UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-KSB

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ýANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2007

 ̈TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from: _____________ to _____________

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CHALLENGER POWERBOATS, INC.

(Name of small business issuer in its charter)

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|                             |              |                    
|---------------------------- | ------------ | -------------------
|NEVADA                       | 000-30914    | 88-0394012         
|(State or Other Jurisdiction | (Commission  | (I.R.S. Employer   
|of Incorporation)            | File Number) | Identification No.)



300 WESTLINK DRIVE

WASHINGTON, MO  63090

(Address of Principal Executive Office) (Zip Code)

(636) 390-9000

(Registrants telephone number, including area code)

N/A

(Former name or former address, if changed since last report)

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|Securities registered pursuant to Section 12(b) of the Act:
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|Title of each class                                         |                  | Name of each exchange on which registered
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|                                                            |                  |                                          
|Securities registered pursuant to Section 12(g) of the Act:
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|                                                           
|                                                            | (Title of Class) |                                          

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

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  ̈







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

The Issuer had $7,399,703 in revenues for the fiscal year ended December 31, 2007.

As of March 31, 2008 the aggregate market value of the Issuer's common stock held by non-affiliates was $1,027,178.80 (based on the closing price of $0.40 per share of common stock on March 31, 2008 as reported by the Over-the-Counter Bulletin Board).



The Issuer had 4,010,920 shares of common stock outstanding as of March 31, 2008.



DOCUMENTS INCORPORATED BY REFERENCE

Transitional Small Business Disclosure Format (Check one): Yes  ̈    No ý











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CHALLENGER POWERBOATS, INC.

FORM 10-KSB



TABLE OF CONTENTS



|          |         |                                                                                                                                       |   
|--------- | ------- | ------------------------------------------------------------------------------------------------------------------------------------- | --
|PART  I   |        
|          | ITEM 1  | DESCRIPTION OF BUSINESS                                                                                                               | 1 
|          | ITEM 2  | DESCRIPTION OF PROPERTY                                                                                                               | 7 
|          | ITEM 3  | LEGAL PROCEEDINGS                                                                                                                     | 9 
|          | ITEM 4  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                                   | 10
|PART  II  |        
|          | ITEM 5  | MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                                                              | 11
|          | ITEM 6  | MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION                                                                             | 14
|          | ITEM 7  | FINANCIAL STATEMENTS                                                                                                                  | 29
|          | ITEM 8  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.                                                 | 69
|          | ITEM 8A | CONTROLS AND PROCEDURES                                                                                                               | 69
|          | ITEM 8B | OTHER INFORMATION                                                                                                                     | 70
|PART  III |        
|          | ITEM 9  | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS CONTROL PERSONS, AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT | 71
|          | ITEM 10 | EXECUTIVE COMPENSATION                                                                                                                | 72
|          | ITEM 11 | SECURITY  OWNERSHIP  OF  CERTAIN  BENEFICIAL  OWNERS  AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                                  | 73
|          | ITEM 12 | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                                             | 75
|          | ITEM 13 | EXHIBITS                                                                                                                              | 79
|          | ITEM 14 | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                                                | 88









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PART I

ITEM 1.

DESCRIPTION OF BUSINESS

OVERVIEW

Challenger Powerboats, Inc. (referred to herein as the Company, we, our, ours, and us) was incorporated in the State of Nevada on August 14, 1994 as Shogun Advertising, Inc.  We design and manufacture high performance boats, family sport cruisers, jet boats and water ski tow boats under the brands Challenger Powerboats, Sugar Sand and Gekko. We target the recreational boating market with our products.  We are a complete design-to-manufacturing organization, creating or licensing designs, and creating tooling, molds, and parts necessary to assemble our products in-house.  Our products combine innovative designs with power, safety, handling and stability. We market our products through a dealer network comprised of more than one hundred dealers, with a footprint throughout the United States, Canada, Mexico, Europe, Australia, the Middle East and Japan.

We design and manufacture our Offshore Performance Series and Family Performance Series boats under the Challenger Powerboats brand name using proven world-class technology from Harry Schoell, the creator of the patented Duo-Delta Conic, or DDC, hull.  The Challenger Powerboats brand competes at the high-end of the commercial boating market with six production models including two Offshore Performance Series models, the DDC 28 and DDC 33, and four Family Performance Series models, 245 FPS, 250 FPS, 252 FPS, and 302 FPS.  These models range in size from 24 to 33 feet in length.

Effective January 1, 2007, we acquired one-hundred percent of the total outstanding membership interest of International Marine and Recreation Group, LLC, (IMAR), and the assets and technology of Gekko Sports Corporation (Gekko).  In connection with this transaction, we paid approximately $7 million in cash, stock and notes.  IMAR manufacturers the brand name Sugar Sand recreational jet boats and Gekko recreational tow boats at an 80,000 square foot leased facility in Fargo, North Dakota.   We sold the Sugar Sand assets to Execute Sports, Inc. (Execute) on August 29, 2007 for $5,000,000 in cash, and entered into a ten year exclusive manufacturing and supply agreement and sales and marketing agreement with Execute for the Sugar Sand product.

Notwithstanding, we do not generate positive cash flows and are required to make large debt service payments. Consequently, we continue to require additional funding at this time.  We may be able to secure funding from our current investors, but there is no assurance we will be able to do so.  If we are unable to generate sufficient cash flow or obtain funds for required payments, or if we fail to comply with the covenants in our debt, we will be in default.  Accordingly, we may not be able to able to meet our debt service obligations and may be forced to consider alternative strategies, including ceasing our operations.  Further, on March 17, 2008, we were required to layoff 58 of our 84 employees due to a slowdown in our operations.

Our common stock is listed on the Over-the-Counter Bulletin Board of the National Quotation Service under the ticker symbol "CPBI."

The address of our principal executive office is 300 Westlink Drive, Washington, MO 63090. Our telephone number is (636) 390-9000.  Our website address is www.challengerpowerboats.com. Information contained on our website does not constitute part of this report and our address should not be used as a hyperlink to our website.

HISTORY

We were incorporated in the State of Nevada on August 14, 1994. On May 10, 1998, we changed our name to Xtreme Webworks. As Xtreme Webworks, we offered services to internet companies. On April 24, 2002, we changed our name to Xtreme Companies, Inc. On November 30, 2002, we determined that our internet hosting and marketing business was not strategic to our ongoing objectives and discontinued capital and human resource investment in the business. On April 26, 2002 we executed an acquisition agreement with Waste Renewal Systems, Inc., a Nevada Corporation (Waste Renewal). Waste Renewal provided an innovative and proprietary waste processing solution for municipal solid waste disposal.  On May 15, 2002, we executed an acquisition Agreement with Nucon International, Inc., a Nevada corporation, which later changed its name to Nuclear Reduction Systems, Inc. (Nuclear).  Nuclear provided cutting edge technology in the nuclear waste treatment industry. In July 2003, we discontinued the operation of Waste Renewal and Nuclear due to the failure to negotiate satisfactory terms for the extension of the license agreements and our inability to commercialize our products.



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On October 1, 2003, we entered into an agreement and plan of reorganization with Rockwell Power Systems, Inc., a Delaware corporation (Rockwell). As a result of the transaction, Rockwell became our wholly-owned subsidiary. Pursuant to this agreement, we purchased substantially all of the capital stock of Rockwell for approximately $175,000 in exchange for 60,000,000 shares of our common stock.

Rockwell was incorporated in Delaware on January 29, 2001 under the name Rockwell Healthcare Systems, Inc. We changed our name on April 12, 2001 to Rockwell Power Systems. On October 1, 2003, we purchased the fire and rescue and the recreational boat division from Sonic Jet Performance, Inc. (Sonic).  Pursuant to the bill of sale agreement, we were granted a license for a period of twenty years to the use the "Sonic Jet Performance" name. Additionally, we were granted the authority to market and sell fire and rescue and recreational boats everywhere in the world except the Middle East (including Egypt, Lebanon, Turkey, Syria, Jordan, Iraq, Saudi Arabia, Bahrain, Oman, Qatar, the UAE and Yemen.)

From October 1, 2003 until February 28, 2005, we focused our efforts on manufacturing, marketing and selling specialty boats designed for fire and rescue purposes.  On March 1, 2005, we signed an exclusive distribution and marketing agreement with Marine Holdings, Inc., a Missouri corporation d/b/a Challenger Offshore (Marine), and Ronald DiBartolo and Gailynn DiBartolo, owners of all outstanding shares of common stock of Marine.  Pursuant to the distribution and marketing agreement, we administered all marketing and sales efforts and served as the exclusive distributor of leisure, fishing and performance boats manufactured by Marine, under the Challenger Offshore name.

We provided Marine with our key personnel, resources and capital to facilitate the sales of Marine's products through direct selling and other distributors. All purchase orders flowed through us and were immediately assigned to Marine for fulfillment. Marine procured all inventory and assumed responsibility for the shipment and delivery of all products ordered by the purchasers. We received a five percent cash commission, based on the total sales price as represented on purchase orders received by us or Marine for all product sales.

We paid an additional five percent of the total outstanding shares of Xtreme on the closing date to Ron DiBartolo and Gailynn DiBartolo for the right to market, sell and distribute its products upon the terms and subject to the conditions set forth in the marketing and distribution agreement.  Furthermore, Marine offered us the option to purchase one-hundred percent of its outstanding shares of common stock.

In March 2005, we permanently relocated all of our operations to Marines headquarters in Washington, Missouri. We did not pay rent to Marine, pursuant to the marketing and distribution agreement. Effective May 31, 2005, we entered into an agreement to terminate our lease for 3,000 square feet of office and assembly space in Stanton, California.  Effective May 31, 2005, we entered into an agreement to terminate our lease for 3,000 square feet of storage space in Riverside, California.

On February 28, 2006, we finalized a purchase transaction to acquire one-hundred percent of the total outstanding shares of Marine, pursuant to the marketing and distribution agreement of March 1, 2005.  In connection with this transaction, we paid in full certain existing loans of Marine from Sun Security Bank.  Funding for payment of these loans was generated through new loans that we executed in the amount of $4,123,627.

In mid-2006, we discontinued the manufacturing of our mission specific fire and rescue patrol boats and sold all remaining assets related to these products to a third party.

On November 15, 2006, we changed our name to Challenger Powerboats, Inc.

Effective January 1, 2007, we acquired one-hundred percent of the total outstanding shares of IMAR and the assets and technology of Gekko.  In connection with this transaction, we paid approximately $7 million in cash, stock and notes.  IMAR manufacturers the brand name Sugar Sand recreational jet boats and Gekko recreational tow boats at the Companys 80,000 square foot leased facility in Fargo, North Dakota.

As consideration for the acquisition, we paid total cash compensation of $256,500 and a total of 150,000 shares of our restricted common stock to Messrs. Bullinger, Crary, Dahl, Shorma and Schlossman, the shareholders of IMAR, all to be distributed on a pro rata basis. The shares are subject to a lock-up that restricts them from sale for a period of eighteen months from the date of issuance. We also granted these individuals two separate promissory notes each, one in the aggregate amount of $1,680,778 with interest at a fixed rate of 8% per annum, and one in the aggregate amount of $1,151,500 with interest at a fixed rate of 10% per annum, to be distributed pro rata among these



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individuals. Under the terms of these promissory notes, the first payment of $168,638 was paid on February 28, 2007 with payments continuing on the same day of each month thereafter until July 28, 2008, at which time the entire unpaid principal balance and all accrued interest shall be due and payable. We have full prepayment privileges at any time without prepayment penalty. Interest on the promissory notes was computed daily on the basis of a 365-day year, for each day all or any part of the principal balance hereof remained outstanding. Payment on the promissory notes was secured by a security interest in the assets set forth in the agreement of purchase and sale dated January 30, 2007, and a guaranty granted by Dutchess Private Equities Fund, Ltd. (Dutchess Private Equities Fund, Ltd., together with Dutchess Private Equities Fund, LP, Dutichess Private Equities Fund II, LP, Dutchess Private Equities, LP and Dutchess Private Equities, Ltd. are collectively referred to herein as Dutchess) as set forth in the guarantee agreement, dated January 30, 2007. The guaranty granted on the promissory note of $1,151,500 by Dutchess was limited to $619,000.  These notes were paid in full on August 29, 2007, at a discount of $213,291.

As part of the agreement of purchase and sale, we agreed to guaranty a $125,000 Mercury Marine letter of credit with the State Bank of Fargo and a $150,000 GE Commercial Distribution Finance Corporation letter of credit (the GE Letter) with the State Bank of Fargo which were secured previously by IMAR members. This letter of credit was further secured, along with the promissory notes issued under the agreement of purchase and sale, by the guarantee agreement with Dutchess.  The GE Letter at the State Bank of Fargo was replaced on September 7, 2007, with a $150,000 letter of credit at Sun Security Bank, secured by a $150,000 certificate of deposit.  Mercury Marine agreed to terminate the $125,000 letter of credit at the State Bank of Fargo.  No replacement was required for this letter of credit.

Through IMAR, our wholly-owned subsidiary, we entered into an asset and technology acquisition agreement with Mark Overbye and Gekko on January 30, 2007. We acquired the ownership rights, title and interests in the assets and technology of Gekko, including patents, trademarks, trade names, trade secrets and goodwill ("Assets and Technology").   In consideration for the Assets and Technology, as well as wages, royalties, commissions and other amounts owed to Mr. Overbye, personally, or Gekko under a prior technology, transfer, license or royalty agreement by and between Gekko and IMAR, we agreed to pay total cash compensation of $670,000 at the closing of the transaction as set forth in a promissory note payable with interest at a fixed rate of 10% per annum. Under the terms of the promissory note, the first payment of $40,238 was due and paid on February 28, 2007 with payments continuing on the same day of each month thereafter until July 28, 2008, at which time the entire unpaid principal balance and all accrued interest shall be due and payable. We have full prepayment privileges at any time without prepayment penalties. Interest on this promissory note is computed daily on the basis of a 365-day year, for each day all or any part of the principal balance thereof shall remain outstanding. Payments not received within 15 days of the due date shall be considered late and shall be subject to a late charge based on the rate of 1% per month. We will be deemed in default under the promissory note if we fail to make a payment under the promissory note when due, a receiver is appointed for us or our guarantor's property, an assignment is made for our benefit or our guarantor's creditors or a proceeding is commenced by or against us or our guarantor in bankruptcy. In the event we default under the promissory note, Mr. Overbye may declare the entire unpaid principal balance on the promissory note, plus all accrued interest, immediately due, after 30 days notice. The promissory note is secured by the security interest in the assets set forth in the security agreement which accompanied the promissory note.

We also agreed to issue Mr. Overbye 31,250 shares of our restricted common stock subject to a leak-out agreement, and warrants to purchase 6,250 shares of our common stock at a strike price of $0.15 and 6,250 shares of our common stock at a strike price of $0.20. The warrants shall vest on January 29, 2009 and resale of the shares of common stock underlying the warrants is subject to the leak-out agreement.

In addition, we entered into a two-year employment agreement with Mr. Overbye. Under the terms of the employment agreement, Mr. Overbye will serve as Marketing Director of Challenger Powerboats and Challenger subsidiary companies, Marine and IMAR . Under the terms of the employment agreement, we agreed to compensate Mr. Overbye with a base salary of $100,000 per year which may be increased at the discretion our Chief Executive Officer. Mr. Overbye is also entitled to receive a quarterly cash bonus of up to five percent of his base salary. The cash bonus will be calculated based on actual performance applied to performance metrics, as well as a discretionary portion to be determined by our Chief Executive Officer and Board of Directors. The metrics are to be mutually agreed upon by our Board of Directors, Chief Executive Officer and Mr. Overbye.



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The promissory note for $670,000 under the asset and technology acquisition agreement, as well as each debt, liability and obligation which IMAR or Challenger Powerboats may now or at any time hereafter owe to Mr. Overbye or Gekko pursuant to such asset and technology acquisition agreement, is secured pursuant to a security agreement entered into on January 29, 2007, between IMAR and Challenger Powerboats on one hand and Mark Overbye and Gekko on the other hand. Under the terms of the security agreement, IMAR and Challenger granted Mr. Overbye and Gekko a security interest, subject to security interests held by our other lenders and its subsidiaries, in and to the following property (i) certain assets, trademarks and domain names; (ii) any adaptation, modification, improvement, or enhancement of the foregoing; and (iii) all of the pending and issued patents and patent applications as well as any continuations, continuations-in-part, divisional applications, and any Letters Patent issued there from, including reissues, together with all non-U.S. counterparts; together with all substitutions and replacements for and products and proceeds of any of the foregoing property.

As described above, in connection with the acquisition of IMAR and the Assets and Technology of Gekko, we issued warrants to purchase 6,250 shares of common stock at a strike price of $0.15 and warrants to purchase 6,250 shares of common stock at a strike price of $0.20.

On August 29, 2007, IMAR, our wholly-owned subsidiary, completed the sale of certain assets of its Sugar Sand division to Execute Sports, Inc. for a cash purchase price of $5,000,000.  Under the terms of the asset purchase agreement, Execute purchased all right, title, interest and goodwill in and to certain assets, properties and rights relating to, used in or held for use in IMARs business of designing, manufacturing and marketing water jet powered Sugar Sand boats, including the Sugar Sand trade name and associated trade names, trademarks, service marks and service names, and the associated logos and their goodwill, and all associated domain names, in particular the domain name www.sugarsand.com, trade secrets and copyrights and their goodwill.

In connection with the transaction, Execute and IMAR entered into an agreement for exclusive right of supply, pursuant to which IMAR will manufacture and serve as the exclusive supplier of the Sugar Sand line of jet boats to Execute for an initial term of ten years.  In addition, we entered into an exclusive sales and marketing agreement with Execute, pursuant to which we will provide sales and marketing services related to the Sugar Sand boats for an initial term of ten years.

On September 30, 2007, pursuant to the authority conferred by our Articles of Incorporation upon our Board of Directors, we agreed to issue 5,000,000 shares of Series A Preferred Stock, par value of $0.001 per share.  Such number of shares may be increased or decreased by resolution of the Board, provided that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by us into Series A Preferred Stock.

On October 18, 2007, our Board of Directors authorized an amendment to our Amended Articles of Incorporation, to effect a reverse split of the issued and outstanding shares of our common stock, par value $0.001, on a 1 for 20 basis. The Amendment was filed on October 19, 2007 and effective on October 31, 2007 (the Effective Date).  As a result of the reverse split, on the Effective Date, each holder of our common stock received 1 share for each 20 shares they owned immediately prior to the Effective Date. Fractional shares were rounded up to the nearest whole share.

INDUSTRY BACKGROUND - PERFORMANCE BOATS AND CABIN CRUISERS

The go fast segment of the marine business emerged in 1962 with the founding of Formula boats by Don Aronow. Having won the 1970 World Championship, Aronow founded Cigarette Racing Team and his stylish and powerful designs gained traction in the marketplace.  As the segment blossomed, go fast boats became a status symbol and Cigarette counts many high profile owners including President George H. Bush, The Shah of Iran, Charles Keating and Robert Vesco.  Hollywood, too, glamorizes go fast boats via TV and movies such as Miami Vice. Today, regularly televised races and high performance magazines featuring go fast boats have given rise to multiple manufacturers.

Whereas go fast boats appeal to certain high performance buyers, cabin cruisers enjoy a broader interest plus a significantly longer historical presence.  Lower ownership costs, functional open-bow and mid-cabin designs as well as the ability to carry more passengers are primary attributes. Versatility is also a hallmark, thus the family attraction



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for socializing combined with watersports such as skiing and wakeboarding.  Market trends suggest a return to family fun, fostering continued growth in the cabin cruiser segment.

CHALLENGER POWERBOAT MODELS

We enjoy the reputation of a high quality, high performance builder with numerous unique distinctions in the go fast category. At the root of our performance is our patented DDC hull design, dispatching outstanding performance.  Racing a Challenger DDC 28, Gallagher Racing is a consistent winner.  Powerboat, Hot Boat and other publications tout our superior rough water handling, reliable top-end performance and position us as a serious contender in the go fast segment.  Recognized as a market leader, Ratical Graphics paint schemes are available on all of our DDC models in a myriad of color choices.  Our DDC lineup comprises 3 models ranging from 28 to 33 feet with retail price points from $99,094 to $279,995.

More recently entering the cabin cruiser sector, our FPS Series consists of a variety of sport boats and family cruisers including deck boats, cuddies, open bows and cabin cruisers with four models ranging from 25 feet to 30 feet with retail price points from $58,306 to $185,677. Benefiting from our attention to detail and performance heritage, our FPS models measure up smartly in the marketplace.

SALES AND MARKETING

Our sales force is composed of independent and factory sales agents.  We concentrate on top retailers across all markets, with the United States representing the primary market. We also enjoy an expanding international presence through various distributors and dealers in many markets outside North America.

Our marketing efforts are directed toward the expansion of the brand franchise through primary boat shows, performance trials, editorial content, professional imaging, top notch collateral materials and website development.  Retail and wholesale sales leads are also farmed through the marketing process. Our marketing objectives are focused on positioning our company as a market leader with brand momentum and energy.

CUSTOMERS

We believe our retail buyers tend to be high net worth families who enjoy the outdoors and boating and have a propensity to spend discretionary dollars on large ticket items. We target retail accounts who have a demonstrated ability to close sales, service departments, can perform on-water demonstrations and are promotionally minded. Our product offering and sales programs are designed to meet the broader needs of boating enthusiasts in their respective segments while alsouniquely satisfying colloquial requirements.

The following customer accounted for more than ten percent of our sales in 2007:

|                 |   |        
|---------------- | - | -------
|Lakelands Marine | $ | 820,050

STRATEGIC RELATIONSHIPS

On December 7, 2006, we entered into an International Sales Representation agreement with Nautique International, located in Indianapolis, Indiana, for an initial term of two years and renewable on a yearly basis thereafter. Either party may terminate the agreement on the last day of one full year if the sales criteria agreed upon, is not attained by Nautique International.   Under the terms of the agreement, Nautique will sell, market and distribute Challenger Powerboats High Performance Offshore Series and Family Performance Series for export inclusive of Canada, but excludes the Caribbean and Bahamas.

COMPETITION

We are subject to strong competition from a variety of companies that could harm our ability to win business and which can increase the price pressure on our products. Most of our competitors have considerably greater financial, marketing and technological resources than we do, and we may not be able to compete successfully.  Certain competitors operate fabrication facilities and have longer operating histories and presence in key markets, greater name recognition, larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources. As a result, these competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. They may also be able to devote  greater  resources  to  the  promotion  and  sale  of  their  products.



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We believe our main competitors to be:

Challenger Offshore Products - DDC 33 and DDC 28:

1.

Baja Boats, a Brunswick Company that manufactures in Bucyrus, OH.

2.

Donzi, an American Marine Holdings Company that manufactures in Sarasota, FL.

3.

Formula, a privately held company that manufactures in Decatur, IN.

4.

Fountain Powerboats Inc., a company that manufactures in Washington, NC.



Challenger Family Performance Series - 250/252 FPS, 302 FPS, 245 FPS:

1.

Crownline Boats, a privately held company manufacturing in Bentonville, IL.

2.

Sea Ray, a Brunswick Company building in multiple locations in the U.S.

3.

Chaparral Boats, a privately held company manufacturing boats in Valdosta, GA.

4.

Rinker Boats, a privately held company manufacturing in Indiana.



Geeko Tow Boats:

1.

Mooba manufactured by Skiers Choice, a privately held company in Marysville, TN.

2.

Mastercraft, a privately held company, manufacturing in Vonore, TN.

3.

Tige Ski Boats, a privately held company, manufacturing in Abilene, TX.

We believe that we can differentiate our products by offering better value in the manufacturing process, distribution, and customer service through a partnership with our dealers.  Our manufacturing, distribution, and customer service are based on Lean/Six Sigma, which is a system for developing metrics for measuring defects and improving quality as well as implementing methodologies to reduce defect levels.  We spend hours relentlessly value streaming each process and transaction to assure ourselves and our Dealer Partners that we are adding value to the products and services we provide.

We believe that recreational boat manufactures and the marine industry in general buy all of their raw materials, hardware, and soft goods from a defined list of vendors.  Most products have between 3 and 5 primary vending companies that supply the industry.  We believe quality and value are not set by the raw materials because they are all shared.  Quality and value are established by the combination of those materials into a product that is price sensitive and functional.  We utilize computer aided design (CAD) technologies in the development of schedules that utilize the common materials to produce a boat that is cost effective to build. We provide value through the application of Lean/ Six Sigma and CAD/CAM methodologies to produce the Challenger High Performance Series, Family Performance Series, Sugar Sand Jet Boats, and Geeko Watersport Tow Boats that we believe have extraordinary value at the dealer and retail market place.

We believe our products offer the following advantages over competitive products:

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Durability:  Our hulls are constructed using hand laid "S" glass. This produces a fiberglass hull that is stronger yet lighter than conventional fiberglass hulls.

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High Performance and Stability: The Challenger performance series utilizes a "V" shape hull design that creates a much more stable boat at high speeds, as well as improved performance in the water.

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Best Cost:  The prices for our commercial boats are competitive with the prices offered by our competitors.

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Consumer Features: All of our products feature components from recognized and trusted vendors.  Such selections inspire consumer confidence and hint at lower warranty costs and extended product lifespans.  Further, efforts to continually improve workmanship, attention to detail and cosmetics are ever present.

OPERATIONS

We manufacture the decks and hulls for the Challenger and Gekko boats in our Washington, Missouri manufacturing facility. Our boat prototyping and boat assembly is performed in Washington, Missouri, utilizing the Marine manufacturing facility and personnel.

We manufacture the decks and hulls for the Sugar Sand boats in our Fargo, North Dakota manufacturing facility. Our boat prototyping and boat assembly is performed in Fargo, North Dakota utilizing the IMAR leased manufacturing facility and personnel.



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SOURCES AND AVAILABILITY OF RAW MATERIALS

We purchase key materials, components and equipment, including engines, fuel tanks, electronics and other components from third party suppliers. We obtain most of our critical raw materials and components from a single or limited number of suppliers.  When possible, we also develop and maintain alternative sources for essential materials and components.  The inability to obtain sufficient quantities of these materials or components may result in delays, increased costs, and reductions in our product shipments.

INTELLECTUAL PROPERTY

Our intellectual property is important to our business. We rely on a combination of trade secret laws, confidentiality procedures and contractual provisions to protect our intellectual property.  We  license  patents  and patents-pending  that  relate  to  the  construction  and  design of the sleek, progressive  "V"  and double pad-bottomed "V-hull" boat. This Duo-Delta Conic, or DDC hull is designed so that  as water hits the hull, it flows to the next convenient degree, creating a lift  and  literally  raising  the  boat  to  the  top  of  the  water.

EMPLOYEES

We presently employ eighty-four full-time employees and one part-time employee in the United States, including administrative, management, sales, marketing and manufacturing personnel.  On March 17, 2008, we were required to layoff 58 of the 85 employees due to a slowdown in our operations. This Company, however, is still paying for benefits for these laid off employees. We also utilize two independent contractors, who assist us in our sales efforts. None of our employees are represented by a collective bargaining arrangement and we believe our relations with employees are good.

ENVIRONMENTAL MATTERS

We are subject to federal, state, local and foreign laws, and regulations regarding protection of the environment, including air, water, and soil. Our manufacturing business involves the use, handling, storage, and contracting for recycling or disposal of hazardous or toxic substances or wastes, including environmentally sensitive materials such as solvents, lubricants, degreasing agents and resin. We must comply with certain requirements for the use, management, handling, and disposal of these materials. However, we do not maintain insurance for pollutant cleanup and removal. If we are found responsible for any hazardous contamination, any fines or penalties, we may be required to pay, or any clean up we are required to perform, could be very costly.  Even if we are charged, and later found not responsible for such contamination or clean up, the cost of defending the charges could be high. If either  of  the  foregoing  occurs,  our  business,  results from operations and financial  condition  could  be  materially  adversely  affected.

OTHER REGULATORY MATTERS

Our operations and products are subject to extensive government regulation, supervision, and licensing under various federal, state, local and foreign statutes, ordinances and regulations. Certain governmental agencies such as the Environmental Protection Agency, or EPA, and the Occupational Safety and Health Administration, or OSHA, monitor our compliance with their regulations, require us to file periodic reports, inspect our facilities and products, and may impose substantial penalties for violations of the regulations. For example, we are subject to federal regulation under the Boat Safety Act of 1971 that requires boat manufacturers to recall products for replacement of parts or components that have demonstrated defects affecting safety. Although manufacturers of certain equipment we use in our boats have instituted recalls, there has never been a recall resulting from our design or manufacturing process.

While we believe that we maintain all requisite licenses and permits and are in compliance with all applicable federal, state, local and foreign regulations, there can be no assurance that we will be able to maintain all requisite licenses and permits. The failure to satisfy those and other regulatory requirements could have a material adverse effect on our business, financial condition, and results of operations.

ITEM  2.

DESCRIPTION OF PROPERTY

The address of our principal executive office is 300 Westlink Drive, Washington, Missouri.  On  February  28,  2006, as part of the Challenger Offshore acquisition, we acquired real estate which  includes Challenger's 65,000  square  foot  boat  manufacturing facility  located  on  12  acres  in  Washington,  Missouri.  The facility is owned by



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Challenger and is security for a long-term note payable with Sun Security Bank, as further described in Note 8 to our financial statements herein.

On January 29, 2007, effective as of January 1, 2007, as part of the IMAR and Gekko acquisition, we assumed the lease obligation of the 80,000 square foot manufacturing facility in Fargo, North Dakota, where the Sugar Sand and Gekko boats are manufactured.  As of January 1, 2007, the term of this lease is on a six month renewable basis, for four periods, by giving the landlord written notice of the exercise of the renewal option at least six months prior to the expiration of the initial term. Effective January 1, 2008, under the terms of the agreement, rent is paid at a rate of $8,050 per month, payable in advance commencing on the first day of each month.  We are also responsible for paying for 100% of the annual taxes, assessments, charges and insurance premiums paid by the landlord.  We pay the reimbursement in equal monthly installments based on the taxes and assessments for the prior year and the then current insurance policy premium.  Effective January 1, 2008, taxes are paid at a rate of $2,383 per month.

ITEM  3.

LEGAL  PROCEEDINGS

On August 17, 2006, Mike Thomas filed a lawsuit in the Circuit Court of the County of Franklin, Missouri against both Marine and Xtreme, asserting claims for breach of his employment contract and wrongful dischargein the amount of $86,375, not including costs and legal fees.  We filed our Answer, Affirmative Defenses and Counterclaim on October 24, 2006, denying that it is appropriate for a court to enter judgment or relief for Mr. Thomas since he failed to state a claim, entered into the employment contract with unclean hands and in bad faith, committed fraud and concealment, failed to mitigate his damages and breached the employment contract.  We furthermore counterclaimed that Mr. Thomas breached his fiduciary duty, and committed fraud, civil conspiracy and racketeering.  We are seeking more than $25,000 in actual damages, as well as punitive damages, treble damages, an accounting of all of our securities owned by Mr. Thomas, forfeiture to us of such shares and warrants held by Mr. Thomas, and attorneys fees.  Mr. Thomas filed an Answer to Defendants Counterclaim and Affirmative Defenses on December 4, 2006, denying our affirmative defenses in full and seeking dismissal of our counterclaims for failure to state a claim.  This lawsuit was settled by the parties who filed a mutual stipulation of dismissal on February 5, 2008.

On October 19, 2006, Gary Miller filed a lawsuit in County Court at Law No. 3 in Tarrant County, Texas against Xtreme, asserting claims for damages for breach of contract, quantum meruit, sworn account, conversion of products and unjust enrichmentin the amount of $70,000, not including legal fees.  We responded with a general denial in state court before removing this action to the Fort Worth Division of the United States District Court for the Northern District of Texas on November 30, 2006.  We then moved to dismiss, or alternatively, to transfer the case on account of improper venue to the Sherman Division of the United States District Court for the Eastern District of Texas.  This motion was granted on February 9, 2007.  We filed our First Amended Answer and Counterclaim on February 27, 2007, asserting that if a contract is found to have existed, we either performed, tendered performance, or were excused from performing all of our contractual obligations.  We were seeking recovery of all attorneys fees.  The parties reached a settlement, and the Court entered an Agreed Order for Dismissal with Prejudice on December 5, 2007

On December 4, 2006, Life Line Marine, LLC filed a lawsuit in the Circuit Court of the County of Franklin, Missouri against both Marine and Xtreme, asserting claims for breach of contract, quantum meruit, civil conspiracy and fraud and misrepresentation.  Life Line Marine, LLC sought damages in excess of $25,000, an accounting of income and profits, a constructive trust, damages resulting from their lost profits, punitive damages and attorneys fees.  We filed our Answer, Affirmative Defenses and Counterclaim on January 23, 2007, denying that it is appropriate for a court to enter judgment or relief for Life Line Marine, LLC since it has failed to state a claim, entered into the employment contract with unclean hands and in bad faith, failed to fulfill certain obligations relating to financing under a contract, committed fraud and concealment, agreed to be subject to an arbitration agreement, breached the contract and failed to revoke their acceptance of goods within a reasonable time under Article 2 of the Uniform Commercial Code.  We furthermore counterclaimed that Life Line Marine, LLC, as well as Michael Lochirco (the owner) and Lochirco Fruit and Produce, Inc., breached their contract, and committed tortuous interference, civil conspiracy and racketeering.  We are seeking more than $25,000 in actual damages, punitive damages, treble damages, forfeiture to us of all profits and gains resulting from their conduct, as well as all attorneys fees.  On February 2, 2007, Life Line Marine, LLC filed a Reply to Defendants Counterclaim, denying our claims for relief, and filing a Motion to Dismiss the claims of tortuous interference, civil conspiracy and racketeering.  Additionally, counterclaim defendants Michael Lochirco and Lochirco Fruit and Produce, Inc. filed an



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Answer to Counterclaim on March 7, 2007, seeking dismissal of our counterclaims, and filed a Motion to Dismiss the claims of tortuous interference, civil conspiracy and racketeering.  On June 25, 2007, together with Marine, we filed a response in opposition to the motions to dismiss of Life Line, Michael Lochirco and Lochirco Fruit and Produce.  On January 3, 2008, the Court denied Life Line, Michael Lochirco and Lochirco Fruit and Produces motion to dismiss.  The parties are currently engaged in discovery.

On December 14, 2006, we filed a lawsuit in the Circuit Court of the County of Franklin, Missouri against Barrett Evans, a former member of the board of directors, asserting claims for damages for breach of fiduciary duty, breach of contract, unjust enrichment, civil conspiracy and racketeering. We sought more than $25,000 in actual damages, punitive damages, treble damages, an accounting and the subsequent forfeiture of all of our shares, warrants and debentures owned by Mr. Evans, forfeiture to us of all profits and gains resulting from his conduct, as well as all attorneys fees and costs.  After reaching a settlement, on January 28, 2008, the parties filed a Joint Stipulation For Dismissal Of All Claims With Prejudice.  On March 6, 2008, Evans served us with notice of default under the settlement agreement.  As of April 14, 2008, Challenger had not cured the alleged default under the settlement agreement.

On December 29, 2006, we filed a lawsuit in the United States District Court Eastern District of Missouri against Kevin Ryan, our former Chief Executive Officer, and his wife, Alicia Fox, asserting claims for violation of the Computer Fraud and Abuse Act, violation of Missouris anti-computer tampering statute, conversion, breach of fiduciary duty, civil conspiracy and racketeering. We are seeking actual damages, punitive damages, treble damages, an accounting and the subsequent forfeiture of all of our shares, warrants and debentures owned by Mr. Ryan or Ms. Fox, return of any missing laptop data by Mr. Ryan, as well as all attorneys fees and costs.  Mr. Ryan and Ms. Fox filed a Counterclaim on March 19, 2007, asserting a claim for indemnity as a result of a severance agreement with us, as well as additional claims against us for breach of release and breach of contract.  After reaching a settlement, on February 1, 2008, the parties filed their Joint Stipulation Dismissing All Claims With Prejudice.

On June 15, 2007, Donald Scott filed a lawsuit in the District Court of the County of Stearns, Minnesota against IMAR, our wholly owned subsidiary, and against Gary Rutherford.  Against IMAR, Donald Scott asserts claims for damages for breaches of contract, conversion, and unjust enrichment. Donald Scott is seeking from IMAR, more than $50,000 in actual damages on each count, a declaratory judgment that an assignment of a security agreement and note from IMAR Group, LLC to Gary Rutherford was of no force and effect, as well as all attorneys fees and costs.  Against Gary Rutherford, Donald Scott asserts claims for conversion, interference with prospective business advantage, slander and unjust enrichment. Donald Scott is seeking from Gary Rutherford more than $50,000 in actual damages on each count, a declaratory judgment that an assignment of a security agreement and note from IMAR to Gary Rutherford was of no force and effect, as well as all attorneys fees and costs.  On July 19, 2007 IMAR filed its Answer and Cross-claim denying liability and asserting a cross claim against Gary Rutherford seeking contribution and/or indemnity from Gary Rutherford to the extent that IMAR and Rutherford are found jointly liable based on actionable conduct by Gary Rutherford.  On July 24, 2007 Gary Rutherford filed a cross-claim against IMAR seeking recovery from IMAR to the extent that the note is reduced by Donald Scotts claims against IMAR and seeking indemnity or reimbursement from IMAR to the extent that IMAR and Gary Rutherford are found jointly liable.  On August 24, 2007, IMAR filed its Answer to the cross-claim of Gary Rutherford, denying liability and asserting numerous affirmative defenses.  The parties are currently engaged in discovery.  This case is scheduled to go to trial on June 23, 2008.

On October 19, 2007, Roy Baker filed a lawsuit in the Court of Common Pleas, Allen County, Ohio, against IMAR, our wholly owned subsidiary, and against Mercury Marine.  Roy Baker asserts claims under the Magnuson-Moss Federal Trade Commission Act, the Ohio Uniform Commercial Code, the Ohio Consumer Sales Practices Act, and for implied warranty in tort.  Roy Baker seeks damages equal to three times his actual damages in excess of $25,000 and/or the statutory minimum of $200 for each additional unlawful act alleged, over and above any treble damage award.  On December 7, 2007, IMAR filed its answer to the complaint denying liability and raising certain affirmative defenses.  The parties are currently engaged in discovery.  This case is scheduled to go to trial on January 20, 2009.

We may be involved from time to time in ordinary litigation, negotiation and settlement matters that will not have a material effect on our operations or finances. Other than the litigation described above, we are not aware of any pending or threatened litigation against us or our officers and directors in their capacity as such that could have a material impact on our operations or finances.



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ITEM  4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of securityholders during the three months ended December 31, 2007 (the fourth quarter of the fiscal period covered by this report).



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PART II

ITEM  5.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock trades on the OTC Bulletin Board under the symbol "CPBI.OB".  Bid and ask quotations for our common shares are routinely submitted by registered broker dealers who are members of the Financial Industry Regulatory Authority on the NASD Over-the-Counter Electronic Bulletin Board.  These quotations reflect inner-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions. The following table shows, for the periods indicated, the high and low closing sales prices per share of our common stock.

|                 |      |      |     |   |     
|---------------- | ---- | ---- | --- | - | ----
|                 | HIGH |      | LOW
|2006 FISCAL YEAR |      |      |     |   |     
|First Quarter    | $    | 3.00 |     | $ | 2.00
|Second Quarter   | $    | 2.40 |     | $ | 1.00
|Third Quarter    | $    | 1.40 |     | $ | 0.60
|Fourth Quarter   | $    | 0.80 |     | $ | 0.60
|                 |      |      |     |   |     
|2007 FISCAL YEAR |      |      |     |   |     
|First Quarter    | $    | 2.28 |     | $ | 0.76
|Second Quarter   | $    | 1.82 |     | $ | 0.80
|Third Quarter    | $    | 1.00 |     | $ | 0.60
|Fourth Quarter   | $    | 0.81 |     | $ | 0.22

SHAREHOLDERS

As of December 31, 2007, there were 4,010,920 shares of common stock outstanding and 1,785,018 shares of preferred stock outstanding.  As of December, 31, 2007, there were approximately 822 record holders of our common stock.  The number of shareholders of record does not include beneficial owners of common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries.

DIVIDEND POLICY

We have never declared a cash dividend on our common stock and our Board of Directors does not anticipate that we will pay cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will depend upon our financial condition, operating results, capital  requirements, restrictions contained in our agreements and other factors which our Board of Directors deems relevant.

TRANSFER AGENT

The Transfer Agent and Registrar for the Companys common stock is Pacific Stock Transfer Company.  Its address is 500 E. Warm Springs Road, Suite 240, Las Vegas, Nevada, 89119 and its telephone number at that location is 702-361-3033.

RECENT SALES OF UNREGISTERED SECURITIES

RELATED PARTY CONVERTIBLE DEBENTURES

On December 3, 2007, we entered into a convertible debenture agreement with Dutchess in the amount of $600,000, at a discount of $100,000.  The debenture has a 10% interest rate and is due and payable December 3, 2012.  Dutchess is entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of thirty cents ($0.30).  As of December 31, 2007, $0 of this convertible debenture was repaid, and the balance at December 31, 2007 is $600,000 plus accrued interest.

SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK PURCHASE AGREEMENTS WITH RELATED PARTIES



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On September 30, 2007, we entered into a Series A convertible preferred stock purchase agreement  with Dutchess whereby we converted the principal and interest due under numerous debentures, promissory notes and other loan facilities, or approximately $16 million owed to Dutchess, into 1,684,921 shares of Series A preferred stock. The Series A Preferred Stock has a quarterly dividend of 5% of the per share price of each share of Series A preferred stock held by such holder (the Dividend).  The Dividend shall be paid as follows: two percent (2%) in Preferred Stock and three percent (3%) in cash.  One-quarter of the annual Dividend shall be paid within fifteen (15) days after the end of each of our fiscal quarters.  Declaration and payment of the Dividend shall be in accordance with the Nevada Revised Statutes (the NRS).  The Dividend shall be paid in cash.  In the event that we are unable to pay the full amount of the Dividend in any quarter as set forth in this provision and Dutchess has elected to receive such Dividend in cash, the unpaid amount of such cash Dividend, together with interest at the rate of eight percent (8%) per annum, shall be added to the following fiscal quarters Dividend.  Dutchess is entitled to convert the face amount of the stock plus the accrued dividend into our common stock at the greater of (i) thirteen dollars ($13.00) worth of our common stock based on the lowest closing bid price of our common stock during the twenty (20) trading day period immediately preceding the date of a conversion notice, or (ii) one hundred (100) shares of common stock.

On December 11, 2007, we sold 40,000 shares our Series A convertible preferred stock to Dutchess for $400,000.  The convertible redeemable preferred agreement has a quarterly Dividend per share price of each share of Series A Preferred Stock held by such holder.  The Dividend shall be paid as follows: two percent (2%) in Preferred Stock and three percent (3%) in cash.  One-quarter of the annual Dividend shall be paid within fifteen (15) days after the end of each of our fiscal quarters.  Declaration and payment of the Dividend shall be in accordance with the NRS.  The Dividend shall be paid in cash.  In the event that we are unable to pay the full amount of the Dividend in any quarter as set forth in this provision and Dutchess has elected to receive such Dividend in cash, the unpaid amount of such cash Dividend, together with interest at the rate of eight percent (8%) per annum, shall be added to the following fiscal quarters Dividend.  Dutchess is entitled to convert the face amount of the stock plus the accrued dividend into our common stock at the greater of (i) thirteen dollars ($13.00) worth of common stock based on the lowest closing bid price of our common stock during the twenty (20) trading day period immediately preceding the date of a conversion notice, or (ii) one hundred (100) shares of common stock.

On December 26, 2007, we sold 47,500 shares of our Series A convertible preferred stock to Dutchess  for $475,000.  The convertible redeemable preferred agreement has a Dividend.  The Dividend shall be paid as follows: two percent (2%) in Preferred Stock and three percent (3%) in cash.  One-quarter of the annual Dividend shall be paid within fifteen (15) days after the end of each of our fiscal quarters.  Declaration and payment of the Dividend shall be in accordance with the NRS.  The Dividend shall be paid in cash.  In the event that we are unable to pay the full amount of the Dividend in any quarter as set forth in this provision and Dutchess has elected to receive such Dividend in cash, the unpaid amount of such cash Dividend, together with interest at the rate of Eight Percent (8%) per annum, shall be added to the following fiscal quarters Dividend.  Dutchess is entitled to convert the face amount of the stock plus accrued dividend into our common stock at the greater of (i) thirteen dollars ($13.00) worth of common stock based on the lowest closing bid price of our common stock during the twenty (20) trading day period immediately preceding the date of a conversion notice, or (ii) one hundred (100) shares of common stock.

PROMISSORY NOTES WITH NON-RELATED PARTIES

At December 31, 2007, we had the following notes payable:

At December 31, 2007, we had ten short term notes payable with the Sun Security Bank totaling $513,531, secured by our boats-in-process and completed boats in inventory.  The notes bear interest at a rate of U.S. Bank Prime Rate plus 2%, with an interest rate floor of 7%.  The individual notes are due and payable upon the sale of the boats securing the note.

On February 28, 2006, we entered into a long-term note payable with the Sun Security Bank totaling $2,961,429, secured by the manufacturing facility in Washington, Missouri, and all of our fixed assets.  The note bears interest at a rate of US Bank Prime Rate plus 1% and has a maturity date of March 1, 2009.  It is also secured by a certificate of deposit in the amount of $1,000,000 on deposit at Sun Security Bank, owned by Dutchess.  As of December 31, 2007, the note payable carries a principal balance of $2,665,286.

On March 28, 2006, we entered into a $16,089 long-term note payable with the Bank of Washington. The note is secured by a 2002 GMC 3500 truck, bearing interest at a rate of 9.25%.  As of December 31, 2007, the unpaid balance on the note is $6,465.



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As consideration for the acquisition of one-hundred percent of the total outstanding shares of IMAR and the assets and technology of Gekko on January 29, 2007, we granted Messrs. Bullinger, Crary, Dahl, Shorma and Schlossman, two promissory notes each, one in the aggregate amount of $1,680,778 with interest at a fixed rate of 8% per annum, and one in the aggregate amount of $1,151,500 with interest at a fixed rate of 10% per annum, to be distributed pro rata among these individuals. Under the terms of these notes, the first payment of $168,638 was due and paid on February 28, 2007 with. We repaid the notes in full on August 29, 2007 at a discount of $213,291.

Through IMAR Group, LLC, the Companys recently acquired wholly-owned subsidiary, the Company entered into an Asset and Technology Acquisition Agreement with Mark Overbye and Gekko Sports Corporation on January 30, 2007. The Company acquired the ownership rights, title and interests in the assets and technology of Gekko Sports Corporation, including patents, trademarks, trade names, trade secrets and goodwill ("Assets and Technology").

We entered into an asset and technology acquisition agreement with Mark Overbye and Gekko on January 30, 2007, pursuant to which we acquired the ownership rights, title and interests in the assets and technology of Gekko, including patents, trademarks, trade names, trade secrets and goodwill ("Assets and Technology")  In consideration for the Assets and Technology, as well as wages, royalties, commissions and other amounts owed to Mr. Overbye, personally, or Gekko under a prior technology, transfer, license or royalty agreement by and between Gekko and IMAR, we agreed to pay total cash compensation of $670,000 at the closing of the transaction as set forth in a promissory note payable with interest at a fixed rate of 10% per annum. Under the terms of the note, the first payment of $40,238. was due and paid on February 28, 2007 and continuing on the same day of each month thereafter until July 28, 2008, at which time the entire unpaid principal balance and all accrued interest shall be due and payable. We will have full prepayment privileges at any time without any prepayment penalties. Interest on this note is computed daily on the basis of a 365-day year, for each day all or any part of the principal balance hereof shall remain outstanding. Payments not received within 15 days of the due date shall be considered late and shall be subject to a late charge based on the rate of 1% per month. We will be in default under the Note if we fail to make a payment under the note when due, a receiver is appointed for us or our guarantor's property, an assignment is made for our benefit or our guarantor's creditors or a proceeding is commenced by or against us or our guarantor in bankruptcy. In the event we defaults under the note, Mr. Overbye may declare the entire unpaid principal balance on the note and all accrued interest immediately due, after 30 days notice. The note is secured by the security interest in the assets set forth in a certain security agreement which is described below.

The $670,000 promissory note under the asset and technology acquisition agreement, as well as each debt, liability and obligation which we or IMAR may now or at any time hereafter owe to Mr. Overbye or Gekko pursuant to such agreement, is secured pursuant to a security agreement entered into on January 29, 2007 between us and IMAR on one hand and Mark Overbye and Gekko on the other hand. Under the terms of the security agreement, we, together with IMAR, granted Mr. Overbye and Gekko a security interest, subject to security interests held by other lenders to us and our subsidiaries, in and to the following property (i) certain assets, trademarks and domain names; (ii) any adaptation, modification, improvement, or enhancement of the foregoing; and (iii) all of the pending and issued patents and patent applications as well as any continuations, continuations-in-part, divisional applications, and any Letters Patent issued there from including reissues, together with all non-U.S. counterparts; together with all substitutions and replacements for and products and proceeds of any of the foregoing property.

On March 13, 2007, we entered into a long-term note payable with Composites One, LLC, in the amount of $221,439.87 for a conversion of our vendor trade debt.  The note has a twenty-four (24) month term and carries an annual interest rate of 8.25%.  The unpaid principal balance at December 31, 2007 was $139,729.

On October 17, 2007, we entered into a short-term note payable with Mercury Marine, in the amount of $100,000 for a conversion of their vendor trade debt.  The note has a twelve (12) month term and carries an annual interest rate of 10%.  The unpaid principal balance at December 31, 2007 was $99,965.

SHARES ISSUED FOR CONSULTING SERVICES

As of December 31, 2007, we owe common stock equivalent to $30,000 to Grannus Financial Advisors per the payment terms of a certain consulting agreement entered into on May 28, 2007.

SHARES ISSUED FOR PRIVATE PLACEMENTS

On November 4, 2007, we issued 15,004 shares of common stock in connection with the rounding up of shares as part of the reverse stock split which occurred on October 31, 2007.



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On November 9, 2007, we issued 20,000 shares of common stock valued at $8,000 to John Layne as payment of interest on a private promissory note dated July 20, 2005.  The principal of $20,000 was repaid in full on July 23, 2007 and August 23, 2007.

As of December 31, 2007, we issued 755,000 shares of our common stock to Preston Capital Partners in connection with a certain equity line agreement dated September 24, 2005.  The proceeds received for 454,300 shares were applied as payment to promissory notes with Dutchess  and we received the cash proceeds from 259,143 shares.  The remaining 41,557 shares had not been returned to the company as of December 31, 2007.

SHARES ISSUED FOR ACQUISITIONS

On November 30, 2007, we issued 31,250 shares of common stock valued at $16,250 to Mark Overbye in connection with the Gekko asset and technology acquisition agreement dated January 30, 2007.

The securities issued in the foregoing transactions were made in reliance upon Rule 506 of Regulation D under the Securities Act of 1933, as amended, by the fact that:

-

the sale was made to a sophisticated or accredited investor, as defined in Regulation D;

-

we gave the purchaser the opportunity to ask questions and receive answers concerning  the  terms  and  conditions  of  the offering and to obtain any additional  information  which  we  possessed  or  could  acquire  without unreasonable  effort or expense that is necessary to verify the accuracy of  information  furnished;

-

at a reasonable  time  prior  to  the  sale  of  securities, we advised the purchaser  of  the  limitations  on  resale in the manner contained in Rule 502(d)2;

-

neither we nor any person acting on our behalf sold the securities by any form  of  general  solicitation  or  general  advertising;  and

-

we exercised reasonable care to assure that the purchaser of the securities is not an underwriter within the meaning of Section 2(11) of the Securities Act  of  1933  in  compliance  with  Rule  502(d).

ITEM  6.

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

You should read this section together with our consolidated financial statements and related notes thereto included elsewhere in this report.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Statements in this Annual Report on Form 10-KSB may be forward-looking statements.  Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions.  These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by our management.  These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict.  Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those risks discussed in this Annual Report on Form 10-KSB, under Risk Factors and Managements Discussion and Analysis and Results of Operations and in other documents which we file from time to time with the Securities and Exchange Commission.

In addition, such statements could be affected by risks and uncertainties related to our financial condition, factors that affect our industry, market and customer acceptance, competition, government regulations and requirements and pricing, as well as general industry and market conditions and growth rates, and general economic conditions.  Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Annual Report on Form 10-KSB, except as required by law.

CRITICAL ACCOUNTING POLICIES

We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are discussed



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throughout this section where such policies affect our reported and expected financial results.  Our preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period.  Actual results may differ from those estimates.

Our  accounting  policies  that  are  the most important to the portrayal of our financial  condition  and  results,  and  which  require  the  highest degree of management  judgment  relate  to revenue recognition, property and equipment and issuance  of  shares  for  service.

We recognize income when the products are shipped, and when the service is provided.  We apply the provisions of the Securities and Exchange Commissions Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements" which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. Our revenues earned from boat sales and related services are recorded when the boat is completed at the manufacturing plant and the customer is invoiced.  The manufacturer's certificate of origin is not provided to the customer until the boat has been paid in full. Our product is recorded when the service is provided, or when the boat is completed at the manufacturing plant and the customer is invoiced.  All boats are sold FOB (Free On Board) Washington, Missouri or Fargo, North Dakota plant, thereby, the customer is responsible for the goods when they are loaded on/to the delivery vessel.  Bulletin No. 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for the disclosure of revenue recognition policies. Our revenue recognition policy for sale of products is in compliance with Bulletin No.  104.  Revenue from the sale of products is recognized when a formal arrangement exists, the price is fixed or determinable, the delivery is completed and collectibility is reasonably assured.  As a result of our sales terms, the likelihood of uncollectible accounts receivable remains low.

Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets as follows:

|                                |          
|------------------------------- | ---------
|Computers:                      | 5 years  
|Software:                       | 3 years  
|Office Equipment and Furniture: | 3-7 years

Leasehold improvements are amortized over the remaining lease term at the date of installation.  Expenditures for maintenance and repairs are charged to expense as incurred.

RECENT ACCOUNTING PRONOUNCEMENTS

In February 2006, the Financial Accounting Standards Board (the FASB) issued Statement of Accounting Standards (SFAS) 155, Accounting for Certain Hybrid Financial Instruments, which amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125. SFAS 155 will be effective for us for all financial instruments issued or acquired after the beginning of our fiscal year ending December 31, 2006.  The adoption of this standard is not expected to have a material effect on the Companys results of operations or financial position.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109, (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return that results in a tax benefit. Additionally, FIN 48 provides guidance on de-recognition, income statement classification of interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation is effective for us for our fiscal year ending December 31, 2007.   The adoption of this standard is not expected to have a material effect on the Companys results of operations or financial position.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for us for our fiscal year beginning on



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December 31, 2008. We are currently assessing the impact the adoption of SFAS No. 157 will have on our financial statements.

In September 2006, the SEC issued SAB No. 108 in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. In SAB 108, the SECestablished an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of our financial statements and the related financial statement disclosures. SAB No. 108 is effective for us for our current fiscal year. The adoption of SAB No. 108 did not have an impact on our financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standars No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). Under this standard, the Company may elect to report financial instruments and certain other items at fair value on a contract-by-contract basis with changes in value reported in earnings. This election is irrevocable. SFAS 159 provides an opportunity to mitigate volatility in reported earnings that is caused by measuring hedged assets and liabilities that were previously required to use a different accounting method than On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and the related hedging contracts when the complex provisions of SFAS 133 hedge accounting are not met.  SFAS 159 is effective for years beginning after November 15, 2007. Early adoption within 120 days of the beginning of the Companys 2007 fiscal year is permissible, provided the Company has not yet issued interim financial statements for 2007 and has adopted SFAS 157. The Company does not anticipate that adoption of this standard will have a material effect on its financial statements.

In December 2007, the FASB issued SFAS No. 141-R, Business Combinations (revised 2007) (SFAS 141-R). This Statement provides greater consistency in the accounting and financial reporting of business combinations. It requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to disclose the nature and financial effect of the business combination. SFAS 141-R is effective for fiscal years beginning after December 15, 2008, or January 1, 2009 for the Company. The Company does not anticipate that adoption of this standard will have a material effect on its financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160). This Statement amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years beginning after December 15, 2008, or January 1, 2009 for the Company. The Company does not anticipate that adoption of this standard will have a material effect on its financial statements.

GOING CONCERN OPINION

Our audited financial statements for the fiscal year ended December 31, 2007, reflect a net loss of $4,656,940 and net cash flows used by operations of ($3,824,947).  Our management is currently pursuing equity and/or debt financing in an effort to continue operations, however, management can give no assurances that any financings will be consummated and, as a result, our operations may cease. Our future success is likely dependent on our ability to attain additional capital to develop our proposed products and ultimately, upon our ability to attain future profitable operations.  There can be no assurance that we will be successful in obtaining such financing, or that we will attain positive cash flows from operations.

RESULTS OF OPERATION

Effective January 1, 2007, we acquired one-hundred percent of the total outstanding membership interest of International Marine and Recreation Group, LLC, (IMAR), and the assets and technology of Gekko Sports Corporation (Gekko).  In connection with this transaction, we paid approximately $7 million in cash, stock and notes.  IMAR manufacturers the brand name Sugar Sand recreational jet boats and Gekko recreational tow boats at an 80,000 square foot leased facility in Fargo, North Dakota.   We sold the Sugar Sand assets to Execute Sports, Inc. (Execute) on August 29, 2007 for $5,000,000 in cash, and entered into a ten year exclusive manufacturing and supply agreement and sales and marketing agreement with Execute for the Sugar Sand product.

Notwithstanding, we do not generate positive cash flows and are required to make large debt service payments. Consequently, we continue to require additional funding at this time.  We may be able to secure funding from our



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current investors, but there is no assurance we will be able to do so.  If we are unable to generate sufficient cash flow or obtain funds for required payments, or if we fail to comply with the covenants in our debt, we will be in default.  Accordingly, we may not be able to able to meet our debt service obligations and may be forced to consider alternative strategies, including ceasing our operations.  Further, on March 17, 2008, we were required to layoff 58 of our 84 employees due to a slowdown in our operations.

RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2007 COMPARED WITH YEAR ENDED DECEMBER 31, 2006

NET REVENUES

For the year ended December 31, 2007, we generated net revenues of $7,399,703 as compared to net revenues of $238,171 for the year ended December 31, 2006. During 2007, the major change in our business which impacted revenues was primarily due to the addition of IMAR, which we acquired in January 2007.

COST OF GOODS SOLD

We incurred costs of sales of $8,061,420 for the year ended December 31, 2007, as compared to $1,748,653 for the year ended December 31, 2006.  Cost of goods sold increased relative to the increased revenue generated through the IMAR acquisition.

OPERATING EXPENSES

Operating expenses increased to $6,384,974 for the year ended December 31, 2007 as compared to $3,701,032 for the twelve months ended December 31, 2006. The increase in operating expenses for the twelve month period occurred primarily as a result of the acquisition of IMAR and the inclusion of their operating expenses.  The major factors in our operating expenses increasing are the following:

·

Payroll and payroll taxes increased from $771,916 to $1,330,589.

·

Travel expenses increased to $214,841 versus $61,291 in 2006. This is due to the addition of four people in the sales department, travel to our Fargo facility and travel of IMAR employees to the Washington plant.

·

Trade show expenses decreased to $97,245 versus $135,888 in 2006.\

·

Professional fees increased to $679,679 versus $232,109 in 2006.

·

Advertising and marketing expenses increased to $283,439 versus $35,301 in 2006 as a result of increased print advertising.

·

Consulting fees increased to $318,320 versus $192,438 in 2006 due to various agreements.

·

Sales expense increased to $356,020 versus $0 in 2006 due to the annual dealer meeting expense, interest free flooring for the dealers and outside sales agent commission.

INTEREST EXPENSE

Interest expense decreased from $3,924,181 to $2,659,100 from the prior year period reflecting the costs of borrowing funds with debentures and promissory notes.  Interest decreased overall as a result of the Dutchess debt conversion on September 30, 2007 and the recission of the Dutchess warrants.  Interest expense is recorded in connection with the issuance of convertible debentures, promissory notes and factoring and purchase order agreements by Dutchess.  Each of our notes and debentures were issued at a discount, which is amortized and charged to interest expense over the life of the promissory note, debenture or warrant.  Also, our debentures are issued with a conversion preference to the holder of the debenture in the event of default, which are included in interest expense on the financial statements.

Interest expense has also increased as the result of work-in-process loans carried by Sun Security Bank, which fund the building of the product until it is sold, and the interest on the Sun Security Bank loan, which funded the acquisition of Marine Holdings, Inc.  Interest expense also increased as a result of the IMAR promissory notes associated with the IMAR Group, LLC and Gekko acquisitions.



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NET LOSS

We had a net loss of $4,656,940 for the twelve months ended December 31, 2007 as compared to $9,133,144 for the twelve months ended December 31, 2006.  The year-over-year net loss decreased primarily due to the sale of the Sugar Sand product line to Execute Sports, Inc for $5,000,000 in August 2007.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2007, we had Total Current Assets of $2,769,550 compared to $1,991,808 as of December 31, 2006.  This was due primarily to an increase in accounts receivable and inventory as a result of the acqusition of IMAR Group, LLC.  As of December 31, 2007, we had Total Current Liabilities of $4,492,112, compared to $5,983,083, as of December 31, 2006.  This was due primarily to a $1,872,216 increase in accounts payable and accrued payables, a  $510,877 increase in warranty reserve which were offset with a $722,125 decrease in accrued interest as a result of the September 30, 2007 debt conversion, as well as a $2,976,054 reduction of related party debt to Dutchess.  Our Stockholders' Equity at December 31, 2007 was a deficit of $4,893,092.

During 2007, we did not issue any promissory notes to related parties. As of December 31, 2007, a total of $0 was owed to related parties for promissory notes.  The outstanding balances of $3,083,454 on related party promissory notes were included in the September 30, 2007 Series A Convertible Preferred Stock Purchase Agreement with Dutchess.

As of December 31, 2007, we had debt of $11,301,142, including convertible debentures which total $3,725,041.  We accrue monthly interest expense on the debt under our convertible debentures, which are due in 2009, 2010, 2011 and 2012.  Our debt could  limit  our  ability  to  obtain additional financing for working capital, capital  expenditures,  debt  service  requirements,  or  other  purposes in the future,  as  needed.

We continue to require additional funding at this time.  We may be able to secure funding from our current investors, but there is no assurance we will be able to do so.  If we are unable to generate sufficient cash flow or obtain funds for required payments, or if we fail to comply with the covenants in our debt, we will be in default.  We may not be able to able to meet our debt service obligations and may be forced to consider alternative strategies and possibly cease operations.

FINANCING ACTIVITIES

On January 3, 2006, we issued a non-interest bearing convertible promissory note to Dutchess in the amount of $302,400.  The note carried an interest rate of 0% per year and is due on January 3, 2011.  The note carried a discounted amount of $50,400.  During the year ended December 31, 2006, $0 of this note was repaid, and the balance at September 29, 2007 was $302,400.  The note was extended and was due and payable with thirty days notice from Dutchess .  On September 30, 2007, we entered into an agreement with Dutchess , whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 30,240 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On January 27, 2006, we issued a non-interest bearing convertible promissory note to Dutchess in the amount of $59,254.  The note carried an interest rate of 0% per year and is due on July 27, 2006.  The note carried a discounted amount of $9,876.  During the year ended December 31, 2006, $0 of this note was repaid, and the balance at September 29, 2007 was $59,254.  The note was extended and was due and payable with thirty days notice from Dutchess .  On September 30, 2007, we entered into an agreement with Dutchess, whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 5,925 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On February 1, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $132,000, at a discount of $22,000.  The debenture had a 10% interest rate and was due and payable February 1, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into tour common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of two dollars.



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On February 3, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $192,000, at a discount of $32,000.  The debenture had a 10% interest rate and was due and payable February 3, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of two dollars. During the year ended December 31, 2006, $192,000 of this note was repaid, and the balance as of June 30, 2007 is $0.

On February 10, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $192,000, at a discount of $32,000.  The debenture had a 10% interest rate and was due and payable February 10, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our  common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of one dollar and sixty cents. During the year ended December 31, 2006, $43,000 of this note was repaid, and the balance at September 29, 2007 was $149,000.

On February 14, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $192,000, at a discount of $32,000.  The debenture had a 10% interest rate and was due and payable February 14, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of one dollar and sixty cents.   On February 22, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $150,000, at a discount of $25,000.  The debenture had a 10% interest rate and was due and payable February 22, 2011Dutchess was entitled to convert the face amount of the debentures plus accrued interest into the our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of one dollar and sixty cents.On September 30, 2007, we entered into an amended and restated convertible debenture with Dutchess, whereby all principal and interest outstanding under this debenture, as well as all Dutchess debentures entered into with Dutchess between the dates of January 20, 2004 and February 22, 2006 were consolidated into one new debenture totaling $2,784,685.

On February 24, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $1,236,000, at a discount of $206,000.  The debenture had a 10% interest rate and was due and payable February 24, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into the our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of one dollar and sixty cents. On September 30, 2007, Dutchess rescinded the original convertible debenture agreement.  All interest booked through this date has been eliminated.

On February 28, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $234,000, at a discount of $39,000.  The debenture had a 10% interest rate and was due and payable February 28, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of one dollar and sixty cents. During the year ended December 31, 2006, $150,690 of this note was repaid, and the balance at September 29, 2007 was $83,310.  On September 30, 2007, we entered into an agreement with Dutchess, whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 10,308 shares of our Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On March 2, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $132,000, at a discount of $22,000.  The debenture had a 10% interest rate and wasdue and payable March 2, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of one dollar and sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess, whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 15,290 shares of our Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On March 9, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $434,400, at a discount of $72,400.  The debenture had a 10% interest rate and was due and payable March 2, 2011.  The Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at



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the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of one dollar and sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess, whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 50,318 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On April 3, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $375,600, at a discount of $62,600.  The debenture had a 10% interest rate and was due and payable April 3, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into the our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of one dollar and sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess, whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 43,194 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On April 26, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $120,000, at a discount of $20,000.  The debenture had a 10% interest rate and was due and payable April 26, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into the our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of one dollar and sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess, whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 13,700 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On May 3, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $276,000, at a discount of $46,000.  The debenture had a 10% interest rate and was due and payable May 3, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of one dollar and sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess Private, whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 31,510 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On May 17, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $492,000, at a discount of $82,000. The debenture had a 10% interest rate and as due and payable May 17, 2011. Dutchess was entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of one dollar and sixty cents.On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 56,170 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On May 17, 2006, we entered into an accounts receivable factoring agreement with Dutchess P, in the amount of $695,000.  The factoring agreement has a 3.5% monthly interest rate and was due and payable July 17, 2006, with one month minimum interest due and payable on the funds.  As funds became available through the collection of receivables on certain boats as described in the factoring agreement, all funds, and any interest and penalties, were to be forwarded to Dutchess within one business day.  In the event that on the maturity date, there was a balance due on the face amount, Dutchess could increase the face amount by ten percent 10% per month, for each month that the agreement remained unpaid. During the year ended December 31, 2006, $0 of this agreement was repaid, and the balance at September 29, 2007 was $695,000.  The Agreement was extended and was due and payable with thirty days notice from Dutchess.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 110,853 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original agreement has been cancelled and terminated.

On May 24, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $168,000, at a discount of $28,000.  The debenture had a 10% interest rate and was due and payable May 24, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the



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lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of one dollar and sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess Private whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 19,040 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On June 7, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $290,400, at a discount of $48,400.  The debenture had a 10% interest rate and was due and payable June 7, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into the our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of one dollar and twenty cents. During the year ended December 31, 2006, $136,202 of this note was repaid, and the balance at September 29, 2007 was $154,198.  On September 30, 2007, we entered into an agreement with Dutchess, whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 18,745 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On June 15, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $72,000, at a discount of $12,000.  The debenture had a 10% interest rate and was due and payable June 15, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into the our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of one dollar and twenty cents.  On September 30, 2007, we entered into an agreement with Dutchess, whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 8,160 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On June 22, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $228,000, at a discount of $38,000.  The debenture had a 10% interest rate and was due and payable June 22, 2011.  The purchaser of the convertible debentures was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of one dollar.  On September 30, 2007, we entered into an agreement with Dutchess, whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 25,650 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On June 23, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $156,000, at a discount of $26,000.  The debenture had a 10% interest rate and was due and payable June 23, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into the our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of one dollar.  On September 30, 2007, we entered into an agreement with Dutchess, whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 17,550 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On July 5, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $312,000, at a discount of $52,000.  The debenture had a 10% interest rate and was due and payable July 5, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of one dollar.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 35,100 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On July 20, 2006, we entered into a convertible debenture agreement with Dutchess in the amount of $186,000, at a discount of $31,000.  The debenture had a 10% interest rate and was due and payable July 20, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of one dollar.  On September 30, 2007, we entered into an agreement with Dutchess, whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of



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20,770 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On July 21, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $66,000, at a discount of $11,000.  The debenture had a 10% interest rate and was due and payable July 21, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into  our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of one dollar.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 7,270 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share. The original convertible debenture agreement has been cancelled and terminated.

On August 1, 2006, we entered into a convertible debenture agreement with Dutchess in the amount of $282,000, at a discount of $47,000.  The debenture had a 10% interest rate and is due and payable August 1, 2011. Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of eighty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 31,570 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On August 17, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $312,000, at a discount of $52,000.  The debenture had a 10% interest rate and was due and payable August 17, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 34,790 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On August 30, 2006 we entered into a convertible debenture agreement with Dutchess, in the amount of $315,600, at a discount of $52,600.  The debenture had a 10% interest rate and was due and payable August 30, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 35,195 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On September 12, 2006, we entered into a convertible debenture agreement with Dutchess in the amount of $324,000, at a discount of $54,000.  The debenture had a 10% interest rate and was due and payable September 12, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.   On September 30, 2007, we entered into an agreement with Dutchess, whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 36,140 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On September 26, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $336,000, at a discount of $56,000.  The debenture had a 10% interest rate and was due and payable September 26, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 37,335 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.



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On September 26, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $446,400, at a discount of $74,400.  The debenture had a 10% interest rate and was due and payable September 26, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 49,755 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On October 11, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $255,600, at a discount of $42,600.  The debenture had a 10% interest rate and was due and payable October 11, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 28,116 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On October 24, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $195,600, at a discount of $32,600.  The debenture had a 10% interest rate and was due and payable October 24, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 21,353 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On November 7, 2006, we entered into a convertible debenture agreement with Dutchess in the amount of $243,600, at a discount of $40,600.  The debenture had a 10% interest rate and was due and payable November 7, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 26,593 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On November 20, 2006, we entered into a convertible debenture agreement with Dutchess, in the amount of $208,800, at a discount of $34,800.  The debenture had a 10% interest rate and was due and payable November 20, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 22,620 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On December 6, 2006, we entered into a convertible debenture agreement with Dutchess in the amount of $204,000, at a discount of $34,000.  The debenture had a 10% interest rate and was due and payable December 6, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 22,100 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On December 28, 2006, we entered into a convertible debenture agreement with Dutchess in the amount of $228,000, at a discount of $38,000.  The debenture had a 10% interest rate and was due and payable December 28, 2011.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion



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date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess Private whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 24,510 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On January 23, 2007, we entered into a convertible debenture agreement with Dutchess in the amount of $392,400, at a discount of $65,400.  The debenture had a 10% interest rate and was due and payable January 23, 2012.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 42,020 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On January 25, 2007, we entered into a convertible debenture agreement with Dutchess in the amount of $312,000, at a discount of $52,000.  The debenture had a 10% interest rate and was due and payable January 25, 2012.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 33,410 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On February 5, 2007, we entered into a convertible debenture agreement with Dutchess in the amount of $270,000, at a discount of $45,000.  The debenture had a 10% interest rate and was due and payable February 5, 2012.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 28,800 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On February 27, 2007, we entered into a convertible debenture agreement with Dutchess, in the amount of $420,000, at a discount of $70,000.  The debenture had a 10% interest rate and was due and payable February 27, 2012.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 44,800 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On March 26, 2007, we entered into a purchase order financing agreement with Dutchess in the amount of $180,000.  The financing agreement has a 3% monthly interest rate and is due and payable April 26, 2007, with $5,000 minimum interest due and payable on the funds.  As funds became available through the collection of receivables on certain boats as described in the financing agreement, all funds, and any interest and penalties, were to be forwarded to Dutchess within one business day.  In the event that on the maturity date, there was a balance due on the face amount, Dutchess could increase the face amount by ten percent per month, for each month that the agreement remained unpaid.   The agreement was extended and was due and payable with thirty days notice from Dutchess.  As of September 30, 2007, $58,000 of agreement was repaid, and the balance at September 29, 2007 is $122,000.  On September 30, 2007,we entered into an agreement with Dutchess, whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 15,101 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original purchase order financing agreement has been cancelled and terminated.

On March 26, 2007, we entered into an accounts receivable factoring agreement with Dutchess, in the amount of $120,000.  The financing agreement had a 3% monthly interest rate and was due and payable April 26, 2007, with $5,000 minimum interest due and payable on the funds.  As funds became available through the collection of receivables on certain boats as described in the factoring agreement, all funds, and any interest and penalties, were to



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be forwarded to Dutchess within one business day.  In the event that on the maturity date, there was a balance due on the face amount, Dutchess could increase the face amount by ten percent per month, for each month that the agreement remained unpaid.   The agreement was repaid in full as of April 11, 2007.

On April 3, 2007, we entered into a purchase order financing agreement with Dutchess in the amount of $150,000.  The financing agreement had a 3% monthly interest rate and was due and payable May 3, 2007, with $5,000 minimum interest due and payable on the funds.  As funds became available through the collection of receivables on certain boats as described in the factoring agreement (above), all funds, and any interest and penalties, were to be forwarded to Dutchess within one business day.  In the event that on the maturity date, there was a balance due on the face amount, Dutchess could increase the face amount by ten percent per month, for each month that the agreement remained unpaid.   The agreement was extended and was repaid in full as of June 22, 2007.

On April 6, 2007, we entered into a convertible debenture agreement with Dutchess in the amount of $720,000, at a discount of $120,000.  The debenture had a 10% interest rate and was due and payable April 6, 2012.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 75,600 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On May 3, 2007, we entered into a convertible debenture agreement with Dutchess in the amount of $186,000, at a discount of $31,000.  The debenture had a 10% interest rate and was due and payable May 3, 2012.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  As of September 30, 2007, $45,093 of this convertible debenture was repaid, and the balance at September 30, 2007 was $140,907.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 14,749 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On May 15, 2007, we entered into a convertible redeemable preferred stock agreement with Dutchess in the amount of $160,000.  The debenture had a 10% dividend rate and was due and payable May 15, 2012.  Dutchess was entitled to convert the face amount of the stock plus accrued dividend into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 16,600 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible redeemable preferred stock agreement has been cancelled and terminated.

On May 25, 2007, we entered into a convertible redeemable preferred stock agreement with Dutchess, in the amount of $530,000.  The debenture had a 10% dividend rate and was due and payable May 25, 2012.  Dutchess was entitled to convert the face amount of the stock plus accrued dividend into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 54,767 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible redeemable preferred stock agreement has been cancelled and terminated.

On June 26, 2007, we entered into a convertible redeemable preferred stock agreement with Dutchess in the amount of $685,000.  The debenture had a 10% dividend rate and was due and payable June 26, 2012.  Dutchess was entitled to convert the face amount of the stock plus accrued dividend into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 70,213 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible redeemable preferred stock agreement has been cancelled and terminated.



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On July 12, 2007, we entered into a convertible redeemable preferred stock agreement with Dutchess in the amount of $550,000.  The debenture had a 10% dividend rate and was due and payable July 12, 2012.  Dutchess was entitled to convert the face amount of the stock plus accrued dividend into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 56,146 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible redeemable preferred stock agreement has been cancelled and terminated.

On August 3, 2007, we entered into a convertible redeemable preferred stock agreement with Dutchess in the amount of $650,000.  The debenture had a 10% dividend rate and was due and payable August 8, 2012.  Dutchess was entitled to convert the face amount of the stock plus accrued dividend into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 66,083 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible redeemable preferred stock agreement has been cancelled and terminated.

On September 30, 2007, we entered into an amended and restated convertible debenture agreement with Dutchess in the amount of $2,784,685.  This debenture is issued in conjunction with the conversion of existing Dutchess debt into Series A Preferred Stock and includes all Dutchess debentures dated January 20, 2004 through February 22, 2006.  The debenture has an 8% interest rate and is due and payable September 30, 2012.  The Dutchess is entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the twenty trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.

On September 30, 2007, we entered into a debt conversion agreement with Dutchess whereby Dutchess converted a total of $16,849,214 in principal and accrued interest currently owed to Dutchess into the right to receive 1,684,921 shares of Series A Preferred Stock. The conversion includes all Dutchess debentures dated February 28, 2006 through May 3, 2007, all amounts outstanding under the promissory notes, all amounts outstanding under the factoring agreements, all amounts outstanding under the purchase order Agreements, all amounts outstanding under the preferred agreements, and all amounts outstanding under the consulting agreement with Dutchess.  The debt conversion agreement requires dividends to be paid quarterly, in cash, at the rate of 8% per annum.  Dividends shall be cumulative.  We have issued 12,497 shares of common stock to Dutchess as payment of the shares portion of the dividend.

On December 3, 2007, we entered into a convertible debenture agreement with Dutchess in the amount of $600,000, at a discount of $100,000.  The debenture has a 10% interest rate and is due and payable December 3, 2012.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of thirty cents ($0.30).  As of December 31, 2007, $0 of this note was repaid, and the balance at December 31, 2007 is $600,000.

On December 11, 2007, we issued 40,000 shares of our Series A convertible redeemable preferred stock to Dutchess for $400,000.  The convertible redeemable preferred agreement has a quarterly Dividend of 5% of the per share price of each share of Series A Preferred Stock held Dutches.  The Dividend shall be paid as follows: two percent (2%) in preferred stock and three percent (3%) in cash.  One-quarter of the annual Dividend shall be paid within fifteen (15) days after the end of each of our fiscal quarters.  Declaration and payment of the Dividend shall be in accordance with the NRS.  The Dividend shall be paid in cash.  We have issued 99 shares of common stock to Dutchess as payment of the shares portion of the dividend

On December 26, 2007, we issued 47,500 shares of our Series A convertible redeemable preferred stock to Dutchess for $475,000.  The Dividend for this agreement shall be paid as follows: two percent (2%) in Preferred Stock and three percent (3%) in cash.  One-quarter of the annual Dividend shall be paid within fifteen (15) days after the end of each of the Companys fiscal quarters.  Declaration and payment of the Dividend shall be in accordance with the NRS.  The Dividend shall be paid in cash.

As of December 31, 2007, the following individual investors held promissory notes in the amount described below.



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|                        |  |                 |            |              |           
|----------------------- |  | --------------- | ---------- | ------------ | ----------
|NAME                    |  | AMOUNT RECEIVED |            | DEPOSIT DATE
|Winn Family Partnership |  | $               | 2,000.00   |              | 05/08/2004
|Patrick Connelly        |  | $               | 50,000.00  |              | 05/27/2004
|Jan Pusch               |  | $               | 50,000.00  |              | 07/01/2004
|Patrick Connelly        |  | $               | 10,000.00  |              | 07/02/2004
|Patrick Connelly        |  | $               | 10,000.00  |              | 04/14/2005
|Sandra Walls            |  | $               | 10,000.00  |              | 06/08/2005
|Gerald Treichel         |  | $               | 10,000.00  |              | 08/05/2005
|Arnold Kramer           |  | $               | 6,000.00   |              | 10/20/2005
|Wakelin McNeel          |  | $               | 100,000.00 |              | 03/08/2007
|Total                   |  | $               | 248,000.00 |              |           

CAPITAL COMMITMENTS

At December 31, 2007, we had the following notes payable outstanding:

At December 31, 2007, we had ten short term notes payable with the Sun Security Bank totaling $513,531, secured by our boats-in-process and completed boats in inventory.  The notes bear interest at a rate of U.S. Bank Prime Rate plus 2%, with an interest rate floor of 7%.  The individual notes are due and payable upon the sale of the boats securing the note.

On February 28, 2006, we entered into a long-term note payable with the Sun Security Bank totaling $2,961,429, secured by the manufacturing facility in Washington, Missouri, and all of our fixed assets.  The note bears interest at a rate of US Bank Prime Rate plus 1% and has a maturity date of March 1, 2009.  It is also secured by a certificate of deposit in the amount of $1,000,000 on deposit at Sun Security Bank, owned by Dutchess.  As of December 31, 2007, the note payable carries a principal balance of $2,665,286.

On March 28, 2006, we entered into a $16,089 long-term note payable with the Bank of Washington. The note is secured by a 2002 GMC 3500 truck, bearing interest at a rate of 9.25%.  As of December 31, 2007, the unpaid balance on the note is $6,465.

As consideration for the acquisition of one-hundred percent of the total outstanding shares of IMAR and the assets and technology of Gekko on January 29, 2007, we granted Messrs. Bullinger, Crary, Dahl, Shorma and Schlossman, two promissory notes each, one in the aggregate amount of $1,680,778 with interest at a fixed rate of 8% per annum, and one in the aggregate amount of $1,151,500 with interest at a fixed rate of 10% per annum, to be distributed pro rata among these individuals. Under the terms of these notes, the first payment of $168,638 was due and paid on February 28, 2007 with. We repaid the notes in full on August 29, 2007 at a discount of $213,291.

Through IMAR Group, LLC, the Companys recently acquired wholly-owned subsidiary, the Company entered into an Asset and Technology Acquisition Agreement with Mark Overbye and Gekko Sports Corporation on January 30, 2007. The Company acquired the ownership rights, title and interests in the assets and technology of Gekko Sports Corporation, including patents, trademarks, trade names, trade secrets and goodwill ("Assets and Technology").

We entered into an asset and technology acquisition agreement with Mark Overbye and Gekko on January 30, 2007, pursuant to which we acquired the ownership rights, title and interests in the assets and technology of Gekko, including patents, trademarks, trade names, trade secrets and goodwill ("Assets and Technology")  In consideration for the Assets and Technology, as well as wages, royalties, commissions and other amounts owed to Mr. Overbye, personally, or Gekko under a prior technology, transfer, license or royalty agreement by and between Gekko and IMAR, we agreed to pay total cash compensation of $670,000 at the closing of the transaction as set forth in a promissory note payable with interest at a fixed rate of 10% per annum. Under the terms of the note, the first payment of $40,238. was due and paid on February 28, 2007 and continuing on the same day of each month thereafter until July 28, 2008, at which time the entire unpaid principal balance and all accrued interest shall be due and payable. We will have full prepayment privileges at any time without any prepayment penalties. Interest on this note is computed daily on the basis of a 365-day year, for each day all or any part of the principal balance hereof shall remain outstanding. Payments not received within 15 days of the due date shall be considered late and shall be subject to a late charge based on the rate of 1% per month. We will be in default under the Note if we fail to make a payment under the note when due, a receiver is appointed for us or our guarantor's property, an assignment is made for our benefit or our guarantor's creditors or a proceeding is commenced by or against us or our guarantor in



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bankruptcy. In the event we defaults under the note, Mr. Overbye may declare the entire unpaid principal balance on the note and all accrued interest immediately due, after 30 days notice. The note is secured by the security interest in the assets set forth in a certain security agreement which is described below.

The $670,000 promissory note under the asset and technology acquisition agreement, as well as each debt, liability and obligation which we or IMAR may now or at any time hereafter owe to Mr. Overbye or Gekko pursuant to such agreement, is secured pursuant to a security agreement entered into on January 29, 2007 between us and IMAR on one hand and Mark Overbye and Gekko on the other hand. Under the terms of the security agreement, we, together with IMAR, granted Mr. Overbye and Gekko a security interest, subject to security interests held by other lenders to us and our subsidiaries, in and to the following property (i) certain assets, trademarks and domain names; (ii) any adaptation, modification, improvement, or enhancement of the foregoing; and (iii) all of the pending and issued patents and patent applications as well as any continuations, continuations-in-part, divisional applications, and any Letters Patent issued there from including reissues, together with all non-U.S. counterparts; together with all substitutions and replacements for and products and proceeds of any of the foregoing property.

On March 13, 2007, we entered into a long-term note payable with Composites One, LLC, in the amount of $221,439.87 for a conversion of our vendor trade debt.  The note has a twenty-four (24) month term and carries an annual interest rate of 8.25%.  The unpaid principal balance at December 31, 2007 was $139,729.

On October 17, 2007, we entered into a short-term note payable with Mercury Marine, in the amount of $100,000 for a conversion of their vendor trade debt.  The note has a twelve (12) month term and carries an annual interest rate of 10%.  The unpaid principal balance at December 31, 2007 was $99,965.

On July 19, 2007, we entered in a professional service and license agreement with Pininfarina Extra USA Corporation.  Under the terms of this agreement, Pininfarina will design two boats for the Challenger product line for a total design fee of $200,000, which has been paid in full to Pininfarina, and we are authorized to use the Pininfarina name for marketing and advertising.  Also under the terms of the agreement, Challenger agrees to pay royalty fees to Pininfarina for each boat sold in 2008.  Challenger is contractually obligated to pay to Pininfarina royalties for a minimum 25 boats in aggregate of both boat categories during the first twelve months of the agreement. Challenger guaranteed to Pininfarina minimum royalty payments during the first twelve months of the Agreement of $226,000.  Challenger paid $50,000 of the total commitment upon execution of the agreement in July 2007, leaving an unpaid balance of $176,000.  Under the terms of the agreement, if Challenger is unable to meet the minimum commitments for the twelve month period, upon the completion of the first twelve month period, either party has the right to rescind the agreement, at which time Challenger loses its right to use the Pininfarina trademark and Challengers obligation to pay royalties thereafter will cease.

INFLATION

We do not believe that inflation has had or is likely to have any significant impact on operations.

OFF-BALANCE SHEET ARRANGEMENTS

None.



28



---

ITEM  7.  FINANCIAL STATEMENTS



JASPERS + HALL, PC

CERTIFIED PUBLIC ACCOUNTANTS

9175 Kenyon Avenue, Suite 100

Denver, CO 80237

303-796-0099



Report of Independent Registered Public Accounting Firm



To the Board of Directors

Challenger Powerboats, Inc.



We  have audited the accompanying balance sheets of Challenger Powerboats, Inc., as of December  31,  2007 and 2006,  and  the  related  statements of operations, stockholders' equity  (deficit)  and  cash  flow  for  the  years  then  ended. These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and  perform  the  audits  to  obtain  reasonable  assurance  about  whether the financial statements  are  free  of  material  misstatement.  The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinions.



The  accompanying  financial  statements  have  been  prepared assuming that the Company  will  continue  as  a  going  concern.  The Company's current liabilities exceed the current assets by $1,722,562 as of December 31, 2007.  The Company had operating losses of $7,046,691 and $5,211,514 in 2007 and 2006, respectively and has ceased operations. As  discussed  in Note 1 to the financial  statements,  the  Company's  recurring losses from operations and its difficulties  in  generating  sufficient  cash  flow  to meet its obligation and sustain  its operations raise substantial doubt about its ability to continue as a  going concern. Management's plans concerning these matters are also described in Note 1.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.



In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Challenger Powerboats, Inc. at December 31, 2007 and 2006, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.





|               |                       |  | 
|-------------- | --------------------- |  | 
|April 14, 2008 | /s/Jaspers and Hall   | 
|               | Jaspers  +  Hall,  PC | 
|               | Denver,  Colorado     | 



29



---

CHALLENGER POWERBOATS, INC.

CONSOLIDATED BALANCE SHEET

(Audited)



|                                             |              |             |              |   |          
|-------------------------------------------- | ------------ | ----------- | ------------ | - | ---------
|                                             | December 31, |             | December 31,
|                                             | 2007         |             | 2006        
|ASSETS                                       |              |             |              |   |          
|CURRENT ASSETS                               |              |             |              |   |          
|Cash                                         | $            | 272,341     |              | $ | 174,706  
|Accounts Receivable  Trade                  |              | 370,469     |              |   | -        
|Inventory  Boats in Progress                |              | 532,961     |              |   | 114,528  
|Inventory  Parts                            |              | 445,901     |              |   | 141,003  
|Inventory  Trailers                         |              | 90,610      |              |   | 85,059   
|Inventory  Complete Boats                   |              | 1,007,268   |              |   | 1,476,023
|Other Current Assets                         |              | 50,000      |              |   | 489      
|TOTAL CURRENT ASSETS                         |              | 2,769,550   |              |   | 1,991,808
|PROPERTY AND EQUIPMENT                       |              |             |              |   |          
|Building and Land                            |              | 961,675     |              |   | 957,010  
|Boats molds and plugs                        |              | 1,146,392   |              |   | 602,203  
|Machinery and equipment                      |              | 458,679     |              |   | 175,856  
|Office equipment and furniture               |              | 47,544      |              |   | 11,070   
|Leasehold improvements and capital additions |              | 595,819     |              |   | 297,563  
|Autos and trucks                             |              | 71,151      |              |   | 69,000   
|Trailers                                     |              | 26,129      |              |   | 26,129   
|Computers and software                       |              | 64,403      |              |   | -        
|R & D Inventory Asset                        |              | 41,800      |              |   | -        
|Accumulated depreciation and amortization    |              | (1,099,461) |              |   | (477,161)
|NET PROPERTY & EQUIPMENT                     |              | 2,314,131   |              |   | 1,661,670
|OTHER ASSETS                                 |              |             |              |   |          
|Certificates of Deposit                      |              | 1,183,614   |              |   | 1,000,000
|Floor plan reserves                          |              | 137,155     |              |   | -        
|Other assets                                 |              | 3,600       |              |   | -        
|TOTAL OTHER ASSETS                           |              | 1,324,369   |              |   | 1,000,000
|TOTAL ASSETS                                 | $            | 6,408,050   |              | $ | 4,653,478
|                                             |              |             |              |   |          





30



---

CHALLENGER POWERBOATS, INC.

CONSOLIDATED BALANCE SHEET(CONTINUED)

(Audited)



|                                                                 |   |              |  |   |             
|---------------------------------------------------------------- | - | ------------ |  | - | ------------
|LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)                   |   |              |  |   |             
|CURRENT LIABILITIES                                              |   |              |  |   |             
|Accounts payable                                                 | $ | 1,872,609    |  | $ | 294,244     
|Accrued expenses - other                                         |   | 390,430      |  |   | 96,579      
|Accrued interest                                                 |   | 365,744      |  |   | 1,087,869   
|Accrued dividend                                                 |   | 84,913       |  |   | -           
|Payroll tax liabilities                                          |   | 86,975       |  |   | 97,781      
|Accrued salaries and vacation                                    |   | 164,863      |  |   | -           
|Warranty reserve                                                 |   | 510,877      |  |   | -           
|Private investor promissory notes                                |   | 248,000      |  |   | 168,000     
|Vendor note payable  current portion                            |   | 118,214      |  |   | -           
|Work-in-process loans                                            |   | 513,531      |  |   | 1,090,780   
|Note payable to Sun Security  current portion                   |   | -            |  |   | 169,224     
|Note payable to Bank of Washington  current portion             |   | -            |  |   | 2,552       
|Notes payable for IMAR acquisition  current portion             |   | -            |  |   | -           
|Note payable for Gekko acquisition  current portion             |   | 37,654       |  |   | -           
|Promissory notes  related party (net of discount)               |   | -            |  |   | 2,281,054   
|Receivable & Purchase Order factoring agreements  related party |   | -            |  |   | 695,000     
|Other current liabilities                                        |   | 98,302       |  |   | -           
|TOTAL CURRENT LIABILITIES                                        |   | 4,492,112    |  |   | 5,983,083   
|LONG TERM LIABILITIES                                            |   |              |  |   |             
|Note payable to Bank of Washington  less current portion        |   | 6,465        |  |   | 9,804       
|Vendor note payable  less current portion                       |   | 139,729      |  |   | -           
|Note payable to Sun Security- less current portion               |   | 2,665,286    |  |   | 2,665,287   
|Notes payable for IMAR acquisition- less current portion         |   | -            |  |   | -           
|Note payable for Gekko acquisition- less current portion         |   | 272,509      |  |   | -           
|Long-term debt  non-related party (net of discount)             |   | 7,596        |  |   |             
|Long-term debt  related party (net of discount)                 |   | 3,717,445    |  |   | 9,310,293   
|TOTAL LONG TERM LIABILITIES                                      |   | 6,809,030    |  |   | 11,985,384  
|TOTAL LIABILITIES                                                |   | 11,301,142   |  |   | 17,968,467  
|STOCKHOLDERS' EQUITY (DEFICIT)                                   |   |              |  |   |             
|Common stock, 100,000,000 shares authorized                      |   |              |  |   |             
|at $0.001 par value, 4,010,920 shares issued                     |   |              |  |   |             
|and outstanding at December 31, 2007 and 2,796,679               |   |              |  |   |             
|issued and outstanding at December 31, 2006                      |   | 4,011        |  |   | 2797        
|Series A Preferred stock, 5,000,000 shares authorized            |   |              |  |   |             
|at $0.001 par value, 1,785,018 shares issued                     |   |              |  |   |             
|and outstanding at December 31, 2007 and 0 shares                |   |              |  |   |             
|issued and outstanding at December 31, 2006                      |   | 1,784        |  |   | -           
|Additional paid-in capital                                       |   | 28,977,701   |  |   | 15,922,331  
|Subscriptions receivable                                         |   | (12,467)     |  |   | (33,064)    
|Accumulated deficit                                              |   | (33,864,121) |  |   | (29,207,181)
|TOTAL STOCKHOLDERS' EQUITY (DEFICIT)                             |   | (4,893,092)  |  |   | (13,315,117)
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)             | $ | 6,408,050    |  | $ | 4,653,350   



Accompanying footnotes are an integral part of these consolidated financial statements.



31



---

CHALLENGER POWERBOATS, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(Audited)



|                                                      |  |                                  |             |      |   |            
|----------------------------------------------------- |  | -------------------------------- | ----------- | ---- | - | -----------
|                                                      |  | Twelve Months Ended December 31,
|                                                      |  | 2007                             |             | 2006
|REVENUE                                               |  |                                  |             |      |   |            
|Performance and Sport Boats                           |  | $                                | 7,399,703   |      | $ | 238,171    
|TOTAL REVENUE                                         |  |                                  | 7,399,703   |      |   | 238,171    
|Cost of Goods Sold - Performance and Sport Boats      |  |                                  | 8,061,420   |      |   | 1,748,653  
|TOTAL COST OF GOODS SOLD                              |  |                                  | 8,061,420   |      |   | 1,748,653  
|GROSS PROFIT (LOSS)                                   |  |                                  | (661,717)   |      |   | (1,510,482)
|OPERATING EXPENSES                                    |  |                                  |             |      |   |            
|Consulting fees                                       |  |                                  | 318,320     |      |   | 192,438    
|Advertising & Marketing                               |  |                                  | 283,439     |      |   | 35,301     
|Documentation fees for funding                        |  |                                  | -           |      |   | 365,000    
|Officer compensation                                  |  |                                  | 278,492     |      |   | 109,840    
|Investor relations                                    |  |                                  | 649,372     |      |   | 690,244    
|Sales consulting & commissions                        |  |                                  | 131,049     |      |   | 29,250     
|Professional fees                                     |  |                                  | 679,679     |      |   | 232,109    
|Payroll and taxes                                     |  |                                  | 1,330,589   |      |   | 771,916    
|Employee benefits                                     |  |                                  | 199,406     |      |   | 111,399    
|Depreciation and amortization                         |  |                                  | 423,945     |      |   | 135,444    
|Writedown of assets                                   |  |                                  | 1,146       |      |   | 248,500    
|Sales adjustments and allowances                      |  |                                  | -           |      |   | 0          
|Travel                                                |  |                                  | 214,841     |      |   | 61,291     
|Trade shows                                           |  |                                  | 97,245      |      |   | 135,888    
|Sales Expense                                         |  |                                  | 356,020     |      |   | 0          
|Business insurance                                    |  |                                  | 316,408     |      |   | 217,082    
|Other operating expenses                              |  |                                  | 1,106,169   |      |   | 365,330    
|TOTAL OPERATING EXPENSES                              |  |                                  | 6,384,974   |      |   | 3,701,032  
|LOSS FROM OPERATIONS                                  |  |                                  | (7,046,691) |      |   | (5,211,514)
|OTHER (INCOME) / EXPENSES                             |  |                                  |             |      |   |            
|Interest expense                                      |  |                                  | 2,659,100   |      |   | 3,924,181  
|Dividend expense                                      |  |                                  | 273,958     |      |   | -          
|Loss/(Gain) on sale of assets                         |  |                                  | (4,861,915) |      |   | (1,156)    
|Other (Income) / Expense                              |  |                                  | (460,894)   |      |   | (1,395)    
|TOTAL OTHER (INCOME) EXPENSE                          |  |                                  | (2,389,751) |      |   | 3,921,630  
|PROFIT (LOSS) BEFORE INCOME TAXES                     |  |                                  | (4,656,940) |      |   | (9,133,144)
|Provision for income taxes                            |  |                                  | -           |      |   | -          
|NET PROFIT (LOSS)                                     |  | $                                | (4,656,940) |      | $ | (9,133,144)
|BASIC NET GAIN (LOSS) PER SHARE                       |  | $                                | (1.10)      |      | $ | (4.77)     
|BASIC WEIGHTED AVERAGE SHARES AND DILUTED OUTSTANDING |  |                                  | 4,246,633   |      |   | 1,914,728  



Accompanying footnotes are an integral part of these consolidated financial statements.



32



---

CHALLENGER POWERBOATS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(Audited)



|                                                                                         |                                  |             |      |   |            
|---------------------------------------------------------------------------------------- | -------------------------------- | ----------- | ---- | - | -----------
|                                                                                         | Twelve Months Ended December 31,
|                                                                                         | 2007                             |             | 2006
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |                                  |             |      |   |            
|Net loss                                                                                 | $                                | (4,656,940) |      | $ | (6,815,407)
|Adjustment to reconcile net loss to net cash provided by (used in) operating activities: |                                  |             |      |   |            
|Depreciation                                                                             |                                  | 179,236     |      |   | 88,678     
|Writedown of assets                                                                      |                                  | -           |      |   | -          
|Issuance of stock for debt inducement                                                    |                                  | 378,565     |      |   | 1,699,422  
|Issuance of stock for other services                                                     |                                  | 621,886     |      |   | 215,500    
|Issuance of stock for equity line funding                                                |                                  | 478,652     |      |   | -          
|Issuance of stock for IMAR and Gekko acquisition                                         |                                  | 343,300     |      |   | -          
|Issuance of stock for reverse split                                                      |                                  | 22,202      |      |   | -          
|Issuance of stock for preferred dividend                                                 |                                  | 125,960     |      |   | -          
|Loan payoffs for Marine Holdings closing transaction                                     |                                  | -           |      |   | (78,251)   
|Debt payoffs for IMAR closing transaction                                                |                                  | (602,487)   |      |   | -          
|(Increase) decrease in current assets:                                                   |                                  | -           |      |   | -          
|Cash from IMAR acquisition                                                               |                                  | 61,003      |      |   | -          
|Accounts receivable                                                                      |                                  | (128,561)   |      |   | 12,530     
|Inventory                                                                                |                                  | 1,010,928   |      |   | (1,561,787)
|Advances to Marine Holdings, Inc                                                         |                                  | -           |      |   | (529,700)  
|Floor plan reserves                                                                      |                                  | 31,240      |      |   | -          
|Prepaid expenses and miscellaneous                                                       |                                  | 97,099      |      |   | -          
|Increase (decrease) in current liabilities:                                              |                                  |             |      |   |            
|Accrued expenses and accounts payable                                                    |                                  | (635,797)   |      |   | (303,915)  
|Accrued interest                                                                         |                                  | (722,125)   |      |   | 622,412    
|Accrued dividend                                                                         |                                  | 84,913      |      |   | -          
|Sun Security WIP loans                                                                   |                                  | (577,248)   |      |   | (73,416)   
|Payroll and tax liabilities payable                                                      |                                  | (10,807)    |      |   | 7,170      
|Floor plan dealer returns                                                                |                                  | 32,602      |      |   | -          
|Warranty reserve                                                                         |                                  | 25,182      |      |   | -          
|Deferred revenues                                                                        |                                  |             |      |   | 43,152     
|NET CASH USED IN OPERATING ACTIVITIES                                                    |                                  | (3,824,947) |      |   | (6,673,612)
|NET CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES                                   |                                  |             |      |  
|Purchase of fixed assets                                                                 |                                  | (521,184)   |      |   | (165,218)  
|Disposal of fixed assets                                                                 |                                  | 395,634     |      |   | -          
|Purchase of certificate of deposit as collateral                                         |                                  | (156,913)   |      |   | (1,000,000)
|NET CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES                                   |                                  | (282,463)   |      |   | (1,165,218)
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                    |                                  |             |      |   |            
|Non-related party notes payable                                                          |                                  | (3,264,603) |      |   | (332,629)  
|Proceeds from private convertible promissory notes                                       |                                  | 100,000     |      |   | -          
|Proceeds from related party convertible debts                                            |                                  | 7,169,138   |      |   | 7,934,013  
|Proceeds from related party securities purchase                                          |                                  | 874,913     |      |   | -          
|Proceeds from related party factoring agreement                                          |                                  | (695,000)   |      |   | -          
|Proceeds from line of credit  stock subscription receivable                             |                                  | 20,597      |      |   | 37,442     
|NET CASH PROVIDED BY FINANCING ACTIVITIES                                                |                                  | 4,205,045   |      |   | 7,638,826  
|NET INCREASE IN CASH                                                                     |                                  | 97,635      |      |   | (200,004)  
|CASH AT BEGINNING OF PERIOD                                                              | $                                | 174,706     |      | $ | 331,386    
|CASH AT END OF PERIOD                                                                    | $                                | 272,341     |      | $ | 131,382    
|SUPPLEMENTAL DISCLOSURE OF CASH FLOWS                                                    |                                  |             |      |   |            
|Cash paid for interest                                                                   | $                                | 598,308     |      | $ | 332,996    
|Income taxes paid                                                                        |                                  | -           |      |   | -          



Accompanying footnotes are an integral part of these consolidated financial statements.



33



---

CHALLENGER POWERBOATS, INC.

Statements of Changes in Stockholders Equity

(Audited)

|                                                                            |              |  |                 |       |        |           |           |   |                            |  |                       |             |                     |   |                     |  |                          |          |  |   |              |  |   |             
|--------------------------------------------------------------------------- | ------------ |  | --------------- | ----- | ------ | --------- | --------- | - | -------------------------- |  | --------------------- | ----------- | ------------------- | - | ------------------- |  | ------------------------ | -------- |  | - | ------------ |  | - | ------------
|                                                                            | Common Stock |  | Preferred Stock |       |        |           |           |   |                            |  |                       |             |                    
|BALANCE,                                                                    | Shares       |  | Par $.001       |       | Shares |           | Par $.001 |   | Additional Paid-In Capital |  | Deferred Compensation |             | Stock
Subscrip
Recv |   | Accumulated
Deficit |  | Total Stockholder
Equity
|December 31, 2005                                                           | 977,569      |  | $               | 978   |        |           |           | $ |                            |  | $                     | 18,456,817  |                     | $ |                     |  | $                        | (77,766) |  | $ | (20,074,037) |  | $ | (1,694,008) 
|Issuance of Stock for Equity line                                           | 430,000      |  |                 | 430   |        |           |           |   |                            |  |                       | 511,356     |                     |   |                     |  |                          | 44,702   |  |   |              |  |   | 556,488     
|Issuance of Stock for Inv Rel Svcs                                          | 112,500      |  |                 | 113   |        |           |           |   |                            |  |                       | 210,250     |                     |   |                     |  |                          |          |  |   |              |  |   | 210,363     
|Issuance of Stock for Debt inducement                                       | 1,149,014    |  |                 | 1,149 |        |           |           |   |                            |  |                       | 1,716,442   |                     |   |                     |  |                          |          |  |   |              |  |   | 1,717,591   
|Conversion of Debts                                                         | 5,793        |  |                 | 6     |        |           |           |   |                            |  |                       | 12,630      |                     |   |                     |  |                          |          |  |   |              |  |   | 12,636      
|Issuance of Stock for Employee comp                                         | 3,000        |  |                 | 3     |        |           |           |   |                            |  |                       | 2,940       |                     |   |                     |  |                          |          |  |   |              |  |   | 2,943       
|Issuance of Stock for Conv Of Prom Note                                     | 146,667      |  |                 | 147   |        |           |           |   |                            |  |                       | 114,400     |                     |   |                     |  |                          |          |  |   |              |  |   | 114,547     
|Recission of Stock issued For Mktg Svcs                                     | -27,864      |  |                 | (28)  |        |           |           |   |                            |  |                       | (21,734)    |                     |   |                     |  |                          |          |  |   |              |  |   | (21,762)    
|Merger Accounting  MHI Acquisition                                         |              |  |                 |       |        |           |           |   |                            |  |                       | (5,115,333) |                     |   |                     |  |                          |          |  |   |              |  |   | (5,115,333) 
|Adjust for 2007 Stock Split                                                 |              |  |                 |       |        |           |           |   |                            |  |                       | 34,563      |                     |   |                     |  |                          |          |  |   |              |  |   | 34,563      
|Net Loss                                                                    |              |  |                 |       |        |           |           |   |                            |  |                       | -           |                     |   |                     |  |                          |          |  |   | (9,133,144)  |  |   | (9,133,144) 
|BALANCE,                                                                    |              |  |                 |       |        |           |           |   |                            |  |                       |             |                     |   |                     |  |                          |          |  |   |              |  |   |             
|December 31, 2006                                                           | 2,796,679    |  | $               | 2,797 |        | 0         |           | $ | -                          |  | $                     | 15,922,331  |                     | $ | 0                   |  | $                        | (33,064) |  | $ | (29,207,181) |  | $ | (13,315,117)
|Issuance of Stock for Equity line                                           | 300,000      |  |                 | 300   |        |           |           |   |                            |  |                       | 478,120     |                     |   |                     |  |                          | 20,597   |  |   |              |  |   | 499,017     
|Issuance of Stock for Debt inducement                                       | 286,250      |  |                 | 287   |        | 87,500    |           |   | 87                         |  |                       | 1,253,104   |                     |   |                     |  |                          |          |  |   |              |  |   | 1,253,478   
|Issuance of Stock for Dividend Payment                                      |              |  |                 |       |        | 12,596    |           |   | 12                         |  |                       | 125,948     |                     |   |                     |  |                          |          |  |   |              |  |   | 125,960     
|Issuance of Stock for Inv Rel Svcs                                          | 266,250      |  |                 | 266   |        |           |           |   |                            |  |                       | 503,425     |                     |   |                     |  |                          |          |  |   |              |  |   | 503,691     
|Issuance of Stock for Consulting Svcs                                       | 145,000      |  |                 | 145   |        |           |           |   |                            |  |                       | 113,100     |                     |   |                     |  |                          |          |  |   |              |  |   | 113,245     
|Issuance of Stock for  Dutchess Debt Conversion                             |              |  |                 |       |        | 1,684,922 |           |   | 1,685                      |  |                       | 16,847,531  |                     |   |                     |  |                          |          |  |   |              |  |   | 16,849,216  
|Conversion of Dutchess Debts to Preferred Stock - Unamortized Debt Disc     |              |  |                 |       |        |           |           |   |                            |  |                       | (1,550,412) |                     |   |                     |  |                          |          |  |   |              |  |   | (1,550,412) 
|Conversion of Dutchess Debt to new debenture - cancellation of O/S warrants |              |  |                 |       |        |           |           |   |                            |  |                       | (229,562)   |                     |   |                     |  |                          |          |  |   |              |  |   | (229,562)   
|Stock issued for IMAR acquisition                                           | 150,000      |  |                 | 150   |        |           |           |   |                            |  |                       | 327,000     |                     |   |                     |  |                          |          |  |   |              |  |   | 327,150     
|Stock issued for Gekko acquisition                                          | 31,250       |  |                 | 31    |        |           |           |   |                            |  |                       | 16,219      |                     |   |                     |  |                          |          |  |   |              |  |   | 16,250      
|Stock issued for Gekko acquisition by IMAR                                  |              |  |                 |       |        |           |           |   |                            |  |                       | (16,250)    |                     |   |                     |  |                          |          |  |   |              |  |   |             
|Issuance of stock for promissory note debt                                  | 20,000       |  |                 | 20    |        |           |           |   |                            |  |                       | 7,600       |                     |   |                     |  |                          |          |  |   |              |  |   | 7,620       
|Issuance of stock for split roundup                                         | 15,491       |  |                 | 15    |        |           |           |   |                            |  |                       | (15)        |                     |   |                     |  |                          |          |  |   |              |  |   | -           
|Stock Split 1:20                                                            |              |  |                 |       |        |           |           |   |                            |  |                       | 22,217      |                     |   |                     |  |                          |          |  |   |              |  |   |             
|Merger Accounting  IMAR Acquisition                                        |              |  |                 |       |        |           |           |   |                            |  |                       | (4,842,655) |                     |   |                     |  |                          |          |  |   |              |  |   | (4,837,199) 
|Net Loss                                                                    |              |  |                 |       |        |           |           |   |                            |  |                       |             |                     |   |                     |  |                          |          |  |   | (4,656,940)  |  |   | (4,656,940) 
|                                                                            | 4,010,920    |  | $               | 4,011 |        | 1,785,018 |           | $ | 1,784                      |  | $                     | 28,977,701  |                     | $ | 0                   |  | $                        | (12,467) |  | $ | (33,864,121) |  | $ | (4,893,092) 



Accompanying footnotes are an integral part of these consolidated financial statements.



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CHALLENGER POWERBOATS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2007

NOTE  1.

SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES

GOING CONCERN

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company's current liabilities exceed the current assets by $1,722,562 as of December 31, 2007.  The Company had operating losses of $7,046,691 and $5,211,514 in 2007 and 2006, respectively.

The Company's management is currently pursuing equity and/or debt financing in an effort to continue operations, however, management can give no assurances that any financings will be consummated, and as a result, our operations may cease. We presently employee eighty-four full-time employees and one part-time employee. On March 17, 2008, we were required to layoff 58 of the 85 employees due to a slowdown in our operations. The Company, however, is still paying for benefits for these laid off employees. The future success of the Company is likely dependent on its ability to attain additional capital to develop its proposed products and manufacturing processes and ultimately, upon its ability to attain future profitable operations. There can be no assurance that the Company will be successful in obtaining such financing, or that it will attain positive cash flows from operations.  The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

BUSINESS AND BASIS OF PRESENTATION

Shogun Advertising, Inc. (the Company) incorporated in the State of Nevada on August 14, 1994. On May 10, 1998, the Company changed its name to Xtreme Webworks. As Xtreme Webworks, the Company offered services to internet companies. On April 24, 2002, the Company changed its name to Xtreme Companies, Inc. On November 30, 2002, the Company determined that its internet hosting and marketing business was not strategic to its ongoing objectives and discontinued capital and human resource investment in the business. On April 26, 2002, the Company executed an Acquisition Agreement with Waste Renewal Systems, Inc., a Nevada Corporation. Waste Renewal Systems, Inc. provided an innovative and proprietary waste processing solution for municipal solid waste disposal.  On May 15, 2002, the Company executed an Acquisition Agreement with Nucon International, Inc., a Nevada corporation who later changed its name to Nuclear Reduction Systems, Inc.  Nuclear Reductions Systems, Inc. provided cutting edge technology in the nuclear waste treatment industry. In July 2003, the Company discontinued the operation of Waste Renewal Systems, Inc. and Nuclear Reduction Systems, Inc., due to the failure to negotiate satisfactory terms for the extension of the license agreements and the Companys inability to commercialize its products.

On October 1, 2003, the Company entered into an Agreement and Plan of Reorganization with Rockwell Power Systems, Inc., a Delaware corporation. As a result of the transaction, Rockwell Power Systems, Inc. became the Companys wholly-owned subsidiary. Under this Agreement, the Company purchased substantially all of the capital stock of Rockwell Power Systems, Inc. for approximately $175,000 in exchange for 60,000,000 shares of its common stock.

Rockwell Power Systems was incorporated in Delaware on January 29, 2001 under the name Rockwell Healthcare Systems, Inc. The Company changed its name on April 12, 2001 to Rockwell Power Systems. On October 1, 2003, the Company purchased the fire and rescue and the recreational boat division from Sonic Jet Performance, Inc.  Pursuant to the Bill of Sale Agreement, Rockwell was granted a license for a period of twenty years to the use the "Sonic Jet Performance" name. Additionally, Rockwell was granted the authority to market and sell fire and rescue and recreational boats everywhere in the world except the Middle East, including Egypt, Lebanon, Turkey, Syria, Jordan, Iraq, Saudi Arabia, Bahrain, Oman, Qatar, the UAE and Yemen.

From October 1, 2003 until February 28, 2005, the Company focused its efforts on manufacturing, marketing and selling specialty boats designed for fire and rescue purposes.  On March 1, 2005, the Company signed an exclusive distribution and marketing agreement with Marine Holdings, Inc., a Missouri corporation d/b/a Challenger Offshore, and Ronald DiBartolo and Gailynn DiBartolo, owners of all outstanding shares of common stock of Marine Holdings, Inc.  Pursuant to the Marketing and Distribution Agreement, the Company administered all marketing and



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sales efforts and was the exclusive distributor of leisure, fishing and performance boats manufactured by Marine Holdings, under the Challenger Offshore name.

The Company provided its key personnel, resources and capital to Marine Holdings, Inc. to facilitate the sales of Marine's products through direct selling and other distributors. All purchase orders flowed through the Company and were immediately assigned to Marine for fulfillment. Marine procured all inventory and assumed responsibility for the shipment and delivery of all of its products ordered by the purchaser. The Company received a five percent cash commission, based on the total sales price as represented on purchase orders received by it or Marine for all product sales.

The Company paid an additional five percent of the total outstanding shares of Xtreme on the closing date to Marine for the right to market, sell and distribute its products upon the terms and subject to the conditions set forth in the Marketing and Distribution Agreement.  Furthermore, Marine offered the Company the option to purchase one-hundred percent of the outstanding shares of the Marine Holdings, Inc.

In March 2005, the Company permanently relocated all its operations to Marine Holdings, Inc. headquarters in Washington, Missouri. The Company did not pay rent to Marine Holdings, pursuant to its Marketing and Distribution Agreement. Effective May 31, 2005, the Company entered into an agreement to terminate its lease for 3,000 square feet of office and assembly space in Stanton, California.  Effective May 31, 2005, the Company entered into an agreement to terminate its lease for 3,000 square feet of storage space in Riverside, California.

On February 28, 2006, the Company finalized the purchase transaction to acquire one-hundred percent of the total outstanding shares of Marine Holdings, Inc., a Missouri corporation d/b/a Challenger Offshore, pursuant to the Marketing and Distribution Agreement of March 1, 2005, and upon the terms and conditions set forth in the Marketing and Distribution Agreement.  In connection with this transaction, the Company paid in full existing loans of Marine Holdings, Inc. at Sun Security Bank.  Funding for payment of these loans was generated through new loans that the Company executed in the amount of $4,123,627.

In mid-2006, the Company discontinued the manufacturing of its mission specific fire and rescue patrol boats and sold all remaining assets related to these products to a third party.

On November 15, 2006, the Company changed its name to Challenger Powerboats, Inc.

On January 29, 2007, with an effective date of January 1, 2007, the Company acquired one-hundred percent of the total outstanding shares of International Marine and Recreation (IMAR) Group, LLC and the assets and technology of Gekko Sports Corporation.  In connection with this transaction, the Company paid approximately $7 million in cash, stock and notes.  IMAR manufacturers the brand name Sugar Sand recreational jet boats and Gekko recreational tow boats at the Companys 80,000 square foot leased facility in Fargo, North Dakota.

As consideration for the acquisition, the Company paid total cash compensation of $256,500 and a total of 150,000 shares of its restricted common stock to Messrs. Bullinger, Crary, Dahl, Shorma and Schlossman, all to be distributed on a pro rata basis. The shares are subject to a lock-up that restricts them from sale for a period of eighteen months from the date of issuance of the shares. The Company also granted these individuals two Promissory Notes, one in the amount of $1,680,778 with interest at a fixed rate of 8% per annum, and one in the amount of $1,151,500 with interest at a fixed rate of 10% per annum, to be distributed pro rata among these individuals. Under the terms of these Notes, the first payment of $168,638 was paid on February 28, 2007 with payments continuing on the same day of each month thereafter until July 28, 2008, at which time the entire unpaid principal balance and all accrued interest shall be due and payable. The Company had full prepayment privileges at any time without prepayment penalty. Interest on these Notes was computed daily on the basis of a 365-day year, for each day all or any part of the principal balance hereof remained outstanding. Payment on the Notes was secured by a security interest in the assets set forth in the Agreement of Purchase and Sale dated January 30, 2007, and a guaranty granted by Dutchess Private Equities Fund, Ltd. as set forth in the Guarantee Agreement, dated January 30, 2007. The guaranty granted on the Note of $1,151,500 by Dutchess was limited to $619,000.  These notes were paid in full on August 29, 2007, at a discount of $213,291.

As part of the Agreement of Purchase and Sale, the Company agreed to guaranty the $125,000 Mercury Marine letter of credit with State Bank of Fargo and a $150,000 GE Commercial Distribution Finance Corporation letter of credit with State Bank of Fargo which were secured by the former IMAR Group, LLC members. This letter of credit was further secured, along with the Notes issued under the Agreement of Purchase and Sale, by the Guarantee



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Agreement with Dutchess.  The GE letter of credit at State Bank of Fargo was replaced on September 7, 2007, with a $150,000 letter of credit at Sun Security Bank, secured by a $150,000 certificate of deposit.  Mercury Marine agreed to terminate the $125,000 letter of credit at State Bank of Fargo.  No replacement was required for this letter of credit.

Through IMAR Group, LLC, the Companys recently acquired wholly-owned subsidiary, the Company entered into an Asset and Technology Acquisition Agreement with Mark Overbye and Gekko Sports Corporation on January 30, 2007. The Company acquired the ownership rights, title and interests in the assets and technology of Gekko Sports Corporation, including patents, trademarks, trade names, trade secrets and goodwill ("Assets and Technology").

In consideration for the Assets and Technology, as well as wages, royalties, commissions and other amounts owed to Mr. Overbye, personally, or Gekko under a prior Technology, Transfer, License or Royalty Agreement by and between Gekko and IMAR, the Company agreed to pay total cash compensation of $670,000 at the closing of the transaction as set forth in a Promissory Note payable with interest at a fixed rate of 10% per annum. Under the terms of the Note, the first payment of $40,238 was due and paid on February 28, 2007 with payments continuing on the same day of each month thereafter until July 28, 2008, at which time the entire unpaid principal balance and all accrued interest shall be due and payable. The Company has full prepayment privileges at any time without prepayment penalty. Interest on this Note is computed daily on the basis of a 365-day year, for each day all or any part of the principal balance hereof shall remain outstanding. Payments not received within 15 days of the due date shall be considered late and shall be subject to a late charge based on the rate of 1% per month. The Company will be in default under the Note if it fails to make a payment under the Note when due, a receiver is appointed for the Company or its guarantor's property, an assignment is made for the benefit of the Company or its guarantor's creditors or a proceeding is commenced by or against the Company or its guarantor in Bankruptcy. In the event the Company defaults under the Note, Mr. Overbye may declare the entire unpaid principal balance on the Note and all accrued interest immediately due, after 30 days notice. The Note is secured by the security interest in the Assets set forth in the Security Agreement.

The Company also agreed to issue Mr. Overbye 31,250 shares of its restricted common stock subject to a Leak-Out Agreement, and warrants to purchase 6,250 shares of its common stock at a strike price of $0.15 and 6,250 shares of its common stock at a strike price of $0.20. The warrants shall vest on January 29, 2009 and resale of the warrants is subject to the Leak-Out Agreement.

In addition, the Company entered into a two-year Employment Agreement with Mr. Overbye. Under the terms of the Employment Agreement, Mr. Overbye will serve as Marketing Director of Challenger Powerboats and Challenger subsidiary companies, Marine Holdings, Inc. and IMAR Group, LLC. Under the terms of the Employment Agreement, the Company agreed to compensate Mr. Overbye with a base salary of $100,000 per year which may be increased at the discretion of the Companys Chief Executive Officer. Mr. Overbye is also entitled to receive a quarterly cash bonus of up to five percent of his base salary. The cash bonus will be calculated based on actual performance applied to performance metrics, as well as a discretionary portion to be determined by the Companys Chief Executive Officer and Board of Directors. The metrics are to be mutually agreed upon by the Companys Board of Directors, Chief Executive Officer and Mr. Overbye.

The Promissory Note of $670,000 under the Asset and Technology Acquisition Agreement, as well as each debt, liability and obligation which IMAR Group or Challenger Powerboats may now or at any time hereafter owe to Mr. Overbye or Gekko Sports Corporation pursuant to such Asset and Technology Acquisition Agreement, is secured pursuant to a Security Agreement entered into on January 29, 2007, between IMAR Group and Challenger Powerboats on one hand and Mark Overbye and Gekko Sports Corporation on the other hand. Under the terms of the Security Agreement, IMAR and Challenger granted Mr. Overbye and Gekko a security interest, subject to security interests held by other lenders to the Company and its subsidiaries, in and to the following property (i) certain assets, trademarks and domain names; (ii) any adaptation, modification, improvement, or enhancement of the foregoing; and (iii) all of the pending and issued patents and patent applications as well as any continuations, continuations-in-part, divisional applications, and any Letters Patent issued there from including reissues, together with all non-U.S. counterparts; together with all substitutions and replacements for and products and proceeds of any of the foregoing property.

As described above, in connection with the acquisition of IMAR and the Assets and Technology of Gekko, the Company issued warrants to purchase 6,250 shares of common stock at a strike price of $0.15 and warrants to purchase 6,250 shares of common stock at a strike price of $0.20.



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On August 29, 2007, IMAR Group, Inc., the Companys wholly-owned subsidiary, completed the sale of certain assets of its Sugar Sand division to Execute Sports, Inc. for a cash purchase price of $5,000,000.  Under the terms of the Asset Purchase Agreement, Execute Sports, Inc. purchased all right, title, interest and goodwill in and to certain assets, properties and rights relating to, used in or held for use in IMARs business of designing, manufacturing and marketing water jet powered Sugar Sand boats, including the Sugar Sand trade name and associated trade names, trademarks, service marks and service names, and the associated logos and their goodwill, and all associated domain names, in particular the domain www.sugarsand.com, trade secrets and copyrights and their goodwill.

In connection with the transaction, Execute Sports, Inc. and IMAR entered into an Agreement for Exclusive Right of Supply, pursuant to which IMAR will manufacture and be the exclusive supplier of the Sugar Sand line of jet boats to Execute Sports, Inc., for an initial term of ten years.  In addition, the Company entered into an Exclusive Sales and Marketing Agreement with Execute Sports, Inc., pursuant to which the Company will provide sales and marketing services related to the Sugar Sand boats for an initial term of ten years.

On September 30, 2007, pursuant to the authority conferred by the Companys Articles of Incorporation upon the Challenger Powerboats Board of Directors, the Company agreed to issue 5,000,000 shares of Series A Preferred Stock, par value of $0.001 per share.  Such number of shares may be increased or decreased by resolution of the Board, provided that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation into Series A Preferred Stock.

On October 18, 2007, the Challenger Powerboats Board of Directors authorized an amendment to the Companys Amended Articles of Incorporation, as amended, to effect a reverse split of the issued and outstanding shares of the Companys common stock, par value $0.001, on a 1 for 20 basis. The Amendment was filed on October 19, 2007 and effective on October 31, 2007 (the Effective Date).  As a result of the reverse split, on the Effective Date, each holder of common stock received 1 share for each 20 shares they owned immediately prior to the Effective Date. Fractional shares were rounded up to the nearest whole share.

The accompanying audited financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for the presentation of interim financial information, but do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. The 2006 audited financial statements were filed in the Company's Form 10-KSB on April 16, 2007, with the Securities and Exchange Commission and are hereby referenced. In the opinion of management, all adjustments considered necessary for a fair presentation have been included.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Challenger Powerboats, Inc. and its wholly-owned subsidiaries; Marine Holdings, Inc., d/b/a Challenger Powerboats, IMAR Group, LLC, d/b/a Sugar Sand and Gekko, and Rockwell Power Systems, Inc.  All significant intercompany accounts and transactions are eliminated in consolidation.  For consolidation purposes, Marine Holdings, Inc. operations have been consolidated from March 1, 2006 forward, in accordance with the closing of that transaction.  For consolidation purposes, IMAR Group, LLC operations have been consolidated from January 1, 2007 forward, in accordance with the terms of the closing transaction.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements.  Significant estimates made in preparing these financial statements include the allowance for doubtful accounts, deferred tax asset valuation allowance and useful lives for depreciable and amortizable assets. Actual results could differ from those estimates.



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CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an original maturity at date of purchase of three months or less to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates market value.

OTHER ASSETS

In conjunction with the purchase of Marine Holdings, Inc. and the loan financing through Sun Security Bank, a certificate of deposit in the amount of $1,000,000 was required by Sun Security Bank.  These funds were acquired by Challenger Powerboats, Inc. through a $1,236,000 convertible debenture with Dutchess Private Equities Fund II, LP, on February 24, 2006.  Because this certificate of deposit has a maturity date of more than three months, it was carried on the Company balance sheet as an Other Asset.  Effective September 30, 2007, Dutchess Private Equities Fund II, LP retired the February 24, 2006 convertible debenture and all interest due on the debenture.  Dutchess intends to continue to hold a certificate of deposit at Sun Security Bank as collateral under various loan agreements with Sun Security Bank.

In conjunction with the establishment of a Marine Holdings, Inc. floor plan credit facility with Bank of America Marine Finance, a letter of credit in the amount of $100,000 was required by Bank of America.  This letter of credit was issued by Sun Security Bank on March 9, 2007, who required a $100,000 certificate of deposit as security.  Because this certificate of deposit has a maturity date of more than three months, it is carried on the Company balance sheet as an Other Asset.

As a condition of the floor plan financing agreement with GE Commercial Distribution Finance Corporation, a letter of credit in the amount of $350,000 was required.  This letter of credit was issued by Sun Security Bank on July 24, 2007, who required a $350,000 certificate of deposit as security.  Because this certificate of deposit has a maturity date of more than three months, it is carried on the Company balance sheet as an Other Asset.

As a condition of the floor plan financing agreement with GE Commercial Distribution Finance Corporation, a letter of credit in the amount of $150,000 was required.  This letter of credit was issued by Sun Security Bank on September 7, 2007, who required a $150,000 certificate of deposit as security.  Because this certificate of deposit has a maturity date of more than three months, it is carried on the Company balance sheet as an Other Asset.

Under the agreement terms for dealer floor plan financing, the GE Commercial Distribution Finance Corporation holds a reserve from each invoice processed before funds are advanced to the Company.  As of December 31, 2007, the reserve balance totaled $137,155.

On July 19, 2007, we entered in a professional service and license agreement with Pininfarina Extra USA Corporation.  Under the terms of this agreement, Pininfarina will design two boats for the Challenger product line for a total design fee of $200,000, which has been paid in full to Pininfarina, and we are authorized to use the Pininfarina name for marketing and advertising.  Also under the terms of the agreement, Challenger agrees to pay royalty fees to Pininfarina for each boat sold in 2008.  Challenger is contractually obligated to pay to Pininfarina royalties for a minimum 25 boats in aggregate of both boat categories during the first twelve months of the agreement. Challenger guaranteed to Pininfarina minimum royalty payments during the first twelve months of the Agreement of $226,000.  Challenger paid $50,000 of the total commitment upon execution of the agreement in July 2007, leaving an unpaid balance of $176,000.  Under the terms of the agreement, if Challenger is unable to meet the minimum commitments for the twelve month period, upon the completion of the first twelve month period, either party has the right to rescind the agreement, at which time Challenger loses its right to use the Pininfarina trademark and Challengers obligation to pay royalties thereafter will cease.

ADVANCES TO MARINE HOLDINGS, INC.

During 2004, 2005 and the two months of January and February 2006, the Company provided financing to Marine Holdings, Inc., d/b/a Challenger Offshore, a Missouri boat manufacturer totaling $144,605, $2,311,891, and $1,254,398, respectively.  These advances have been eliminated in the consolidated financial statements. The Company provided this financing in the form of advances pursuant to the Marketing and Distribution Agreement executed between the two companies on March 1, 2005. Pursuant to the Marketing and Distribution Agreement, the Company administered all marketing and sales efforts and was the exclusive distributor of leisure, fishing and performance boats manufactured by Marine, under the Challenger Offshore name.



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On February 28, 2006, the Company finalized the purchase transaction to acquire one-hundred percent of the total outstanding shares of Marine Holdings, Inc., a Missouri corporation d/b/a Challenger Offshore, pursuant to the Marketing and Distribution Agreement of March 1, 2005 and upon the terms and conditions set forth in the Marketing and Distribution Agreement.  In connection with this transaction, existing loans of Marine Holdings, Inc. at Sun Security Bank were paid in full by Challenger Powerboats, Inc.  Funding for payment of these loans was generated through new loans executed by Challenger Powerboats, Inc. in the amount of $4,123,627.

ACCOUNTS RECEIVABLE

The Company reported an Accounts Receivable balance for December 31, 2007 of $370,469. The Company

maintains an allowance for doubtful accounts for estimated losses that may arise if any of its customers are unable to make required payments.  Management specifically analyzes the age of customer balances, historical bad debt experience, customer credit-worthiness, and changes in customer payment terms when making estimates of the uncollectibility of its trade accounts receivable balances. If the Company determines that the financial conditions of any of its customers has deteriorated, whether due to customer specific or general economic issues, an increase in the allowance may be made. Accounts receivable are written off when all collection attempts have failed.  Due to the preapproved floor plan financing, cash in advance and cash on delivery payment terms provided to most customers, the likelihood of an uncollectible account is relatively low.

INVENTORY

The finished boat inventory of $1,007,268 consists of twenty-seven boats.  The $90,610 at December 31, 2007 of trailer inventory consists of trailers which the Company intends to be resold when the boats in inventory are sold.  The Challenger trailers are built specific to the model of boat.

The boats-in-process inventory of $532,961 at December 31, 2007 consists of Challenger boats in various stages of the manufacturing process, which will be sold under the following brands  Challenger Powerboats, Sugar Sand and Gekko. The $445,901 at December 31, 2007 of parts inventory consists primarily of small parts, stereos, windows, steering systems, and engines for use in the Challenger manufactured boats.   The inventory is routinely analyzed and reviewed to determine if there is excess or obsolete inventory.  Any inventory determined to be excess or obsolete is returned to vendors or sold.  In the event there is any remaining inventory, it is expensed and written-off the balance sheet.

PROPERTY & EQUIPMENT

Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets, e.g. computers  (5  years),  software  (3 years), office equipment and furniture (3-7 years),  tenant  improvements  (life  of  the  lease - approximately 60 months).

LONG-LIVED ASSETS

SFAS No. 121,  "Accounting  for  the  Impairment  of Long-Lived Assets and for Long-Lived  Assets  to  Disposed of" requires that long-lived assets be reviewed for  impairment  whenever  events  or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company has adopted this statement  and  determined  an  impairment  loss was needed to be recognized for applicable  assets  of  continuing  operations  in  2004.

STOCK-BASED COMPENSATION

The Company has adopted the use of Statement of Financial Accounting Standards No. 123R, Share-Based Payment, (SFAS No. 123R). This Statement requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost is recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance and eliminates the alternative to use Opinion 25s intrinsic value method of accounting that was provided in Statement 123 as originally issued.



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FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments, including  cash  and  cash equivalents, accounts  receivable,  accounts  payable  and accrued liabilities are carried at cost,  which approximates their fair value, due to the relatively short maturity of  these  instruments.  As  of  December  31,  2007  and December 31, 2006, the Company's  notes  payable  have  stated borrowing rates that are consistent with those  currently available to the Company and, accordingly, the Company believes the  carrying  value  of  these  debt instruments approximates their fair value.

REVENUE RECOGNITION

The Company recognizes income when the products are shipped, and when the service is provided.  The Company applies the provisions of SEC Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The Companys revenues earned from boat sales and related services are recorded when the boat is completed at the manufacturing plant and the customer is invoiced.  The manufacturer's certificate of origin is not provided to the customer until the boat has been paid in full. Challenger Powerboat product is recorded when the service is provided, or when the boat is completed at the manufacturing plant and the customer is invoiced.  All boats are sold FOB Washington, Missouri or Fargo, North Dakota.  Bulletin No. 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for the disclosure of revenue recognition policies. The Companys revenue recognition policy for sale of products is in compliance with Bulletin No.  104.  Revenue  from the  sale  of products is recognized when a formal arrangement exists, the price is  fixed,  or  determinable,  the  delivery  is completed and collectibility is reasonably  assured.  As a  result  of  the Companys  sales  terms,  the  likelihood  of uncollectible  accounts  receivable  remains  low.

NET LOSS PER SHARE

SFAS No. 128, "Earnings per Share," requires presentation of basic loss per share and diluted loss per share. The computation of basic loss per share is computed by dividing loss available to common stockholders by the weighted-average number of outstanding common shares during the period. Diluted loss per share gives effect to all dilutive potential common shares outstanding and all shares held in treasury during the period. The computation of diluted loss per share does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on losses.

Net loss per common share is computed using the weighted average number of common shares outstanding during the periods presented. Convertible debentures and warrants may have a dilutive effect on the Company's earnings per share in the future but are not included in the calculation. As of December 31, 2007, convertible debentures could convert into 1,177,176 shares of common stock and 156,200 shares of common stock could be issued pursuant to the exercise of warrants.  Series A Preferred Debt conversion agreements could potentially convert into 5,236,700 shares of common stock.

SHIPPING AND HANDLING COSTS

Shipping and handling costs are expensed when incurred.  All sales are recorded when the products are shipped to the customer. The Company bills its customers on a separate basis for shipping and handling costs. Amounts billed to customers for shipping and handling are recorded as revenues, and more specifically within the "product sales" revenue subcategory. Amounts incurred by the Company for shipping  and  handling  costs  related to the sale and delivery of goods to its customers  are  included  in  other  operating  expenses  in  the  statement  of operations.  Total shipping and handling costs were $246,724 and $29,965 for the years ended December 31, 2007 and 2006, respectively.

INCOME TAXES

There has been no provision for U.S. federal, state, or foreign income taxes for any period because the Company has incurred losses in all periods and for all jurisdictions.  Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets are as follows:



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|                                            |      |              |      |   |             
|------------------------------------------- | ---- | ------------ | ---- | - | ------------
|                                            | 2006 |              | 2006
|Deferred tax assets:                        |      |              |      |   |             
|Net operating loss carryforwards            | $    | 33,864,121   |      | $ | 29,207,181  
|Valuation allowance for deferred tax assets |      | (33,864,121) |      |   | (29,207,181)
|                                            |      |              |      |   |             
|Net deferred tax assets                     | $    | -            |      | $ | -           



Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. As of December 31, 2007, the Company had net operating loss carryforwards of approximately $33,864,121 or federal income tax purposes.  Utilization of the net operating loss may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions.  The annual limitation could result in the expiration of the net operating loss before utilization.

NOTE  2.

TRADE ACCOUNTS RECEIVABLE

As of December 31, 2007, trade accounts receivable is $370,469.

NOTE  3.

INVENTORY

The finished boat inventory of $1,007,268 consists of twenty-seven boats.  The $90,610 at December 31, 2007 of trailer inventory consists of trailers which the Company intends to be resold when the boats in inventory are sold.  The Challenger trailers are built specific to the model of boat.

The boats-in-process inventory of $532,961 at December 31, 2007 consists of Challenger boats in various stages of the manufacturing process, which will be sold under the following brands  Challenger Powerboats, Sugar Sand and Gekko. The $445,901 at December 31, 2007 of parts inventory consists primarily of small parts, stereos, windows, steering systems, and engines for use in the Challenger manufactured boats.   The inventory is routinely analyzed and reviewed to determine if there is excess or obsolete inventory.  Any inventory determined to be excess or obsolete is returned to vendors or sold.  In the event there is any remaining inventory, it is expensed and written-off the balance sheet.

As of December 31, 2007, inventory consists of the following:

|                |   |          
|--------------- | - | ---------
|Finished boats  | $ | 1,007,268
|Trailers        |   | 90,610   
|Parts           |   | 445,901  
|Work-in-process |   | 532,961  
|                |   |          
|                | $ | 2,076,740





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NOTE  4.

PROPERTY AND EQUIPMENT



Property and equipment at December 31, 2007 and 2006 consists of the following:



|                                               |      |             |      |   |          
|---------------------------------------------- | ---- | ----------- | ---- | - | ---------
|                                               | 2007 |             | 2006
|Machinery & equipment                          | $    | 458,679     |      | $ | 194,124  
|Building & land                                |      | 961,675     |      |   | 990,021  
|Boat Molds                                     |      | 1,146,392   |      |   | 602,203  
|Autos & trucks                                 |      | 71,151      |      |   | 69,000   
|Trailers for yard use                          |      | 26,129      |      |   | 26,129   
|Furniture and fixtures                         |      | 47,544      |      |   | 11,070   
|Computers and software                         |      | 64,403      |      |   | -        
|R&D Inventory Asset                            |      | 41,800      |      |   | -        
|Leasehold improvements                         |      | 595,819     |      |   | 246,284  
|                                               | $    | 3,413,592   |      | $ | 2,138,831
|Less accumulated depreciation and amortization |      | (1,099,461) |      |   | (477,161)
|                                               |      |             |      |   |          
|                                               | $    | 2,314,131   |      | $ | 1,661,670



NOTE  5.

ADVANCES TO MARINE HOLDINGS, INC.

During 2004, 2005, and the two months of January and February 2006, the Company provided financing to Marine Holdings, Inc. d/b/a Challenger Offshore, a Missouri boat manufacturer, totaling $144,605, $2,311,891, and $1,254,398 respectively. These advances have been eliminated in the consolidated financial statements subsequent to the purchase and merge with Xtreme. The Company provided this financing in the form of advances pursuant to the Marketing and Distribution Agreement executed between the two companies on March 1, 2005. Pursuant to the Marketing and Distribution Agreement, the Company administered all marketing and sales efforts and was the exclusive distributor of leisure, fishing and performance boats manufactured by Marine, under the Challenger Offshore name.

On February 28, 2006, the Company finalized the purchase transaction to acquire one-hundred percent of the total outstanding shares of Marine Holdings, Inc. pursuant to the Marketing and Distribution Agreement of March 1, 2005 and upon the terms and conditions set forth in the Marketing and Distribution Agreement.  In connection with this transaction, existing loans of Marine Holdings, Inc. at Sun Security Bank were paid in full by Xtreme Companies, Inc.  Funding for payment of these loans was generated through new loans executed by Xtreme Companies, Inc. in the amount of $4,123,627.

NOTE  6.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses at December 31, 2007 consist of the following:

|                                    |   |          
|----------------------------------- | - | ---------
|Accounts payable & accrued expenses | $ | 2,263,039
|Accrued interest                    |   | 365,744  
|Accrued dividends                   |   | 84,913   
|Accrued salaries & vacations        |   | 164,863  
|                                    |   |          
|                                    | $ | 2,878,559



NOTE  7.

CONVERTIBLE DEBENTURES AND PROMISSORY NOTES WITH RELATED PARTIES

On October 1, 2003, the Company entered into an investment agreement with eFund Capital Partners, LLC for $50,000 whereby the Company issued a convertible debenture. The debenture is convertible into the Companys common stock at the lesser of 75% of the lowest closing bid price of the common stock during the previous fifteen trading days or 100% of the average of the five lowest bid prices of the common stock for the thirty trading days prior to closing.



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On January 20, 2004, the Company entered into an investment agreement with Dutchess Private Equity Fund II, LP for $20,665 whereby the Company issued a convertible debenture. The debenture is convertible into the Company's common stock at the lesser of 75% of the lowest closing bid price of the common stock during the previous fifteen trading days or 100% of the average of the five lowest  bid  prices of the common stock for the thirty trading days prior to closing. On September 30, 2007, the Company entered into an amended and restated convertible debenture with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this debenture, as well as all Dutchess debentures entered into with Dutchess between the dates of January 20, 2004 and February 22, 2006 were consolidated into one new debenture totaling $2,784,685.

On February 18, 2004, the Company entered into an investment agreement with Preston Capital Partners, LLC for $28,000 whereby the Company issued a convertible debenture.  The debenture is convertible into the Company's common stock at the lesser of 75% of the lowest closing bid price of the common stock during the previous fifteen trading days or 100% of the average of the five lowest  bid  prices  of  the  common  stock for the thirty trading days prior to closing.  As of September 30, 2007, $20,404 of this Note had been repaid and the balance is $7,596.

On February 18, 2004, the Company entered into an investment agreement with eFund Capital Partners, LLC for $28,000 whereby the Company issued a convertible debenture. The debenture is convertible into the Companys common stock at the lesser of 75% of the lowest closing bid price of the common stock during the previous fifteen trading days or 100% of the average of the five lowest bid prices of the common stock for the thirty trading days prior to closing.

On February 23, 2004, the Company entered into an investment agreement with eFund Capital Partners, LLC for $40,000 whereby the Company issued a convertible debenture. The debenture is convertible into the Companys common stock at the lesser of 75% of the lowest closing bid price of the common stock during the previous fifteen trading days or 100% of the average of the five lowest bid prices of the common stock for the thirty trading days prior to closing.

On October 18, 2004, the Company entered into an investment agreement with Dutchess Private Equity Fund II, LP, for $20,000 whereby the Company issued a convertible debenture.  The debenture is convertible into the Companys common stock at the lesser of 75% of the lowest closing bid price of the common stock during the previous fifteen trading days or 100% of the average of the five lowest bid prices of the common stock for the  thirty trading days prior to closing.  On September 30, 2007, the Company entered into an amended and restated convertible debenture with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this debenture, as well as all Dutchess debentures entered into with Dutchess between the dates of January 20, 2004 and February 22, 2006 were consolidated into one new debenture totaling $2,784,685.

On October 18, 2004, the Company entered into an investment agreement with eFund Capital Partners, LLC for $18,000 whereby the Company issued a convertible debenture. The debenture is convertible into the Companys common stock at the lesser of 75% of the lowest closing bid price of the common stock during the previous fifteen trading days or 100% of the average of the five lowest bid prices of the common stock for the thirty trading days prior to closing.

On December 15, 2004, the Company entered into an investment agreement with eFund Capital Partners, LLC for $38,400 whereby the Company issued a convertible debenture. The debenture is convertible into the Companys common stock at the lesser of 75% of the lowest closing bid price of the common stock during the previous fifteen trading days or 100% of the average of the five lowest bid prices of the common stock for the thirty trading days prior to closing.

On December 23, 2004, the Company entered into an investment agreement with Dutchess Private Equity Fund II LP, for $240,000 whereby the Company issued a convertible debenture. The debenture is convertible into the Companys common stock at the lesser of 75% of the lowest closing bid price of the common stock during the previous fifteen trading days or 100% of the average of the five lowest bid prices of the common stock for the thirty  trading days prior to closing. On September 30, 2007, the Company entered into an amended and restated convertible debenture with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this debenture, as well as all Dutchess debentures entered into with Dutchess between the dates of January 20, 2004 and February 22, 2006 were consolidated into one new debenture totaling $2,784,685.



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On January 3, 2005, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund II, LP, in the amount of $240,000, at a discount of $40,000. The debenture has an 8% interest rate and is due and payable January 3, 2010. The purchaser of the convertible debenture is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price of the common stock during the fifteen trading days prior to the Conversion Date or (ii) 100% of the average closing bid prices for the twenty trading days immediately preceding the Closing Date of the Transaction.  On September 30, 2007, the Company entered into an amended and restated convertible debenture with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this debenture, as well as all Dutchess debentures entered into with Dutchess between the dates of January 20, 2004 and February 22, 2006 were consolidated into one new debenture totaling $2,784,685.

In connection with the above financing, the Company issued a warrant to Dutchess Private Equities Fund, LP to purchase 1,000 shares of common stock at $3.00 per share.  The warrant has a term of five years.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby Dutchess cancels all outstanding warrant agreements as of September 30, 2007.

On March 8, 2005, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $120,000, at a discount of $20,000. The debenture has an 8% interest rate and is due and payable March 8, 2010. The  purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) 100% of the average closing bid prices for  the twenty  trading days immediately  preceding  the Closing Date of the Transaction. On September 30, 2007, the Company entered into an amended and restated convertible debenture with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this debenture, as well as all Dutchess debentures entered into with Dutchess between the dates of January 20, 2004 and February 22, 2006 were consolidated into one new debenture totaling $2,784,685.

In connection with the above financing, the Company issued a warrant to Dutchess Private Equities Fund, LP to purchase 300 shares of common stock at $3.00 per share. The warrant has a term of five years. On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby Dutchess cancels all outstanding warrant agreements as of September 30, 2007.

On March 10, 2005, the Company entered into a Convertible Debenture Agreement with eFund Capital Partners, LLC, in the amount of $60,000, at a discount of $10,000. The debenture has an 8% interest rate and is due and payable March 10, 2010. The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) fifteen cents per share.

In connection with the above financing, the Company issued a warrant to eFund Capital Partners, LLC to purchase 150 shares of common stock at $3.00 per share. The warrant has a term of five years and expires March 10, 2010.

On March 18, 2005, the Company entered into a Convertible Debenture Agreement with eFund Capital Partners, LLC, in the amount of $60,000, at a discount of $10,000. The debenture has an 8% interest rate and is due and payable March 18, 2010. The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) 100% of the average closing bid prices for the twenty trading days immediately preceding the Closing Date of the Transaction.

In connection with the above financing, the Company issued a warrant to eFund Capital Partners, LLC to purchase 150 shares of common stock at $3.00 per share. The warrant has a term of five years and expires March 18, 2010.

On April 18, 2005, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $84,000, at a discount of $14,000.  The debenture has an 8% interest rate and is due and payable April 18, 2010. The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) 100% of the average closing bid prices for the twenty trading days immediately preceding the Closing Date of the Transaction.  On September 30, 2007, the Company entered into an amended and restated convertible debenture with Dutchess Private Equities Fund, Ltd.,



45



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whereby all principal and interest outstanding under this debenture, as well as all Dutchess debentures entered into with Dutchess between the dates of January 20, 2004 and February 22, 2006 were consolidated into one new debenture totaling $2,784,685.

In connection with the above financing, the Company issued a warrant to Dutchess Private Equities Fund, LP to purchase 210 shares of common stock at $7.00 per share. The warrant has a term of five years. On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby Dutchess cancels all outstanding warrant agreements as of September 30, 2007.

On May 5, 2005, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $192,000, at a discount of $32,000. The debenture has an 8% interest rate and is due and payable May 5, 2010. The purchaser  of  the convertible debentures is entitled to convert the face amount of  the  debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the  Conversion  Date or (ii)  100%  of the average closing bid prices for the twenty  trading  days immediately preceding the Closing Date of the Transaction. On September 30, 2007, the Company entered into an amended and restated convertible debenture with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this debenture, as well as all Dutchess debentures entered into with Dutchess between the dates of January 20, 2004 and February 22, 2006 were consolidated into one new debenture totaling $2,784,685.

In connection with the above financing, the Company issued a warrant to Dutchess Private Equities Fund, LP to purchase 480 shares of common stock at $4.40 per share.  The warrant has a term of five years.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby Dutchess cancels all outstanding warrant agreements as of September 30, 2007.

On May 13, 2005, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund II, LP, in the amount of $228,000, at a discount of $38,000. The debenture has an 8% interest rate and is due and payable May 13, 2010.  The  purchaser  of  the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser  of  (i)  75%  of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) 100% of the average closing bid prices for  the  twenty  trading  days  immediately  preceding  the Closing Date of the Transaction.  On September 30, 2007, the Company entered into an amended and restated convertible debenture with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this debenture, as well as all Dutchess debentures entered into with Dutchess between the dates of January 20, 2004 and February 22, 2006 were consolidated into one new debenture totaling $2,784,685.

In connection with the above financing, the Company issued a warrant to Dutchess Private Equities Fund II, LP to purchase 950 shares of common stock at $4.00 per share. The warrant has a term of five years. On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby Dutchess cancels all outstanding warrant agreements as of September 30, 2007.

On May 18, 2005, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund II, LP, in the amount of $101,817, at a discount of $26,817. The debenture has an 8% interest rate and is due and payable May 18, 2010. The  purchaser  of  the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser  of  (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) 100% of the average closing bid prices for  the  twenty  trading  days  immediately  preceding the Closing Date of the Transaction. On September 30, 2007, the Company entered into an amended and restated convertible debenture with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this debenture, as well as all Dutchess debentures entered into with Dutchess between the dates of January 20, 2004 and February 22, 2006 were consolidated into one new debenture totaling $2,784,685.

In connection with the above financing, the Company issued a warrant to Dutchess Private Equities Fund II, LP to purchase 255 shares of common stock at $4.00 per share. The warrant has a term of five years. On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby Dutchess cancels all outstanding warrant agreements as of September 30, 2007.



46



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On May 20, 2005, the Company entered into a Convertible Debenture Agreement with eFund Capital Partners, LLC, in the amount of $120,000, at a discount of $20,000. The debenture has an 8% interest rate and is due and payable May 20, 2010.  The purchaser of the convertible debentures is entitled to convert the face amount of  the  debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) 100% of the average closing bid prices for the twenty trading days immediately preceding the Closing Date of the Transaction.

In connection with the above financing, the Company issued a warrant to eFund Capital Partners, LLC to purchase 300 shares of common stock at $4.00 per share. The warrant has a term of five years and expires May 20, 2010.

On June 16, 2005, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund II LP, in the amount of $240,000, at a discount of $30,000.  The debenture has an 8% interest rate and is due and payable June 16, 2010.  The  purchaser  of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days  prior  to  the  Conversion  Date  or  (ii)  fifteen  cents  per  share.  On September 30, 2007, the Company entered into an amended and restated convertible debenture with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this debenture, as well as all Dutchess debentures entered into with Dutchess between the dates of January 20, 2004 and February 22, 2006 were consolidated into one new debenture totaling $2,784,685.

In connection with the above financing, the Company issued a warrant to Dutchess Private Equities Fund II, LP, to purchase 600 shares of common stock at $3.20 per share.  The warrant has a term of five years.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby Dutchess cancels all outstanding warrant agreements as of September 30, 2007.

On July 7, 2005, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund II, LP, in the amount of $228,000, at a discount of $28,000.  The debenture has an 8% interest rate and is due and payable July 7, 2010.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) fifteen cents per share.  On September 30, 2007, the Company entered into an amended and restated convertible debenture with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this debenture, as well as all Dutchess debentures entered into with Dutchess between the dates of January 20, 2004 and February 22, 2006 were consolidated into one new debenture totaling $2,784,685.

In connection with the above financing, the Company issued a warrant to Dutchess Private Equities Fund II, LP to purchase 570 shares of common stock at $2.40 per share. The warrant has a term of five years.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby Dutchess cancels all outstanding warrant agreements as of September 30, 2007.

On July 7, 2005, the Company entered into a Convertible Debenture Agreement with eFund Capital Partners, LLC, in the amount of $72,000, at a discount of $12,000. The debenture has an 8% interest rate and is due and payable July 7, 2010. The purchaser of the convertible debentures is entitled to convert the face amount of  the  debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) fifteen cents per share.

In connection with the above financing, the Company issued a warrant to eFund to purchase 180 shares of common stock at $2.40 per share. The warrant has a term of five years and expires July 7, 2010.

On July 21, 2005, the Company issued a non-interest bearing Convertible Promissory Note to Dutchess Private Equities Fund, LP in the amount of $120,000.  The Note carries an interest rate of 0% per year and was due on December 21, 2005.  The Note carries a discounted amount of $10,000. During the year ended December 31, 2006, $0 of this Note was repaid, and the balance at September 29, 2007 was $120,000. The Note was extended and is due and payable with thirty days notice from Dutchess Private Equities Fund, LP. On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 12,000 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share. The original Convertible Debenture Agreement has been cancelled and terminated.



47



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On August 5, 2005, the Company issued a non-interest bearing Convertible Promissory Note to Dutchess Private Equities Fund, LP in the amount of $144,000. The Note carries an interest rate of 0% per year and was due on January 5, 2006.  The Note carries a discounted amount of $24,000. During the year ended December 31, 2006, $0 of this Note was repaid, and the balance at September 29, 2007 was $144,000. The Note was extended and is due and payable with thirty days notice from Dutchess Private Equities Fund, LP. On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 14,400 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share. The original Convertible Debenture Agreement has been cancelled and terminated.

On August 22, 2005, the Company issued a non-interest bearing Convertible Promissory Note to Dutchess Private Equities Fund, LP in the amount of $180,000. The Note carries an interest rate of 0% per year and was due on August 22, 2006. The Note carries a discounted amount of $30,000.  During the year ended December 31, 2006, $0 of this Note was repaid, and the balance at September 29, 2007 was $180,000. The Note was extended and is due and payable with thirty days notice from Dutchess Private Equities Fund, LP. On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 18,000 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share. The original Convertible Debenture Agreement has been cancelled and terminated.

On September 1, 2005, the Company issued a non-interest bearing Convertible Promissory Note to Dutchess Private Equities Fund, LP in the amount of $72,000. The Note carries an interest rate of 0% per year and was due on September 1, 2006. The Note carries a discounted amount of $12,000.  During the year ended December 31, 2006, $0 of this Note was repaid, and the balance at September 29, 2007 was $72,000. The Note was extended and is due and payable with thirty days notice from Dutchess Private Equities Fund, LP. On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 7,200 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On September 7, 2005, the Company issued a non-interest bearing Convertible Promissory Note to Dutchess Private Equities Fund, LP in the amount of $108,000. The Note carries an interest rate of 0% per year and was due on September 7, 2006. The Note carries a discounted amount of $18,000.  During the year ended December 31, 2006, $0 of this Note was repaid, and the balance at September 29, 2007 was $108,000. The Note was extended and is due and payable with thirty days notice from Dutchess Private Equities Fund, LP. On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 10,800 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share. The original Convertible Debenture Agreement has been cancelled and terminated.

On September 15, 2005, the Company issued a non-interest bearing Convertible Promissory Note to Dutchess Private Equities Fund, LP in the amount of $201,000.  The Note carries an interest rate of 0% per year and was due on September 15, 2006.  The Note carries a discounted amount of $33,500.  During the year ended December 31, 2006, $0 of this Note was repaid, and the balance at September 29, 2007 was $201,000.  The Note was extended and is due and payable with thirty days notice from Dutchess Private Equities Fund, LP.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 20,100 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On September 22, 2005, the Company issued a non-interest bearing Convertible Promissory Note to Dutchess Private Equities Fund, LP in the amount of $158,400.  The Note carries an interest rate of 0% per year and was due on September 22, 2006.  The note carries a discounted amount of $26,400.  During the year ended December 31, 2006, $0 of this Note was repaid, and the balance at September 29, 2007 was $158,400.  The Note was extended and is due and payable with thirty days notice from Dutchess Private Equities Fund, LP.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 15,840 shares of Series A



48



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preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On September 30, 2005, the Company issued a non-interest bearing Convertible Promissory Note to Dutchess Private Equities Fund, LP in the amount of $236,400.  The Note carries an interest rate of 0% per year and was due on September 30, 2006.  The Note carries a discounted amount of $39,400.  During the year ended December 31, 2006, $0 of this Note was repaid, and the balance at September 29, 2007 was $236,400.  The Note was extended and is due and payable with thirty days notice from Dutchess Private Equities Fund, LP.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 23,640 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On October 7, 2005, the Company issued a non-interest bearing Convertible Promissory Note to Dutchess Private Equities Fund, LP in the amount of $222,000.  The Note carries an interest rate of 0% per year and was due on October 7, 2006.  The Note carries a discounted amount of $37,000.  During the year ended December 31, 2006, $0 of this Note was repaid, and the balance at September 29, 2007 was $222,000.  The Note was extended and is due and payable with thirty days notice from Dutchess Private Equities Fund, LP.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 22,200 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On October 14, 2005, the Company issued a non-interest bearing Convertible Promissory Note to Dutchess Private Equities Fund, LP in the amount of $192,000.  The Note carries an interest rate of 0% per year and was due on October 14, 2006.  The Note carries a discounted amount of $32,000.  During the year ended December 31, 2006, $0 of this Note was repaid, and the balance at September 29, 2007 was $192,000.  The Note was extended and is due and payable with thirty days notice from Dutchess Private Equities Fund, LP.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 19,200 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On November 1, 2005, the Company entered into a twelve month consulting agreement with Dutchess Advisors, LLC.  In connection with the consulting agreement, we entered into a Convertible Debenture Agreement with Dutchess Advisors, LLC, in the amount of $500,000, at a discount of $497,000.  The debenture has a 5% interest rate and is due and payable November 1, 2010.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest  into  the Companys common stock at the lesser of (I) 75% of the lowest closing bid price during the five trading days prior to the Conversion Date or (ii) 100% of  the  average  closing  bid  prices  for  the  five  trading days immediately preceding  the  Closing  Date  of  the  Transaction.  On September 30, 2007, the Company entered into an agreement with Dutchess Advisors, LLC, whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 54,583 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On November 1, 2005, the Company issued a non-interest bearing Convertible Promissory Note to Dutchess Private Equities Fund II, LP in the amount of $156,000.  The Note carries an interest rate of 0% per year and was due on November 1, 2006.  The note carries a discounted amount of $26,000.  During the year ended December 31, 2006, $0 of this Note was repaid, and the balance at September 29, 2007 was $156,000.  The Note was extended and is due and payable with thirty days notice from Dutchess Private Equities Fund II, LP.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 15,600 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On November 9, 2005, the Company issued a non-interest bearing Convertible Promissory Note to Dutchess Private Equities Fund II, LP in the amount of $216,000.  The Note carries an interest rate of 0% per year and was due on November 9, 2006.  The note carries a discounted amount of $36,000.  During the year ended December 31, 2006,



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$0 of this Note was repaid, and the balance at September 29, 2007 was $216,000.  The Note was extended and is due and payable with thirty days notice from Dutchess Private Equities Fund II, LP.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 21,600 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On November 22, 2005, the Company issued a non-interest bearing Convertible Promissory Note to Dutchess Private Equities Fund II, LP in the amount of $60,000.  The Note carries an interest rate of 0% per year and was due on November 22, 2006.  The Note carries a discounted amount of $10,000.  The Note was extended and is due and payable with thirty days notice from Dutchess Private Equities Fund II, LP. During the year ended December 31, 2005, $17,234 of this Note was repaid and during the year ended December 31, 2006, $42,666 of this Note was repaid.  The balance at September 30, 2007 was $0.

On December 6, 2005, the Company issued a non-interest bearing Convertible Promissory Note to Dutchess Private Equities Fund II, LP in the amount of $216,000.  The Note carries an interest rate of 0% per year and was due on December 6, 2006.  The Note carries a discounted amount of $36,000.  During the year ended December31, 2006, $0 of this Note was repaid, and the balance at September 29, 2007 was $216,000.  The Note was extended and is due and payable with thirty days notice from Dutchess Private Equities Fund II, LP. On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 21,600 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On January 3, 2006, the Company issued a non-interest bearing Convertible Promissory Note to Dutchess Private Equities Fund II, LP in the amount of $302,400.  The Note carries an interest rate of 0% per year and is due on January 3, 2011.  The Note carries a discounted amount of $50,400.  During the year ended December 31, 2006, $0 of this Note was repaid, and the balance at September 29, 2007 was $302,400.  The Note was extended and is due and payable with thirty days notice from Dutchess Private Equities Fund II, LP.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 30,240 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On January 27, 2006, the Company issued a non-interest bearing Convertible Promissory Note to Dutchess Private Equities Fund II, LP in the amount of $59,254.  The Note carries an interest rate of 0% per year and is due on July 27, 2006.  The Note carries a discounted amount of $9,876.  During the year ended December 31, 2006, $0 of this Note was repaid, and the balance at September 29, 2007 was $59,254.  The Note was extended and is due and payable with thirty days notice from Dutchess Private Equities Fund II, LP.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 5,925 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On February 1, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $132,000, at a discount of $22,000.  The debenture has a 10% interest rate and is due and payable February 1, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of two dollars.  On September 30, 2007, the Company entered into an amended and restated convertible debenture with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this debenture, as well as all Dutchess debentures entered into with Dutchess between the dates of January 20, 2004 and February 22, 2006 were consolidated into one new debenture totaling $2,784,685.

On February 3, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $192,000, at a discount of $32,000.  The debenture has a 10% interest rate and is due and payable February 3, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid



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price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of two dollars. During the year ended December 31, 2006, $192,000 of this Note was repaid, and the balance at June 30, 2007 is $0.

On February 10, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund II, LP, in the amount of $192,000, at a discount of $32,000.  The debenture has a 10% interest rate and is due and payable February 10, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of one dollar and sixty cents. During the year ended December 31, 2006, $43,000 of this Note was repaid, and the balance at September 29, 2007 was $149,000.  On September 30, 2007, the Company entered into an amended and restated convertible debenture with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this debenture, as well as all Dutchess debentures entered into with Dutchess between the dates of January 20, 2004 and February 22, 2006 were consolidated into one new debenture totaling $2,784,685.

On February 14, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund II, LP, in the amount of $192,000, at a discount of $32,000.  The debenture has a 10% interest rate and is due and payable February 14, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of one dollar and sixty cents.   On September 30, 2007, the Company entered into an amended and restated convertible debenture with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this debenture, as well as all Dutchess debentures entered into with Dutchess between the dates of January 20, 2004 and February 22, 2006 were consolidated into one new debenture totaling $2,784,685.

On February 22, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund II, LP, in the amount of $150,000, at a discount of $25,000.  The debenture has a 10% interest rate and is due and payable February 22, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of one dollar and sixty cents.On September 30, 2007, the Company entered into an amended and restated convertible debenture with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this debenture, as well as all Dutchess debentures entered into with Dutchess between the dates of January 20, 2004 and February 22, 2006 were consolidated into one new debenture totaling $2,784,685.

On February 24, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund II, LP, in the amount of $1,236,000, at a discount of $206,000.  The debenture has a 10% interest rate and is due and payable February 24, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of one dollar and sixty cents. On September 30, 2007, Dutchess Capital rescinded the original Convertible Debenture Agreement.  All interest booked through this date has been eliminated.

On February 28, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $234,000, at a discount of $39,000.  The debenture has a 10% interest rate and is due and payable February 28, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of one dollar and sixty cents. During the year ended December 31, 2006, $150,690 of this Note was repaid, and the balance at September 29, 2007 was $83,310.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 10,308 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On March 2, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $132,000, at a discount of $22,000.  The debenture has a 10% interest rate and is due and payable March 2, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the



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debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of one dollar and sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 15,290 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On March 9, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $434,400, at a discount of $72,400.  The debenture has a 10% interest rate and is due and payable March 2, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of one dollar and sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 50,318 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On April 3, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $375,600, at a discount of $62,600.  The debenture has a 10% interest rate and is due and payable April 3, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of one dollar and sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 43,194 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On April 26, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $120,000, at a discount of $20,000.  The debenture has a 10% interest rate and is due and payable April 26, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of one dollar and sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 13,700 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On May 3, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $276,000, at a discount of $46,000.  The debenture has a 10% interest rate and is due and payable May 3, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of one dollar and sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 31,510 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On May 17, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund II, LP, in the amount of $492,000, at a discount of $82,000. The debenture has a 10% interest rate and is due and payable May 17, 2011. The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of one dollar and sixty cents.On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 56,170 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.





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On May 24, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund II, LP, in the amount of $168,000, at a discount of $28,000.  The debenture has a 10% interest rate and is due and payable May 24, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of one dollar and sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 19,040 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On June 7, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund II, LP, in the amount of $290,400, at a discount of $48,400.  The debenture has a 10% interest rate and is due and payable June 7, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of one dollar and twenty cents. During the year ended December 31, 2006, $136,202 of this Note was repaid, and the balance at September 29, 2007 was $154,198.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 18,745 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On June 15, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund II, LP, in the amount of $72,000, at a discount of $12,000.  The debenture has a 10% interest rate and is due and payable June 15, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of one dollar and twenty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 8,160 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On June 22, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund II, LP, in the amount of $228,000, at a discount of $38,000.  The debenture has a 10% interest rate and is due and payable June 22, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of one dollar.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 25,650 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On June 23, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund II, LP, in the amount of $156,000, at a discount of $26,000.  The debenture has a 10% interest rate and is due and payable June 23, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of one dollar.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 17,550 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On July 5, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund II, LP, in the amount of $312,000, at a discount of $52,000.  The debenture has a 10% interest rate and is due and payable July 5, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of five cents.



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On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 35,100 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On July 20, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $186,000, at a discount of $31,000.  The debenture has a 10% interest rate and is due and payable July 20, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of one dollar.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 20,770 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On July 21, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $66,000, at a discount of $11,000.  The debenture has a 10% interest rate and is due and payable July 21, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of one dollar.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 7,270 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share. The original Convertible Debenture Agreement has been cancelled and terminated.

On August 1, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $282,000, at a discount of $47,000.  The debenture has a 10% interest rate and is due and payable August 1, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of eighty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 31,570 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On August 17, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $312,000, at a discount of $52,000.  The debenture has a 10% interest rate and is due and payable August 17, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 34,790 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On August 30, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $315,600, at a discount of $52,600.  The debenture has a 10% interest rate and is due and payable August 30, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 35,195 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.





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On September 12, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund II, LP, in the amount of $324,000, at a discount of $54,000.  The debenture has a 10% interest rate and is due and payable September 12, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of three cents.   On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 36,140 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On September 26, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $336,000, at a discount of $56,000.  The debenture has a 10% interest rate and is due and payable September 26, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 37,335 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On September 26, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund II, LP, in the amount of $446,400, at a discount of $74,400.  The debenture has a 10% interest rate and is due and payable September 26, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 49,755 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On October 11, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $255,600, at a discount of $42,600.  The debenture has a 10% interest rate and is due and payable October 11, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 28,116 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On October 24, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $195,600, at a discount of $32,600.  The debenture has a 10% interest rate and is due and payable October 24, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 21,353 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On November 7, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $243,600, at a discount of $40,600.  The debenture has a 10% interest rate and is due and payable November 7, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right



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to receive an aggregate of 26,593 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On November 20, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $208,800, at a discount of $34,800.  The debenture has a 10% interest rate and is due and payable November 20, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 22,620 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On December 6, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $204,000, at a discount of $34,000.  The debenture has a 10% interest rate and is due and payable December 6, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 22,100 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On December 28, 2006, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, LP, in the amount of $228,000, at a discount of $38,000.  The debenture has a 10% interest rate and is due and payable December 28, 2011.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a Fixed Conversion Price of sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 24,510 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On January 23, 2007, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, Ltd., in the amount of $392,400, at a discount of $65,400.  The debenture has a 10% interest rate and is due and payable January 23, 2012.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a "Fixed Conversion Price" of sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 42,020 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On January 25, 2007, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, Ltd., in the amount of $312,000, at a discount of $52,000.  The debenture has a 10% interest rate and is due and payable January 25, 2012.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a "Fixed Conversion Price" of sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 33,410 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On February 5, 2007, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, Ltd., in the amount of $270,000, at a discount of $45,000.  The debenture has a 10% interest rate and is due and payable February 5, 2012.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a "Fixed Conversion Price" of sixty



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cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 28,800 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On February 27, 2007, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, Ltd., in the amount of $420,000, at a discount of $70,000.  The debenture has a 10% interest rate and is due and payable February 27, 2012.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a "Fixed Conversion Price" of sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 44,800 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On April 6, 2007, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, Ltd., in the amount of $720,000, at a discount of $120,000.  The debenture has a 10% interest rate and is due and payable April 6, 2012.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a "Fixed Conversion Price" of sixty cents.On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 75,600 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On May 3, 2007, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, Ltd., in the amount of $186,000, at a discount of $31,000.  The debenture has a 10% interest rate and is due and payable May 3, 2012.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a "Fixed Conversion Price" of sixty cents.  As of September 30, 2007, $45,093 of this Note was repaid, and the balance at September 30, 2007 is $140,907.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 14,749 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On May 25, 2007, the Company entered into a Convertible Redeemable Preferred Stock Agreement with Dutchess Private Equities Fund, Ltd., in the amount of $530,000.  The debenture has a 10% dividend rate and is due and payable May 25, 2012.  The purchaser of the convertible preferred stock is entitled to convert the face amount of the stock plus accrued dividend into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a "Fixed Conversion Price" of sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 54,767 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Redeemable Preferred Stock Agreement has been cancelled and terminated.

On September 30, 2007, the Company entered into an Amended and Restated Convertible Debenture Agreement with Dutchess Private Equities Fund, Ltd., in the amount of $2,784,685.  This debenture is issued in conjunction with the conversion of existing Dutchess debt into Series A Preferred Stock and includes all Dutchess debentures dated January 20, 2004 through February 22, 2006.  The debenture has an 8% interest rate and is due and payable September 30, 2012.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the twenty trading days prior to the Conversion Date or (ii) at a "Fixed Conversion Price" of sixty cents.

On September 30, 2007, the Company entered into a Debt Conversion Agreement with Dutchess Private Equities Fund, Ltd., whereby Dutchess converted a total of $16,849,214 in principal and accrued interest currently owed to Dutchess into  the right to receive 1,684,921 shares of Series A Preferred Stock. The conversion includes all Dutchess debentures dated February 28, 2006 through May 3, 2007, all amounts outstanding under the Promissory



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Notes, all amounts outstanding under the Factoring Agreements, all amounts outstanding under the Purchase Order Agreements, all amounts outstanding under the Preferred Agreements, and all amounts oustanding under the consulting agreement with Dutchess Advisors,  The Debt Conversion Agreement requires dividends to be paid quarterly, in cash, at the rate of 8% per annum.  Dividends shall be cumulative.

On December 3, 2007, the Company entered into a Convertible Debenture Agreement with Dutchess Private Equities Fund, Ltd., in the amount of $600,000, at a discount of $100,000.  The debenture has a 10% interest rate and is due and payable December 3, 2012.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a "Fixed Conversion Price" of thirty cents.  As of December 31, 2007, $0 of this Note was repaid, and the balance at December 31, 2007 is $600,000.

All share and per share amounts in the accompanying financial statements of the Company and notes thereto have been retroactively adjusted to give effect to the stock splits.

Amortization of the debt discount on all convertible debentures, warrants and promissory notes amounted to $296,910 and $707,624 for the years ended December 31, 2007 and 2006, and is included in interest expense on the  consolidated statement of operations.   The 2007 financials include an adjustment out of interest expense for the debt discount associated with the Dutchess warrants that were rescinded as part of the September 30, 2007 debt conversion.

NOTE 8.

FACTORING AGREEMENTS WITH RELATED PARTIES

On May 17, 2006, the Company entered into an Accounts Receivable Factoring Agreement with Dutchess Private Equities Fund II, LP, in the amount of $695,000.  The factoring agreement has a 3.5% monthly interest rate and was due and payable July 17, 2006, with one month minimum interest due and payable on the funds.  As funds became available through the collection of receivables on certain boats as described in the factoring agreement, all funds, and any interest and penalties, were to be forwarded to the Holder within one business day.  In the event that on the maturity date, there was a balance due on the face amount, the Holder can increase the face amount by ten percent 10% per month, for each month that the agreement remains unpaid. During the year ended December 31, 2006, $0 of this Agreement was repaid, and the balance at September 29, 2007 was $695,000.  The Agreement was extended and is due and payable with thirty days notice from Dutchess Private Equities Fund II, LP.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 110,853 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Debenture Agreement has been cancelled and terminated.

On March 26, 2007, the Company entered into a Purchase Order Financing Agreement with Dutchess Private Equities Fund, Ltd., in the amount of $180,000.  The financing agreement has a 3% monthly interest rate and is due and payable April 26, 2007, with $5,000 minimum interest due and payable on the funds.  As funds became available through the collection of receivables on certain boats as described in the factoring agreement, all funds, and any interest and penalties, are to be forwarded to the Holder within one business day.  In the event that on the maturity date, there was a balance due on the face amount, the Holder can increase the face amount by ten percent per month, for each month that the agreement remains unpaid.   The Agreement was extended and is now due and payable with thirty days notice from Dutchess Private Equities Fund, Ltd.  As of September 30, 2007, $58,000 of this Note was repaid, and the balance at September 29, 2007 is $122,000.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 15,101 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Purchase Order Financing Agreement has been cancelled and terminated.

On March 26, 2007, the Company entered into an Accounts Receivable Factoring Agreement with Dutchess Private Equities Fund, Ltd., in the amount of $120,000.  The financing agreement had a 3% monthly interest rate and was due and payable April 26, 2007, with $5,000 minimum interest due and payable on the funds.  As funds became available through the collection of receivables on certain boats as described in the factoring agreement, all funds, and any interest and penalties, were to be forwarded to the Holder within one business day.  In the event that on the maturity date, there was a balance due on the face amount, the Holder could increase the face amount by ten percent



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per month, for each month that the agreement remained unpaid.   The agreement was repaid in full as of April 11, 2007.

On April 3, 2007, the Company entered into a Purchase Order Financing Agreement with Dutchess Private Equities Fund, Ltd., in the amount of $150,000.  The financing agreement had a 3% monthly interest rate and was due and payable May 3, 2007, with $5,000 minimum interest due and payable on the funds.  As funds became available through the collection of receivables on certain boats as described in the factoring agreement, all funds, and any interest and penalties, were to be forwarded to the Holder within one business day.  In the event that on the maturity date, there was a balance due on the face amount, the Holder could increase the face amount by ten percent per month, for each month that the agreement remained unpaid.   The Agreement was extended and was repaid in full as of June 22, 2007.

NOTE 9.

CONVERTIBLE PREFERRED STOCK AGREEMENTS WITH RELATED PARTIES

On May 15, 2007, the Company entered into a Convertible Redeemable Preferred Stock Agreement with Dutchess Private Equities Fund, Ltd., in the amount of $160,000.  The debenture has a 10% dividend rate and is due and payable May 15, 2012.  The purchaser of the convertible preferred stock is entitled to convert the face amount of the stock plus accrued dividend into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a "Fixed Conversion Price" of sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 16,600 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Redeemable Preferred Stock Agreement has been cancelled and terminated.

On May 25, 2007, the Company entered into a Convertible Redeemable Preferred Stock Agreement with Dutchess Private Equities Fund, Ltd., in the amount of $530,000.  The debenture has a 10% dividend rate and is due and payable May 25, 2012.  The purchaser of the convertible preferred stock is entitled to convert the face amount of the stock plus accrued dividend into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a "Fixed Conversion Price" of sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 54,767 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Redeemable Preferred Stock Agreement has been cancelled and terminated.

On June 26, 2007, the Company entered into a Convertible Redeemable Preferred Stock Agreement with Dutchess Private Equities Fund, Ltd., in the amount of $685,000.  The debenture has a 10% dividend rate and is due and payable June 26, 2012.  The purchaser of the convertible preferred stock is entitled to convert the face amount of the stock plus accrued dividend into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a "Fixed Conversion Price" of sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 70,213 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Redeemable Preferred Stock Agreement has been cancelled and terminated.

On July 12, 2007, the Company entered into a Convertible Redeemable Preferred Stock Agreement with Dutchess Private Equities Fund, Ltd., in the amount of $550,000.  The debenture has a 10% dividend rate and is due and payable July 12, 2012.  The purchaser of the convertible preferred stock is entitled to convert the face amount of the stock plus accrued dividend into the Companys common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a "Fixed Conversion Price" of sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 56,146 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Redeemable Preferred Stock Agreement has been cancelled and terminated.

On August 3, 2007, the Company entered into a Convertible Redeemable Preferred Stock Agreement with Dutchess Private Equities Fund, Ltd., in the amount of $650,000.  The convertible redeemable preferred has a 10% dividend rate and is due and payable August 3, 2012.  The purchaser of the convertible preferred stock is entitled to convert the face amount of the stock plus accrued dividend into the Companys common stock at the lesser of (i) 75% of the



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lowest closing bid price during the fifteen trading days prior to the Conversion Date or (ii) at a "Fixed Conversion Price" of sixty cents.  On September 30, 2007, the Company entered into an agreement with Dutchess Private Equities Fund, Ltd., whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 66,083 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original Convertible Redeemable Preferred Stock Agreement has been cancelled and terminated.

NOTE 10.

SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK PURCHASE AGREEMENTS WITH RELATED PARTIES

The September 30, 2007 Series A. Convertible Preferred Stock Purchase Agreement with Dutchess Private Equities Fund, Ltd., has a quarterly dividend of 5% of the per share price of each share of Series A Preferred Stock held by such holder (the Dividend).  The Dividend shall be paid as follows: two percent (2%) in Preferred Stock and three percent (3%) in cash.  One-quarter of the annual Dividend shall be paid within fifteen (15) days after the end of each of the Companys fiscal quarters.  Declaration and payment of the Dividend shall be in accordance with the NRS.  The Dividend shall be paid in cash.  In the event that the Company is unable to pay the full amount of the Dividend in any quarter as set forth in this provision and the holder of the Series A Preferred Stock has elected to receive such Dividend in cash, the unpaid amount of such cash Dividend, together with interest at the rate of Eight Percent (8%) per annum, shall be added to the following fiscal quarters Dividend.  The purchaser of the convertible preferred stock is entitled to convert the face amount of the stock plus accrued dividend into the Companys common stock at the greater of (i) Thirteen Dollars ($13.00) worth of Common Stock based on the lowest closing bid price of the Companys Common Stock during the Twenty (20) trading day period immediately preceding the date of the Conversion Notice, or (ii) one hundred (100) shares of Common Stock.

On December 11, 2007, the Company entered into a Series A Convertible Redeemable Preferred Stock Purchase Agreement with Dutchess Private Equities Fund, Ltd., in the amount of $400,000.  The convertible redeemable preferred agreement has a quarterly dividend of 5% of the per share price of each share of Series A Preferred Stock held by such holder (the Dividend).  The Dividend shall be paid as follows: two percent (2%) in Preferred Stock and three percent (3%) in cash.  One-quarter of the annual Dividend shall be paid within fifteen (15) days after the end of each of the Companys fiscal quarters.  Declaration and payment of the Dividend shall be in accordance with the NRS.  The Dividend shall be paid in cash.  In the event that the Company is unable to pay the full amount of the Dividend in any quarter as set forth in this provision and the holder of the Series A Preferred Stock has elected to receive such Dividend in cash, the unpaid amount of such cash Dividend, together with interest at the rate of Eight Percent (8%) per annum, shall be added to the following fiscal quarters Dividend.  The purchaser of the convertible preferred stock is entitled to convert the face amount of the stock plus accrued dividend into the Companys common stock at the greater of (i) Thirteen Dollars ($13.00) worth of Common Stock based on the lowest closing bid price of the Companys Common Stock during the Twenty (20) trading day period immediately preceding the date of the Conversion Notice, or (ii) one hundred (100) shares of Common Stock.

On December 26, 2007, the Company entered into a Series A Convertible Redeemable Preferred Stock Purchase Agreement with Dutchess Private Equities Fund, Ltd., in the amount of $475,000.  The convertible redeemable preferred agreement has a quarterly dividend of 5% of the per share price of each share of Series A Preferred Stock held by such holder (the Dividend).  The Dividend shall be paid as follows: two percent (2%) in Preferred Stock and three percent (3%) in cash.  One-quarter of the annual Dividend shall be paid within fifteen (15) days after the end of each of the Companys fiscal quarters.  Declaration and payment of the Dividend shall be in accordance with the NRS.  The Dividend shall be paid in cash.  In the event that the Company is unable to pay the full amount of the Dividend in any quarter as set forth in this provision and the holder of the Series A Preferred Stock has elected to receive such Dividend in cash, the unpaid amount of such cash Dividend, together with interest at the rate of Eight Percent (8%) per annum, shall be added to the following fiscal quarters Dividend.  The purchaser of the convertible preferred stock is entitled to convert the face amount of the stock plus accrued dividend into the Companys common stock at the greater of (i) Thirteen Dollars ($13.00) worth of Common Stock based on the lowest closing bid price of the Companys Common Stock during the Twenty (20) trading day period immediately preceding the date of the Conversion Notice, or (ii) one hundred (100) shares of Common Stock.

NOTE  11.

NOTES PAYABLE

At December 31, 2007, the Company had various Notes Payable as follows:



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At December 31, 2007, the Company had ten short term Notes Payable with Sun Security Bank totaling $513,531, secured by Challenger boats-in-process and completed boats in inventory.  The Notes bear interest at a rate of U.S. Bank Prime Rate plus 2%, with an interest rate floor of 7%.  The individual notes are due and payable upon the sale of the boat securing the note.

On February 28, 2006, the Company entered into a long-term Note Payable with Sun Security Bank of $2,961,429, secured by the manufacturing facility in Washington, Missouri, and all fixed assets of the Company.  The Note bears interest at a rate of US Bank Prime Rate plus 1% and a maturity date of March 1, 2009.  It is also secured by a certificate of deposit in the amount of $1,000,000 on deposit at Sun Security Bank, owned by Dutchess.  As of December 31, 2007, the Note Payable carries a principal balance of $2,665,286.

On March 28, 2006, the Company entered into a $16,089 long-term Note Payable with Bank of Washington. The Note is secured by a 2002 GMC 3500 truck, bearing interest at a rate of 9.25%.  As of December 31, 2007, the unpaid balance on the note is $6,465.

On January 29, 2007, with an effective date of January 1, 2007, the Company acquired one-hundred percent of the total outstanding shares of International Marine and Recreation (IMAR) Group, LLC and the assets and technology of Gekko Sports Corporation.  In connection with this transaction, the Company paid approximately $7 million in cash, stock and notes.  IMAR manufacturers the brand name Sugar Sand recreational jet boats and Gekko recreational tow boats at the Companys 80,000 square foot leased facility in Fargo, North Dakota.

As consideration for the acquisition, the Company paid total cash compensation of $256,500 and a total of 150,000 shares of its restricted common stock to Messrs. Bullinger, Crary, Dahl, Shorma and Schlossman, all to be distributed on a pro rata basis. The shares are subject to a lock-up that restricts them from sale for a period of eighteen months from the date of issuance of the shares. The Company also granted these individuals two Promissory Notes, one in the amount of $1,680,778 with interest at a fixed rate of 8% per annum, and one in the amount of $1,151,500 with interest at a fixed rate of 10% per annum, to be distributed pro rata among these individuals. Under the terms of these Notes, the first payment of $168,638 was due and paid on February 28, 2007 with payments continuing on the same day of each month thereafter until July 28, 2008, at which time the entire unpaid principal balance and all accrued interest shall be due and payable. The Company had full prepayment privileges at any time without prepayment penalty. Interest on these Notes was computed daily on the basis of a 365-day year, for each day all or any part of the principal balance hereof remained outstanding. Payment on the Notes was secured by a security interest in the assets set forth in the Agreement of Purchase and Sale dated January 30, 2007, and a guaranty granted by Dutchess Private Equities Fund, Ltd. as set forth in the Guarantee Agreement, dated January 30, 2007. The guaranty granted on the Note of $1,151,500 by Dutchess was limited to $619,000.  These notes were paid in full on August 29, 2007 at a discount of $213,291.

As part of the Agreement of Purchase and Sale, the Company agreed to guaranty the $125,000 Mercury Marine and a $150,000 GE Commercial Distribution Finance Corporation letter of credit with State Bank of Fargo. This letter of credit was further secured, along with the Notes issued under the Agreement of Purchase and Sale, by the Guarantee Agreement with Dutchess.  The GE letter of credit at State Bank of Fargo was replaced on September 7, 2007, with a $150,000 letter of credit at Sun Security Bank, secured by a $150,000 certificate of deposit.  Mercury Marine agreed to terminate the $125,000 letter of credit at State Bank of Fargo.  No replacement was required for this letter of credit.

Through IMAR Group, LLC, the Companys recently acquired wholly-owned subsidiary, the Company entered into an Asset and Technology Acquisition Agreement with Mark Overbye and Gekko Sports Corporation on January 30, 2007. The Company acquired the ownership rights, title and interests in the assets and technology of Gekko Sports Corporation, including patents, trademarks, trade names, trade secrets and goodwill ("Assets and Technology").

In consideration for the Assets and Technology, as well as wages, royalties, commissions and other amounts owed to Mr. Overbye, personally, or Gekko under a prior Technology, Transfer, License or Royalty Agreement by and between Gekko and IMAR, the Company agreed to pay total cash compensation of $670,000 at the closing of the transaction as set forth in a Promissory Note payable with interest at a fixed rate of 10% per annum. Under the terms of the Note, the first payment of $40,238. was due and paid on February 28, 2007 and continuing on the same day of each month thereafter until July 28, 2008, at which time the entire unpaid principal balance and all accrued interest shall be due and payable. The Company will have full prepayment privileges at any time without prepayment penalty. Interest on this Note is computed daily on the basis of a 365-day year, for each day all or any part of the



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principal balance hereof shall remain outstanding. Payments not received within 15 days of the due date shall be considered late and shall be subject to a late charge based on the rate of 1% per month. The Company will be in default under the Note if it fails to make a payment under the Note when due, a receiver is appointed for the Company or its guarantor's property, an assignment is made for the benefit of the Company or its guarantor's creditors or a proceeding is commenced by or against the Company or its guarantor in Bankruptcy. In the event the Company defaults under the Note, Mr. Overbye may declare the entire unpaid principal balance on the Note and all accrued interest immediately due, after 30 days notice. The Note is secured by the security interest in the Assets set forth in the Security Agreement.

The Promissory Note of $670,000 under the Asset and Technology Acquisition Agreement, as well as each debt, liability and obligation which IMAR Group or Challenger Powerboats may now or at any time hereafter owe to Mr. Overbye or Gekko Sports Corporation pursuant to such Asset and Technology Acquisition Agreement, is secured pursuant to a Security Agreement entered into on January 29, 2007 between IMAR Group and Challenger Powerboats on one hand and Mark Overbye and Gekko Sports Corporation on the other hand. Under the terms of the Security Agreement, IMAR and Challenger granted Mr. Overbye and Gekko a security interest, subject to security interests held by other lenders to the Company and its subsidiaries, in and to the following property (i) certain assets, trademarks and domain names; (ii) any adaptation, modification, improvement, or enhancement of the foregoing; and (iii) all of the pending and issued patents and patent applications as well as any continuations, continuations-in-part, divisional applications, and any Letters Patent issued therefrom including reissues, together with all non-U.S. counterparts; together with all substitutions and replacements for and products and proceeds of any of the foregoing property.

On March 13, 2007, the Company entered into a long-term note payable with Composites One, LLC, in the amount of $221,439.87 for a conversion of their vendor trade debt.  The note has a twenty-four (24) month term and carries an annual interest rate of 8.25%.  The unpaid principal balance at December 31, 2007 was $139,729.

On October 17, 2007, the Company entered into a short-term note payable with Mercury Marine, in the amount of $100,000 for a conversion of their vendor trade debt.  The note has a twelve (12) month term and carries an annual interest rate of 10%.  The unpaid principal balance at December 31, 2007 was $99,965.

As of December 31, 2007, the following individual investors held promissory notes in the amount described below.

|                        |  |                 |            |              |           
|----------------------- |  | --------------- | ---------- | ------------ | ----------
|NAME                    |  | AMOUNT RECEIVED |            | DEPOSIT DATE
|Winn Family Partnership |  | $               | 2,000.00   |              | 05/08/2004
|Patrick Connelly        |  | $               | 50,000.00  |              | 05/27/2004
|Jan Pusch               |  | $               | 50,000.00  |              | 07/01/2004
|Patrick Connelly        |  | $               | 10,000.00  |              | 07/02/2004
|Patrick Connelly        |  | $               | 10,000.00  |              | 04/14/2005
|Sandra Walls            |  | $               | 10,000.00  |              | 06/08/2005
|Gerald Treichel         |  | $               | 10,000.00  |              | 08/05/2005
|Arnold Kramer           |  | $               | 6,000.00   |              | 10/20/2005
|Wakelin McNeel          |  | $               | 100,000.00 |              | 03/08/2007
|Total                   |  |                 | 248,000.00 |              |           

NOTE  12.  COMMITMENTS AND CONTINGENCIES

LEGAL MATTERS

On August 17, 2006, Mike Thomas filed a lawsuit in the Circuit Court of the County of Franklin, Missouri against both Marine and Xtreme, asserting claims for breach of his employment contract and wrongful dischargein the amount of $86,375, not including costs and legal fees.  We filed our Answer, Affirmative Defenses and Counterclaim on October 24, 2006, denying that it is appropriate for a court to enter judgment or relief for Mr. Thomas since he failed to state a claim, entered into the employment contract with unclean hands and in bad faith, committed fraud and concealment, failed to mitigate his damages and breached the employment contract.  We furthermore counterclaimed that Mr. Thomas breached his fiduciary duty, and committed fraud, civil conspiracy and racketeering.  We are seeking more than $25,000 in actual damages, as well as punitive damages, treble damages, an accounting of all of our securities owned by Mr. Thomas, forfeiture to us of such shares and warrants held by Mr. Thomas, and attorneys fees.  Mr. Thomas filed an Answer to Defendants Counterclaim and Affirmative Defenses



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on December 4, 2006, denying our affirmative defenses in full and seeking dismissal of our counterclaims for failure to state a claim.  This lawsuit was settled by the parties who filed a mutual stipulation of dismissal on February 5, 2008.

On October 19, 2006, Gary Miller filed a lawsuit in County Court at Law No. 3 in Tarrant County, Texas against Xtreme, asserting claims for damages for breach of contract, quantum meruit, sworn account, conversion of products and unjust enrichmentin the amount of $70,000, not including legal fees.  We responded with a general denial in state court before removing this action to the Fort Worth Division of the United States District Court for the Northern District of Texas on November 30, 2006.  We then moved to dismiss, or alternatively, to transfer the case on account of improper venue to the Sherman Division of the United States District Court for the Eastern District of Texas.  This motion was granted on February 9, 2007.  We filed our First Amended Answer and Counterclaim on February 27, 2007, asserting that if a contract is found to have existed, we either performed, tendered performance, or were excused from performing all of our contractual obligations.  We were seeking recovery of all attorneys fees.  The parties reached a settlement, and the Court entered an Agreed Order for Dismissal with Prejudice on December 5, 2007

On December 4, 2006, Life Line Marine, LLC filed a lawsuit in the Circuit Court of the County of Franklin, Missouri against both Marine and Xtreme, asserting claims for breach of contract, quantum meruit, civil conspiracy and fraud and misrepresentation.  Life Line Marine, LLC sought damages in excess of $25,000, an accounting of income and profits, a constructive trust, damages resulting from their lost profits, punitive damages and attorneys fees.  We filed our Answer, Affirmative Defenses and Counterclaim on January 23, 2007, denying that it is appropriate for a court to enter judgment or relief for Life Line Marine, LLC since it has failed to state a claim, entered into the employment contract with unclean hands and in bad faith, failed to fulfill certain obligations relating to financing under a contract, committed fraud and concealment, agreed to be subject to an arbitration agreement, breached the contract and failed to revoke their acceptance of goods within a reasonable time under Article 2 of the Uniform Commercial Code.  We furthermore counterclaimed that Life Line Marine, LLC, as well as Michael Lochirco (the owner) and Lochirco Fruit and Produce, Inc., breached their contract, and committed tortuous interference, civil conspiracy and racketeering.  We are seeking more than $25,000 in actual damages, punitive damages, treble damages, forfeiture to us of all profits and gains resulting from their conduct, as well as all attorneys fees.  On February 2, 2007, Life Line Marine, LLC filed a Reply to Defendants Counterclaim, denying our claims for relief, and filing a Motion to Dismiss the claims of tortuous interference, civil conspiracy and racketeering.  Additionally, counterclaim defendants Michael Lochirco and Lochirco Fruit and Produce, Inc. filed an Answer to Counterclaim on March 7, 2007, seeking dismissal of our counterclaims, and filed a Motion to Dismiss the claims of tortuous interference, civil conspiracy and racketeering.  On June 25, 2007, together with Marine, we filed a response in opposition to the motions to dismiss of Life Line, Michael Lochirco and Lochirco Fruit and Produce.  On January 3, 2008, the Court denied Life Line, Michael Lochirco and Lochirco Fruit and Produces motion to dismiss.  The parties are currently engaged in discovery.

On December 14, 2006, we filed a lawsuit in the Circuit Court of the County of Franklin, Missouri against Barrett Evans, a former member of the board of directors, asserting claims for damages for breach of fiduciary duty, breach of contract, unjust enrichment, civil conspiracy and racketeering. We sought more than $25,000 in actual damages, punitive damages, treble damages, an accounting and the subsequent forfeiture of all of our shares, warrants and debentures owned by Mr. Evans, forfeiture to us of all profits and gains resulting from his conduct, as well as all attorneys fees and costs.  After reaching a settlement, on January 28, 2008, the parties filed a Joint Stipulation For Dismissal Of All Claims With Prejudice.  On March 6, 2008, Evans served us with notice of default under the settlement agreement.  As of April 14, 2008, Challenger had not cured the alleged default under the settlement agreement.

On December 29, 2006, we filed a lawsuit in the United States District Court Eastern District of Missouri against Kevin Ryan, our former Chief Executive Officer, and his wife, Alicia Fox, asserting claims for violation of the Computer Fraud and Abuse Act, violation of Missouris anti-computer tampering statute, conversion, breach of fiduciary duty, civil conspiracy and racketeering. We are seeking actual damages, punitive damages, treble damages, an accounting and the subsequent forfeiture of all of our shares, warrants and debentures owned by Mr. Ryan or Ms. Fox, return of any missing laptop data by Mr. Ryan, as well as all attorneys fees and costs.  Mr. Ryan and Ms. Fox filed a Counterclaim on March 19, 2007, asserting a claim for indemnity as a result of a severance agreement with us, as well as additional claims against us for breach of release and breach of contract.  After reaching a settlement, on February 1, 2008, the parties filed their Joint Stipulation Dismissing All Claims With Prejudice.



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On June 15, 2007, Donald Scott filed a lawsuit in the District Court of the County of Stearns, Minnesota against IMAR, our wholly owned subsidiary, and against Gary Rutherford.  Against IMAR, Donald Scott asserts claims for damages for breaches of contract, conversion, and unjust enrichment. Donald Scott is seeking from IMAR, more than $50,000 in actual damages on each count, a declaratory judgment that an assignment of a security agreement and note from IMAR Group, LLC to Gary Rutherford was of no force and effect, as well as all attorneys fees and costs.  Against Gary Rutherford, Donald Scott asserts claims for conversion, interference with prospective business advantage, slander and unjust enrichment. Donald Scott is seeking from Gary Rutherford more than $50,000 in actual damages on each count, a declaratory judgment that an assignment of a security agreement and note from IMAR to Gary Rutherford was of no force and effect, as well as all attorneys fees and costs.  On July 19, 2007 IMAR filed its Answer and Cross-claim denying liability and asserting a cross claim against Gary Rutherford seeking contribution and/or indemnity from Gary Rutherford to the extent that IMAR and Rutherford are found jointly liable based on actionable conduct by Gary Rutherford.  On July 24, 2007 Gary Rutherford filed a cross-claim against IMAR seeking recovery from IMAR to the extent that the note is reduced by Donald Scotts claims against IMAR and seeking indemnity or reimbursement from IMAR to the extent that IMAR and Gary Rutherford are found jointly liable.  On August 24, 2007, IMAR filed its Answer to the cross-claim of Gary Rutherford, denying liability and asserting numerous affirmative defenses.  The parties are currently engaged in discovery.  This case is scheduled to go to trial on June 23, 2008.

On October 19, 2007, Roy Baker filed a lawsuit in the Court of Common Pleas, Allen County, Ohio, against IMAR, our wholly owned subsidiary, and against Mercury Marine.  Roy Baker asserts claims under the Magnuson-Moss Federal Trade Commission Act, the Ohio Uniform Commercial Code, the Ohio Consumer Sales Practices Act, and for implied warranty in tort.  Roy Baker seeks damages equal to three times his actual damages in excess of $25,000 and/or the statutory minimum of $200 for each additional unlawful act alleged, over and above any treble damage award.  On December 7, 2007, IMAR filed its answer to the complaint denying liability and raising certain affirmative defenses.  The parties are currently engaged in discovery.  This case is scheduled to go to trial on January 20, 2009.

The Company may be involved from time to time in ordinary litigation, negotiation and settlement matters that will not have a material effect on its operations or finances. Other than the litigation described above, the Company is not aware of any pending or threatened litigation against the Company or its officers and directors in their capacity as such that could have a material impact on our operations or finances.

NOTE 13.

DEALER FLOOR PLAN FINANCING

The Company has entered into floor plan financing whereby it is paid by its dealers for their products via a third-party floor plan company.  The Company has entered into three such agreements.  These master agreements include a repurchase agreement that requires the Company to accept returned product from the dealers and repay the outstanding loan amount to the floor plan financing companies.  Although these returns are uncommon, and the boats are usually resold to another dealer in a short period of time, the Company has the possibility of future repayment under the agreements.  As of December 31, 2007, the Company had a total of $3,806,975 financed through the floor plan financing companies.

NOTE 14.

CAPITAL STOCK TRANSACTIONS

The authorized common stock of the Company consists of 100,000,000 shares with par value of $0.001. On September 26, 2003, the Companys Board of Directors declared a 100-for-1 reverse stock split of outstanding common stock payable at September 26, 2003 and amended its Articles of Incorporation to increase the authorized capital shares to 100,000,000. On January 30, 2004, the Companys Board of Directors declared a 10-for-1 reverse split of the outstanding common stock payable at January 30, 2004.

On October 18, 2007, our Challenger Powerboats Board of Directors authorized an amendment to the Companys Amended Articles of Incorporation, as amended, to effect a reverse split of the issued and outstanding shares of our common stock, par value $0.001, on a 1 for 20 basis. The Amendment was filed on October 19, 2007 and effective on October 31, 2007 (the Effective Date).

All share and per share amounts in the accompanying financial statements of the Company and notes thereto have been retroactively adjusted to give effect to the stock splits.



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During the year beginning January 1, 2007, and through September 30, 2007, the following common stock transactions were made:

On January 3, 2007, the Company issued 12,500 shares of common stock valued at $10,000 to Dutchess Private Equities Fund in conjunction with their December 6, 2006, investment in the Company.  The shares were accounted for as interest expense.

On January 29, 2007, the Company issued 30,000 shares of common stock valued at $36,000 to Dutchess Private Equities Fund in conjunction with their January 23, 2006 and January 25, 2007, investments in the Company.  The shares were accounted for as interest expense.

On February 6, 2007, the Company issued a common stock purchase warrant to Infinity Consulting Group, LLC. The warrants can be exercised at any time on or after January 2, 2008 and through January 2, 2009, to purchase up to 62,500 shares of the Companys common stock as of January 2, 2008.  The purchase price of one share of stock under the warrant is equal to $0.35.

On February 12, 2007, the Company issued 50,000 shares of common stock in connection with the Equity Line Agreement dated August 24, 2005 with Preston Capital Partners.  As of March 31, 2007, the Company had received cash proceeds for these shares on February 16, 2007 and February 26, 2007.

On February 21, 2007, the Company issued 150,000 shares of common stock in connection with the Equity Line Agreement dated August 24, 2005 with Preston Capital Partners.  As of June 30, 2007, the Company had received cash proceeds for 125,029 of these shares on February 26, 2007, March 7, 2007, March 12, 2007, March 19, 2007 and April 3, 2007.  The remaining 24,971 shares outstanding were applied as payment against the May 3, 2007 debenture with Dutchess Private Equities Fund.

On February 21, 2007, the Company issued 20,000 shares of common stock valued at $66,000 to Michael Bullinger in connection with the acquisition of IMAR Group, LLC.

On February 21, 2007, the Company issued 20,000 shares of common stock valued at $66,000 to Charles Crary in connection with the acquisition of IMAR Group, LLC.

On February 21, 2007, the Company issued 20,000 shares of common stock valued at $66,000 to Howard Dahl in connection with the acquisition of IMAR Group, LLC.

On February 21, 2007, the Company issued 20,000 shares of common stock valued at $66,000 to Thomas Shorma in connection with the acquisition of IMAR Group, LLC.

On February 21, 2007, the Company issued 20,000 shares of common stock valued at $66,000 to William Schlossman, Jr. in connection with the acquisition of IMAR Group, LLC.

On February 21, 2007, the Company issued 155,000 shares of common stock valued at $341,000 to Pacific Shores Investments for investor relation services.  The shares were accounted for as investor relations expense.

On February 21, 2007, the Company issued 37,500 shares of common stock valued at $82,500 to Seacoast Advisors, Ltd. for investor relation services.  The shares were accounted for as investor relations expense.

On February 21, 2007, the Company issued 18,7500 shares of common stock valued at $41,250 to OTC Alerts, LLC for investor relation services.  The shares were accounted for as investor relations expense.

On February 28, 2007, the Company issued 25,000 shares of common stock valued at $55,000 to Dutchess Private Equities Fund in conjunction with their February 5, 2007 and February 27, 2007 investments in the Company.  The shares were accounted for as interest expense.

On February 29, 2007, the Company issued a common stock purchase warrant to Mark Overbye in accordance with the Gekko purchase terms. The warrants can be exercised at any time on or after February 28, 2009 and through January 28, 2010 to purchase up to 6,250 shares of the Companyscommon stock.  The purchase price of one share of stock under the warrant is equal to $0.15.

On February 29, 2007, the Company issued a common stock purchase warrant to Mark Overbye in accordance with the Gekko purchase terms. The warrants can be exercised at any time on or after February 28, 2009 and through



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January 28, 2010 to purchase up to 6,250 shares of the Companys common stock.  The purchase price of one share of stock under the warrant is equal to $0.20.

On April 9, 2007, the Company issued 150,000 shares of common stock valued at $207,000 to Dutchess Private Equities Fund in conjunction with their April 6, 2007 investment in the Company.  The shares were accounted for as interest expense.

On May 24, 2007, the Company issued 34,500 shares of common stock valued at $33,810 to Dutchess Private Equities Fund in conjunction with their May 3, 2007 and May 15, 2007 investment in the Company.  The shares were accounted for as interest expense.

On May 29, 2007, the Company issued 100,000 shares of common stock in connection with the Equity Line Agreement dated August 24, 2005 with Preston Capital Partners.  As of June 30, 2007, the Company applied proceeds from 6,118 of these shares against the May 3, 2007 debenture with Dutchess Private Equities Fund.

On June 26, 2007, the Company issued 31,250 shares of common stock valued at $33,565 to Dutchess Private Equities Fund in conjunction with their June 26, 2007 investment in the Company.  The shares were accounted for as interest expense.

On August 14, 2007, the Company issued 25,000 shares of common stock valued at $20,000 to TGR Group for investor relation services.  The shares were accounted for as investor relations expense.

On August 14, 2007, the Company issued 30,000 shares of common stock valued at $24,000 to CCRI for investor relation services.  The shares were accounted for as investor relations expense.

On August 14, 2007, the Company issued 45,000 shares of common stock valued at $36,000 to Grannus Finacial for consulting services.  The shares were accounted for as consulting expense.

On August 14, 2007, the Company issued 40,000 shares of common stock valued at $32,000 to Robert Rico for consulting services.  The shares were accounted for as consulting expense.

On August 14, 2007, the Company issued 40,000 shares of common stock valued at $32,000 to Ben Shirazipour for consulting services.  The shares were accounted for as consulting expense.

On August 14, 2007, the Company issued 10,000 shares of common stock valued at $8,000 to RR Investment Holdings for consulting services.  The shares were accounted for as consulting expense.

On August 14, 2007, the Company issued 10,000 shares of common stock valued at $8,000 to Global Capital for consulting services.  The shares were accounted for as consulting expense.

On September 30, 2007, the Company entered into a Debt Conversion Agreement with Dutchess Private Equities Fund, Ltd., whereby Dutchess converted a total of $16,849,214 in principal and accrued interest currently owed to Dutchess into  the right to receive 1,684,921 shares of Series A Preferred Stock. The conversion includes all Dutchess debentures dated February 28, 2006 through May 3, 2007, all amounts outstanding under the Promissory Notes, all amounts outstanding under the Factoring Agreements, all amounts outstanding under the Purchase Order Agreements, all amounts outstanding under the Preferred Agreements, and all amounts oustanding under the consulting agreement with Dutchess Advisors,  The Debt Conversion Agreement requires dividends to be paid quarterly, in cash, at the rate of 8% per annum.  Dividends shall be cumulative.

On November 4, 2007, the Company issued 15,004 shares of common stock in connection with the rounding up of shares as part of the reverse stock split occuring on October 31, 2007.

On November 9, 2007, the Company issued 20,000 shares of common stock valued at $8,000 to John Layne as payment of interest on a private promissory note dated July 20, 2005.  The principal of $20,000 was repaid in full on July 23, 2007 and August 23, 2007.

As of December 31, 2007, the Company owes common stock equivalent to $30,000 to Grannus Financial Advisors per the payment terms of the consulting agreement entered into on May 28, 2007.

As of December 31, 2007, the Company had issued 755,000 shares of the Companys common stock to Preston Capital Partners in connection with the Equity Line Agreement dated September 24, 2005.  The proceeds received



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for 454,300 shares were applied as payment to promissory notes with Dutchess Private Equities Fund, LP, and Dutchess Private Equities Fund II, LP, and the Company received the cash proceeds from 259,143 shares.  The remaining 41,557 shares had not been returned to the company as of December 31, 2007.

NOTE  15.

RENTS

The Company occupies office and manufacturing space at the manufacturing facility in Washington, Missouri, which is owned by the Company. Effective January 1, 2007, the Company rents a manufacturing facility in Fargo, North Dakota. This facility is used for production of the IMAR Group, LLC product and includes office space.

For the twelve months ended December 31, 2007, the Company had building rental expense of $120,863 for the rental of the manufacturing and office space in Fargo.

NOTE 16.

GAIN OR LOSS ON SALE OF ASSETS

On August 29, 2007, IMAR, our wholly-owned subsidiary, completed the sale of certain assets of its Sugar Sand division to Execute for a cash purchase price of $5,000,000.  Dutchess has provided funds to Execute for the purposes of consummating the purchase of the Sugar Sand assets.  Under the terms of the asset purchase agreement, Execute purchased all right, title, interest and goodwill in and to certain assets, properties and rights relating to, used in or held for use in IMARs business of designing, manufacturing and marketing water jet powered Sugar Sand boats, including the Sugar Sand trade name and associated trade names, trademarks, service marks and service names, and the associated logos and their goodwill, and all associated domain names, in particular the domain name www.sugarsand.com, trade secrets and copyrights and their goodwill.

In connection with the transaction, Execute and IMAR entered into an agreement for exclusive right of supply, pursuant to which IMAR will manufacture and serve as the exclusive supplier of the Sugar Sand line of jet boats to Execute for an initial term of ten years.  In addition, we entered into an exclusive sales and marketing agreement with Execute, pursuant to which we will provide sales and marketing services related to the Sugar Sand boats for an initial term of ten years.

NOTE  17.

SUBSEQUENT EVENTS

On January 9, 2008, the Company entered into a Series A Convertible Redeemable Preferred Stock Purchase Agreement with Dutchess Private Equities Fund, Ltd., in the amount of $2,000,000.  The convertible redeemable preferred agreement has a quarterly dividend of 5% of the per share price of each share of Series A Preferred Stock held by such holder (the Dividend).  The Dividend shall be paid as follows: two percent (2%) in Preferred Stock and three percent (3%) in cash.  One-quarter of the annual Dividend shall be paid within fifteen (15) days after the end of each of the Companys fiscal quarters.  Declaration and payment of the Dividend shall be in accordance with the NRS.  The Dividend shall be paid in cash.  In the event that the Company is unable to pay the full amount of the Dividend in any quarter as set forth in this provision and the holder of the Series A Preferred Stock has elected to receive such Dividend in cash, the unpaid amount of such cash Dividend, together with interest at the rate of Eight Percent (8%) per annum, shall be added to the following fiscal quarters Dividend.  The purchaser of the convertible preferred stock is entitled to convert the face amount of the stock plus accrued dividend into the Companys common stock at the greater of (i) Thirteen Dollars ($13.00) worth of Common Stock based on the lowest closing bid price of the Companys Common Stock during the Twenty (20) trading day period immediately preceding the date of the Conversion Notice, or (ii) one hundred (100) shares of Common Stock.

On February 28, 2008, the Company entered into a Securities Purchase Agreement with Dutchess Private Equities Fund, Ltd,, Michael Novielli, Douglas Leighton and Theodore Smith, whereby in exchange for a total of $500,000, the Company shall issue and sell to the Purchasers, in aggregate, up to 3,500,000 Units, each consisting 35,000 shares of the Companys 8% Convertible Preferred Stock, one Series A Warrant to purchase the Companys common stock, par value $0.001 and one Series B warrant to purchase Common Stock for an aggregate gross purchase price of up to $3,500,000.  The price per Unit will equal $100.

NOTE 18.

RECENT ACCOUNTING PRONOUNCEMENTS

In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments, which amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125.



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SFAS 155 will be effective for the Company for all financial instruments issued or acquired after the beginning its fiscal year ending December 31, 2006. The Company not yet evaluated and determined the likely effect of SFAS 155 on future financial statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109, (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return that results in a tax benefit.  Additionally, FIN 48 provides guidance on de-recognition, income statement classification of interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation is effective for the Company for its fiscal year ending December 31, 2007. The Company has not yet evaluated the effect that the application of FIN 48 may have, if any, on its future results of operations and financial condition.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for the Company for its fiscal year beginning on July 1, 2008. The Company is currently assessing the impact the adoption of SFAS No. 157 will have on its financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108 in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. In SAB 108, the SEC staff established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the Companys financial statements and the related financial statement disclosures. SAB No. 108 is effective for the Company for its current fiscal year. The adoption of SAB No. 108 did not have an impact on the Companys financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standars No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). Under this standard, the Company may elect to report financial instruments and certain other items at fair value on a contract-by-contract basis with changes in value reported in earnings. This election is irrevocable. SFAS 159 provides an opportunity to mitigate volatility in reported earnings that is caused by measuring hedged assets and liabilities that were previously required to use a different accounting method than On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and the related hedging contracts when the complex provisions of SFAS 133 hedge accounting are not met.  SFAS 159 is effective for years beginning after November 15, 2007. Early adoption within 120 days of the beginning of the Companys 2007 fiscal year is permissible, provided the Company has not yet issued interim financial statements for 2007 and has adopted SFAS 157. The Company does not anticipate that adoption of this standard will have a material effect on its financial statements.

In December 2007, the FASB issued SFAS No. 141-R, Business Combinations (revised 2007) (SFAS 141-R). This Statement provides greater consistency in the accounting and financial reporting of business combinations. It requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to disclose the nature and financial effect of the business combination. SFAS 141-R is effective for fiscal years beginning after December 15, 2008, or January 1, 2009 for the Company. The Company does not anticipate that adoption of this standard will have a material effect on its financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160). This Statement amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years beginning after December 15, 2008, or January 1, 2009 for the Company. The Company does not anticipate that adoption of this standard will have a material effect on its financial statements.



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ITEM  8.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM  8A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report on Form 10-KSB, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934).  Based  on  that  evaluation,  our  Chief Executive Officer and Chief Financial  Officer  concluded  that  our  disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we  file  or  submit  under the Securities Exchange Act of 1934 (i) is recorded, processed,  summarized  and  reported  within  the  time  periods  specified  in Securities  and Exchange Commission rules and forms, and (ii) is accumulated and communicated  to our management, including our Chief Executive Officer and Chief Financial  Officer, as appropriate, to allow timely decisions regarding required reasonable  assurance  that  such information is accumulated and communicated to our  management.  Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management.  Our disclosure controls and procedures include components of our internal control over financial reporting.

Managements Report on Internal Control Over Financial Reporting

Management  is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.   Inherent in small business is the pervasive problem of segregation of duties.  Given that the Company has limited resources, the Chief Executive Officer also fulfills the Chief Financial Officer role and the Company employs a small limited office staff, segregation of duties is not possible at this stage in the corporate lifecycle.  Based on its assessment, management concluded that, as of December 31, 2007, the Companys internal control over financial reporting is effective based on those criteria.

This Annual Report does not include an attestation report of the Companys registered public accounting firm regarding internal controls over financial reporting. Managements report was not subject to attestation by the



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Companys registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only Managements Report in this Annual Report.

CHANGES IN INTERNAL CONTROLS

There  was  no  change  in  our  internal  control over financial reporting that occurred  during the fourth quarter covered by this Annual Report on Form 10-KSB that  materially  affected,  or  is  reasonably likely to materially affect, our internal  control  over  financial  reporting.

ITEM  8B.

OTHER INFORMATION

None.



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PART III



ITEM 9.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The  following  table  sets  forth  the  name,  age,  positions,  and offices or employments for  the  past five years as of December 31, 2007, of our executive officers  and directors. Members of the board are elected and serve for one year terms or until their successors are elected and qualify. All of the officers serve at the pleasure of the Board of Directors.

|                  |  |     |  |                                                    
|----------------- |  | --- |  | ---------------------------------------------------
|NAME              |  | AGE |  | POSITION                                           
|Laurie Phillips   |  | 39  |  | Chief Executive Officer and Chief Financial Officer
|Michael  Novielli |  | 42  |  | Director, Chairman                                 
|Douglas  Leighton |  | 38  |  | Director                                           



LAURIE PHILLIPS has been our Chief Executive Officer since May 10, 2006, and our Chief Financial Officer since May 17, 2005. Prior to joining us, Ms. Phillips worked for twelve years at Ace Electric in Columbus, Kansas, holding various positions in the accounting department, including Chief Financial Officer and Controller  from  1997-2001, and Vice President and General Manager  from 2001 through February 2005. Ms. Phillips received her Bachelor of Business Administration degree from Pittsburg State University in Pittsburg, Kansas with a major in Accounting. She also holds a certified public accountant certificate.

MICHAEL A. NOVIELLI has served as our director since January 7, 2004. Mr.Novielli is a Managing Partner of Dutchess Capital Management, LLC and Dutchess Advisors, LLC. A co-founder of Dutchess in 1996, Mr. Novielli advises the senior management of issuers in which Dutchess has invested, in areas of business development, legal, accounting and regulatory compliance.  Prior  to co-founding Dutchess, Mr. Novielli was a partner at Scharff, Witchel & Company, a 42 year-old, full service investor relations firm, where he consulted with publicly-traded  companies  on  areas of finance and business development. Prior to joining Scharff, Mr. Novielli was Vice-President of Institutional Sales-Private Placements at Merit Capital Associates, an independent FINRA registered broker-dealer.  Before joining Merit, Mr. Novielli began his investment career at PaineWebber, where he served for approximately three years as a registered representative servicing high net worth individuals and institutional clientele. Mr. Novielli has held Series 7, 63 and 65 licenses and received his B.S. in Business from the University of South Florida in 1987.

DOUGLAS LEIGHTON has served as our director since January 7, 2004. Mr. Leighton is a Managing Partner of Dutchess Capital Management, LLC and Dutchess Advisors, LLC.  A co-founder of Dutchess in 1996, Mr. Leighton oversees trading and portfolio risk management of investments made on behalf of Dutchess Private Equities Fund, LP.  Prior to co-founding Dutchess, Mr. Leighton was founder and president of Boston-based Beacon Capital from 1990-1996, which engaged in money management.  Mr. Leighton holds a BS/BA in Economics and Finance from the University of Hartford.

EMPLOYMENT AGREEMENTS

We had a two-year employment agreement with Jack Clark, our Chief Operations Officer, on a monthly salary of $9,000, until his resignation on February 20, 2008.  Mr. Clark was eligible for an annual cash bonus of up to 40% of his annual salary. After employment of two years, Mr. Clark was also eligible for a one time bonus of up to 10% of our outstanding shares of common stock.

BOARD OF DIRECTORS

We currently have two members on our Board of Directors, who are elected to annual terms and until their successors are elected and qualified or until his resignation or removal by the board. Executive officers are appointed by the Board of Directors on an annual basis and serve until their successors have been duly elected and qualified. There are no family relationships among any of our directors, officers or key employees.



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AUDIT COMMITTEE

We do not have a separate Audit Committee. Our full Board of Directors performs the functions usually designated to an Audit Committee.  As of December 31, 2007, we did not have a director on our board that met the definition of audit committee financial expert as set forth in Item 407(d)(3)of Regulation S-B.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section  16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and persons who beneficially own more than ten percent of our common  stock,  to  file  initial reports of ownership and reports of changes in ownership  with  the  Securities  and  Exchange  Commission. Executive officers, directors and greater than ten percent beneficial owners are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations from our executive officers and directors, all required reports were filed during the fiscal year ended December 31, 2007, except reports relating to the Companys former chief financial officer, Eric Wieble.

We believe that all Section 16(a) filing requirements applicable to the executive officers, directors and greater-than-ten percent beneficial owners were complied with.

CODE OF ETHICS

We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Our Code of Ethics is filed with our Report on Form 10-KSB for the period ending December 31, 2003 as Exhibit 14.1.

PROCEDURE FOR NOMINATING DIRECTORS

We have not made any material changes to the procedures by which security holders may recommend nominees to our Board of Directors.

The Board of Directors does not have a written policy or charter regarding how director candidates are evaluated or nominated for the Board of Directors. Additionally, the Board of Directors has not created particular qualifications or minimum standards that candidates must meet. Instead, the Board of Directors considers how a candidate could contribute to our business and meet our needs and the needs of the Board of Directors.  The Board of Directors does not currently consider recommendations from shareholders for candidates for director.

ITEM  10.

EXECUTIVE COMPENSATION

|                                                        |  |                         |  |            |         |     |           |   |                  |  |                   |  |                                           |  |                            |  |           |  |   |        
|------------------------------------------------------- |  | ----------------------- |  | ---------- | ------- | --- | --------- | - | ---------------- |  | ----------------- |  | ----------------------------------------- |  | -------------------------- |  | --------- |  | - | -------
|Name and Principal Position                             |  | Year Ended December 31, |  | Salary
($) |         |     | Bonus
($) |   | Stock Awards
($) |  | Option Awards
($) |  | Nonequity incentive plan compensation
($) |  | All other compensation
($) |  | Total
($)
|Laurie Phillips                                         |  | 2007                    |  | $          | 135,000 |     |           | $ | 15,712           |  |                   |  |                                           |  |                            |  |           |  | $ | 150,712
|Chief Executive Officer and Chief Financial Officer (1) |  | 2006                    |  | $          | 120,966 | (4) |           |   |                  |  |                   |  |                                           |  |                            |  |           |  | $ | 120,966
|Jack Clark                                              |  | 2007                    |  | $          | 108,000 |     |           |   |                  |  |                   |  |                                           |  |                            |  |           |  | $ | 108,000
|Former Chief Operating Officer (2)                      |  | 2006                    |  | $          | 36,000  |     |           |   |                  |  |                   |  |                                           |  |                            |  |           |  | $ | 36,000 
|Kevin Ryan                                              |  | 2007                    |  | $          | 0       |     |           |   |                  |  |                   |  |                                           |  |                            |  |           |  | $ | 0      
|Former Chief Executive Officer and Director (3)         |  | 2006                    |  | $          | 70,000  |     |           |   |                  |  |                   |  |                                           |  |                            |  |           |  | $ | 70,000 

The following table shows the compensation paid or accrued during the fiscal years ended December 31, 2007 and 2006 to (1) our current Chief Executive Officer (3) our former Chief Operating Officer and (3) our former Chief Executive Officer. No other executive officer received compensation in excess of $100,000 during 2007.  Except as listed below, there are no bonuses, other annual compensation, restricted stock awards or stock options/SARs or any other compensation paid to the executive officers.



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SUMMARY COMPENSATION TABLE

(1)   As of May 10, 2006, Laurie Phillips, our Chief Executive Officer and Chief Financial Officer receives $11,250 per month.  Prior to May 10, 2006, Ms. Phillips received $8,000 per month for compensation as our Chief Financial Officer.

(2)   Mr. Clark was paid $9,000 per month per his employment agreement with us, pursuant to which he served as our Chief Operating Officer.  Mr. Clark will continue to be paid under his employment agreement through March 31, 2008.  Mr. Clark resigned his position as our Chief Operating Officer on February 20, 2008.

(3)   Mr. Ryan was paid $10,000 per month per his employment agreement with us, pursuant to which he served as our Chief Executive Officer.  Mr. Ryan was paid under his employment agreement through June 30, 2006.  Mr. Ryan ceased serving as our Chief Executive Officer and Director on May 10, 2006.

Mr. Eric Wieble was our Chief Financial Officer from June 11, 2007 through August 10, 2007. During this period we paid Mr. Wieble approximately $16,238, which includes a small severage payment.

EMPLOYMENT AGREEMENTS OF OUR EXECUTIVE OFFICER

On May 10, 2006, we entered into a verbal employment agreement with Laurie Phillips, our Chief Executive Officer, for a monthly salary of $11,250.  Ms. Phillips is eligible for an annual cash bonus of up to 50% of her annual salary. After May 10, 2008, Ms. Phillips will also be eligible for a one time bonus of up to 20% of our outstanding shares of common stock.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

No equity awards which were issued to any of our named executive officers are outstanding on December 31, 2007.

DIRECTOR COMPENSATION

We do not have a formal plan to compensate our directors.  Our directors did not receive any compensation for their services in 2007.

ITEM  11.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information as of April 1, 2008 regarding the beneficial ownership of our common stock held by each of our executive officers and directors, individually and as a group and by each person who beneficially owns in excess of five percent of our common stock. In general, beneficial ownership includes those shares that a person has the power to vote, sell, or otherwise dispose. Beneficial ownership also includes that number of shares which an individual has the right to acquire within 60 days (such as stock options) of the date this table was prepared. Two or more persons may be considered the beneficial owner of the same shares. The inclusion in this section of any shares deemed beneficially owned does not constitute an admission by that person of beneficial ownership of those shares. The information below reflects the Companys twenty for one reverse stock split which was effective on October 19, 2007.

The number of shares of common stock issued and outstanding as of April 1, 2008 was 4,010,920 shares. The calculation of percentage ownership for each listed beneficial owner is based upon the number of shares of common stock issued and outstanding on as of April 1, 2008, plus shares of common stock subject to options and warrants held by such person on April 1, 2008 and exercisable within 60 days thereafter. The persons and entities named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them, except as noted below.



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|               |  |                                                                                        |  |                                  |  |                     
|-------------- |  | -------------------------------------------------------------------------------------- |  | -------------------------------- |  | --------------------
|Title of Class |  | Name and Address of Beneficial Owner                                                   |  | Common Shares Beneficially Owned |  | Percent of Class (1)
|Common Stock   |  | Michael Novielli  (2)
1110 Rt. 55, Suite 206,
LaGrangeville, NY 12540                  |  | 195,264,315                      |  | 98.72%              
|Common Stock   |  | Douglas Leighton  (3)
50 Commonwealth Ave, Suite 2
Boston, MA 02116                    |  | 195,264,315                      |  | 98.72%              
|Common Stock   |  | Dutchess Private Equities Fund, Ltd. (4)
50 Commonwealth Ave, Suite 2
Boston, MA 02116 |  | 195,219,065                      |  | 98.70%              
|Common Stock   |  | Laurie Phillips (5)
300 Westlink Drive,
Washington, MO  63090                          |  | - 0 -                            |  | *                   
|Common Stock   |  | Theodore Smith (6)
50 Commonwealth Ave, Suite 2
Boston, MA 02116                       |  | - 0 -                            |  | *                   
|Common Stock   |  | All directors and current executive
officers as a group (3 persons)                    |  | 195,264,315                      |  | 98.72%              

* Less than 1%

(1)

The number of shares issued and outstanding on  April 1, 2008 was 4,010,920 shares.

(2)   Mr. Novielli is a member of our board of directors.  The total number of shares Mr. Novielli beneficially owns is comprised of 45,250 shares owned by Mr. Novielli which he has sole voting and dispositive power of and 1,435,265 shares of common stock owned by Dutchess Private Equities Fund, Ltd and 2,000,000 shares of common stock issuable within 60 days to Dutchess Private Equities Fund, Ltd. pursuant to convertible debenture in the principal face amount of $600,000 issued in December 2007. Also includes up to 1,917,838 shares of Series A Preferred Stock owned by Dutchess Private Equities Fund, Ltd convertible into up to 191,783,800 shares of common stock. Mr. Novielli is a director of Dutchess Private Equities Fund, Ltd. and, as such, has voting and dispositive power over such shares beneficially owned by that entity.

(3)

Mr. Leighton is a member of our board of directors.  The total number of shares Mr. Leighton beneficially owns is comprised of 45,250 shares owned by Mr. Novielli which he has sole voting and dispositive power of and 1,435,265 shares of common stock owned by Dutchess Private Equities Fund, Ltd and 2,000,000 shares of common stock issuable within 60 days to Dutchess Private Equities Fund, Ltd. pursuant to convertible debenture in the principal face amount of $600,000 issued in December 2007. Also includes up to 1,917,838 shares of Series A Preferred Stock owned by Dutchess Private Equities Fund, Ltd convertible into up to 191,783,800 shares of common stock. Mr. Leighton is a director of Dutchess Private Equities Fund, Ltd. and, as such, has voting and dispositive power over such shares beneficially owned by that entity.

(4)

Dutchess Private Equities Fund, Ltd., owns 1,435,265 shares of common stock and 2,000,000 shares of common stock issuable within 60 days pursuant to convertible debenture in the principal face amount of $600,000 issued in December 2007. Also includes up to 1,917,838 shares of Series A Preferred Stock owned by Duthcess Private Equities Fund, Ltd convertible into up to 191,783,800 shares of common stock. . Mr. Leighton and Mr. Novielli are the directors of Dutchess Private Equities Fund, Ltd.and have shared voting and dispositive power over the shares owned by that entity

(5)

Ms. Phillips serves as our Chief Executive Officer and Chief Financial Officer.

(6)  Mr. Smith was a member of our Board of Directors until his resignation on on February 5, 2008.  Mr. Smith has been the director of Corporate Finance of Dutchess Private Equities Fund since 1998.  He graduated with a BS in marketing and finance from Boston College in 1999.



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ITEM  12.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr. Novelli, our Chairman and Director, and Mr. Leighton, our Director, serve as a Managing Partners of Dutchess Capital Management, LLC and Dutchess Advisors LLC, which are related companies of Dutchess.  The transactions we have undertaken with Dutchess are listed below:

On January 23, 2007, we entered into a convertible debenture agreement with Dutchess in the amount of $392,400, at a discount of $65,400.  The debenture had a 10% interest rate and was due and payable January 23, 2012.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 42,020 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On January 25, 2007, we entered into a convertible debenture agreement with Dutchess in the amount of $312,000, at a discount of $52,000.  The debenture had a 10% interest rate and was due and payable January 25, 2012.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 33,410 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On February 5, 2007, we entered into a convertible debenture agreement with Dutchess in the amount of $270,000, at a discount of $45,000.  The debenture had a 10% interest rate and was due and payable February 5, 2012.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 28,800 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On February 27, 2007, we entered into a convertible debenture agreement with Dutchess, in the amount of $420,000, at a discount of $70,000.  The debenture had a 10% interest rate and was due and payable February 27, 2012.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 44,800 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On March 26, 2007, we entered into a purchase order financing agreement with Dutchess in the amount of $180,000.  The financing agreement has a 3% monthly interest rate and is due and payable April 26, 2007, with $5,000 minimum interest due and payable on the funds.  As funds became available through the collection of receivables on certain boats as described in the financing agreement, all funds, and any interest and penalties, were to be forwarded to Dutchess within one business day.  In the event that on the maturity date, there was a balance due on the face amount, Dutchess could increase the face amount by ten percent per month, for each month that the agreement remained unpaid.   The agreement was extended and was due and payable with thirty days notice from Dutchess.  As of September 30, 2007, $58,000 of agreement was repaid, and the balance at September 29, 2007 is $122,000.  On September 30, 2007,we entered into an agreement with Dutchess, whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 15,101 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original purchase order financing agreement has been cancelled and terminated.



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On March 26, 2007, we entered into an accounts receivable factoring agreement with Dutchess, in the amount of $120,000.  The financing agreement had a 3% monthly interest rate and was due and payable April 26, 2007, with $5,000 minimum interest due and payable on the funds.  As funds became available through the collection of receivables on certain boats as described in the factoring agreement, all funds, and any interest and penalties, were to be forwarded to Dutchess within one business day.  In the event that on the maturity date, there was a balance due on the face amount, Dutchess could increase the face amount by ten percent per month, for each month that the agreement remained unpaid.   The agreement was repaid in full as of April 11, 2007.

On April 3, 2007, we entered into a purchase order financing agreement with Dutchess in the amount of $150,000.  The financing agreement had a 3% monthly interest rate and was due and payable May 3, 2007, with $5,000 minimum interest due and payable on the funds.  As funds became available through the collection of receivables on certain boats as described in the factoring agreement (above), all funds, and any interest and penalties, were to be forwarded to Dutchess within one business day.  In the event that on the maturity date, there was a balance due on the face amount, Dutchess could increase the face amount by ten percent per month, for each month that the agreement remained unpaid.   The agreement was extended and was repaid in full as of June 22, 2007.

On April 6, 2007, we entered into a convertible debenture agreement with Dutchess in the amount of $720,000, at a discount of $120,000.  The debenture had a 10% interest rate and was due and payable April 6, 2012.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 75,600 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On May 3, 2007, we entered into a convertible debenture agreement with Dutchess in the amount of $186,000, at a discount of $31,000.  The debenture had a 10% interest rate and was due and payable May 3, 2012.  Dutchess was entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  As of September 30, 2007, $45,093 of this convertible debenture was repaid, and the balance at September 30, 2007 was $140,907.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 14,749 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible debenture agreement has been cancelled and terminated.

On May 15, 2007, we entered into a convertible redeemable preferred stock agreement with Dutchess in the amount of $160,000.  The debenture had a 10% dividend rate and was due and payable May 15, 2012.  Dutchess was entitled to convert the face amount of the stock plus accrued dividend into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 16,600 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible redeemable preferred stock agreement has been cancelled and terminated.

On May 25, 2007, we entered into a convertible redeemable preferred stock agreement with Dutchess, in the amount of $530,000.  The debenture had a 10% dividend rate and was due and payable May 25, 2012.  Dutchess was entitled to convert the face amount of the stock plus accrued dividend into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 54,767 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible redeemable preferred stock agreement has been cancelled and terminated.

On June 26, 2007, we entered into a convertible redeemable preferred stock agreement with Dutchess in the amount of $685,000.  The debenture had a 10% dividend rate and was due and payable June 26, 2012.  Dutchess was entitled to convert the face amount of the stock plus accrued dividend into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all



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principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 70,213 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible redeemable preferred stock agreement has been cancelled and terminated.

On July 12, 2007, we entered into a convertible redeemable preferred stock agreement with Dutchess in the amount of $550,000.  The debenture had a 10% dividend rate and was due and payable July 12, 2012.  Dutchess was entitled to convert the face amount of the stock plus accrued dividend into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 56,146 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible redeemable preferred stock agreement has been cancelled and terminated.

On August 3, 2007, we entered into a convertible redeemable preferred stock agreement with Dutchess in the amount of $650,000.  The debenture had a 10% dividend rate and was due and payable August 8, 2012.  Dutchess was entitled to convert the face amount of the stock plus accrued dividend into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.  On September 30, 2007, we entered into an agreement with Dutchess whereby all principal and interest outstanding under this agreement was converted into the right to receive an aggregate of 66,083 shares of Series A preferred stock, par value $0.001 per share, at a conversion price of $10 per share.  The original convertible redeemable preferred stock agreement has been cancelled and terminated.

On September 30, 2007, we entered into an amended and restated convertible debenture agreement with Dutchess in the amount of $2,784,685.  This debenture is issued in conjunction with the conversion of existing Dutchess debt into Series A Preferred Stock and includes all Dutchess debentures dated January 20, 2004 through February 22, 2006.  The debenture has an 8% interest rate and is due and payable September 30, 2012.  The Dutchess is entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the twenty trading days prior to the conversion date or (ii) at a fixed conversion price of sixty cents.

On September 30, 2007, we entered into a debt conversion agreement with Dutchess whereby Dutchess converted a total of $16,849,214 in principal and accrued interest currently owed to Dutchess into the right to receive 1,684,921 shares of Series A Preferred Stock. The conversion includes all Dutchess debentures dated February 28, 2006 through May 3, 2007, all amounts outstanding under the promissory notes, all amounts outstanding under the factoring agreements, all amounts outstanding under the purchase order aAgreements, all amounts outstanding under the preferred agreements, and all amounts outstanding under the consulting agreement with Dutchess.  The debt conversion agreement requires dividends to be paid quarterly, in cash, at the rate of 8% per annum.  Dividends shall be cumulative.

On December 3, 2007, we entered into a convertible debenture agreement with Dutchess in the amount of $600,000, at a discount of $100,000.  The debenture has a 10% interest rate and is due and payable December 3, 2012.  The purchaser of the convertible debentures is entitled to convert the face amount of the debentures plus accrued interest into our common stock at the lesser of (i) 75% of the lowest closing bid price during the fifteen trading days prior to the conversion date or (ii) at a fixed conversion price of thirty cents.  As of December 31, 2007, $0 of this note was repaid, and the balance at December 31, 2007 is $600,000.

On December 11, 2007, we entered into a Series A convertible redeemable preferred stock purchase agreement with Dutchess in the amount of $400,000.  The convertible redeemable preferred agreement has a quarterly Dividend of 5% of the per share price of each share of Series A Preferred Stock held Dutchess.  The Dividend shall be paid as follows: two percent (2%) in preferred stock and three percent (3%) in cash.  One-quarter of the annual Dividend shall be paid within fifteen (15) days after the end of each of our fiscal quarters.  Declaration and payment of the Dividend shall be in accordance with the NRS.  The Dividend shall be paid in cash.

On December 26, 2007, we entered into a Series A convertible redeemable preferred stock purchase agreement with Dutchess in the amount of $475,000.  The Dividend for this agreement shall be paid as follows: two percent (2%) in Preferred Stock and three percent (3%) in cash.  One-quarter of the annual Dividend shall be paid within fifteen (15) days after the end of each of the Companys fiscal quarters.  Declaration and payment of the Dividend shall be in accordance with the NRS.  The Dividend shall be paid in cash.



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On August 29, 2007, IMAR, our wholly-owned subsidiary, completed the sale of certain assets of its Sugar Sand division to Execute for a cash purchase price of $5,000,000.  Dutchess has provided funds to Execute for the purposes of consummating the purchase of the Sugar Sand assets.  Under the terms of the asset purchase agreement, Execute purchased all right, title, interest and goodwill in and to certain assets, properties and rights relating to, used in or held for use in IMARs business of designing, manufacturing and marketing water jet powered Sugar Sand boats, including the Sugar Sand trade name and associated trade names, trademarks, service marks and service names, and the associated logos and their goodwill, and all associated domain names, in particular the domain name www.sugarsand.com, trade secrets and copyrights and their goodwill.

In connection with the transaction, Execute and IMAR entered into an agreement for exclusive right of supply, pursuant to which IMAR will manufacture and serve as the exclusive supplier of the Sugar Sand line of jet boats to Execute for an initial term of ten years.  In addition, we entered into an exclusive sales and marketing agreement with Execute, pursuant to which we will provide sales and marketing services related to the Sugar Sand boats for an initial term of ten years.

DIRECTOR INDEPENDENCE

During the year ended December 31, 2007, Michael Novielli, Douglas Leighton and Theodore Smith served as our directors. We are currently traded on the Over-the-Counter Bulletin Board or OTCBB.  The OTCBB does not require that a majority of the board be independent.



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ITEM 13.

EXHIBITS.



EXHIBIT

NUMBER     DESCRIPTION



2.1

Acquisition Agreement between the Company and Waste Renewal Systems, Inc., dated April 26, 2002 (included as Exhibit 2 to the Form 8-K filed May 8, 2002, and incorporated herein by reference).



2.2

Agreement and Plan of Reorganization between the Company and Rockwell Power Systems, dated October 1, 2003 (included as Exhibit 2.1 to the Form 8-K filed October 9, 2003, and incorporated herein by reference).



3.1

Articles of Incorporation (included as Exhibit 3.1 to the Form 10-SB12G/A filed November 7, 2000, and incorporated herein by reference).



3.2

By-laws (included as Exhibit 3.2 to the Form 10-SB filed November 7, 2000, and incorporated herein by reference).



3.3

Amendment to Articles of Incorporation (included as Exhibit 3.3 to the Form SB-2/A filed July 21, 2005, and incorporated herein by reference).



3.4

Certificate of Amendment to Articles of Incorporation, dated November 15, 2006 (included as Exhibit 3.1 to the Form 8-K filed November 21, 2006, and incorporated herein by reference).



4.1

Debenture Agreement between the Company and Dutchess Private Equities Fund, L.P., dated October 1, 2003 (included as Exhibit 4.1 to the Form 10-KSB filed April 14, 2004, and incorporated herein by reference).



4.2

Debenture Agreement between the Company and eFund Small-Cap Fund, L.P., dated October 1, 2003 (included as Exhibit 4.2 to the Form 10-KSB filed April 14, 2004, and incorporated herein by reference).



4.3

Subscription Agreement between the Company and Dutchess Private Equities Fund, L.P., dated October 1, 2003 (included as Exhibit 10.4 to the Form 10-KSB filed April 14, 2004, and incorporated herein by reference).



4.4

Subscription Agreement between the Company and eFund Capital Partners, dated October 1, 2003 (included as Exhibit 10.5 to the Form 10-KSB filed April 14, 2004, and incorporated herein by reference).



4.5

Registration Rights Agreement between the Company and Dutchess Private Equities Fund, L.P., dated October 1, 2003 (included as Exhibit 10.6 to the Form  10-KSB  filed April 14, 2004, and incorporated herein by reference).



4.6

Registration Rights Agreement between the Company and eFund Small-Cap Fund, L.P., dated October 1, 2003 (included as Exhibit 10.7 to the Form 10-KSB filed April 14, 2004, and incorporated herein by reference).



4.7

Debenture Agreement between the Company and Preston Capital Partners, L.P., dated February 3, 2004 (included as Exhibit 4.1 to the Form 10-QSB filed May 24, 2004, and incorporated herein by reference).



4.8

Debenture Agreement between the Company and eFund Capital Partners, LLC, dated February 18, 2004 (included as Exhibit 4.2 to the Form 10-QSB filed May 24, 2004, and incorporated herein by reference).



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4.9

Registration Rights Agreement between the Company and Preston Capital Partners, L.P., dated February 3, 2004 (included as Exhibit 10.1 to the Form 10-QSB filed May 24, 2004, and incorporated herein by reference).



4.10

Registration Rights Agreement between the Company and eFund Capital Partners, LLC, dated February 18, 2004 (included as Exhibit 10.2 to the Form 10-QSB filed May 24, 2004, and incorporated herein by reference).



4.11

Subordinated Convertible Promissory Note between the Company and Lenders (included as Exhibit 10.24 to the Form 10-QSB filed November 23, 2004, and incorporated herein by reference).



4.12

Debenture Agreement between the Company and Dutchess Private Equities Fund L.P., dated October 18, 2004 (included as Exhibit 4.3 to the Form 10-KSBfiled April 15, 2005, and incorporated herein by reference).



4.13

Debenture Agreement between the Company and eFund Capital Partners, LLC, dated October 18, 2004 (included as Exhibit 4.4 to the Form 10-KSB filed April 15, 2005, and incorporated herein by reference).



4.14

Debenture Agreement between the Company and Dutchess Private Equities Fund L.P., dated December 23, 2004 (included as Exhibit 4.5 to the Form 10-KSB filed April 15, 2005, and incorporated herein by reference).



4.15

Debenture Agreement between the Company and Dutchess Private Equities Fund, II, LP, dated January 3, 2005 (included as Exhibit 4.6 to the Form 10-QSB filed May 16, 2005, and incorporated herein by reference).



4.16

Warrant Agreement between the Company and Dutchess Private Equities, II, LP, dated January 3, 2005 (included as Exhibit 4.7 to the Form 10-QSB filed May 16, 2005, and incorporated herein by reference).



4.17

Debenture Agreement between the Company and Dutchess Private Equities Fund, LP, dated March 8, 2005 (included as Exhibit 4.8 to the Form 10-QSB filed May 16, 2005, and incorporated herein by reference).



4.18

Warrant Agreement between the Company and Dutchess Private Equities, LP, dated March 8, 2005 (included as Exhibit 4.9 to the Form 10-QSB filed May 16, 2005, and incorporated herein by reference).



4.19

Debenture Agreement between the Company and eFund Capital Partners, LLC, dated March 10, 2005 (included as Exhibit 4.10 to the Form 10-QSB filed May 16, 2005, and incorporated herein by reference).



4.20

Warrant Agreement between the Company and eFund Capital Partners, LLC, dated March 10, 2005 (included as Exhibit 4.11 to the Form 10-QSB filed May 16, 2005, and incorporated herein by reference).



4.21

Debenture Agreement between the Company and eFund Capital Partners, LLC, dated March 18, 2005 (included as Exhibit 4.12 to the Form 10-QSB filed May 16, 2005, and incorporated herein by reference).



4.22

Warrant Agreement between the Company and eFund Capital Partners, LLC, dated March 10, 2005 (included as Exhibit 4.13 to the Form 10-QSB filed May 16, 2005, and incorporated herein by reference).





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4.23

Promissory Note between the Company and Dutchess Private Equities Fund, II, L.P., dated March 11, 2005 (included as Exhibit 4.14 to the Form 10-QSB filed May 16, 2005, and incorporated herein by reference).



4.24

Debenture Agreement between the Company and Dutchess Private Equities Fund, dated April 18, 2005 (included as Exhibit 4.24 to the Form SB-2 filed June 9, 2005, and incorporated herein by reference).



4.25

Warrant Agreement between the Company and Dutchess Private Equities Fund, dated April 18, 2005 (included as Exhibit 4.25 to the Form SB-2 filed June 9, 2005, and incorporated herein by reference).



4.26

Debenture Agreement between the Company and Dutchess Private Equities Fund, II, dated May 5, 2005 (included as Exhibit 4.26 to the Form SB-2 filed June 9, 2005, and incorporated herein by reference).



4.27

Warrant Agreement between the Company and Dutchess Private Equities Fund, II, dated May 5, 2005 (included as Exhibit 4.27 to the Form SB-2 filed June 9, 2005, and incorporated herein by reference).



4.28

Debenture Agreement between the Company and Dutchess Private Equities Fund, II, dated May 13, 2005 (included as Exhibit 4.28 to the Form SB-2 filed June 9, 2005, and incorporated herein by reference).



4.29

Warrant Agreement between the Company and Dutchess Private Equities Fund, II, dated May 13, 2005 (included as Exhibit 4.29 to the Form SB-2 filed June 9, 2005, and incorporated herein by reference).



4.30

Debenture Exchange Agreement between the Company and Dutchess Private Equities Fund, II, dated May 18, 2005 (included as Exhibit 4.30 to the Form SB-2 filed June 9, 2005, and incorporated herein by reference).



4.31

Warrant Agreement between the Company and Dutchess Private Equities Fund, II, dated May 18, 2005 (included as Exhibit 4.31 to the Form SB-2 filed June 9, 2005, and incorporated herein by reference).



4.32

Debenture Agreement between the Company and eFund Capital Partners, LLC dated, May 20, 2005 (included as Exhibit 4.32 to the Form SB-2 filed June 9, 2005, and incorporated herein by reference).



4.33

Warrant Agreement between the Company and eFund Capital Partners, dated May 20, 2005 (included as Exhibit 4.33 to the Form SB-2 filed June 9, 2005, and incorporated herein by reference).



4.34

Debenture Conversion Amendment between the Company, Dutchess Private Equities Fund, Dutchess Private Equities Fund II and eFund Capital Partners, dated May 23, 2005 (included as Exhibit 4.34 to the Form SB-2 filed June 9, 2005, and incorporated herein by reference).



4.35

Debenture Agreement between the Company and Dutchess Private Equities Fund, II, L.P., dated June 16, 2005 (included as Exhibit 4.36 to the Form 10-QSB filed August 15, 2005, and incorporated herein by reference).



4.36

Warrant Agreement between the Company and Dutchess Private Equities Fund, II, LP, dated June 16, 2005(included as Exhibit 4.37 to the Form 10-QSB filed August 15, 2005, and incorporated herein by reference).



4.37

Registration Rights Agreement between the Company and Preston Capital Partners, LLC, dated August 24, 2005 (included as Exhibit 4.35 to the Form SB-2 filed August 24, 2005, and incorporated herein by reference).



4.38

Warrant Agreement between the Company and Dutchess Private Equities Fund, II, LP, dated July 7, 2005(included as Exhibit 4.38 to the Form 10-QSB filed November 14, 2005, and incorporated herein by reference).



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4.39

Debenture Agreement between the Company and Dutchess Private Equities Fund, II, LP dated July 7, 2005 (included as Exhibit 4.39 to the Form 10-QSB filed November 14, 2005, and incorporated herein by reference).



4.40

Warrant Agreement between the Company and eFund Capital Partners, dated July 7, 2005 (included as Exhibit 4.40 to the Form 10-QSB filed November 14, 2005, and incorporated herein by reference).



4.41

Debenture Agreement between the Company and eFund Capital Partners, dated July 7, 2005 (included as Exhibit 4.41 to the Form 10-QSB filed November 14, 2005, and incorporated herein by reference).



4.42

Promissory Note between the Company and Dutchess Private Equities Fund, II, L.P., dated July 21, 2005 (included as Exhibit 4.42 to the Form 10-QSB filed November 14, 2005, and incorporated herein by reference).



4.43

Promissory Note between the Company and Dutchess Private Equities Fund, II, L.P., dated August 5, 2005 (included as Exhibit 4.43 to the Form 10-QSB filed November 14, 2005, and incorporated herein by reference).



4.44

Promissory Note between the Company and Dutchess Private Equities Fund, II,L.P., dated August 19, 2005 (included as Exhibit 4.44 to the Form 10-QSB filed November 14, 2005, and incorporated herein by reference).



4.45

Promissory Note between the Company and Dutchess Private Equities Fund, L.P., dated September 1, 2005 (included as Exhibit 4.45 to the Form 10-QSB filed November 14, 2005, and incorporated herein by reference).



4.46

Promissory Note between the Company and Dutchess Private Equities Fund, L.P., dated September 7, 2005 (included as Exhibit 4.46 to the Form 10-QSB filed November 14, 2005, and incorporated herein by reference).



4.47

Promissory Note between the Company and Dutchess Private Equities Fund, L.P., dated September 15, 2005 (included as Exhibit 4.47 to the Form 10-QSB filed on November 14, 2005, and incorporated herein by reference).



4.48

Promissory Note between the Company and Dutchess Private Equities Fund, L.P., dated September 22, 2005 (included as Exhibit 4.48 to the Form 10-QSB filed November 14, 2005, and incorporated herein by reference).



4.49

Promissory Note between the Company and Dutchess Private Equities Fund, L.P., dated September 30, 2005 (included as Exhibit 4.49 to the Form 10-QSB filed November 14, 2005, and incorporated herein by reference).



4.50

Promissory Note between the Company and Dutchess Private Equities Fund, L.P., dated October 7, 2005 (included as Exhibit 4.50 to the Form 10-KSB filed April 14, 2006, and incorporated herein by reference).



4.51

Promissory Note between the Company and Dutchess Private Equities Fund, L.P., dated October 14, 2005 (included as Exhibit 4.51 to the Form 10-KSB filed April 14, 2006, and incorporated herein by reference).



4.52

Promissory Note between the Company and Dutchess Private Equities Fund, II,L.P., dated November 1, 2005 (included as Exhibit 4.52 to the Form 10-KSB filed April 14, 2006, and incorporated herein by reference).





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4.53

Promissory Note between the Company and Dutchess Private Equities Fund, II, L.P., dated November 9, 2005 (included as Exhibit 4.53 to the Form 10-KSB filed April 14, 2006, and incorporated herein by reference).



4.54

Promissory Note between the Company and Dutchess Private Equities Fund, II, L.P., dated November 22, 2005 (included as Exhibit 4.54 to the Form 10-KSB filed April 14, 2006, and incorporated herein by reference).



4.55

Promissory Note between the Company and Dutchess Private Equities Fund, II, L.P., dated December 7, 2005 (included as Exhibit 4.55 to the Form 10-KSB filed April 14, 2006, and incorporated herein by reference).



4.56

Promissory Note between the Company and Dutchess Private Equities Fund, II,L.P., dated January 3, 2006 (included as Exhibit 4.56 to the form 10-QSB filed June 5, 2006, and incorporated herein by reference).



4.57

Promissory Note between the Company and Dutchess Private Equities Fund, II, L.P., dated January 27, 2006 (included as Exhibit 4.57 to the form 10-QSB filed June 5, 2006, and incorporated herein by reference).



4.58

Debenture Agreement between the Company and Dutchess Private Equities Fund, L.P., dated February 1, 2006 (included as Exhibit 4.58 to the form 10-QSB filed June 5, 2006, and incorporated herein by reference).



4.59

Debenture Agreement between the Company and Dutchess Private Equities Fund, L.P., dated February 3, 2006 (included as Exhibit 4.59 to the form 10-QSB filed June 5, 2006, and incorporated herein by reference).



4.60

Debenture Agreement between the Company and Dutchess Private Equities Fund, II, L.P., dated February 10, 2006 (included as Exhibit 4.60 to the form 10-QSB filed June 5, 2006, and incorporated herein by reference).



4.61

Debenture Agreement between the Company and Dutchess Private Equities Fund,  II, L.P., dated February 14, 2006 (included as Exhibit 4.61 to the form 10-QSB  filed June 5, 2006, and incorporated herein by reference).



4.62

Debenture Agreement between the Company and Dutchess Private Equities Fund, II, L.P., dated February 24, 2006 (included as Exhibit 4.62 to the form 10-QSB  filed June 5, 2006, and incorporated herein by reference).



4.63

Debenture Agreement between the Company and Dutchess Private Equities Fund, II, L.P., dated February 28, 2006 (included as Exhibit 4.63 to the form 10-QSB filed June 5, 2006, and incorporated herein by reference).



4.64

Debenture Agreement between the Company and Dutchess Private Equities Fund, L.P., dated February 28, 2006 (included as Exhibit 4.64 to the form 10-QSB filed June 5, 2006, and incorporated herein by reference).



4.65

Debenture Agreement between the Company and Dutchess Private Equities Fund, L.P., dated March 2, 2006 (included as Exhibit 4.65 to the form 10-QSB filed  June 5, 2006, and incorporated herein by reference).



4.66

Debenture Agreement between the Company and Dutchess Private Equities Fund, L.P., dated April 3, 2006 (included as Exhibit 4.66 to the form 10-QSB filed  June 5, 2006, and incorporated herein by reference).





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4.67

Debenture Agreement between the Company and Dutchess Private Equities Fund, L.P., dated April 26, 2006 (included as Exhibit 4.67 to the form 10-QSB filed August 14, 2006, and incorporated herein by reference).



4.68

Debenture Agreement between the Company and Dutchess Private Equities Fund, L.P., dated May 3, 2006 (included as Exhibit 4.68 to the form 10-QSB filed August 14, 2006, and incorporated herein by reference).



4.69

Debenture Agreement between the Company and Dutchess Private Equities Fund, L.P., dated May 17, 2006 (included as Exhibit 4.69 to the form 10-QSB filed August 14, 2006, and incorporated herein by reference).



4.70

Debenture Agreement between the Company and Dutchess Private Equities Fund, L.P., dated May 24, 2006 (included as Exhibit 4.70 to the form 10-QSB filed August 14, 2006, and incorporated herein by reference).



4.71

Debenture Agreement between the Company and Dutchess Private Equities Fund, L.P., dated June 7, 2006 (included as Exhibit 4.71 to the form 10-QSB filed August 14, 2006, and incorporated herein by reference).



4.72

Debenture Agreement between the Company and Dutchess Private Equities Fund, L.P., dated June 15, 2006 (included as Exhibit 4.72 to the form 10-QSB filed August 14, 2006, and incorporated herein by reference).



4.73

Debenture Agreement between the Company and Dutchess Private Equities Fund, L.P., dated June 22, 2006 (included as Exhibit 4.73 to the form 10-QSB filed August 14, 2006, and incorporated herein by reference).



4.74

Debenture Agreement between the Company and Dutchess Private Equities Fund, L.P., dated June 23, 2006 (included as Exhibit 4.74 to the form 10-QSB filed August 14, 2006, and incorporated herein by reference).



4.75

Debenture Agreement between the Company and Dutchess Private Equities Fund, II, L.P., dated July 5, 2006 (included as Exhibit 4.75 to the form 10-QSB filed November 14, 2006, and incorporated herein by reference).



4.76

Debenture Agreement between the Company and Dutchess Private Equities Fund, II, L.P., dated July 20, 2006 (included as Exhibit 4.76 to the form 10-QSB filed November 14, 2006, and incorporated herein by reference).



4.77

Debenture Agreement between the Company and Dutchess Private Equities Fund, L.P., dated July 21, 2006 (included as Exhibit 4.77 to the form 10-QSB filed November 14, 2006, and incorporated herein by reference).



4.78

Debenture Agreement between the Company and Dutchess Private Equities Fund, L.P., dated August 1, 2006 (included as Exhibit 4.78 to the form 10-QSB filed November 14, 2006, and incorporated herein by reference).



4.79

Debenture Agreement between the Company and Dutchess Private Equities Fund, L.P., dated August 17, 2006 (included as Exhibit 4.79 to the form 10-QSB filed November 14, 2006, and incorporated herein by reference).



4.80

Debenture Agreement between the Company and Dutchess Private Equities Fund, L.P., dated August 30, 2006 (included as Exhibit 4.80 to the form 10-QSB filed November 14, 2006, and incorporated herein by reference).





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4.81

Debenture Agreement between the Company and Dutchess Private Equities Fund, II, L.P., dated September 12, 2006 (included as Exhibit 4.81 to the form 10-QSB filed November 14, 2006, and incorporated herein by reference).



4.82

Debenture Agreement between the Company and Dutchess Private Equities Fund, L.P., dated September 26, 2006 (included as Exhibit 4.82 to the form 10-QSB filed November 14, 2006, and incorporated herein by reference).



4.83

Debenture Agreement between the Company and Dutchess Private Equities Fund, II, L.P., dated September 26, 2006 (included as Exhibit 4.83 to the form 10-QSB filed November 14, 2006, and incorporated herein by reference).



4.84

Debenture Agreement between the Company and Dutchess Private Equities Fund, Ltd., dated January 23, 2007 (included as Exhibit 4.84 to the Form 10-KSB for the fiscal year end December 31, 2006, and incorporated herein by reference).



4.85

Debenture Agreement between the Company and Dutchess Private Equities Fund, Ltd., dated January 25, 2007 (included as Exhibit 4.85 to the Form 10-KSB for the fiscal year end December 31, 2006, and incorporated herein by reference).



4.86

Debenture Agreement between the Company and Dutchess Private Equities Fund, Ltd., dated February 5, 2007 (included as Exhibit 4.86 to the Form 10-KSB for the fiscal year end December 31, 2006, and incorporated herein by reference).



4.87

Debenture Agreement between the Company and Dutchess Private Equities Fund, Ltd., dated February 27, 2007 (included as Exhibit 4.87 to the Form 10-KSB for the fiscal year end December 31, 2006, and incorporated herein by reference).



4.88

Debenture Agreement between the Company and Dutchess Private Equities Fund, Ltd., dated December 3, 2007 (filed herewith)



10.1

Employment Agreement between the Company and Kevin Ryan, dated October 30, 2003 (included as Exhibit 10.2 to the Form 10-KSB filed April 14, 2004, and incorporated herein by reference).



10.2

Consulting Agreement between the Company and Calicorp, dated October 1, 2003 (included as Exhibit 10.3 to the Form 10-KSB filed April 14, 2004, and incorporated herein by reference).



10.3

Lease Agreement between the Company and Corning Garden Grove, LLC, dated November 5, 2003 (included as Exhibit 10.8 to the Form 10-KSB filed April 14, 2004, and incorporated herein by reference).



10.4

Lease Agreement between the Company and Marlborough Square Equities, LLC, dated December 1, 2003 (included as Exhibit 10.9 to the Form 10-KSB filed April 14, 2004, and incorporated herein by reference).



10.5

Consulting Agreement between the Company and Dutchess Advisors, dated October 1, 2003 (included as Exhibit 10.10 to the Form 10-KSB filed April 14, 2004, and incorporated herein by reference).



10.6

Consulting Agreement between the Company and Lane Longhurst, dated October 28, 2003 (included as Exhibit 10.11 to the Form 10-KSB filed April 14, 2004, and incorporated herein by reference).



10.7

Consulting Agreement between the Company and Gordon McGilton, dated October 28, 2003 (included as Exhibit 10.12 to the Form 10-KSB filed April 14, 2004, and incorporated herein by reference).



10.8

Consulting Agreement between the Company and Douglas Leighton, dated January 15, 2004 (included as Exhibit 10.1 to the Form S-8 filed February 4, 2004, and incorporated herein by reference).



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10.9

Consulting Agreement between the Company and Michael Novielli, dated January 15, 2004 (included as Exhibit 10.2 to the Form S-8 filed February 4, 2004, and incorporated herein by reference).



10.10

Consulting Agreement between the Company and Theodore J. Smith, dated February 6, 2004 (included as Exhibit 10.1 to the Form S-8 filed February 13, 2004, and incorporated herein by reference).



10.11

Consulting Agreement between the Company and Jeffrey Conrad, dated February 6, 2004 (included as Exhibit 10.2 to the Form S-8 filed February 13, 2004, and incorporated herein by reference).



10.12

Letter of Agreement between the Company and Roean Industries, Inc., dated February 26, 2004 (included as Exhibit 10.1 to the Form S-8 filed February  27, 2004, and incorporated herein by reference).



10.13

Non-Employee Directors and Consultants Retainer Stock Plan, dated October 2, 2003 (included as Exhibit 4 to the Form S-8 filed October 17, 2003, and incorporated herein by reference).



10.14

Fire rescue jet sale agreement between the Company and Barb Weir, dated July 1, 2004 (included as Exhibit 10.20 to the Form 10-QSB filed November 23, 2004, and incorporated herein by reference).



10.15

License Agreement between the Company and Albert Mardikian, dated June 2, 2004 (included as Exhibit 10.23 to the Form 10-QSB filed August 25, 2004, and incorporated herein by reference).



10.16

Sales Agreement between the Company and Barb Weir, dated July 1, 2004 (included as Exhibit 10.20 to the Form 10-QSB filed November 23, 2004, and incorporated herein by reference).



10.17

Consulting Agreement between the Company and TGR Group, LLC, dated January 27, 2004 (included as Exhibit 10.22 to the Form 10-QSB filed November 23, 2004, and incorporated herein by reference).



10.18

Sales Agreement between the Company and Jackson County Fire Department, dated July 7, 2004 (included as Exhibit 10.23 to the Form 10-QSB filed November 23, 2004, and incorporated herein by reference).



10.19

Marketing and Distribution Agreement between the Company and Marine Holdings, Inc., dated March 1, 2005 (included as Exhibit 10.1 to the 8-K filed March 4, 2005, and incorporated herein by reference).



10.20

Business Services Agreement between the Company and Dutchess Advisors, LLC, dated March 1, 2005 (included as Exhibit 10.26 to the Form 10-QSB filed May 16, 2005, and incorporated herein by reference).



10.21

Investment Agreement between the Company and Preston Capital Partners, dated August 24, 2005 (included as Exhibit 10.21 to the Form SB-2 filed August 24, 2005, and incorporated herein by reference).



10.22

Placement Agent Agreement between the Company, Preston Capital Partners, and U.S. Euro Securities, dated August 24, 2005 (included as Exhibit 10.22 to the Form SB-2 filed August 24, 2005, and incorporated herein by reference).



10.23

Employment Agreement between the Company and Laurie Phillips, dated May 16, 2005 (included as Exhibit 10.1 to the Form 8-K filed June 8, 2005, and incorporated herein by reference).



10.24

Corporate Consulting Agreement between the Company and Dutchess Advisors LLC, dated November 1, 2005 (included as Exhibit 10.24 to the Form 10-KSB filed April 14, 2006, and incorporated herein by reference).





86



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10.25

Receivable Factoring Agreement between the Company and Dutchess Private Equities Fund, II, LP, dated May 17, 2006 (included as Exhibit 10.25 to the form 10-QSB filed August 14, 2006, and incorporated herein by reference).



10.26

Employment Agreement between the Company and Jack Clark, dated September 6, 2006 (included as Exhibit 10.1 to the Form 8-K filed September 12, 2006, and incorporated herein by reference).



10.27

Agreement of Purchase and Sale between the Company and IMAR Group, LLC, dated January 30, 2007 (included as Exhibit 10.1 to the Form 8-K filed February 7, 2007 and incorporated herein by reference).



10.28

Promissory Note among the Company and Mike Bullinger, Chuck Crary, Howard Dahl, Tom Shorma, and Bill Schlossman, dated January 29, 2007 (included as Exhibit 10.2 to the Form 8-K filed February 7, 2007 and incorporated herein by reference).



10.29

Promissory Note among the Company and Mike Bullinger, Chuck Crary, Howard Dahl, Tom Shorma, and Bill Schlossman, dated January 29, 2007 (included as Exhibit 10.3 to the Form 8-K filed February 7, 2007 and incorporated herein by eference).



10.30

Guaranty Agreement among the Company, Dutchess Private Equities Fund, Ltd. and Howard Dahl, Chuck Crary, Tom Shorma, William Schlossman, and Michael Bullinger, dated January 30, 2007 (included as Exhibit 10.4 to the Form 8-K filed February 7, 2007 and incorporated herein by reference).



10.31

Asset and Technology Acquisition Agreement between IMAR Group, LLC, and Mark Overbye and Gekko Sports Corporation, dated January 30, 2007 (included as Exhibit 10.5 to the Form 8-K filed February 7, 2007 and incorporated herein by reference).



10.32

Security Agreement between the Company and IMAR Group, LLC, and Mark Overbye and Gekko Sports Corporation, dated January 29, 2007 (included as Exhibit 10.6 to the Form 8-K filed February 7, 2007 and incorporated herein by reference).



10.33

Employment Agreement between the Company and Mark Overbye, dated January 1, 2007 (included as Exhibit 10.7 to the Form 8-K filed February 7, 2007 and incorporated herein by reference).



10.34

Leak-out Agreement between the Company and Mark Overbye, dated January 29, 2007 (included as Exhibit 10.8 to the Form 8-K filed February 7, 2007 and incorporated herein by reference).



10.35

Promissory Note between the Company and Mark Overbye, dated January 29, 2007 (included as Exhibit 10.9 to the Form 8-K filed February 7, 2007 and incorporated herein by reference).



10.36

Common Stock Purchase Warrant, dated January 28, 2007 (included as Exhibit 10.10 to the Form 8-K filed February 7, 2007 and incorporated herein by reference).



10.37

Common Stock Purchase Warrant, dated January 28, 2007 (included as Exhibit 10.11 to the Form 8-K filed February 7, 2007 and incorporated herein by reference).



10.38

International Sales Representation Agreement between the Company and Nautique International, Inc., dated December 7, 2006 (included as Exhibit 10.38 to the Form 10-KSB for the fiscal year end December 31, 2006, and incorporated herein by reference).



10.39

Securities Purchase Agreement, dated February 28, 2008 between the Company and Dutchess Private Equities Fund, Ltd. (filed herewith)



10.40

Series A Convertible Preferred Stock Purchase Agreement between the Company and Dutchess Private Equities Fund, Ltd., dated September 30, 2007 (filed herewith)



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10.41

Professional Service and License Agreement between the Company and Pininfarina Extra USA Corp. (filed herewith)



14.1

Corporate Code of Conduct and Ethics (included as Exhibit 14.1 to the Form 10-KSB filed April 14, 2004, and incorporated herein by reference).



21.1

List of Subsidiaries (filed herewith).



31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



32.1

Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



ITEM  14.

PRINCIPAL  ACCOUNTANT  FEES  AND  SERVICES

Jaspers  and  Hall,  PC,  served as our  auditors  for the fiscal years ended December  31,  2007, 2006, 2005  and  2004.

The following is a summary of the fees billed to us by Jaspers and Hall, PC for professional services rendered for 2007 and 2006:

|                   |  |           |        |           |   |        
|------------------ |  | --------- | ------ | --------- | - | -------
|Fee Category       |  | 2007 Fees |        | 2006 Fees
|Audit Fees         |  | $         | 31,000 |           | $ | 32,000 
|Audit Related Fees |  |           |        |           |   |        
|Tax Fees           |  |           |        |           |   |        
|All Other Fees     |  |           |        |           |   |        
|Total Fees         |  | $         | 31,000 |           | $ | $32,000



Audit Fees.Consists of fees and expenses incurred for professional services rendered for the audit of our annual consolidated financial statements and review of the interim consolidated financial statements included in our Annual Report on Form 10-KSB for December 31, 2007 and our Form 10-QSB filing for interim reviews in 2007, and services that are normally provided by Jaspers and Hall, PC in connection with statutory and regulatory filings or engagements, regardless of when the fees and expenses were billed.

Audit Related Fees.Consists of fees and expenses for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under Audit Fees. These services include services related to accounting consultations in connection with acquisitions and divestitures, attest services that are not required by statute or regulation, and consultations concerning financial accounting and reporting standards.

Tax Fees.Consists of fees and expenses for professional services related to tax compliance, tax advice and tax planning. These services include assistance regarding federal and state tax compliance, tax audit defense, acquisition and divestiture tax planning.

All Other Fees.Consists of fees and expenses for products and services other than the services reported above.



88



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Washington, State of Missouri on the 15th day of April, 2008.



| |     |                                                                   
| | --- | ------------------------------------------------------------------
| |     | CHALLENGER POWERBOATS, INC.                                       
| |     |                                                                   
| |     |                                                                   
| | By: | /s/ Laurie A. Phillips                                            
| |     | Laurie A. Phillips                                                
| |     | President,  Chief  Executive  Officer and 
Chief Financial Officer



Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated.



|                           |  |                                                                   |  |               
|-------------------------- |  | ----------------------------------------------------------------- |  | --------------
|SIGNATURE                  |  | TITLE                                                             |  | DATE          
|                           |  |                                                                   |  |               
|/s/  Laurie A. Phillips    |  | President,  Chief  Executive  Officer and Chief Financial Officer |  | April 15, 2008
|Laurie A. Phillips         |  |                                                                   |  |               
|                           |  |                                                                   |  |               
|                           |  |                                                                   |  |               
|/s/  Michael  A.  Novielli |  | Chairman of the Board of Directors                                |  | April 15, 2008
|Michael  A.  Novielli      |  |                                                                   |  |               
|                           |  |                                                                   |  |               
|                           |  |                                                                   |  |               
|/s/  Douglas  H.  Leighton |  | Director                                                          |  | April 15, 2008
|Douglas  H.  Leighton      |  |                                                                   |  |               





89