $
            638,470
            
            $
            (38,505
            )





Three
      Months ended September 30, 2007 compared to Three Months ended September 30,
      2006





Net
      sales
      - Net sales for the three months ended September 30, 2007 were $18,049,430,
      as
      compared to $19,413,852 for the three months ended September 30, 2006, a
      decrease of $1,364,422 or 7 percent. The decrease in sales is attributable
      to
      the market decline that has affected the overall fiberglass recreational marine
      industry.





Net
      sales
      by Product Line for the three months ending September 30:





**2007**
            
            **Percentage**
            
            **2006**
            
            **Percentage**Sport
                boats
            
            $
            7,604,431
            
            
            41
            %
            $
            7,912,892
            
            
            41
            %Express
                cruisers
            
            
            2,565,206
            
            
            16
            %
            
            3,246,706
            
            
            17
            %Sport
                fishing boats
            
            
            7,452,176
            
            
            41
            %
            
            7,666,110
            
            
            39
            %Service,
                parts, sportswear
            
            
            427,617
            
            
            2
            %
            
            588,144
            
            
            3
            %Total
            
            $
            18,049,430
            
            
            
            
            $
            19,413,852





The
      Company’s retail sales subsidiary is in initial phases of organization and
      start-up, therefore there is no comparable information for the three months
      ended September 30, 2006. All discussions below are from the consolidated
      financial statements.





Gross
      profit - Gross profit for the three months ended September 30, 2007 was
      $2,704,586, 15 percent of net sales, as compared to $2,875,917, 15 percent
      of
      net sales, for the three months ended September 30, 2006.





Selling
      expense - Selling related expenses were $1,230,167 for the three months ended
      September 30, 2007, as compared to $1,967,096 for the three months ended
      September 30, 2006, a reduction of $736,929 or 37.5 percent. The decrease was
      primarily attributable to the reduction of expenses related to the Company’s
      support of off-shore racing programs, advertising expenses and sales force
      expenses.





General
      and administrative expenses - General and administrative expenses were $835,949
      for the three months ended September 30, 2007, as compared to $947,326 for
      the
      three months ended September 30, 2006, a reduction of $111,377 or 12 percent.
      The decrease in expenses was principally from reduction in legal related
      expenses, airplane leasing expenses and expenses related to preparation for
      Sarbanes-Oxley Section 404.




11




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





Interest
      expense - Interest expense for the three months ended September 30, 2007 was
      $263,368, as compared to $239,189 for the three months ended September 30,
      2006.





Net
      income(loss) - Net income for the three months ended September 30, 2007 was
      $273,340 as compared to a loss of ($196,670) for the three months ended
      September 30, 2006. The net profit, as compared to a net loss for the prior
      year, was a result of the significant reductions of selling, general and
      administrative expenses.





Income
      tax - The Deferred Tax Benefit for the three months ended September 30, 2007
      is
      $0,,compared to a Deferred Tax Benefit of $81,000 for the same period last
      year.
      During the three months ended September 30, 2007, 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 is presently entitled to.





Liquidity
      and capital resources - As disclosed on the Unaudited Condensed Consolidated
      Statements of Cash Flows, the cash balance decreased by $1,598,010 during the
      three month period ended September 30, 2007 (the current period). By comparison,
      during the three months ended September 30, 2006 (the previous period), the
      cash
      balance decreased $3,193,976. The use of cash during the current period is
      primarily attributable Financing activities.





The
      use
      of cash attributable to Operating activities in the current period, $277,535,
      includes the Company’s Net Income for the current period, $273,340, which was
      more than completely offset by:




·
            The
                Accounts Receivable ledger registered a decrease, a source of cash
                in the
                amount of $735,674. The Accounts Receivable balance at the end of
                the
                previous period was exceptionally high because it included two 48
                foot
                Cruisers, our highest priced model, and together they accounted for
                approximately $1.2 million of the total in Accounts Receivable at
                that
                time. Furthermore, the total number of boats reflected in the Accounts
                Receivable ledger at September 30, 2007, was down to 12 from 17 at
                June
                30, 2007.





·
            Dealer
                Incentives decreased by $1,209,271 during the current period. This
                use of
                cash represents payments to dealers to discharge accrued liabilities
                created when boats were sold to those dealers. When the dealer sells
                a
                boat to a retail customer, the Company pays the dealer an amount
                accrued
                as an incentive for that dealer to provide the expected level of
                service
                for the retail customer over time.





·
            Customer
                Deposits decreased by $662,102 during the current period. This use
                of cash
                reflects the ebb and flow of our business. Deposits taken during
                the past
                winter and spring at boat shows and other sales events were applied
                to
                invoices as the boats were built, sold and delivered during the current
                period. Fewer orders placed, and therefore fewer deposits collected,
                during the current period reflects the seasonality of the boating
                industry.





The
      use
      of cash during the current period attributable to investing is $263,795, 70
      %
      less than the cash used for investing during the same period last year. The
      cash
      spent on the development of new molds and plugs was approximately 80% lower
      year
      over year primarily because the Company has not introduced any new models for
      Fiscal 2008. Cash spent on other fixed assets decreased approximately 50% year
      over year as well.




The
      cash
      used by financing activities during the current period was $1,056,680 which
      was
      primarily attributable to the repayment of a note payable in the amount of
      $799,333. That amount had been borrowed under a credit facility which has since
      been extinguished. The Company also paid $185,268 as repayment of principal
      on
      the Term Loan with Regions Bank and paid $72,079 in fees and expenses for the
      acquisition of the Floor Plan agreement (see Note 3).





Management
      is of the opinion that cash flows and existing credit facilities will satisfy
      its current and future liquidity demands. As of September 30, 2007 the confirmed
      sales order backlog was approximately $27 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.




12




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




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, 2007, the Company owed $15,043,0428 on a $16,500,000 loan
      agreement with Regions Bank. The loan agreement has $2,668,428 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%. **** A
      hypothetical 50 basis point increase in interest rates would result in an
      approximately $13,000 increase in annual interest expense.




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




As
      of
      September 30, 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 Company’s disclosure controls and procedures were effective
      to provide reasonable assurance that it is able to record, process, summarize
      and report in a timely manner the information required to be disclosed in
      reports it files under the Exchange Act. There are inherent limitations to
      the
      effectiveness of any system of disclosure controls and procedures. Even
      effective disclosure controls and procedures can only provide reasonable
      assurance of achieving their control objectives.





In
      connection with the above evaluation of the effectiveness of the Company’s
      disclosure controls and procedures, 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
      September 30, 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, 2007, 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, that we have
      not
      yet identified or that we currently believe are immaterial or
      unlikely.




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




None.




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




None.




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





None.





**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.





13




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


**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
                13, 2007Irving
                L. SmithChief
                Financial Officer





By:
            /s/
                Roger F. Scott
            
            Date: November
                13, 2007Roger
                F. ScottPrincipal
                Accounting Officer





14




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





**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







15