U.S.
SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
DC  20549




FORM
10-K




(MARK
ONE)




þ           Annual
Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of
1934




For the
fiscal year ended December 31,
2008




o           Transition
report under Section 13 or 15(d) of the Securities Exchange Act of
1934




For the
transition period from _______ to _______.




COMMISSION
FILE NO. 000-28321




BROWNIE’S
MARINE GROUP, INC.


(Name Of
Small Business Issuer In Its Charter)




Nevada
                        90-0226181(State
      or Other Jurisdiction of Incorporation or Organization)
                        (I.R.S.
      Employer Identification No.)940
      N.W. 1stStreet,
      Fort Lauderdale, Florida
                        33311(Address
      of Principal Executive Offices)
                        (Zip
      Code)(954) 462-5570(Issuer’s
      Telephone Number, Including Area
Code)





Securities
registered pursuant to Section 12(b) of the Act:




Title of each class
                Name of each exchange on which
      registeredNone
                None




Securities
registered pursuant to Section 12(g) of the Act:




Common
Stock


(Title of
class)




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined by
Rule 405 of the Securities Act.
 Yes   ̈    No  x
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
 Yes   ̈    No  x
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes  x    No   ̈
  Check
whether the issuer:  (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has
been subject to such filing requirements for the past 90
days.  Yes  x    No   ̈
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K.    
 ̈
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
  Large
      accelerated filer   ̈
                    Accelerated
      filer   ̈Non-accelerated
      filer   ̈ (Do not check if
      a smaller reporting company)
                    Smaller
      reporting company  x
  Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act).
 Yes   ̈    No  x
  The
aggregate market value of the Company's voting stock held by non-affiliates as
of March 1, 2009 was approximately $121,984 based on the average closing bid and
asked prices of such stock on that date as quoted on the Over the-Counter
Bulletin Board.
  There
were 1,785,538 shares of common stock outstanding as of March 1,
2009.
   
 FORWARD-LOOKING
STATEMENTS AND ASSOCIATED RISKS
  Information
included or incorporated by reference in this filing may contain forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act.  This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements.  Forward-looking statements, which involve assumptions and
describe our future plans, strategies and expectations, are generally
identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "estimate," "believe,"  "intend" or "project" or the
negative of these words or other variations on these words or comparable
terminology.
  This
filing contains forward-looking statements, including statements regarding,
among other things, (a) our projected sales and profitability, (b) our Company’s
growth strategies, (c) our Company's future financing plans and (d) our
Company's anticipated needs for working capital.  These statements may
be found under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as in this prospectus
generally.  Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" and
matters described in this filing generally.  In light of these risks
and uncertainties, there can be no assurance that the forward-looking statements
contained in this filing will in fact occur.
  PART
I
  Item
      1.
              Business.
  Overview
  Brownie’s
Marine Group, Inc., a Nevada corporation (formerly United Companies Corporation)
(referred to herein as “BWMG” or “the Company”), does business through its
wholly owned subsidiary, Trebor Industries, Inc., d/b/a Brownie’s Third Lung, a
Florida corporation.  The Company designs, tests, manufactures and
distributes recreational hookah diving, yacht based scuba air compressor and
Nitrox Generation Systems, and scuba and water safety products.  BWMG
sells its products both on a wholesale and retail basis, and does so from its
headquarters and manufacturing facility in Fort Lauderdale,
Florida.
  Mr.
Carmichael has operated Trebor as its President since 1986.  Since
April 16, 2004, Mr. Carmichael has served as President, Acting Principal
Accounting Officer and Acting Chief Financial Officer of the
Company.  From March 23, 2004 to April 26, 2004, Mr. Carmichael served
as the Company’s Executive Vice-President and Chief Operating
Officer.  He is the holder or co-holder of numerous patents that are
used by Trebor and several other large original equipment manufacturers in the
diving industry.
  The
Company’s products are classified into three main sales categories: Brownie’s Third
Lung, Brownie’s Tankfill,andBrownie’s Public
Safety.
  TheBrownie’s Third
Lung product category generates a significant portion of the Company’s
net revenues.  Included in this category are surface supplied diving
products, commonly called hookah systems and Brownie's Integrated Air Systems
(“BIAS”).  These
systems allow one to four divers to enjoy the marine environment without the
bulk and weight of conventional SCUBA gear.  We believe that Hookah
and BIAS diving hold greater appeal to families with children of diving age than
does conventional SCUBA.  The reduction of weight by eliminating the
tank allows smaller divers, especially children, to participate more actively
and enjoyably. In conjunction with these systems, Brownie’s Third Lung supplies
a variety of other products to support this market. These products are sold
through SCUBA diving, sporting, marine, and boating retailers.  All
hookah units sold include on-line training certificates.  The training
certificates entitle the holder to an on-line interactive course at no
additional charge to the holder.  The number of on-line training
certificates issued per unit is the same as the number of divers the unit as
sold is designed to accommodate (i.e., a three diver unit configuration comes
with three on-line training certificates).  It is anticipated that the
final phase of the training will still be completed through traditional dive
retailers and instructors.  Web-based training allows consumers that
are not already certified divers to initiate the required training for use of
the system on their own schedule. It also addresses the training aspect that was
previously a sale consideration at point-of-sale.  The addition of the
web based training program has expanded the market for Brownie’s since it can
now sell hookah systems to the non-diving public.
  Brownie’s
Tankfillbecame the product
category net revenues leader in 2008, through the design, installation and
maintenance of yacht-based high-pressure and low-pressure compressors for diving
on air and mixed gases. Many yacht owners enjoy the convenience and freedom of
filling their own diving tanks with air, NITROX or custom mixed gases while out
on cruise, freeing them from carrying extra cylinders or the need to locate a
reputable source in various ports-of-call. Brownie’s Tankfill specializes in the
design and installation of high-end custom systems to do just that. From
surveying the vessel for installation requirements to custom fabrication of the
necessary components, Brownie’s Tankfill provides all the services necessary to
satisfy this market.  The Company has established a number of
relationships with yacht builders to allow shipyards to market and sell the
Brownie’s Tankfill systems.  We believe that every large vessel
currently in service, being re-fitted, or being built is a potential
customer.  Through OEM relationships we expand our market to reach
these customers.  Toward that end we have grown our number of OEM
relationships to approximately eleven and continue to pursue more through direct
contact with yacht-builders.
  TheBrownie’s Public
Safety product category provides integrated and stand-alone flotation and
emergency/rescue equipment for use by fire departments and other government
agencies in their on-water/near-water activities. “Rescue, not Recovery” is the
marketing slogan for this product category, and the driving force behind
development. We believe municipalities and government agencies can increase
their own safety while responding more quickly in emergencies through the use of
our products.  We continue to pursue product distributorships to
expand this market.
  Our
Products and Services by Category and Their Related Websites
  Brownie’s Third
Lung  (www.browniedive.com) - Surface Supplied Air
(SSA), Hookah, (Low Pressure Units) - Recreational surface supplied air units
(gas and electric), Commercial surface supplied air units (gas and electric),
Integrated air systems (built-in systems) with or without an Electronic Reel
(E-Reel), Pressurized snorkel (battery), Egressor packages and regulators,
hookah hoses and regulators, Drop Weight Cummerbelt, Dive weight belts, SeaDoo
Sea Scooters, Twin-trim, Diving hose, Diving kits, Dive Hose connections,
Replacement SS engines, compressors, miscellaneous service parts, SSA
accessories including but not limited to gear bags, dog snares, and keel and
trim weight packages.
  2
  Brownie’s
Tankfill  (www.tankfill.com) - Tankfill Systems (High And
Low Pressure Units) -Yacht pro automated compressors (heavy-duty service
capacity), Yacht pro automated compressors (medium-duty service capacity),
Marine basic compressors (light-duty service capacity), Bauer portable
compressors (light-duty service capacity), Custom tankfill and nitrox generation
systems for yachts, NitroxMakers, Four-way fill manifolds, Remote fill control
panels, High pressure storage/cascade systems, Custom tank racks, Kaeser low
pressure compressors and components, Built in compressor systems, Design and
engineering services including but not limited to AutoCAD, Nitrox generation,
and custom gas mixing, Repairs and service on all products sold.
  Brownie’s Public Safety
(www.browniespublicsafety.com) - Public Safety Dive Gear
and Accessories -SHERPA, HELO systems, Rapid Entry System (RES), Garment
integrated personal flotation device (water extrication buoyancy system: WEBS),
Fast float system, Personal life raft, Surf shuttle, lift bags, various other
safety related accessories.
  Some
of the Company’s Products in Depth
  Surface Supplied
Air Systems:  The Company produces a line of Surface Supplied
Diving products, commonly called hookah systems. These systems allow one to four
divers to enjoy the marine environment up to 90 feet without the bulk and weight
of conventional SCUBA-gear.  We believe that hookah diving holds
greater appeal to families with children of diving age than does conventional
SCUBA.  The reduction of weight by eliminating the tank allows smaller
divers, especially children, to participate more actively and enjoyably. The
design of our product also reduces the effort required to both transport and use
it.  We believe the PELETONTM Hose System revolutionizes hose
management for recreational surface supplied diving.  It reduces the
work required of any single diver by dispersing the load over the entire group.
We use a single, larger diameter hose as a main downline with up to four
individual hoses attached to it. This configuration not only reduces the weight
and bulk of the hose required, but also reduces drag and entanglement. An entire
line of deck-mounted systems is available for commercial applications that
demand extremely high performance.  In addition to the
gasoline-powered units, a series of electric powered systems is also available
for light to commercial duty. Powered by battery for portability or household
current for virtually unlimited dive duration, these units are used primarily by
businesses that work in a marine environment.
  E-Reel and
Built-in Battery Systems:  Taking convenience one step further,
the Company has developed two surface supplied air products that it believes
makes boat diving even easier. The Built-in Battery System builds a battery
powered electric unit into the boat, eliminating the need to transport the
compressor/motor assembly. The need for a flotation tube is also removed, as the
boat itself serves in that capacity.  The E-Reel advances this idea by
adding a reel system to provide compact storage of up to 150 feet of hose.
Boaters can perform their own in-water maintenance and inspections, or just dive
for enjoyment. The hose is manually pulled from the reel supporting up to two
divers to a depth of fifty feet. When the dive is complete, the hose is
automatically recoiled and stowed by the simple activation of a
switch.
  Brownie’s
Integrated Air Systems (BIASTM):Compressed air can have many uses on a
boat.  The E-Reel and Built in Battery Systems discussed above are
just a few examples of BIAS.  In addition to supplying air to divers,
integrated air systems provide for the inflating fenders, opening of doors,
blowing of air horns, flushing toilets and more.
  Kayak Diving Hose
Kits: This
product allows the use of a conventional SCUBA cylinder, but does not require
the diver to wear it.  The cylinder remains above the surface, in a
kayak or boat, and a hose ranging from 20 to 150 feet allow the diver to explore
the surrounding area.
  Drop Weight
Cummerbelt:  The patented Drop Weight Cummerbelt is available
with all our diving systems, and brings a new dimension to weighting
systems.  The belt will accommodate waist sizes from 24 to 54 inches
and is depth compensating. It features two pockets, each capable of holding up
to 10 pounds of block or shot weight.  Each pocket can be instantly
release by either hand, allowing the diver to achieve positive buoyancy in an
emergency while retaining the belt itself.  Additionally, the design
of this belt provides for expanded capability. By adding an optional sleeve that
zips onto the back of the belt, an egress, or bailout system, can be added. The
Egressor Add-on Kit contains the sleeve, a 6 or 13 cubic foot SCUBA cylinder,
and a SCUBA regulator. In addition to the added safety inherent in this design,
many other uses for this present themselves, such as propeller clearing,
overboard item retrieval and pool maintenance, to name only a few.
  3
  Bell Bottom Flag
Bag (BBFB):  Is what we believe is a unique product providing
the diver with a collection bag at depth, a marker (floating flag) at the
surface and a lifting device independent of the diver as well as an ascent
safety device.  This product allows the diver to minimize the amount
of gear needed for safety or the harvest of seafood.
  BC KEEL
Counterweight System:  Is what we believe is a revolutionary
ballast system designed to offset the inherent buoyancy of a SCUBA tank and
provide the diver with a more reliable ‘face -up’ surface
position.  We believe our product has the technical and affordable
potential to become the “primary ballast system” with the right promotion and
education of the diving public.  A weight system is one of the four
most popular items that almost ALL divers buy before the completion of Open
Water I Certification: Mask, Snorkel, Fins, and Weight system, because these
items are affordable, small, universal, and personal.
  Tankfill
Compressors:  Many yacht owners enjoy the convenience and
freedom of filling their own diving tanks with air, NITROX or custom mixed gases
while out on cruise, freeing them from carrying extra cylinders or the need to
locate a reputable source in various ports-of-call. Brownie’s Tankfill
specializes in the design and installation of high-end custom systems to do just
that. From surveying the vessel for installation requirements to custom
fabrication of the necessary components, Tankfill provides all the services
necessary to satisfy this market.  We believe that every large vessel
currently in service, being re-fitted, or being built is a potential
customer.  Through OEM relationships we have expanded our market to
reach these customers.  Our light duty compressor, the Marine Basic is
specifically designed and built to withstand the marine environment with all
components and hardware impervious to spray from the elements. The Yacht Pro
series contains models for both medium-duty applications, such as recreational
divers and small groups, and heavy-duty use as found on research vessels,
commercial operations and live-aboard dive boats.  All Yacht Pro
models come with the Digital Frequency Drive, which is a Brownie’s Tankfill
innovation. The Digital Frequency Drive eliminates the spike previously
experienced in starting the compressor, eliminating the need to ration the
boat’s electrical usage by shutting down components when the compressor is
needed.Brownie’s
utilizes an AutoCAD industrial drawing program to design, engineer and maintain
drawings of its various products.  Custom design work is done in-house
for major product installations and in conjunction with other
entities.
  NitroxMakerTM:  We
believe Nitrox has become the gas of choice for informed recreational diving the
world over. What was once only available from land based gas mixing facilities
is now easily accessible to the yacht diver. With a Brownie’s NitroxMakerTM, the
user simply dials-in a desired oxygen level from 21% to 40%, eliminating the
need to transport and handle pure oxygen. The resulting diving gas mix is
monitored with digital oxygen analyzers, removing the calculations required to
blend or mix the gas.
  Rapid Entry
System (RES) and HELO System:  The Brownie’s Public Safety
product line exists to address the needs of the public safety dive
market.  The inherent speed and ease of donning our Drop Weight
Cummerbelt with Egressor Add-on Kit identified it as an obvious choice for rapid
response for water-related emergencies. A first-responder or officer on-scene
can initiate the location and extraction of victims while the dive team is
en-route, saving valuable time and increasing the chances for survival of
victims. The RES is a small SCUBA system that can be quickly donned over
clothes, usually in less than sixty seconds.  Its small size allows it
to be stored in areas that would never accommodate a full set of SCUBA gear. The
13 cubic foot aluminum tank can provide up to 15 minutes of air at the surface.
The air cell remains stowed under the protective cover and can be partially
inflated to achieve positive flotation.  The covers specially designed
break-away zipper bursts open to provide instant inflation yet “heals” and can
be repacked and fastened quickly in the field. The HELO offers all the same
features, but has been specially designed and modified for rescue divers working
from helicopters. By placing the cylinder in the front and adding leg straps,
the HELO allows divers to use the standard seating configurations. The
advantages of this system over full sized SCUBA rigs are increased mobility for
the diver and diminished space requirements for the gear. Since the bottle is
mounted at the diver’s waist, he can more easily control his gear during
deployment, further adding to the comfort and safety.
  4
  Market
Data
  The
Company operates in both the SCUBA Diving and the Marine
Industries.  The following is general market data for
both:
  SCUBA
Diving Industry
  The
following data is based on information reported on Professional Association of
Dive Instructors’ (PADI) website, www.padi.com, as of March 15,
2009:  PADI certifies approximately 60% of all new divers in the
United States. PADI issued 536,580 new divers certifications worldwide in 2007
(the most recent information available). Thus, per our extrapolation, an
estimated 894,300 new divers were certified by all the training agencies
collectively worldwide in 2007.  PADI estimates that the range of
active divers in the United States ranges from 1.6 million to 2.9 million based
on data it collected.  Per PADI, the largest number of SCUBA
certifications completed each year in the United States has been in Florida.
Also, per PADI’s statistics, the cumulative number of certifications issued by
PADI  from 1967 through 2007 is 10,603,339.
  Marine
Industry
  The
following data is based on the 2007 Boating Abstract published by the National
Marine Manufacturers Association (NMMA) in 2008, www.nmma.org:
  Recreational
boating contributed approximately $37.5 billion in 2007 to the nation’s economy,
a decrease of 5% from 2006.  There were 12.7 million boats registered
in the United States in 2006, and of this amount, Florida captured the number
one ranking with 988,652 registrations.  Total dollars spent on new
power boats, motors, trailers and accessory purchases in 2007 was $14.5 billion
down from $16.8 billion in 2006.  Florida ranked number one among all the
states capturing $2.1 billion of this market, down from $2.5
billion.  Total aftermarket accessory sales fell to approximately $2.6
billion in 2007 from $2.8 billion in 2006.  However, over the last ten
years aftermarket sales have more than doubled from $1.2 billion in 1997 to $2.6
billion in 2007.  NMMA reports that more Americans went boating in
2007 than in 2006 despite the decrease in boat sales and the soft
economy.  Adult participation in recreational boating was 59.1 million
in 2007 up from 53.6 million in 2006, or a 10% increase.
  Product
Target Markets
  The
Company sells a variety of products that fall primarily into three categories,
Brownie’s Third Lung, Brownie’s Tankfill, and Brownie’s Public Safety Diving.
While all of our offerings are marine based, each product category targets a
slightly different consumer and approaches its target group in a different
manner. Due to the common water-based theme, some of the markets will overlap,
thereby qualifying the same customer for more than one major product. Brownie’s
Third Lung, the Surface Supplied Air or hookah business has both retail and
wholesale groups.  We believe that a significant portion of the
approximately 988,652 reported registered boat owners in Florida, are potential
customers for our recreational systems.  In past years our product was
more likely to reach them through SCUBA diving retailers.  In mid 2005, in
an effort to expand our Scuba diving retailer market and to reach additional,
non-diving consumers, the Company implemented a web-based training program to
expand the availability of our product to marine retailers who cater, for the
most part, specifically to boaters.  Brownie’s Tankfill targets a
similar group, the boating community, but concentrates its attention on boats
over 30 feet in length.  We have enjoyed a measure of success by
approaching the consumer directly.  We also continue to establish
relationships with boat yards building luxury vessels throughout the world by
offering them an OEM policy and pricing structure. Our newest market is that for
Brownie’s Public Safety Diving.  We have identified municipalities and
government agencies, both in the United States and abroad, as our primary
consumer. The Rapid Entry System (RES) is perhaps the product with the largest
recognition within this product category.  Although the United States
and predominantly Florida have been our past focus, we continue to search for
distributors both nationally and abroad for all of our products.
  5
  Tradenames
and Patents
  Tradenames
  The
Company has licensed from two entities in which the Chief Executive Officer has
an ownership interest, the exclusive use of the following registered and
unregistered tradenames, trademarks and service marks for the terms of their
indefinite lives: Brownie’s Third LungTM, browniedive.com, Brownie’s, Brownie’s
Third Lung oval symbol, browniedive, NitroxMakerTM, HELO, RES, fast float rescue
harness, tankfill.com, browniestankfill, browniestankfill.com,
browniespublicsafety.com, and browniespublicsafety, Peleton Hose System,
Twin-Trim, Kayak Diving Hose Kit, Bell Bottom Flag Bag, and Brownie’s
Dogsnare.
  The
Company has licensed from an entity that the Chief Executive Officer has an
ownership interest, the non-exclusive use of the following registered and
unregistered trademarks, trade names, and service marks for the terms of their
indefinite lives: SHERPA, BC keel, and Garment integrated personal flotation
device (GI-PFD).
  Patents
  The
Company has licensed from two entities that the Chief Executive Officer has an
ownership interest, the non-exclusive use of the following issued and pending
Patents for the terms of their respective lives ranging from 10 to 20
years:
  Issued:Drop Weight Dive Belt
(Drop Weight Cummerbelt), Combined Life Vest Buoyancy Compensator (BC/PFD and
Separating Life Vest), Water Safety Survival System (Non-Releasable Tank Mounted
Counterweight and Weight Ballasting Systems note: includes BC Keel), Separating
Life Vest Multifunction Buoyancy Compensator (MC/PFD and Continuation in Part to
the Water Safety Survival System), Garment Integrated Personal Flotation Device
(GI-PFD), Inflatable Dive Marker Collection Bag (Bell Bottom Flag
Bag).
  Pending:Break Away Keel with
Neutralizing Buoyancy Offset (Advanced BC Keel Design).
  The
Company owns a patent for an Active Control Releasable Ballast.  This
patent is utilized in the drop weight cummerbelt.  The patent was
acquired on July 31, 2008 from Robert Carmichael, the Chief Executive Officer of
the Company, for restricted stock.  In addition, effective March 3,
2009 the Company acquired from Mr. Carmichael, six other patents both issued and
pending, some that were previously licensed by the Company.  These
patents were acquired from Mr. Carmichael in exchange for stock
options.  The patents include the patents on the Drop Weight
Cummerbelt, a filed dive belt patent, and a series of filed patents on a
Buoyancy Compensator, Utility Backpack, Transport Harness or Like Garment with
Adjustable One Size Component for Use by a Wide Range of
Individuals  The transactions are further detailed in the Related
Party and the Subsequent Event Notes to the year end 2008 financial
statements.  Mr. Carmichael believes that the recent equity based
transfers of the Intellectual Property to the Company are in the best interest
of the Company because by acquiring the Intellectual Property, the Company (i)
eliminated an estimated $41,000 net discounted cash flows it would otherwise
have had to pay related to the Intellectual Property through 2018, (ii) is
provided with an opportunity to further develop the Intellectual Property, (iii)
is provided with the ability to incorporate the Intellectual Property into
current and future products, and (iv) is provided with the opportunity to
license the Intellectual Property to third parties.
  Marketing
  Print
Literature, Public Relations, and Advertising
  We have
in-house graphic design and public relations department to create and maintain
product support literature, catalogs, mailings, web-based advertising,
newsletters, editorials, advertorials, and press releases.  We also
target specific markets by selectively advertising in journals and magazines
that we believe reach our potential customers.
  6
  Tradeshows
  In 2008
the Company was represented at the following annual trade shows: Miami Yacht and
Brokerage Show, Fort Lauderdale International Boat Show, the Palm Beach Boat
Show, and International Boat Exhibitors Exchange (IBEX).
  Websites
  The
Company has several websites: www.browniedive.com, www.tankfill.com,
www.browniesmarinegroup.com, and
www.browniespublicsafety.com.  Additionally, all our products are
marketed on our primary customers’ website.  In addition, to these
websites, numerous other websites have quick links to the Company’s
websites.  Our products are available domestically and
internationally.  Internet sales and inquiries are also supported by
the Company as a preferred method of many of our customers, particularly
International customers.
  Distribution
  Our
products are distributed to our customers primarily by common
carrier.
  Expansion
Goal
  The
Company has expanded in the past through internal growth and current plans are
to do the same.  Should an opportunity arise in the future for a
business acquisition that we believe will complement our business strategically
or expand our market share, we will evaluate its feasibility at that
time.
  Product
Research and Development (R&D)
  We
continuously work to provide our customers with both new and improved products.
We offer research and development services to not only the related entities we
license our patents and trademarks from, but also to other customers as well.
R&D services for customers and the related entities are invoiced in the
normal course of business.  In addition, we are working on internal
research and development projects toward the goal of developing some of our own
patentable products. Research and development costs for the year ended
December 31, 2008 and 2007, were $26,510 and $3,780,
respectively.
  Government
Regulations
  The SCUBA
industry is self-regulating; therefore, the Company is not subject to government
industry specific regulation.  Nevertheless, the Company strives to be
a leader in promoting safe diving practices within the industry and believes it
is at the forefront of self-regulation through responsible diving
practices.  The Company is subject to all regulations applicable to
“for profit” companies as well as all trade and general commerce governmental
regulation. All required federal and state permits, licenses, and bonds to
operate its facility have been obtained.  There can be no assurance
that the Company’s operation and profitability will not be subject to more
restrictive regulation or increased taxation by federal, state, or local
agencies in the future.
  Customers
  We are
predominantly a wholesale distributor to retail dive stores, marine stores, and
shipyards.  This includes approximately 250 active independent Brownie
dealers.  We retail our products to including, but not limited to,
boat owners, recreational divers and commercial divers.  Our largest
customer and Brownie dealer is Brownie’s Southport Diver’s, Inc. (BSD), a
related entity owned by the brother of Robert Carmichael, the Company’s Chief
Executive Officer.  Sales to BSD for the years ended December 31, 2008
and 2007 represented, 10.78% and 22.43%, respectively, of total Company net
revenues. Sales to Al Masaood Marine and Engineering Division and to Shadow
Marine for the years ended December 31, 2008 represented 12.79% and 11.20%,
respectively, of total net revenues. Sales to no other customer represented
greater than 10.00% of net revenues for the years ended December 31, 2008 and
2007.
  7
  Raw
Materials
 
 Principal
raw materials for our business include machined parts such as rods, pistons,
bearings; hoses; regulators; compressors; engines; high-pressure valves and
fittings; sewn goods; and various plastic parts including pans, covers, intake
staffs, and quick release connections.  Principal suppliers of these
materials to us are Kuriyama, Advantage Plastics of New York, Gates Rubber,
Ocean Divers Supply, Anderson Metals, East Coast Plastics, Center Star, Bauer,
Leeson Electric, Sagittarius, Campbell Hausfield, Roberts Supply, Robin America
Subaru, and Florida Fluid Systems Technology Inc.  Most materials are
readily available from multiple vendors. Some materials require greater lead
times than others.  Accordingly, we strive to avoid out of stock
situations through careful monitoring of these inventory lead times, and through
avoiding single source vendors whenever possible.
  Competition
  We
consider the most significant competitive factors in our business to be low
prices, shopping convenience, the variety of available of products,
knowledgeable sales personnel, rapid and accurate fulfillment of orders, and
prompt customer service.  We currently recognize one significant
competitor in hookah sales and two significant competitors in high pressure
tankfill sales. Products from the hookah competitor and those from one of the
tankfill competitors are very similar to ours as the principals in both received
their training in the industry from Brownie’s as previous employees of the
Company. Brownie’s other competitor in high pressure tankfill is a large
multi-national company that does not offer significant customization, thereby we
believe reducing our head-to-head competition in many cases.  We
believe we do not have significant competitors in the Brownie’s Tankfill line of
high-end custom yacht packages.
  Overall,
we are operating in a moderately competitive environment.  We believe
that the price structure for all the products we distribute compares favorably
with the majority of our competitors based on quality and available
features.  While certain of our competitors offer lower prices on some
similar products, we believe that few can offer products and services which are
comparable to those of ours in terms of convenience, available features,
reliability, and quality.  In addition, most of our competitors offer
only high or low-pressure products and services where we are able to fulfill
both needs.
  Personnel
  We
currently have eighteen (18) full time employees and (1) part time employee at
our facility in Fort Lauderdale, Florida: eight (8) are classified as sales and
administrative or management, and eleven (11) are classified as factory or
administrative support. We utilize consultants when needed in the absence of
available in-house expertise.  Our employees are not covered by a
collective bargaining agreement.
  Seasonality
  The main
product categories of our business, Brownie’s Third Lung and Brownie’s Tankfill,
are seasonal in nature.  The peak season for Brownie’s Third Lung’s
products is generally the second and third quarters of the year.  The
peak season for Brownie’s Tankfill’s products is generally the fourth and
first quarters of the year.  Since the seasons complement one another,
we are able to shift cross-trained factory and warehouse personnel between the
two product categories as needed throughout the year.  Thus, the
Company is able to avoid the down time normally associated with seasonal
business.
  Item
      1A.
              Risk
      Factors.
  The
Company is subject to various risks that may materially harm its business,
financial condition and results of operations.  These may not be the
only risks and uncertainties that the Company faces.  Additional risks
that we do not yet know of or that we currently think are immaterial may also
impair our future business operations.  If any of these risks or
uncertainties actually occurs, the Company’s business, financial condition or
operating results could be materially harmed.  In that case, the
trading price of the Company’s common stock could decline and you could lose all
or part of your investment.
  8
  Our
Common Stock May Be Affected By Limited Trading Volume and May Fluctuate
Significantly
  Our
common stock is traded on the Over-the-Counter Bulletin Board.  There
has been a limited public market for our common stock and there can be no
assurance that an active trading market for our common stock will develop. As a
result, this could adversely affect our shareholders’ ability to sell our common
stock in short time periods, or possibly at all.  Thinly traded common
stock can be more volatile than common stock traded in an active public
market.  Our common stock has experienced, and is likely to experience
in the future, significant price and volume fluctuations, which could adversely
affect the market price of our common stock without regard to our operating
performance.  In addition, we believe that factors such as quarterly
fluctuations in our financial results and changes in the overall economy or the
condition of the financial markets could cause the price of our common stock to
fluctuate substantially.
  Our
Common Stock Is Deemed To Be “Penny Stock,” Which May Make It More Difficult For
Investors to Sell Their Shares Due To Suitability Requirements
  Our
common stock is deemed to be “penny stock” as that term is defined under the
Securities Exchange Act of 1934.  Penny stocks generally are equity
securities with a price of less than $5.00 (other than securities registered on
certain national securities exchanges or quoted on the NASDAQ system, provided
that current price and volume information with respect to transactions in such
securities is provided by the exchange or system). Our common stock is covered
by an SEC rule that imposes additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors, which are generally institutions with assets
in excess of $5,000,000, or individuals with net worth in excess of $1,000,000
or annual income exceeding $200,000 or $300,000 jointly with their
spouse.
  Broker/dealers
dealing in penny stocks are required to provide potential investors with a
document disclosing the risks of penny stocks.  Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to sell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
  We
Depend On the Services of Our Chief Executive Officer
  Our
success largely depends on the efforts and abilities of Robert M. Carmichael,
our President and Chief Executive Officer.  Mr. Carmichael has been
instrumental in securing our existing financing arrangements.  Mr.
Carmichael is primarily responsible for the development of our technology and
the design of our products.  The loss of the services of Mr.
Carmichael could materially harm our business because of the cost and time
necessary to recruit and train a replacement.  Such a loss would also
divert management attention away from operational issues. We do not presently
maintain a key-man life insurance policy on Mr. Carmichael.
  We
Require Additional Personnel and Could Fail To Attract or Retain Key
Personnel
  In
addition, our continued growth depends on our ability to attract and retain a
Chief Financial Officer, a Chief Operations Officer, and additional skilled
associates.  We are currently utilizing the services of two
professional consultants to assist the Chief Executive Officer in the areas of
finance and operations.  The loss of the services of these consultants
prior to our ability to attract and retain a Chief Financial Officer or Chief
Operations Officer or further assistance in these areas  may have a
material adverse effect upon us. Also, there can be no assurance that we will be
able to retain our existing personnel or attract additional qualified associates
in the future.
  9
  Our
Failure to Obtain and Enforce Intellectual Property Protection May Have a
Material Adverse Effect on Our Business
  Our
success depends in part on our ability, and the ability of our patent and
trademark licensors, entities owned and controlled by Robert M. Carmichael, our
President and Chief Executive Officer, to obtain and defend our intellectual
property, including patent protection for our products and processes, preserve
our trade secrets, defend and enforce our rights against infringement and
operate without infringing the proprietary rights of third parties, both in the
United States and in other countries.  Despite our efforts to protect
our intellectual proprietary rights, existing copyright, trademark and trade
secret laws afford only limited protection.
  Our
industry is characterized by frequent intellectual property litigation based on
allegations of infringement of intellectual property rights.  Although
we are not aware of any intellectual property claims against us, we may be a
party to litigation in the future.
  We
May Be Unable To Manage Growth
  Successful
implementation of our business strategy requires us to manage our growth. Growth
could place an increasing strain on our management and financial
resources.  If we fail to manage our growth effectively, our business,
financial condition or operating results could be materially harmed, and our
stock price may decline.
  Reliance
on Vendors and Manufacturers
  We deal
with suppliers on an order-by order basis and have no long-term purchase
contracts or other contractual assurances of continued supply or
pricing.  In addition, we have no long-term contracts with our
manufacturing sources and compete with other companies for production facility
capacity.  Historically, we have purchased enough inventories of
products or their substitutes to satisfy demand.  However,
unanticipated failure of any manufacturer or supplier to meet our requirements
or our inability to build or obtain substitutes could force us to curtail or
cease operations.
  Dependence
on Consumer Spending
  The
success of the our business depends largely upon a number of factors related to
consumer spending, including current and future economic conditions affecting
disposable consumer income such as employment, business conditions, tax rates,
and interest rates.  In times of economic uncertainty, consumers tend
to defer expenditures for discretionary items, which affects demand for our
products.  Any significant deterioration in overall economic
conditions that diminishes consumer confidence or discretionary income can
reduce our sales and adversely affect our financial results.  The
impact of weakening consumer credit markets; layoffs; corporate restructurings;
higher fuel prices; declines in the value of investments and residential real
estate; and increases in federal and state taxation can all negatively affect
our results.  There can be no assurance that in this type of
environment consumer spending will not decline, thereby adversely affecting our
growth, net sales and profitability or that our business will not be adversely
affected by continuing or future downturns in the economy, boating industry, or
dive industry.  If declines in consumer spending on recreational
marine accessories and dive gear are other than temporary, we could be forced to
curtail or cease operations.
  Government
Regulations May Impact Us
  The SCUBA
industry is self-regulating; therefore, Brownie’s is not subject to government
industry specific regulation.  Nevertheless, Brownie’s strives to be a
leader in promoting safe diving practices within the industry and is at the
forefront of self-regulation through responsible diving
practices.  Brownie’s is subject to all regulations applicable to “for
profit” companies as well as all trade and general commerce governmental
regulation.  All required federal and state permits, licenses, and
bonds to operate its facility have been obtained.  There can be no
assurance that our operations will not be subject to more restrictive
regulations in the future, which could force us to curtail or cease
operations.
  10
  Bad
Weather Conditions Could Have an Adverse Effect on Operating
Results
  Our
business is significantly impacted by weather patterns. Unseasonably cool
weather, extraordinary amounts of rainfall, or unseasonably rough surf, may
decrease boat use and diving, thereby decreasing sales.  Accordingly,
our results of operations for any prior period may not be indicative of results
of any future period.
  The
Manufacture and Distribution of Recreational Diving Equipment Could Result In
Product Liability Claims
  We, like
any other retailer, distributor and manufacturer of products that are designed
for recreational sporting purposes, face an inherent risk of exposure to product
liability claims in the event that the use of our products results in
injury.  Such claims may include, among other things, that our
products are designed and/or manufactured improperly or fail to include adequate
instructions as to proper use and/or side effects, if any.  We do not
anticipate obtaining contractual indemnification from parties-supplying raw materials,manufacturing our products
or marketing our products.  In any event, any such indemnification if
obtained will be limited by our terms and, as a practical matter, to the
creditworthiness of the indemnifying party. In the event that we do not have
adequate insurance or contractual indemnification, product liabilities relating
to defective products could have a material adverse effect on our operations and
financial conditions, which could force us to curtail or cease our business
operations.
  Item
      2.
              Properties.
  The
corporate headquarters, factory and distribution center of the Company are
located at 936/940 NW 1st Street, Ft. Lauderdale,
FL  33311.  The facilities are comprised of approximately
16,000 square feet of space of which approximately 7,500 square feet is office,
and the remainder is factory and warehouse space.  We believe that the
facilities are suitable for their intended purpose, are being efficiently
utilized and provide adequate capacity to meet demand for the foreseeable
future.  The facilities are encumbered by a first and second
mortgage.  In addition, a third mortgage exists on the property to the
extent of the outstanding balance existing under the Company’s line of
credit.  Information regarding the mortgages is disclosed in the Notes
Payable and Related Party Notes to the Company’s year ended December 31, 2008
financial statements.
  Item
      3.
              Legal
      Proceedings.
  None.
  Item
      4.
              Submission
      of Matters to a Vote of Security
Holders.
  None.
  11
  PART
II
  Item
      5.
              Market
      for Common Equity, Related Stockholder Matters, and Small Business Issuer
      Purchases of Equity Securities.
  The
Company’s common stock was quoted on the Over-the-Counter Bulletin Board under
the symbol “UCPJ” through August 22, 2007 at which time the symbol was changed
to “BWMG”.  The Company’s high and low bid prices by quarter during
2008 and 2007, as provided by the Over the Counter Bulletin Board are provided
below and have been adjusted retrospectively for the 1-100 reverse stock split
that was effectuated on August 23, 2007. These quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.  On March 1, 2009, the closing price of
our common stock, as reported on the Over-the-Counter Bulletin Board, was $0.20
per share.
  Calendar Year 2008High Bid
                      
                      
                      Low BidFirst
      Quarter
                      
                      $
                      1.10
                      
                      
                      $
                      .55Second
      Quarter
                      
                      $
                      1.10
                      
                      
                      $
                      .30Third
      Quarter
                      
                      $
                      1.89
                      
                      
                      $
                      .65Fourth
      Quarter
                      
                      $
                      .90
                      
                      
                      $
                      .15
 
 Calendar Year 2007High Bid
                        
                        
                        Low BidFirst
      Quarter
                        
                        $
                        5.10
                        
                        
                        $
                        1.60Second
      Quarter
                        
                        $
                        6.70
                        
                        
                        $
                        3.10Third
      Quarter
                        
                        $
                        3.50
                        
                        
                        $
                        1.15Fourth
      Quarter
                        
                        $
                        2.50
                        
                        
                        $
                        1.10
  Holders
of Common Stock
  As of
March 1, 2009, we believe the Company had in excess of 250 shareholders of
record.
  Dividends
  We have
not paid any dividends on our common stock and do not anticipate paying any cash
dividends in the foreseeable future.  We intend to retain any earnings
to finance the growth of the business. We cannot assure you that we will ever
pay cash dividends.  Whether we pay any cash dividends in the future
will depend on the financial condition, results of operations and other factors
that the Board of Directors will consider.
  Securities Authorized for Issuance under Equity
Compensation Plans
  On August
22, 2007 the Company adopted an Equity Incentive Plan (the
“Plan”).  Under the Plan, Stock Options may be granted to Employees,
Directors, and Consultants in the form of Incentive Stock Options or
Nonstatutory Stock Options.  Stock Purchase Rights, time vested
and/performance invested Restricted Stock, and Stock Appreciation Rights and
Unrestricted Shares may also be granted under the Plan.  The initial
maximum number of shares that may be issued under the Plan shall be 400,000
shares, and no more than 100,000 Shares of Common Stock may be granted to any
one Participant with respect to Options, Stock Purchase Rights and Stock
Appreciation Rights during any one calendar year period.  Common Stock
to be issued under the Plan may be either authorized and unissued or shares held
in treasury by the Company.  The term of the Plan shall be ten
years.  The Board of Directors may amend, alter, suspend, or terminate
the Plan at any time.  The table below includes information as of
December 31, 2008.
   12
  Equity
Compensation Plan Information as of December 31, 2008
  Number of securities
                          to be issued upon
                          exercise of
                          outstanding options,
                          warrants and rights
                          (a)
                        
                        
                        Weighted – average
                          exercise price of
                          outstanding options,
                          warrants and rights
                          (b)
                        
                        
                        Number of securities
                          remaining available for
                          future issuances under equity
                          compensation plans
                          (excluding securities
                          reflected in column (a))
                          (c)Equity
      Compensation Plans
                          Approved
      by Security Holders
                        
                        
                        211,000
                        
                        
                        $
                        1.07
                        
                        
                        
                        189,000Equity
      Compensation Plans Not Approved by Security Holders
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Total
                        
                        
                        211,000
                        
                        
                        $
                        1.07
                        
                        
                        
                        189,000
  Sales
of Unregistered Securities
  Effective
December 31, 2008, the Company granted 211,000 fully vested incentive stock
options under the Plan to a total of 23 key employees, consultants and officers
under the Plan.  The fair value of the options was determined to be
$31,650 using the Black-Scholes Model.  Accordingly, the Company
recognized $31,650 in operating expense for the options as of December 31,
2008.  The options were issued under the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as
amended.  The options include a legend restricting their
transferability absent registration or applicable exemption.  Through
March 1, 2009, 1,000 options were cancelled in accordance with the Termination
of Option clause of the Incentive Stock Option Agreement.
  Item
      6.
              Selected
      Financial Data.
  Information
not required by smaller reporting company.
  Item
      7.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
  Overview
  The
Company through its wholly owned subsidiary, Trebor Industries, Inc., d/b/a
Brownie’s Third Lung, a Florida corporation, designs, tests, manufactures and
distributes recreational hookah diving, yacht based scuba air compressor and
Nitrox Generation Systems, and scuba and water safety products.  BWMG
sells its products both on a wholesale and retail basis, and does so from its
headquarters and manufacturing facility in Fort Lauderdale,
Florida.  The Company does business as (dba) Brownie’s Third
Lung.
  Financial
Performance
  For the
years ended December 31, 2008 and 2007, BWMG had net income of $219,668 and
$62,460, respectively.
  Significant
Accounting Policies
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make a
wide variety of estimates and assumptions that affect (i) the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities as
of the date of the financial statements, and (ii) the reported amounts of
revenues and expenses during the reporting periods covered by the financial
statements.  Our management routinely makes judgments and estimates
about the effect of matters that are inherently uncertain.  As the
number of variables and assumptions affecting the future resolution of the
uncertainties increases, these judgments become even more subjective and
complex.  We have identified certain accounting policies that are most
important to the portrayal of our current financial condition and results of
operations.  Our significant accounting policies are as
follows:
  13
  Inventory- Inventory
is stated at the lower of cost or market.  Cost is principally
determined by using the average cost method that approximates the first-in,
first-out (FIFO) accounting method at the Company.  Inventory consists
of raw materials as well as finished goods held for sale.  The
Company’s management monitors the inventory for excess and obsolete items and
makes necessary valuation adjustments when required.
  Fixed assets – Fixed
assets are stated at cost less accumulated depreciation. Depreciation is
provided principally on the straight-line method over the estimated useful lives
of the assets, which is primarily 3 to 5 years except for the building that is
being depreciated over a life of 39 years.  The cost of repairs and
maintenance is charged to expense as incurred. Expenditures for property
betterments and renewals are capitalized. Upon sale or other disposition of a
depreciable asset, cost and accumulated depreciation are removed from the
accounts and any gain or loss is reflected in other income
(expense).
  The
Company periodically evaluates whether events and circumstances have occurred
that may warrant revision of the estimated useful lives of fixed assets or
whether the remaining balance of fixed assets should be evaluated for possible
impairment.  The Company uses an estimate of the related undiscounted
cash flows over the remaining life of the fixed assets in measuring their
recoverability.
  Revenue recognition –
Revenues from product sales are recognized when the Company’s products are
shipped.  Revenues from fixed-price contracts are recognized on the
percentage-of-completion method, measured by the percentage of cost incurred to
date to estimated total cost of each contract.  This method is used
because management considers the percentage of cost incurred to date to
estimated total cost to be the best available measure of progress on the
contracts.
  Contract
costs include all direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor, supplies, tools,
repairs, and depreciation costs.  General and administrative costs are
charged to expense as incurred.  Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.  Change in job performance, job conditions, and estimated
profitability may result in revisions to costs and income and are recognized in
the period in which the revisions are determined.
  The
asset, “Costs and estimated earnings in excess of billings on uncompleted
contracts”, represents revenues recognized in excess of amounts
billed.  The liability, “Billings in excess of costs and estimated
earnings on uncompleted contracts”, represents billings in excess of revenues
recognized.  Claims are included in revenues when realization is
probable and the amount can be reliably estimated.
  Revenue
and costs incurred for time and material projects are recognized currently as
the work is performed.
  Product development
costs – Product development expenditures are charged to expenses as
incurred.
  Advertising and marketing
costs – The Company recognizes advertising expenses in accordance with
Statement of Position 93-7 “Reporting on Advertising Costs.” Accordingly, the
Company expenses the costs of producing advertisements at the time production
occurs, and expenses the costs of communicating advertisements in the period in
which the advertising space or airtime is used.  Advertising and trade
show expenses incurred for the year ended December 31, 2008 and 2007, were
$38,948 and $25,590,  respectively.
  Income taxes – The
Company accounts for its income taxes in accordance with Statement of Financial
Accounting Standards No. 109, which requires recognition of deferred tax assets
and liabilities for future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
  14
  In July
2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertaintyin
Income Taxes—an interpretation of FASB Statement No. 109, (“FIN 48”) which
clarifies the accounting for uncertainty in tax positions.  FIN 48
requires the recognition of a tax position when it is more likely than not that
the tax position will be sustained upon examination by relevant taxing
authorities, based on the technical merits of the position.  The
Company adopted FIN 48 in the first quarter of 2007 without significant
financial impact.
  Comprehensive income
(loss) – The Company has no components of other comprehensive income.
Accordingly, net loss equals comprehensive loss for all periods.
  Stock-based compensation
–  The Company accounts for stock based compensation in
accordance with Statement of Financial Accounting Standards No. 123 revised that
requires that the Company measures the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award.  That cost is recognized over the period the employee is
required to provide service in exchange for the award.
  Effective
December 31, 2008, the Company granted 211,000 fully vested incentive stock
options to certain key employees, consultants and officers under the Equity
Incentive Plan.  The fair value of the options was determined to be
$31,650 using the Black-Scholes Model.  Accordingly, the Company
recognized $31,650 as operating expense for the options as of December 31,
2008.
  Fair value of financial
instruments - The carrying amounts and estimated fair values of the
Company’s financial instruments approximate their fair value due to the
short-term nature.
  Earnings (loss) per common
share – Basic earnings (loss) per share excludes any dilutive effects of
options, warrants and convertible securities.  Basic earnings (loss)
per share is computed using the weighted-average number of outstanding common
shares during the applicable period.  Diluted earnings (loss) per
share is computed using the weighted average number of common and common stock
equivalent shares outstanding during the period.  Common stock
equivalent shares are excluded from the computation if their effect is
antidilutive.
  Recent
Accounting Pronouncements
  In May
2008, FASB issued Financial Accounting Statement (“SFAS”) No. 162, “The
Hierarchy of Generally Accepted Accounting Principles (“GAAP”).  The
GAAP hierarchy is currently set forth in the American Institute of Certified
Public Accountants (“AICPA”) Statement on Auditing Standards No. 69, the Meaning
of Present Fairly in Conformity with Generally Accepted Accounting
Principles.  Auditing Standards No. 69 is (1) directed to the auditor,
(2) is complex, and (3) ranks FASB Statements of Financial Accounting Concepts,
which are subject to the same level of due process as the FASB Statements of
Financial Accounting Statements, below industry practices that are widely
recognized as generally accepted but that are not subject to due
process.  The Board believes the GAAP hierarchy should reside in the
accounting literature established by the FASB and instead of being directed to
the auditor, should be directed to entities since they are responsible for
selecting accounting principles for financial statements that are presented in
accordance with GAAP.  This statement is to become effective 60 days
following the Security and Exchange Commission’s (“SEC”) approval of the
Accounting Oversight Board amendments to AU Section 411, The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting
Principles.  The Company does not expect any significant financial
impact upon adoption of SFAS No. 162.
  In May
2008, the FASB issued STAFF POSITION (“FSP”) No. APB 14-1, “Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement”.  This FSP applies to convertible
debt instruments that, by their stated terms, may be settled in cash (or other
assets) upon conversion, including partial cash settlement, unless the embedded
conversion option is required to be separately accounted for as a derivative
under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. FSP No. 14-1 clarifies that convertible debt instruments that may be
settled in cash upon conversion (including partial cash settlement) are not
addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt
and Debt Issued with Stock Purchase Warrants. Additionally, this FSP specifies
that issuers of such instruments should separately account for the liability and
equity components in a manner that will reflect the entity’s nonconvertible debt
borrowing rate when interest cost recognized in subsequent periods. The FSP is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years.  The
Company does not currently have any debt instruments for which this FSP would
apply and does not expect to have any significant financial impact upon adoption
in January 2009.  Early adoption is not permitted.
  15
  In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No.
133.”  This statement is intended to enhance the current disclosure
framework in SFAS No. 133.  Under SFAS No. 161, entities will have to
provide disclosures about (a) how and why and entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations, and (c), how
derivative instruments and related hedged items effect an entity’s financial
position, financial performance and cash flows.  SFAS No. 161 is
effective for all financial statements issued for fiscal and interim periods
beginning after November 15, 2008.  Since the Company does not
currently have any derivative instruments, nor does it engage in hedging
activities, the Company expects to have no significant financial impact as a
result of adoption of SFAS No. 161.
  In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree, and the goodwill acquired. SFAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination. SFAS 141R is effective for the Company with
respect to business combinations for which the acquisition date is on or after
January 1, 2009. The Company does not currently anticipate a significant
financial impact upon adoption of SFAS No. 141.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent’s ownership interest, and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated.
SFAS 160 also establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the interests of
noncontrolling owners. SFAS 160 is effective for the Company as of
January 1, 2009. The Company is currently evaluating the potential impact,
if any, of the adoption of SFAS 160 on the consolidated financial position,
results of operations, and disclosures.
  In
December 2007, the SEC issued Staff Accounting Bulletin (“SAB”) No. 110 (“SAB
110”).  SAB 110 relates to the use of the “simplified” method, as
discussed in SAB No. 107 (“SAB 107”), in developing an estimate of expected term
of “plain vanilla” share option in accordance with SFAS No. 123 (revised 2004),
Share-Based Payment.  The Staff’s view in SAB 107 was that it did not
expect companies to use the simplified method for share option grants after
December 31, 2007 since it believed that more detailed external information
about employee exercise behavior would be available to companies by this
date.  Since this is not true in all cases, SAB 110 states that under
certain circumstances, the Staff will continue to accept the use of the
simplified method beyond December 31, 2007.  The Company is currently
evaluating this guidance and does not anticipate it will have significant
financial impact
  The
following discussion and analysis of the Company’s financial condition and
results of operations are based upon the Company’s consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States.  The preparation of these
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities.  On an
on-going basis, the Company evaluates its estimates, including those related to
allowance for doubtful accounts and deferred income tax assets.  The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other
sources.  Actual results may differ from these estimates under
different assumptions or conditions.
  16
  Results
of Operations for the Year Ended December 31, 2008, As Compared To the Year
Ended December 31, 2007
  Net revenues.  For
the year ended December 31, 2008, we had net revenues of $4,697,737 as compared
to net revenues of $3,204,395 for the year ended December 31, 2007, an increase
of $1,493,342 or 46.60%.  The increase was primarily attributable to
an increase in low pressure hookah system sales and related products of
approximately $200,000 and an increase in high pressure tankfill system sales of
approximately $1,300,000.  The increase in hookah system sales and
related products of $200,000 was comprised primarily of increased sales of
recreational and electric hookah systems, built in low pressure systems, and
hose reel systems.  The increase in tankfill system sales was
primarily attributable to four large custom tankfill projects during the year
ended December 31, 2008, three completed and one in progress at year end
December 31, 2008.  These projects contributed approximately
$1,400,000 to net revenues for the period, whereas in the same period in 2007
custom tank fill projects contributed approximately $210,000 to net revenues, a
$1,190,000 increase in the current period.  With regard to non-custom
tankfill systems, there was an approximate increase of $110,000 to net
revenues for the year ended December 31, 2008 compared to the same period in
2007.
  Cost of net
revenues.  For the year ended December 31, 2008, we had cost of
net revenues of $3,024,793 as compared with cost of net revenues of $2,148,843
for the year ended December 31, 2007, an increase of $875,880, or
40.76%.  The increase was primarily to support the increase in sales
volume for the year ended December 31, 2008 as compared to same period in
2007.  As a percentage of net revenues, cost of net revenues was down
approximately 3%.  This net decrease was primarily attributable to a
decrease in costs attributable to the sales mix that included the large custom
tankfill sales completed during the year ended December 31, 2008 without
comparable sales contributing to the mix for the same period of 2007, and an
increase in an overall material costs.
  Gross profit.  For
the year ended December 31, 2008, we had a gross profit of $1,673,014 as
compared to gross profit of $1,055,552 for the year ended December 31, 2007, an
increase of $617,462, or 58.50%.  This increase is primarily
attributable to the increase in net revenues coupled with the decrease in cost
of net revenues (as a percentage of net revenues) for the year ended December
31, 2008 as compared to the same period in 2007.
  Operating
expenses.  For the year ended December 31, 2008, we had total
operating expenses of $1,134,794 as compared to total operating expenses of
$957,263 for the year ended December 31, 2007, an increase of $177,531, or
18.55%.  Research and development costs increased $22,730 and selling,
general and administrative costs increased $154,801. The increase in selling,
general and administrative costs is attributable to an across the board increase
in most operating expenses, some to support the increase in sales (including but
not limited to telephone, travel, advertising and trade show expense, and truck
expense), and others as a function of the increase in the overall cost of
supplies and services (including but not limited to office supplies, auto
expense, utilities, repairs and maintenance, and insurance
expense).
  Other expenses,
net.  For the year ended December 31, 2008, we had other
expenses, net of $99,934 as compared to other expenses, net of $93,452 for the
year ended December 31, 2007, an increase of $6,482, or 6.94%.  The
increase is primarily attributable to approximately $11,000 less interest
expense and approximately $18,000 less other income, net.  The
decrease in interest expense is primarily a result of satisfaction of some
related party debt on July 31, 2008, resulting in five less months of interest
on this debt in 2008 as compared to 2007.  The other income and
expense, net account has various nonrecurring type transactions, thus whereas we
had recovery of bad debt and adjustment downward of the online training
certificates reserve in 2007 to match historical redemption rates, we did not
have comparable transactions in 2008.
  Provision for income tax
expense.  For the year ended December 31, 2008, we had a
provision for income tax expense of $218,618, as compared to a provision for
income tax benefit of $57,623 for the year ended December 31, 2007, an increase
in provision for income tax expense of $276,241 or 479.39%.  This
increase is primarily attributable to the increase in net income before
provision for income taxes and full utilization of the net operating loss
carryforward from 2007 for the year ended December 31, 2008 as compared to the
year ended December 31, 2007.
  Net income.  For the
year ended December 31, 2008, we had net income of $219,668 as compared to net
income of $62,460 for the year ended December 31, 2007, an increase of $157,208,
or 251.69%.  The increase is attributable to the increase in gross
profit of $617,462, offset by the increases in operating expenses of $177,531,
other expenses, net of $6,482, and the provision for income tax expense of
$276,241.
  17
  Liquidity
and Capital Resources
  As of
December 31, 2008, the Company had cash and current assets of $1,196,351 and
current liabilities of $976,675, or a current ratio of 1.23%.  As of
December 31, 2007, the Company had cash and current assets of $951,538 and
current liabilities of $942,808, or a current ratio of 1.01%.
  On March
5, 2008, the Company secured a $100,000 variable rate revolving line of
credit.  The line of credit is evidenced by a third mortgage on the
real property.  The interest rate is the lender’s base rate (currently
6.00%), plus 1.00%, resulting in an initial rate of 7.00%.  The
line of credit is secured by the Company’s assets and the real property up to
the value of the outstanding balance due under the line of
credit.  The amount available under the line of credit was increased
to $200,000 on December 2, 2008.  Interest payments are due on the
outstanding principal balance monthly, and the line of credit matures on
December 2, 2009.  At December 31, 2008 the balance outstanding under
the line of credit was $200,000.
  The
Company anticipates that cash generated from operations should be sufficient to
satisfy the Company’s contemplated cash requirements for its current operations
for at least the next twelve months.  The Company does not anticipate
any significant purchases of equipment during fiscal year 2009. The Company
believes the number and level of employees at December 31, 2008 is adequate to
maintain the Company's operations for at least the next 12 months.
  Contractual
obligations of the Company as of December 31, 2008 are set forth in the
following table:
  Payments
due by period
 Contractual Obligations
                      
                      Total
                      
                      
                      Less than
                        1 year
                      
                      
                      1-3 years
                      
                      
                      3-5 years
                      
                      
                      More than 5
                        yearsLong-Term
      Debt Obligations
                      
                      $
                      1,527,631
                      
                      
                      $
                      330,865
                      
                      
                      $
                      279,954
                      
                      
                      $
                      244,741
                      
                      
                      $
                      672,071Operating
      Lease Obligations
                      
                      
                      3,169
                      
                      
                      
                      3,169
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Purchase
      Obligations
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Other
      Long-Term Liabilities Reflected on the Company’s Balance Sheet under
      GAAP
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Total
                      
                      $
                      1,530,800
                      
                      
                      $
                      334,034
                      
                      
                      $
                      279,954
                      
                      
                      $
                      244,741
                      
                      
                      $
                      672,071
  Item
      7A.
              Quantitative
      and Qualitative Disclosures about Market
Risk.
  Market
risk generally represents the risk of loss that may be expected to result from
the potential change in value of a financial instrument as a result of
fluctuations in credit ratings of the issuer, equity prices, interest rates or
foreign currency exchange rates. We do not use derivative financial instruments
for any purpose.
  We are
also subject to interest rate risk on the balance of our revolving credit
facility that matures on December 2, 2009 with Colonial
Bank.  Interest on the credit facility is variable based on the
lender’s base rate plus 1%. Our balance at December 31, 2008 under the facility
was $200,000.  We do not believe there would be a large enough
increase or decrease in the lender’s base through December 2, 2009 that would
have a material effect on our future results of operations.
  Item
      8.
              Financial
      Statements.
  Our
consolidated financial statements appear beginning at page F-1.
  18
  Item
      9.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.
  None.
  Item
      9A.
              Controls
      and Procedures
  Evaluation
of disclosure controls and procedures
  As of the
end of the period covered by this report, we carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14.  This evaluation was
done under the supervision and with the participation of our Principal Executive
Officer and Principal Financial Officer. Based upon that evaluation, our
Principal Executive Officer and Principal Financial Officer concluded that our
disclosure controls and procedures are effective in gathering, analyzing and
disclosing information needed to satisfy our disclosure obligations under the
Exchange Act.
  Management’s
Report on Internal Control over Financial Reporting
  Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. 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.
  Management,
including the Company's Chief Executive Officer and Principal Accounting
Officer, has conducted an evaluation of the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2008, based on the
criteria for effective internal control described in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on its assessment, management concluded that the
Company’s internal control over financial reporting was effective as of December
31, 2008.
  This
Annual Report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s independent 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.
  This
report shall not be deemed to be filed for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liabilities of that
section, and is not incorporated by reference into any filing of the Company,
whether made before or after the date hereof, regardless of any general
incorporation language in such filing.
  Changes
in internal controls
  There
were no changes in our internal controls or in other factors during the period
covered by this report that have materially affected or are likely to materially
affect the Company’s internal controls over financial reporting.
  Item
      9B.
              Other
      Information
  None.
  19


PART
III




Item
      10.
            Directors,
      Executive Officers, and Corporate
Governance;




Our
directors, executive officers and key employees as of March 1, 2009 are as
follows:




Name:
              
              Age:
              
              Position:Robert
      M. Carmichael
              
              46
              
              President,
      Chief Executive Officer, Principal Financial Officer and
      Director




Robert M.
Carmichael.  Since April 16, 2004, Mr. Carmichael has served as
BWMG’s President, Chief Executive Officer, Principal Financial Officer, and
Director.  From March 23, 2004 through April 16, 2004, Mr. Carmichael
served as United’s Executive Vice-President and Chief Operating
Officer.  Mr. Carmichael has served as president of Trebor Industries
since 1986.  Mr. Carmichael is the holder and co-holder of numerous
patents that are used by Trebor Industries and several other major companies in
the diving industry.




Directors




Our Board
of Directors may consist of up to five (5) seats, with Robert Carmichael
currently serving as the sole director.  Directors serve for a term of
one year and stand for election at our annual meeting of
stockholders.  Pursuant to our Bylaws, a majority of directors may
appoint a successor to fill any vacancy on the Board of Directors.




Committees




Currently,
the Company has not established any committees of the Board of
Directors.  Because the board of directors consists of only one
member, the board has not delegated any of its functions to
committees.  The entire board of directors acts as our audit committee
as permitted under Section 3(a)(58)(B) of the Exchange Act.  We do not
have any independent directors who would qualify as an audit committee financial
expert. We believe that it has been, and may continue to be, impractical to
recruit independent directors unless and until we are significantly
larger.  Mr. Carmichael is not considered a “financial expert” as
defined under item 407 of Regulation S-K.




Compensation
of Directors




Members
of the Company’s Board of Directors are reimbursed for all out of pocket
expenses incurred in connection with the attendance at any Board meeting or in
connection with any services they provide for and on behalf of the
Company.




Compliance
with Section 16(a) Of the Securities Act Of 1934




Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers, and persons who own more than 10% of a registered class of
our equity securities to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other of our equity securities.  Officers, directors and greater
than 10% shareholders are required by SEC regulations to furnish us copies of
all Section 16(a) forms they file.  Based on available
information, filings required under Section 16(a) were complied with for the
period covered by this report.




Code
of Ethics




The
Company has adopted a formal code of ethics that applies to our principal
executive officer and principal accounting officer, all other officers,
directors and employees.  The code of ethics is provided as an exhibit
to the 10-K for the year ended December 31, 2008.  The Company
undertakes to provide to any person without charge, upon written request to the
Company’s Chief Executive Officer, a copy of the code of
ethics.


20


Item
      11.
            Executive
      Compensation




The
following table shows all the cash compensation paid by the Company, as well as
certain other compensation paid or accrued, during the fiscal years ended
December 31, 2008 and 2007 to BWMG’s named executive officers.  No
restricted stock awards, long-term incentive plan payouts or other types of
compensation, other than the compensation identified in the chart below, were
paid to these executive officers during these fiscal years.




Summary
Compensation Table




Name
      and Principal
                              Position(s)
                            Year
                            
                            Salary
                              ($)
                            
                            
                            Bonus
                              ($)
                            
                            
                            Stock
                              Awards
                              ($)
                            
                            
                            Option
                              Awards
                              ($)
                            
                            
                            Non
      Equity
                              Incentive
                              Plan
                              Compen-sation
      ($)
                            
                            
                            All
      Other
                              Compen-sation
                              ($)
                            
                            
                            TotalRobert
      M. Carmichael, President, Principal Executive Officer, and
                            2008
                            
                            $
                            105,398
                            
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            15,000
                            (1)
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            120,398
                            (2)Principal
      Financial Officer
                            2007
                            
                            $
                            97,305
                            
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            97,305
                            (2)




(1)
Effective December 31, 2008, Robert M. Carmichael, the President and Chief
Executive Officer of the Company, was granted 100,000 fully vested incentive
stock options.  The grant was pursuant to the 2007 Equity Incentive
Plan and as disclosed in the Equity Incentive Plan Note to the financial
statements for the year ended December 31, 2008.  The options are
exercisable at $1.07 per share and expire on December 31, 2013. At the date of
grant the average market price for the Company’s stock was $0.15.  The
option award was part of 211,000 options granted to employees and
consultants.  All options were valued using the Black-Scholes
Model.




(2)
Executivecompensation excludes
certain transactions which are disclosed under “Item 13.  Certain
Relationships and Related Transactions, and Director Independence.”




Outstanding
Equity Awards at Fiscal Year End




Option Awards
                                                  
                                                  Stock AwardsName
                                                  
                                                  Number of
                                                    securities
                                                    underlying
                                                    unexercised
                                                    options (#)
                                                    exercisable
                                                  
                                                  Number of
                                                    securities
                                                    underlying
                                                    unexercised
                                                    option (#)
                                                    un-exercisable
                                                  
                                                  Equity
                                                    Incentive
                                                    plan
                                                    awards:
                                                    Number of
                                                    securities
                                                    underlying
                                                    unexercised
                                                    unearned
                                                    options (#)
                                                  
                                                  Option
                                                    exercise
                                                    price ($)
                                                    per share
                                                  
                                                  Option
                                                    expiration
                                                    date
                                                  
                                                  Number
                                                    of shares
                                                    or units
                                                    of stock
                                                    that have
                                                    not
                                                    vested
                                                    (#)
                                                  
                                                  Market
                                                    value of
                                                    shares of
                                                    units of
                                                    stock
                                                    that have
                                                    not
                                                    vested
                                                    ($)
                                                  
                                                  Equity Incentive
                                                    plan awards:
                                                    Number of
                                                    unearned shares,
                                                    units or other
                                                    rights that have
                                                    not vested (#)
                                                  
                                                  Incentive
                                                    plan
                                                    awards:
                                                    Market or
                                                    payout value
                                                    of unearned
                                                    shares, units
                                                    or other
                                                    rights that
                                                    have not
                                                    vested ($)Robert
      M. Carmichael, Principal Executive Officer, and Principal Financial
      Officer
                                                  
                                                  
                                                  100,000
                                                  (1)
                                                  
                                                  
                                                  
                                                  
                                                  $
                                                  1.07
                                                  
                                                  December 31,
      2013




(1)
            See
      Footnote (1) to the Summary Compensation Table
  above.




Director
Compensation




None.




Employment
Agreements




None.


21


Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters




Security
Ownership of Certain Beneficial Owners and Management




The
following table sets forth information about the beneficial ownership of our
common stock as of March 10, 2009 by (i) each person who we know is the
beneficial owner of more than 5% of the outstanding shares of common stock
(ii) each of our directors or those nominated to be directors, and
executive officers, and (iii) all of our directors and executive officers as a
group.  Applicable percentage of ownership is based on 1,785,538
shares of common stock outstanding as of March 10, 2009 together with securities
exercisable or convertible into shares of common stock within 60 days of March
10, 2009 for each stockholder. Beneficial ownership is determined in accordance
with the rules of the SEC and generally includes voting or investment power with
respect to securities.  Shares of common stock subject to securities
exercisable or convertible into shares of common stock that are currently
exercisable or exercisable within 60 days of March 10, 2009 are deemed to be
beneficially owned by the person holding such options for the purpose of
computing the percentage of ownership of such person, but are not treated as
outstanding for the purpose of computing the percentage ownership of any other
person.





Title of Class
                                
                                Name and Address of Beneficial
                                  Owner
                                
                                Amount and Nature of
                                  Beneficial Owner
                                
                                
                                Percent of ClassCommon
                                
                                Robert
      M Carmichael
                                  C/O
      Brownie’s Marine Group, Inc.
                                  940
      NW 1st
      Street
                                  Fort
      Lauderdale, FL  33311
                                
                                
                                1,473,314
                                (1)
                                
                                
                                66.95
                                %Common
                                
                                Jeffrey
      William Morris
                                  C/O
      Brownie’s Marine Group, Inc.
                                  940
      NW 1st
      Street
                                  Fort
      Lauderdale, FL  33311
                                
                                
                                97,675
                                (2)
                                
                                
                                5.44
                                %Common
                                
                                All
      officers and directors as a
                                  Group
      (1 person)
                                
                                
                                1,473,314
                                (1)
                                
                                
                                66.95
                                %





(1)
              Includes
      an aggregate of 415,000 shares underlying currently exercisable
      options.


(2)
              Includes
      10,000 shares underlying currently exercisable
  options.




Equity
Compensation Plan




See
Equity Incentive Plan Note to the financial statements for the year ended
December 31, 2008 for discussion of the stock options authorized and
outstanding, as well as the Equity Compensation Plan Information table in Item
5.




Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence.




Notes payable – related parties
–




Notes
payable – related parties consists of the following as of December 31, 2008:




Promissory
      note payable to the Chief Executive Officer of the Company, unsecured,
      bearing interest at 7.5% per annum, due in monthly principal and interest
      payments of $7,050, maturing on August 1, 2013.
              
              $
              333,737Promissory
      note payable due an entity in which the Company’s Chief Executive Officer
      has a financial interest, GKR Associates, LLC., secured by second mortgage
      on real property, bearing 6.99% interest per annum, due in monthly
      principal and interest payments of $1,980, maturing on February 22,
      2012.
              
              
              67,296401,033Less
      amounts due within one year
              
              
              86,677Long-term
      portion of notes payable – related parties
              
              $
              314,356




On August
11, 2008, the related party note due Robert Carmichael was restructured. The
restructured note represents a reduction in the annual interest rate from 10% to
7.5%, an acceleration of the maturity date from January 15, 2016 to August 1,
2013, and an increase in the monthly note payment from $6,047 to $7,050.
Additionally, the restructured note is uncollateralized and eliminated the late
payment penalty clause.


22


Net revenues– related parties – The Company
sells products to three entities owned by the brother of the Company’s Chief
Executive Officer, Brownie’s Southport Divers, Inc., Brownie’s Palm Beach
Divers, and Brownie’s Yacht Toys.  Terms of sale are no more favorable
than those extended to any of the Company’s other customers.  Combined
net revenues from these entities for the years ended December 31, 2008 and 2007,
was $767,753 and $886,092, respectively.  Sales to Robert Carmichael,
the Chief Executive Officer of the Company, for the year ended December 31,
2008, was $2,084.  Sales to 940 Associates, Inc., a company wholly
owned by the Company’s Chief Executive Officer, for the year ended December 31,
2008, was $12,922.  Accounts receivable from Brownie’s SouthPort
Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December
31, 2008, was $11,875, $8,903, and $3,982, respectively.  Accounts
receivable from Robert Carmichael and 940 Associates, Inc. was $2,207 and
$13,679, respectively, at December 31, 2008.




Royalties expense– related
parties  –  The Company has Non-Exclusive License
Agreements with the Carleigh Rae Corporation (herein referred to as “CRC”), an
entity that the Company’s Chief Executive Officer has an ownership interest, to
license product patents it owns.  Based on the license agreements with
CRC, the Company pays royalties ranging from $1.00 to $50.00 per licensed
products sold, with rates increasing 5% annually.  Also with CRC, the
Company has a Non-Exclusive License Agreement to license a trademark of products
owned by CRC.  Based on the agreement, the Company will pay the entity
$0.25 per licensed product sold, with rates increasing $0.05
annually.




The
Company has Non-Exclusive License Agreements with 940 Associates, Inc. (herein
referred to as “940AI”), an entity owned by the Company’s Chief Executive
Officer, to license product patents it owns.  Under the terms of the
license agreements effective January 1, 2005, the Company pays 940AI $2.00 per
licensed product sold, rates increasing 5% annually.  Also with 940AI,
the Company has an Exclusive License Agreement to license the trademark
“Brownies Third Lung”, “Tankfill”, “Brownies Public Safety” and various other
related trademarks as listed in the agreement.  Based on this license
agreement, the Company pays 940AI 2.5% of gross revenues per
quarter.




Total
royalties expense for the above agreements for the years ended December 31, 2008
and 2007, was $121,040 and $87,595, respectively.




Consulting expense – Jeff Morris, a
greater than 5% beneficial owner of common stock of the Company, provides
management and strategic consulting services for BWMG.  For these
services, Mr. Morris earned $120,000, and $120,000, from the Company for the
year ended December 31, 2008, and 2007, respectively.  As of December
31, 2008 and 2007, the Company was in arrears on payments due Mr. Morris for
these services by $40,000, and $20,000, respectively.




Asset Purchase Agreements – Effective
July 31, 2008, the Company entered into an Asset Purchase Agreement with Robert
Carmichael, pursuant to which the Company acquired a granted European and
pending U.S. Patent relating to active control releasable ballast systems for
diving equipment (the “Intellectual Property”) and certain contracts related to
the Intellectual Property (the “Contracts”).  The Contracts included a
non-exclusive licensing agreement with a third party for a fee of
$228,000.  The Intellectual Property and Contracts are collectively
referred to as the “Assets”.  Per the stated terms of the Asset
Purchase Agreement, the purchase price for the Assets was $297,000, consisting
of issuance of 100,000 of restricted shares of the Company’s common stock and
$15,000.  The number of shares was determined based on the average
closing price of the common stock as reported on the “OTCBB” for the 12 month
period ending three days prior to the Effective Date, ($2.82 per
share).  For financial reporting purposes, the value of the Assets
consists of the cash consideration delivered at closing under current Contracts
and Mr. Carmichael’s historical cost for the Assets if the stock price on the
date of the transaction supports valuation in excess of the cash exchange
value.  Since the average price of the stock exchanged on the
transaction day was less than the cash exchange value, the Contract fee
receivable was valued at $213,000, the cash exchange value ($228,000 received
under contract, less the $15,000 paid), thereby resulting in zero value
attributed to the acquired Intellectual Property.


23


The fee
received in July 2008 under the non-exclusive license agreement referenced above
was used to reduce certain Company debt, such as the related party note payable
due to 940 Associates, Inc. of approximately $181,000 was retired, and the
Company paid down the related party note payable to Robert Carmichael by
approximately $35,000.




Effective
March 3, 2009, the Company entered into an Asset Purchase Agreement with
Robert Carmichael.  The Company purchased several patents it had
previously been paying royalties on and several related unissued
patents.  In exchange for the Intellectual Property, the Company
issued Mr. Carmichael 315,000 stock options at a $1.00 exercise
price.  For financial reporting purposes the Company has valued the
group of Patents at $0 which is the lower of Mr. Carmichael’s historical cost as
compared to the fair market value of the stock options on the date of the
transaction as determined using the Black-Scholes Valuation
Model.  Accordingly, the Company realized a $63,000 loss on the
transaction, the fair market value of the options granted effective March 3,
2009 less the $0 historical cost.  By acquiring the Intellectual
Property, the Company (i) eliminated an estimated $41,000 net discounted cash
flows it would otherwise have had to pay related to the Intellectual Property
through 2018, (ii) has an opportunity to further develop the Intellectual
Property, (iii) has the ability to incorporate the Intellectual Property into
current and future products, and (iv) has the opportunity to license the
Intellectual Property to third parties.




Independent directors – The Company
currently has no independent directors.




Principal
Accounting Fees and Services.




Fees
to Auditors Fiscal Year ended December 31, 2008




Audit Fees: The
aggregate fees, including expenses, billed by the Company's principal
accountants for professional services rendered for the audit of the Company’s
consolidated financial statements during the fiscal year ending December 31,
2008 and for the review of the Company’s financial information included in its
quarterly reports on Form 10-Q during the fiscal year ending December 31, 2008
or services that are normally provided in connection with statutory and
regulatory filings or engagements during the fiscal year ending
December 31, 2008 was $41,710.




Audit Related
Fees:  The aggregate fees, including expenses, billed by
principal accountants for assurance and related services reasonably related to
the performance of the Company’s audit or review of the Company’s financial
statements were $-0-.




Tax
Fees:  The aggregate fees, including expenses, billed by
principal accountants for tax compliance, tax advice and tax planning during
year 2008 was $5,075.




All Other
Fees:  The aggregate fees, including expenses, billed for all
other services rendered to the Company by principal accountants during year 2007
was $-0-.




Fees
to Auditors Fiscal Year ended December 31, 2007




Audit Fees: The
aggregate fees, including expenses, billed by principal accountants for
professional services rendered for the audit of the Company’s consolidated
financial statements during fiscal year ending December 31, 2007 and for the
review of the Company’s financial information included in its quarterly reports
on Form 10-QSB during the fiscal year ending December 31, 2007 or services that
are normally provided in connection with statutory and regulatory filings or
engagements during the fiscal year ending December 31, 2007 was
$39,882.


24


Audit Related
Fees:  The aggregate fees, including expenses, billed by
principal accountants for assurance and related services reasonably related to
the performance of the Company’s audit or review of the Company’s financial
statements during the year ended December 31, 2007 were $-0-.




Tax
Fees:  The aggregate fees, including expenses, billed by
principal accountants for tax compliance, tax advice and tax planning during
year 2007 was $-0-.




All Other
Fees:  The aggregate fees, including expenses, billed for all
other services rendered to the Company by principal accountants during year 2007
was $-0-.




The
Company has no audit committee.  The Company's board of directors has
considered whether the provisions of the services covered above under the
captions is compatible with maintaining the auditor’s
independence.  All services were approved by the board of directors
prior to the completion of the respective audit.




25




PART
IV




Item
      14.
            Exhibits,
      Financial Statement Schedules




Our
consolidated financial statements appear beginning at F-1.




Exhibits





Exhibit
      No.
              
              Description
              
              Location2.2
              
              Merger
      Agreement, dated June 18, 2002 by and among United Companies Corporation,
      Merger Co., Inc. and Avid Sportswear & Golf Corp.
              
              Incorporated
      by reference to Exhibit 2.02 Amendment No. 1 to Form S-4 filed June 24,
      20022.3
              
              Articles
      of Merger of Avid Sportswear & Golf Corp. with and into Merger Co.,
      Inc.
              
              Incorporated
      by reference to Exhibit 2.03 Amendment No. 1 to Form S-4 filed June 24,
      20023.1
              
              Articles
      of Incorporation
              
              Incorporated
      by reference to Exhibit 3.05 Amendment No. 1 to Form S-4 filed June 24,
      20023.2
              
              Articles
      of Amendment
              
              Incorporated
      by reference to the appendix to the Definitive Information Statement on
      Schedule 14C filed July 31, 20073.2
              
              Bylaws
              
              Incorporated
      by reference to Exhibit 3.04 to the Registration Statement on Form
      10-SB5.1
              
              2007
      Equity Incentive Plan
              
              Incorporated
      by reference to the appendix to theDefinitive Information Statement on
      Schedule 14C filed July 31, 200710.1
              
              Share
      Exchange Agreement, dated March 23, 2004 by and among the Company, Trebor
      Industries, Inc. and Robert Carmichael
              
              Incorporated
      by reference to Exhibit 16.1 to Current Report on Form 8-K filed April 9,
      200410.2
              
              Two
      Year Consulting Agreement with Jeff Morris effective January 1, 2005 for
      Management and Strategic Services and Warrants issued in conjunction with
      the same
              
              Incorporated
      by reference to Exhibit 10.14 to Current Report on Form 8-K filed on March
      11, 200510.3
              
              Non-Exclusive
      License Agreement – BC Keel Trademark
              
              Incorporated
      by reference to Exhibit 10.18 to 10QSB for the quarter ended September 30,
      2005 filed August 15, 200510.4
              
              Non-Exclusive
      License Agreement – Buoyancy Compensator (and Dive Belt) Weight
      System
              
              Incorporated
      by reference to Exhibit 10.18 to 10QSB for the quarter ended September 30,
      2005 filed August 15, 200510.5
              
              Exclusive
      License Agreement - Brownie's Third Lung, Brownie's Public Safety,
      Tankfill, and Related Trademarks and Copyrights
              
              Incorporated
      by reference to Exhibit 10.18 to 10QSB for the quarter ended September 30,
      2005 filed August 15, 200510.6
              
              Non-Exclusive
      License Agreement - Drop Weight Dive Belt
              
              Incorporated
      by reference to Exhibit 10.18 to 10QSB for the quarter ended September 30,
      2005 filed August 15,
2005




26




10.7
                
                Non-Exclusive
      License Agreement - Garment Integrated or Garment Attachable Flotation Aid
      and/or PFD
                
                Incorporated
      by reference to Exhibit 10.18 to 10QSB for the quarter ended September 30,
      2005 filed August 15, 200510.8
                
                Non-Exclusive
      License Agreement - Inflatable Dive Market and Collection
    Bag
                
                Incorporated
      by reference to Exhibit 10.18 to 10QSB for the quarter ended September 30,
      2005 filed August 15, 200510.9
                
                Non-Exclusive
      License Agreement – SHERPA Trademark and Inflatable Flotation Aid/Signal
      Device Technology
                
                Incorporated
      by reference to Exhibit 10.18 to 10QSB for the quarter ended September 30,
      2005 filed August 15, 200510.10
                
                Non-Exclusive
      License Agreement - Tank-Mounted Weight, BC or PFD-Mounted Trim Weight or
      Trim Weight Holding System
                
                Incorporated
      by reference to Exhibit 10.18 to 10QSB for the quarter ended September 30,
      2005 filed August 15, 200510.11
                
                Exclusive
      License Agreement – Brownie’s Third Lung and Related Trademarks and
      Copyright
                
                Incorporated
      by reference to Exhibit 10.26 to 10KSB for the year ended December 31,
      200610.12
                
                Redemption
      Agreement – Cornell Capital Partner’s, LP Secured Convertible
      Debentures
                
                Incorporated
      by reference to Form 8K filed on June 2, 200610.13
                
                Agreement
      for Purchase and Sale of Property Between Trebor Industries, Inc. and GKR
      Associates, Inc. dated February 21, 2007
                
                Incorporated
      by reference to Exhibit 10.28 to 10KSB for the year ended December 31,
      200610.14
                
                First
      Mortgage dated February 22, 2007 between Trebor Industries, Inc. and
      Colonial  Bank
                
                Incorporated
      by reference to Exhibit 10.29 to 10KSB for the year ended December 31,
      200610.15
                
                Note
      dated February 22, 2007 payable to GKR Associates, Inc
                
                Incorporated
      by reference to Exhibit 10.30 to 10KSB for the year ended December 31,
      200610.16
                
                Second
      Mortgage dated February 22, 2007 between Trebor Industries, Inc.
      and  GKR Associates, LLC
                
                Incorporated
      by reference to Exhibit 10.31 to 10KSB for the year ended December 31,
      200610.17
                
                Promissory
      Note dated January 1, 2007 payable to Robert M. Carmichael
                
                Incorporated
      by reference to Exhibit 10.32 to 10KSB for the year ended December 31,
      200610.18
                
                Promissory
      Note dated January 1, 2007 Payable to 940 Associates, Inc.
                
                Incorporated
      by reference to Exhibit 10.33 to 10KSB for the year ended December 31,
      200610.19
                
                Purchase
      and Sale Agreement with GKR Associates, LLC
                
                Incorporated
      by reference to Form 8K filed on March 23, 200710.20
                
                Asset
      Purchase Agreement between Trebor Industries, Inc. and Robert
      Carmichael
                
                Incorporated
      by reference to Form 8K filed on August 1, 200810.21
                
                Asset
      Purchase Agreement between Trebor Industries, Inc. and Robert
      Carmichael
                
                Incorporated
      by reference to Form 8K filed on March 5, 200914.0
                
                Code
      of Ethics
                
                Provided
      herewith31.1
                
                Certification
      Pursuant to Rule 13a-14(a)/15d-14(a)
                
                Provided
      herewith31.2
                
                Certification
      Pursuant to Rule 13a-14(a)/15d-14(a)
                
                Provided
      herewith32.1
                
                Certification
      Pursuant to Section 1350
                
                Provided
      herewith32.2
                
                Certification
      Pursuant to Section 1350
                
                Provided
      herewith


27


SIGNATURES




In
accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.




Date:   March
      23, 2009
              
              Brownie’s
      marine group,  Inc.By:
              /s/
      Robert M. CarmichaelRobert
      M. CarmichaelPresident,
      Chief Executive Officer,Chief
      Financial Officer andPrincipal
      Accounting 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 registrant and in the
capacities and on the dates indicated.




Date:  March
      23, 2009
                By:
                /s/
      Robert M. CarmichaelRobert
      M. CarmichaelDirector




28


Financial
Statements




BROWNIE'S
MARINE GROUP, INC.


TABLE OF
CONTENTS FOR FINANCIAL STATEMENTS


FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007





PAGE(S)REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                        
                        F-1CONSOLIDATED
      BALANCE SHEETS AS OF DECEMBER 31, 2008 AND 2007
                        
                        F-2CONSOLIDATED
      STATEMENTS OF INCOME FOR THE YEARS ENDEDDECEMBER
      31, 2008 AND 2007
                        
                        F-3CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY(DEFICIT)
      FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
                        
                        F-4CONSOLIDATED
      STATEMENTS OF CASH FLOWS FOR THE YEARS ENDEDDECEMBER
      31, 2008 AND 2007
                        
                        F-5NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS
                        
                        F-6
      TO
F-21









REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






To the
Board of Directors and Stockholders
 Brownie's
Marine Group, Inc.
 Fort
Lauderdale, Florida
 
 We have
audited the accompanying consolidated balance sheets of Brownie's Marine Group,
Inc. as of December 31, 2008 and 2007, and the related consolidated statements
of operations, stockholders’ equity (deficit), and cash flows for the years then
ended.  Brownie's Marine Group, Inc.’s management is responsible for
these financial statements.  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 audit 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 audits 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 audit provides a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Brownie's Marine Group, Inc.
as of December 31, 2008 and 2007, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
 
 
 
 
 /s/ L.L.
Bradford & Company, LLC
 March 16,
2009
 Las
Vegas, Nevada


F -
1











BROWNIE'S
MARINE GROUP, INC.


CONSOLIDATED
BALANCE SHEETS





December 31,
                    
                    
                    December 31,2008
                    
                    
                    2007ASSETSCurrent
      assetsCash
                    
                    $
                    3,532
                    
                    
                    $
                    142,516Accounts
      receivable, net of $25,000 and $9,000, respectively,
    allowancefor
      doubtful accounts
                    
                    
                    34,328
                    
                    
                    
                    34,877Accounts
      receivable - related parties
                    
                    
                    41,059
                    
                    
                    
                    3,635Inventory
                    
                    
                    735,036
                    
                    
                    
                    656,303Prepaid
      expenses and other current assets
                    
                    
                    94,079
                    
                    
                    
                    81,879Costs
      and estimated earnings in excess of billings on uncompleted
      contract
                    
                    
                    287,861
                    
                    
                    
                    —Deferred
      tax assets, net - current
                    
                    
                    456
                    
                    
                    
                    32,328Total
      current assets
                    
                    
                    1,196,351
                    
                    
                    
                    951,538Property,
      plant and equipment, net
                    
                    
                    1,199,554
                    
                    
                    
                    1,229,898Deferred
      tax asset, net - non-current
                    
                    
                    —
                    
                    
                    
                    52,363Other
      assets
                    
                    
                    6,968
                    
                    
                    
                    6,968Total
      assets
                    
                    $
                    2,402,873
                    
                    
                    $
                    2,240,767LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)Current
      liabilitiesAccounts
      payable and accrued liabilities
                    
                    $
                    333,639
                    
                    
                    $
                    397,292Customer
      deposits
                    
                    
                    194,425
                    
                    
                    
                    286,220Royalties
      payable - related parties
                    
                    
                    42,865
                    
                    
                    
                    15,263Other
      liabilities - related parties
                    
                    
                    40,000
                    
                    
                    
                    117,601Income
      taxes payable
                    
                    
                    30,649
                    
                    
                    
                    —Other
      liabilities
                    
                    
                    4,232
                    
                    
                    
                    9,477Notes
      payable - current portion
                    
                    
                    244,188
                    
                    
                    
                    46,031Notes
      payable - related parties - current portion
                    
                    
                    86,677
                    
                    
                    
                    70,924Total
      current liabilities
                    
                    
                    976,675
                    
                    
                    
                    942,808Deferred
      tax liability, net - non-current
                    
                    
                    2,411
                    
                    
                    
                    —Notes
      payable - long-term portion
                    
                    
                    882,410
                    
                    
                    
                    925,399Notes
      payable - related parties - long-term portion
                    
                    
                    314,356
                    
                    
                    
                    609,857Total
      liabilities
                    
                    
                    2,175,852
                    
                    
                    
                    2,478,064Commitments
      and contingenciesStockholders'
      equity (deficit)Common
      stock; $0.001 par value; 250,000,000 shares authorized, 1,785,538 and
                      1,685,
      538 shares issued and outstanding, respectively
                    
                    
                    1,785
                    
                    
                    
                    1,685Additional
      paid-in capital
                    
                    
                    1,084,216
                    
                    
                    
                    839,666Accumulated
      deficit
                    
                    
                    (858,980
                    )
                    
                    
                    (1,078,648
                    )Total
      stockholders' equity (deficit)
                    
                    
                    227,021
                    
                    
                    
                    (237,297
                    )Total
      liabilities and stockholders' equity (deficit)
                    
                    $
                    2,402,873
                    
                    
                    $
                    2,240,767





See
Accompanying Notes to Consolidated Financial Statements


F -
2


BROWNIE'S
MARINE GROUP, INC.


CONSOLIDATED
STATEMENTS OF INCOME





Year Ended December 31,2008
                
                
                2007Net
      revenuesNet
      revenues
                
                $
                3,914,978
                
                
                $
                2,318,303Net
      revenues - related parties
                
                
                782,759
                
                
                
                886,092Total
      net revenues
                
                
                4,697,737
                
                
                
                3,204,395Cost
      of net revenuesCost
      of net revenues
                
                
                2,903,683
                
                
                
                2,061,248Royalties
      expense - related parties
                
                
                121,040
                
                
                
                87,595Total
      cost of net revenues
                
                
                3,024,723
                
                
                
                2,148,843Gross
      profit
                
                
                1,673,014
                
                
                
                1,055,552Operating
      expensesResearch
      and development costs
                
                
                26,510
                
                
                
                3,780Selling,
      general and administrative costs
                
                
                1,108,284
                
                
                
                953,483Total
      operating expenses
                
                
                1,134,794
                
                
                
                957,263Income
      from operations
                
                
                538,220
                
                
                
                98,289Other
      expenses (income), netOther
      income, net
                
                
                (10,483
                )
                
                
                (28,075
                )Interest
      expense
                
                
                68,073
                
                
                
                58,426Interest
      expense - related parties
                
                
                42,344
                
                
                
                63,101Total
      other expenses, net
                
                
                99,934
                
                
                
                93,452Net
      income before provision for income taxes
                
                
                438,286
                
                
                
                4,837Provision
      for income tax expense (benefit)
                
                
                218,618
                
                
                
                (57,623
                )Net
      income
                
                $
                219,668
                
                
                $
                62,460Basic
      income per common share
                
                $
                0.13
                
                
                $
                0.04Diluted
      income per common share
                
                $
                0.13
                
                
                $
                0.03Basic
      weighted average common shares outstanding
                
                
                1,727,341
                
                
                
                1,624,301Diluted
      weighted average common  shares outstanding
                
                
                1,727,341
                
                
                
                1,795,906





See
Accompanying Notes to Consolidated Financial Statements


F -
3


BROWNIE'S
MARINE GROUP, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)





Additional
                
                
                
                
                
                TotalCommon Stock
                
                
                Paid-in
                
                
                Accumulated
                
                
                Stockholders'Shares
                
                
                Amount
                
                
                Capital
                
                
                Deficit
                
                
                Equity (Deficit)Balance,
      December 31, 2006
                
                
                1,556,877
                
                
                $
                1,557
                
                
                $
                739,794
                
                
                $
                (1,141,108
                )
                
                $
                (399,757
                )Issuance
      of common stock as part of February 21, 2007 purchase of real
      property
                
                
                44,440
                
                
                
                44
                
                
                
                99,956
                
                
                
                —
                
                
                
                100,000Redemption of warrant tranches
      for common stock pursuant to warrant dated January
      1, 2005
                
                
                84,075
                
                
                
                84
                
                
                
                (84
                )
                
                
                —
                
                
                
                —Issuance
      of common stock to roundup fractional shares as part of the reverse stock
      split effectuated on August 22, 2007
                
                
                146
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Net
      income
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                62,460
                
                
                
                62,460Balance,
      December 31, 2007
                
                
                1,685,538
                
                
                
                1,685
                
                
                
                839,666
                
                
                
                (1,078,648
                )
                
                
                (237,297
                )Purchase
      of Asset and Patents on July 31, 2008
                
                
                100,000
                
                
                
                100
                
                
                
                212,900
                
                
                
                —
                
                
                
                213,000Operating
      expense recognized for incentive stock options issued effective December
      31, 2008
                
                
                —
                
                
                
                —
                
                
                
                31,650
                
                
                
                —
                
                
                
                31,650Net
      Income
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                219,668
                
                
                
                219,668Balance,
      December 31, 2008
                
                
                1,785,538
                
                
                $
                1,785
                
                
                $
                1,084,216
                
                
                $
                (858,980
                )
                
                $
                227,021





See
Accompanying Notes to Consolidated Financial Statements


F -
4


BROWNIE'S
MARINE GROUP, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year Ended December 31,2008
                              
                              
                              2007Cash
      flows from operating activities:Net
      income
                              
                              $
                              219,668
                              
                              
                              $
                              62,460Adjustments
      to reconcile net income to netcash
      (used in) provided by operating activities:Depreciation
      and amortization
                              
                              
                              39,396
                              
                              
                              
                              40,051Change
      in deferred tax asset
                              
                              
                              84,235
                              
                              
                              
                              (39,801
                              )Issuance
      of equity based stock options
                              
                              
                              31,650Change
      in deferred tax liability
                              
                              
                              2,411Loan
      payable settlement loss
                              
                              
                              —
                              
                              
                              
                              777Changes
      in operating assets and liabilities:Change
      in accounts receivable, net
                              
                              
                              (36,875
                              )
                              
                              
                              (132,181
                              )Change
      in inventory
                              
                              
                              (78,733
                              )
                              
                              
                              (74,874
                              )Change
      in costs and estimated earnings in excess of billingson
      uncompleted projects
                              
                              
                              (287,861
                              )
                              
                              
                              —Change
      in prepaid expenses and other current assets
                              
                              
                              (12,200
                              )
                              
                              
                              (20,439
                              )Change
      in accounts payable and accrued liabilities
                              
                              
                              (63,653
                              )
                              
                              
                              64,193Change
      in customer deposits
                              
                              
                              (91,795
                              )
                              
                              
                              202,779Change
      in other liabilities
                              
                              
                              (5,245
                              )
                              
                              
                              (33,683
                              )Change
      in income taxes payable
                              
                              
                              30,649
                              
                              
                              
                              (11,029
                              )Change
      in other liabilities - related parties
                              
                              
                              (77,601
                              )
                              
                              
                              7,250Change
      in royalties payable - related parties
                              
                              
                              27,602
                              
                              
                              
                              6,812Net
      cash (used in) provided by operating activities
                              
                              
                              (218,352
                              )
                              
                              
                              72,315Cash
      flows from investing activities:Proceeds
      from receivable purchased through issuance of commonstock
      in conjunction with asset/patent acquisition
                              
                              
                              228,000
                              
                              
                              
                              —Payment
      for receivable purchased through issuance of commonstock
      in conjunction with asset/patent acquisition
                              
                              
                              (15,000
                              )
                              
                              
                              —Purchase
      of fixed assets
                              
                              
                              (9,052
                              )
                              
                              
                              (1,139,563
                              )Net
      cash provided by (used in) investing activities
                              
                              
                              203,948
                              
                              
                              
                              (1,139,563
                              )Cash
      flows from financing activities:Proceeds
      from borrowings on notes payable
                              
                              
                              200,000
                              
                              
                              
                              1,000,000Proceeds
      from borrowings on notes payable - related parties
                              
                              
                              —
                              
                              
                              
                              100,000Principal
      payments on notes payable
                              
                              
                              (44,832
                              )
                              
                              
                              (41,875
                              )Principal
      payments on notes payable - related parties
                              
                              
                              (279,748
                              )
                              
                              
                              (56,548
                              )Net
      cash (used in) provided by financing activities
                              
                              
                              (124,580
                              )
                              
                              
                              1,001,577Net
      change in cash
                              
                              
                              (138,984
                              )
                              
                              
                              (65,671
                              )Cash,
      beginning of period
                              
                              
                              142,516
                              
                              
                              
                              208,187Cash,
      end of period
                              
                              $
                              3,532
                              
                              
                              $
                              142,516Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                              
                              $
                              113,420
                              
                              
                              $
                              119,889Cash
      paid for income taxes
                              
                              $
                              91,408
                              
                              
                              $
                              18,211


Supplemental
      disclosure of non-cash investing activities:Common
      stock  and additional paid in capital issued toward patent/asset
      purchase on July 31, 2008
                
                $
                213,000
                
                
                $
                —Common
      stock and additional paid in capital issued toward real property purchase
      on  February 21, 2007
                
                $
                —
                
                
                $
                100,000Supplemental
      disclosure of non-cash financing activities:Redemption
      of warrant for common stock pursuant to warrant dated January 1,
      2005
                
                $
                —
                
                
                $
                8,422Assumption
      of other liabilities - related partiesLoan
      payable
                
                
                —
                
                
                
                (266,000
                )Accounts
      receivable
                
                
                —
                
                
                
                156,246Loan
      payable settlement loss
                
                
                —
                
                
                
                (777
                )$
                —
                
                
                $
                (110,531
                )








F -
5




BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS







1.
            DESCRIPTION OF
      BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES





Description of
business – Brownie’s Marine Group, Inc.  (hereinafter referred
to as the “Company” or “BWMG”) designs, tests, manufactures and distributes
recreational hookah diving, yacht based scuba air compressor and Nitrox
Generation Systems, and scuba and water safety products through its wholly owned
subsidiary Trebor Industries, Inc.  The Company sells its products
both on a wholesale and retail basis, and does so from its headquarters and
manufacturing facility in Fort Lauderdale, Florida.  The Company does
business as (dba) Brownie’s Third Lung, the dba name of Trebor Industries,
Inc.





Prior to
August 22, 2007 the Company was known as United Companies Corporation
(hereinafter referred to as “UCC”).  The Company changed its name to
Brownie’s Marine Group, Inc. during the third quarter of 2007 since it believes
“Brownie’s Marine Group” more closely reflects its line of business, and it also
brings brand recognition to the Company as a result of its existing
products.





History –The Company
was incorporated under the laws of Nevada on November 26, 2001, with authorized
common stock of 250,000,000 shares with a par value of $0.001.  On
August 22, 2007, the Company effectuated a 1-for-100 reverse stock split of the
Common Stock whereby every one hundred shares of Common Stock outstanding was
combined and reduced to one share of Common Stock.  Fractional shares
were rounded up and this resulted in an additional 146 shares
issued.  All footnotes and financial statement amounts that relate to
common share data have been retrospectively adjusted to reflect the reverse
stock split.





On March
23, 2004, UCC consummated an agreement to acquire all of the outstanding capital
stock of Trebor Industries, Inc., dba Brownies Third Lung, in exchange for
950,000 shares of the Company’s common stock (“the UCC
Transaction”).  Prior to the UCC Transaction, UCC was a non-operating
public shell company with no operations, nominal assets, accrued liabilities
totaling $224,323 and 144,837 shares of common stock issued and outstanding; and
Trebor Industries, Inc., dba Brownies Third Lung, was a manufacturer and
distributor of hookah diving, and yacht based scuba air compressor and Nitrox
Generation Systems from its factory in Ft. Lauderdale, Florida.  The
UCC Transaction is considered to be a capital transaction in substance, rather
than a business combination.  Inasmuch, the UCC Transaction is
equivalent to the issuance of stock by Trebor Industries, Inc., for the net
monetary assets of a non-operational public shell company, accompanied by a
recapitalization.  UCC issued 950,000 shares of its common stock for
all of the issued and outstanding common stock of Trebor Industries, Inc. The
accounting for the UCC Transaction is identical to that resulting from a reverse
acquisition, except goodwill or other intangible assets will not be
recorded.  Accordingly, these financial statements are the historical
financial statements of Trebor Industries, Inc.  Trebor Industries,
Inc. was incorporated in September 17, 1981.  Therefore, these
financial statements reflect activities from September 17, 1981 (Date of
Inception for Trebor Industries, Inc.) and forward.





Definition of fiscal
year – The Company’s fiscal year end is December 31.





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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates.





Reclassifications –
Certain reclassifications have been made to the 2007 financial statement amounts
to conform to the 2008 financial statement presentation.





Cash and equivalents– Only highly liquid investments with original maturities of 90 days or
less are classified as cash and equivalents.  These investments are
stated at cost, which approximates market value.


F -
6


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS







1.
            DESCRIPTION OF
      BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)





Inventory – Inventory
is stated at the lower of cost or market.  Cost is principally
determined by using the average cost method that approximates the First-In,
First-Out (FIFO) method of accounting for inventory.  Inventory
consists of raw materials as well as finished goods held for
sale.  The Company’s management monitors the inventory for excess and
obsolete items and makes necessary valuation adjustments when
required.





Fixed assets – Fixed
assets are stated at cost less accumulated depreciation. Depreciation is
provided principally on the straight-line method over the estimated useful lives
of the assets, which is primarily 3 to 5 years except for the building that is
being depreciated over a life of 39 years. The cost of repairs and maintenance
is charged to expense as incurred. Expenditures for property betterments and
renewals are capitalized. Upon sale or other disposition of a depreciable asset,
cost and accumulated depreciation are removed from the accounts and any gain or
loss is reflected in other income (expense).





The
Company periodically evaluates whether events and circumstances have occurred
that may warrant revision of the estimated useful lives of fixed assets or
whether the remaining balance of fixed assets should be evaluated for possible
impairment.  The Company uses an estimate of the related undiscounted
cash flows over the remaining life of the fixed assets in measuring their
recoverability.





Revenue recognition –
Revenues from product sales are recognized when the Company’s products are
shipped or when service is rendered.  Revenues from fixed-price
contracts are recognized on the percentage-of-completion method, measured by the
percentage of cost incurred to date to estimated total cost of each
contract.  This method is used because management considers the
percentage of cost incurred to date to estimated total cost to be the best
available measure of progress on the contracts.





Contract
costs include all direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor, supplies, tools,
repairs, and depreciation costs.  General and administrative costs are
charged to expense as incurred.  Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.  Change in job performance, job conditions, and estimated
profitability may result in revisions to costs and income and are recognized in
the period in which the revisions are determined.





Revenue
and costs incurred for time and material projects are recognized as the work is
performed.





Product development
costs – Product development expenditures are charged to expenses as
incurred.





Advertising and marketing
costs – The Company recognizes advertising expenses in accordance with
Statement of Position 93-7 “Reporting on Advertising Costs.” Accordingly, the
Company expenses the costs of producing advertisements at the time production
occurs, and expenses the costs of communicating advertisements in the period in
which the advertising space or airtime is used.  Advertising and trade
show expense incurred for the years ended December 31, 2008 and 2007, was
$38,948 and $25,590, respectively.





Customer deposits and return
policy– The Company takes a minimum 50% deposit against custom and large
tankfill systems prior to ordering and/or building the systems.  The
remaining balance due is payable upon delivery, shipment, or installation of the
system.  There is no provision for cancellation of custom orders once
the deposit has been accepted, nor return of the custom ordered
product.  Additionally, returns of all other merchandise are subject
to a 15% restocking fee as stated on each sales invoice.


F -
7


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS







1.
            DESCRIPTION OF
      BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (continued)





Income taxes – The
Company accounts for its income taxes in accordance with Statement of Financial
Accounting Standards No. 109, which requires recognition of deferred tax assets
and liabilities for future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.





In July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109, (“FIN 48”) which clarifies the
accounting for uncertainty in tax positions.  FIN 48 requires the
recognition of a tax position when it is more likely than not that the tax
position will be sustained upon examination by relevant taxing authorities,
based on the technical merits of the position.  The Company adopted
FIN 48 in the first quarter of 2007 without significant financial
impact.





Comprehensive income
– The Company has no components of other comprehensive income. Accordingly, net
income equals comprehensive income for all periods.





Stock-based
compensation –  The Company accounts for stock based
compensation in accordance with Statement of Financial Accounting Standards No.
123 revised that requires that the Company measures the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award.  That cost is recognized over the
period the employee is required to provide service in exchange for the
award.





Effective
December 31, 2008, the Company granted incentive stock options to certain key
employees, consultants and officers for compensation under the 2007 Equity
Incentive Plan.  See Note 12. EQUITY INCENTIVE
PLAN.





Fair value of financial
instruments – The carrying amounts and estimated fair values of the
Company’s financial instruments approximate their fair value due to the
short-term nature.





Earnings (loss) per common
share – Basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities.  Basic earnings per
share is computed using the weighted-average number of outstanding common shares
during the applicable period.  Diluted earnings per share is computed
using the weighted average number of common and common stock equivalent shares
outstanding during the period.  Common stock equivalent shares are
excluded from the computation if their effect is antidilutive.  All
common stock equivalent shares were excluded in the computation for the year
ended December 31, 2008, since their effect was antidilutive, and included in
the computation for the year ended December 31, 2007, since their effect was
dilutive.


F -
8


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS







1.
            DESCRIPTION OF
      BUSINESS AND SUMMARY OF SIGNIFICANT POLICIES
      (continued)





New accounting
pronouncements – In May 2008, FASB issued Financial Accounting Statement
(“SFAS”) No. 162, “The Hierarchy of Generally Accepted Accounting Principles
(“GAAP”).  The GAAP hierarchy is currently set forth in the American
Institute of Certified Public Accountants (“AICPA”) Statement on Auditing
Standards No. 69, the Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles.  Auditing Standards No. 69 is (1)
directed to the auditor, (2) is complex, and (3) ranks FASB Statements of
Financial Accounting Concepts, which are subject to the same level of due
process as the FASB Statements of Financial Accounting Statements, below
industry practices that are widely recognized as generally accepted but that are
not subject to due process.  The Board believes the GAAP hierarchy
should reside in the accounting literature established by the FASB and instead
of being directed to the auditor, should be directed to entities since they are
responsible for selecting accounting principles for financial statements that
are presented in accordance with GAAP.  This statement is to become
effective 60 days following the Security and Exchange Commission’s (“SEC”)
approval of the Accounting Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles.  The Company does not expect any significant financial
impact upon adoption of SFAS No. 162.





In May
2008, the FASB issued STAFF POSITION (“FSP”) No. APB 14-1, “Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement”.  This FSP applies to convertible
debt instruments that, by their stated terms, may be settled in cash (or other
assets) upon conversion, including partial cash settlement, unless the embedded
conversion option is required to be separately accounted for as a derivative
under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. FSP No. 14-1 clarifies that convertible debt instruments that may be
settled in cash upon conversion (including partial cash settlement) are not
addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt
and Debt Issued with Stock Purchase Warrants. Additionally, this FSP specifies
that issuers of such instruments should separately account for the liability and
equity components in a manner that will reflect the entity’s nonconvertible debt
borrowing rate when interest cost recognized in subsequent periods. The FSP is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years.  The
Company does not currently have any debt instruments for which this FSP would
apply and does not expect to have any significant financial impact upon adoption
in January 2009.  Early adoption is not permitted.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No.
133.”  This statement is intended to enhance the current disclosure
framework in SFAS No. 133.  Under SFAS No. 161, entities will have to
provide disclosures about (a) how and why and entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations, and (c), how
derivative instruments and related hedged items effect an entity’s financial
position, financial performance and cash flows.  SFAS No. 161 is
effective for all financial statements issued for fiscal and interim periods
beginning after November 15, 2008.  Since the Company does not
currently have any derivative instruments, nor does it engage in hedging
activities, the Company expects to have no significant financial impact as a
result of adoption of SFAS No. 161.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree, and the goodwill acquired. SFAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination. SFAS 141R is effective for the Company with
respect to business combinations for which the acquisition date is on or after
January 1, 2009. The Company does not currently anticipate a significant
financial impact upon adoption of SFAS No. 141.


F -
9


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS







1.
            DESCRIPTION OF
      BUSINESS AND SUMMARY OF SIGNIFICANT POLICIES
      (continued)





New accounting
pronouncements (continued) – In December 2007, the FASB issued SFAS
No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an
amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements
that clearly identify and distinguish between the interests of the parent and
the interests of noncontrolling owners. SFAS 160 is effective for the Company as
of January 1, 2009. The Company is currently evaluating the potential
impact, if any, of the adoption of SFAS 160 on the consolidated financial
position, results of operations, and disclosures.





In
December 2007, the SEC issued Staff Accounting Bulletin (“SAB”) No. 110 (“SAB
110”).  SAB 110 relates to the use of the “simplified” method, as
discussed in SAB No.107 (“SAB 107”), in developing an estimate of expected term
of “plain vanilla” share option in accordance with SFAS No. 123 (revised 2004),
Share-Based Payment.  The Staff’s view in SAB 107 was that it did not
expect companies to use the simplified method for share option grants after
December 31, 2007 since it believed that more detailed external information
about employee exercise behavior would be available to companies by this
date.  Since this is not true in all cases, SAB 110 states that under
certain circumstances, the Staff will continue to accept the use of the
simplified method beyond December 31, 2007.  The Company is currently
evaluating this guidance and does not anticipate it will have significant
financial impact





2.
            INVENTORY





Inventory
consists of the following as of:





December 31, 2008
                  
                  
                  December 31, 2007Raw
      materials
                  
                  $
                  485,367
                  
                  
                  $
                  418,123Work
      in process
                  
                  
                  —
                  
                  
                  
                  —Finished
      Goods
                  
                  
                  249,669
                  
                  
                  
                  238,180$
                  735,036
                  
                  
                  $
                  656,303





3.
            PREPAID EXPENSES AND
      OTHER CURRENT ASSETS





Prepaid
expenses and other current assets totaling $94,079 at December 31, 2008,
consists of $70,000 of prepaid inventory, $20,267 of prepaid insurance, $1,040
of prepaid software maintenance, $2,550 of employee advances, and $222 of other
prepaid expenses and current assets.





Prepaid
expenses and other current assets totaling $81,879 at December 31, 2007,
consists of $47,287 of prepayments for inventory, $16,168 of prepaid insurance,
$17,822 of federal and state income taxes receivable due for estimated taxes
paid and net operating loss carry back, and $602 of other prepaid
expenses.


F -
10


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS







4.
            PROPERTY, PLANT AND
      EQUIPMENT





Property, plant and equipment consists
of the following as of:





December 31, 2008
                  
                  
                  December 31, 2007Building
      and land
                  
                  $
                  1,221,362
                  
                  
                  $
                  1,218,362Furniture,
      fixtures, vehicles and equipment
                  
                  
                  248,787
                  
                  
                  
                  242,7351,470,149
                  
                  
                  
                  1,461,097Less:
      accumulated depreciation and amortization
                  
                  
                  270,595
                  
                  
                  
                  231,199$
                  1,199,554
                  
                  
                  $
                  1,229,898





For the
years ended December 31, 2008 and 2007, depreciation expense was $39,396 and
$40,051, respectively.





On
February 21, 2007, the Company purchased the corporate headquarters, factory and
distribution center of the Company located at 936/940 NW 1st Street, Ft.
Lauderdale, FL  33311 from GKR Associates, LLC, an entity in which the
Chief Executive Officer has an ownership interest.  The purchase price
was $1,200,000, and is secured by a first mortgage payable to the bank of
$1,000,000, and $100,000 secured by a second mortgage payable to the seller, GKR
Associates, Inc.  The balance of $100,000 was paid by 44,400 shares of
the Company’s common stock based on market price of the stock on the purchase
date.  In addition, $18,362 of closing expenses were capitalized to
the building.





5.
            CUSTOMER CREDIT
      CONCENTRATIONS





Sales to
Brownie’s Southport Diver’s, Inc. for the years ended December 31, 2008 and 2007
represented 10.78% and 22.43%, respectively, of total net
revenues.  Sales to Al Masaood Marine and Engineering Division and to
Shadow Marine for the years ended December 31, 2008 represented 12.79% and
11.20%, respectively, of total net revenues.  Sales to no other
customers represented greater than 10% of net revenues for the years ended
December 31, 2008 and 2007.





The
brother of Robert Carmichael, the Company’s Chief Executive Officer, as further
discussed in Note 6 - RELATED PARTY
TRANSACTIONS, owns Brownie’s Southport Diver’s Inc.


F -
11


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS







6.
            RELATED PARTY
      TRANSACTIONS





Notes payable – related parties
–




Notes
      payable – related parties consists of the following as of December 31,
      2008:Promissory
      note payable to the Chief Executive Officer of the
Company,unsecured,
      bearing interest at 7.5% per annum, due in monthly
    principaland
      interest payments of $7,050, maturing on August 1, 2013.
                                      
                                      $
                                      333,737Promissory
      note payable due an entity in which the Company’s ChiefExecutive
      Officer has a financial interest, GKR Associates, LLC.,
      securedby
      second mortgage on real property, bearing 6.99% interest per
      annum,due
      in monthly principal and interest payments of $1,980, maturing
      onFebruary
      22, 2012.
                                      
                                      
                                      67,296401,033Less
      amounts due within one year
                                      
                                      
                                      86,677Long-term
      portion of notes payable – related parties
                                      
                                      $
                                      314,356





As
      of December 31, 2008, principal payments due on the notes payable –
      related parties are as
follows:





2009
                  
                  $
                  86,6772010
                  
                  
                  87,9552011
                  
                  
                  94,6682012
                  
                  
                  81,5592013
                  
                  
                  50,174Thereafter
                  
                  
                  —$
                  401,033








F -
12


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS







6.
            RELATED PARTY
      TRANSACTIONS (continued)





Notes payable – related
parties




Notes
      payable – related parties consists of the following as of December 31,
      2007:Promissory
      note payable to the Chief Executive Officer of the
Company,secured
      by Company assets, bearing interest at 10% per annum,due
      in monthly principal and interest payments of $6,047,
    maturingon
      January 15, 2016, with final principal and interest payment of
      $4,360.
                                            
                                            $
                                            404,183Promissory
      note payable to an entity owned by the Company’s ChiefExecutive
      Officer, 940 Associates, Inc., secured by Company assets,bearing
      interest at 10% per annum, due in monthly principal and
      interestpayments
      of $2,861, maturing on January 1, 2016.
                                            
                                            
                                            190,941Promissory
      note payable due an entity in which the Company’s ChiefExecutive
      Officer has a financial interest, GKR Associates, LLC.,
      securedby
      second mortgage on real property, bearing 6.99% interest per
      annum,due
      in monthly principal and interest payments of $1,980, maturing
      onFebruary
      22, 2012.
                                            
                                            
                                            85,657680,781Less
      amounts due within one year
                                            
                                            
                                            70,924Long-term
      portion of notes payable – related parties
                                            
                                            $
                                            609,857





Net revenues – related
parties – The Company sells products to three entities owned by the
brother of the Company’s Chief Executive Officer, Brownie’s Southport Divers,
Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys.  Terms of
sale are no more favorable than those extended to any of the Company’s other
customers.  Combined net revenues from these entities for the years
ended December 31, 2008 and 2007, was $767,753 and $886,092,
respectively.  Sales to Robert Carmichael, the Chief Executive Officer
of the Company, for the year ended December 31, 2008, was
$2,084.  Sales to 940 Associates, Inc., a company wholly owned by the
Company’s Chief Executive Officer, for the year ended December 31, 2008, was
$12,922.  Accounts receivable from Brownie’s SouthPort Diver’s, Inc.,
Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2008, was
$11,875, $8,903, and $3,982, respectively.  Accounts receivable from
Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s
Yacht Toys at December 31, 2007, was $2,597, $1,038, and $0,
respectively.  Accounts receivable from Robert Carmichael and 940
Associates, Inc. was $2,207 and $13,679, respectively, at December 31,
2008.





Royalties expense – related
parties–  The Company has Non-Exclusive License Agreements
with the Carleigh Rae Corporation (herein referred to as “CRC”), an entity that
the Company’s Chief Executive Officer has an ownership interest, to license
product patents it owns.  Based on the license agreements with CRC,
the Company pays royalties ranging from $1.00 to $50.00 per licensed products
sold, with rates increasing 5% annually.   Also with CRC, the
Company has a Non-Exclusive License Agreement to license a trademark of products
owned by CRC.  Based on the agreement, the Company will pay the entity
$0.25 per licensed product sold, with rates increasing $0.05
annually.


F -
13


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS







6.
            RELATED PARTY
      TRANSACTIONS (continued)





Royalties expense –
related parties (continued) – The Company
has Non-Exclusive License Agreements with 940 Associates, Inc. (herein referred
to as “940AI”), an entity owned by the Company’s Chief Executive Officer, to
license product patents it owns.  Under the terms of the license
agreements effective January 1, 2005, the Company pays 940AI $2.00 per licensed
product sold, rates increasing 5% annually.  Also with 940AI, the
Company has an Exclusive License Agreement to license the trademark “Brownies
Third Lung”, “Tankfill”, “Brownies Public Safety” and various other related
trademarks as listed in the agreement.  Based on this license
agreement, the Company pays 940AI 2.5% of gross revenues per
quarter.





Total
royalties expense for the above agreements for the years ended December 31, 2008
and 2007, was $121,040 and $87,595, respectively.





Consulting expense –
Jeff Morris, an approximately 5% beneficial owner of common stock of the
Company, provides management and strategic consulting services for
BWMG.  For these services, Mr. Morris earned $120,000, and $120,000,
from the Company for the year ended December 31, 2008, and 2007,
respectively.  As of December 31, 2008, the Company was $40,000 in
arrears on payments due Mr. Morris for these services.





Asset Purchase
Agreement – Effective July
31, 2008, the Company entered into an Asset Purchase Agreement with Robert
Carmichael, the Company’s Chief Executive Officer and largest shareholder,
pursuant to which the Company acquired a granted European and pending U.S.
Patent relating to active control releasable ballast systems for diving
equipment ( the “Intellectual Property”) and certain contracts related to the
Intellectual Property (the “Contracts”).  The Contracts included a
non-exclusive licensing agreement with a third party for a fee of
$228,000.  The Intellectual Property and Contracts are collectively
referred to as the “Assets”.  Per the stated terms of the Asset
Purchase Agreement, the purchase price for the Assets was $297,000, consisting
of issuance of 100,000 of restricted shares of the Company’s common stock and
$15,000.  The number of shares was determined based on the average
closing price of the common stock as reported on the “OTCBB” for the 12 month
period ending three days prior to the Effective Date, ($2.82 per
share).  For financial reporting purposes, the value of the Assets
consists of the cash consideration delivered at closing under current Contracts
and Mr. Carmichael’s historical cost for the Assets if the stock price on the
date of the transaction supports valuation in excess of the cash exchange
value.  Since the average price of the stock exchanged on the
transaction day was less than the cash exchange value, the Contract fee
receivable was valued at $213,000, the cash exchange value ($228,000 received
under contract, less the $15,000 paid), thereby resulting in zero value
attributed to the acquired Intellectual Property.





The fee
received in July 2008 under the non-exclusive license fee referenced above was
used to reduce certain Company debt, such as the related party note payable due
to 940 Associates, Inc. of approximately $181,000 was retired, and the Company
paid down the related party note payable to Robert M. Carmichael by
approximately $35,000.


F -
14


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS







6.
            RELATED PARTY
      TRANSACTIONS (continued)





Other liabilities – related
parties





Other
liabilities – related parties consists of the following at:





December 31, 2008
                  
                  
                  December 31, 2007Due
      to Brownies Southport Diver’s, Inc.
                  
                  $
                  —
                  
                  
                  $
                  16,820Due
      to Robert M. Carmichael
                  
                  
                  —
                  
                  
                  
                  37,500Due
      to 940 Associates, Inc.
                  
                  
                  —
                  
                  
                  
                  43,281Loan
      payable to related parties for settlement of customer loan
      payable
                  
                  
                  —
                  
                  
                  
                  97,601Management
      and strategic consulting service due Jeff Morris
                  
                  
                  40,000
                  
                  
                  
                  20,000Other
      liabilities – related parties
                  
                  $
                  40,000
                  
                  
                  $
                  117,601





At
December 31, 2008 and 2007, $40,000 and $20,000, respectively, was due to a
shareholder of the Company for consulting services rendered as referred to in
this Note above under Consulting Expense.





At
December 31, 2007, $97,601 was due to related parties for settlement of a
customer loan payable that originated in June 2006.  On that date the
Company borrowed $266,000 from a customer.  The proceeds of the loan
were used to satisfy the outstanding principal balance, redemption fees, and
accrued interest totaling $266,777 due under the secured convertible debentures
held by a third party lender.  In July 2007, the Company settled the
obligation due the customer through a series of transactions that resulted in
cancellation of amounts due to and from the customer and related parties of the
customer and the Company.  The settlement resulted in cancellation of
$156,426 of trade accounts receivable due the Company from the customer and its
related parties, assumption of $110,351 of liabilities incurred by the customer
due to related parties of the Company, and settlement loss of
$777.  By the second quarter ended June 30, 2008 all liabilities due
the aforementioned related parties as a result of this transaction had been
settled in full.





7.
            ACCOUNTS PAYABLE AND
      ACCRUED LIABILITIES





Accounts
payable and accrued liabilities of $333,639 at December, 2008 consists of
$186,774 accounts payable trade, $60,574 balance of legal expenses that were a
Company expense prior to the reverse merger with Trebor Industries, Inc.,
$79,072 of accrued payroll and related fringe benefits, $5,638 of accrued
interest, and $1,581 of other liabilities and accruals.





Accounts
payable and accrued liabilities of $397,292 at December 31, 2007 consists of
$258,923 accounts payable trade, $60,574 balance of legal expenses that were
a Company expense prior to the reverse merger with Trebor Industries, Inc.,
$66,593 of accrued payroll and related fringe benefits, and $11,202 of other
liabilities and accruals.


F -
15


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS







8.
            OTHER
      LIABILITIES





Other
liabilities of $4,232 at December 31, 2008 consists of $4,193 on-line training
liability and $39 of deferred tooling expense.  Other liabilities of
$9,477 at December 31, 2007 consists of $6,538 of on-line training liability,
and $2,939 of deferred tooling expense.





Effective
July 1, 2005, the Company began including on-line training certificates with all
hookah units sold.  The training certificates entitle the holder to an
on-line interactive course at no additional charge to the holder.  The
number of on-line training certificates issued per unit is the same as the
number of divers the unit as sold is designed to accommodate (i.e., a three
diver unit configuration comes with three on-line training
certificates).  The certificates have an eighteen-month redemption
life after which time they expire.  The eighteen-month life of the
certificates begins at the time the customer purchases the unit.  The
Company owes the on-line training vendor the agreed upon negotiated rate for all
on-line certificates redeemed payable at the time of redemption.  For
certificates that expire without redemption, no amount is due the on-line
training vendor.  The Company had no historical data with regard to
the percentage of certificates that would be redeemed versus those that would
expire.    Therefore, until the Company accumulated
historical data related to the certificate redemption ratio, it assumed that
100% of certificates issued with unit sales would be
redeemed.  Accordingly, at the time a unit was sold, the related
on-line training liability was recorded.  The same liability was
reduced as certificates are redeemed and the related payments are made to the
on-line training vendor.





In July
2007, the Company had accumulated 24 months of historical data regarding
redemption rates so the liability estimate was adjusted accordingly to reflect
the actual redemption history.  On a go forward basis the Company is
maintaining a reserve for certificate redemption of 10% that approximates the
historical redemption rate.





9.
            NOTES
      PAYABLE




Notes
      payable consists of the following as of December 31, 2008:Revolving
      Line of Credit secured by a third mortgage on the realproperty
      of the Company with a carrying value $1,172,227 at December
      31,2008,
      bearing interest at the lender’s base rate plus 1.00% per
      annum.  Interestpayments
      are due monthly on the outstanding principal balance and
    theLine
      of Credit matures on December 2, 2009.
                                            
                                            $
                                            200,000Promissory
      note payable secured by a first mortgage on the real
    propertyof
      the Company having a carrying value of $1,172,227 at December 31,
      2008,interest
      at 6.99% per annum, due in monthly principal and interestbearing
      payments of $9,038, maturing on January 22, 2022.
                                            
                                            
                                            926,5981,126,598Less
      amounts due within one year:
                                            
                                            
                                            244,188Long-term
      portion of notes payable
                                            
                                            $
                                            882,410





On
December 2, 2008 the line of credit was increased from $100,000 to $200,000
under the same terms and conditions with the exception that the maturity date
was extended to December 2, 2009.


F -
16


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS







9.
            NOTES PAYABLE
      (continued)





As of
December 31, 2008, principal payments on the notes payable are as
follows:




2009
            
            $
            244,1882010
            
            
            47,4342011
            
            
            49,8972012
            
            
            54,4852013
            
            
            58,523Thereafter
            
            
            672,071$
            1,126,598





Notes
      payable consists of the following as of December 31, 2007:Promissory
      note payable secured by a vehicle of the Company having acarrying
      value of $3,664 at December 31, 2007, bearing no interest,due
      in monthly principal and interest payments of $349,
    maturingon
      November 14, 2008.
                                      
                                      $
                                      3,838Promissory
      note payable secured by real property of the Companyhaving
      a carrying value of $1,195,514 at December 31, 2007,
    bearinginterest
      at 6.99% per annum, due in monthly principal and interestpayments
      of $9,038, maturing on January 22, 2022.
                                      
                                      
                                      967,592971,430Less
      amounts due within one year:
                                      
                                      
                                      46,031Long-term
      portion of notes payable
                                      
                                      $
                                      925,399





10.
            REVERSE STOCK
      SPLIT





On August
22, 2007, the Company effectuated a 1-for-100 reverse stock split of the Common
Stock whereby every one hundred shares of Common Stock outstanding was combined
and reduced to one share of Common Stock.  Fractional shares were
rounded up and this resulted in an additional 146 shares
issued.


F -
17


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS







11.
            STOCK
      WARRANTS





As of
March 31, 2007, all the rights to exercise 285,714 warrants had vested pursuant
to a Warrant agreement dated January 1, 2005. The exercise price of the warrants
is $.7 per share, which equaled the bid/ask price of the Company’s common stock
on January 1, 2005, the effective date of the expired consulting
agreement.  The warrants expire twenty-four months after the vesting
date of each of tranche of 71,429 at June 30, 2007, December 31, 2007, June 30,
2008, and December 31, 2008, respectively.   Further, the
warrants have “piggy-back” registration rights and provide for either a cash or
cashless exercise.  The cashless exercise provision provides for a
discount in the amount of shares provided at exercise based on a formula that
takes into account as one of its factors the average of the closing sale price
on the common stock for five trading days immediately prior to but not including
the date of exercise.





On June
29, 2007 a warrant tranche of 71,429 related to the above agreement was
exercised.  The cashless exercise was elected, and accordingly, 56,894
shares of common stock were issued.  On December 28, 2007, an
additional warrant tranche of 71,429 related to the above agreement was
exercised.  The cashless exercise was elected, and accordingly, 27,181
shares of common stock were issued. The Company recognized compensation expense
for the stock warrants ratably over the term of the consulting agreement,
January 1, 2005 to December 31, 2006, based on the fair value of the stock
warrants using the Black-Scholes model. As a result, issuance of the stock in
June and December 2007 were equity only transactions.  On December 31,
2008 and June 30, 2008, warrant tranches of 71,429, and 71,429, respectively,
expired without being exercised.





12.
            EQUITY INCENTIVE
      PLAN





On August
22, 2007 the Company adopted an Equity Incentive Plan (the
“Plan”).  Under the Plan, Stock Options may be granted to Employees,
Directors, and Consultants in the form of Incentive Stock Options or
Nonstatutory Stock Options.  Stock Purchase Rights, time vested
and/performance invested Restricted Stock, and Stock Appreciation Rights and
Unrestricted Shares may also be granted under the Plan.  The initial
maximum number of shares that may be issued under the Plan shall be 400,000
shares, and no more than 100,000 Shares of Common Stock may be granted to any
one Participant with respect to Options, Stock Purchase Rights and Stock
Appreciation Rights during any one calendar year period.  Common Stock
to be issued under the Plan may be either authorized and unissued or shares held
in treasury by the Company.  The term of the Plan shall be ten
years.  The Board of Directors may amend, alter, suspend, or terminate
the Plan at any time.





Effective
December 31, 2008, the Company granted 211,000 fully vested incentive stock
options to certain key employees, consultants and officers under the Equity
Incentive Plan.  The fair value of the options was determined to be
$31,650 using the Black-Scholes Model.  Accordingly, the Company
recognized $31,650 as operating expense for the options as of December 31,
2008.


F -
18


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS







13.
            INCOME
      TAXES





The
components of the provision for income tax (benefit) expense are as follows for
the years ended:





December 31, 2008
                    
                    
                    December 31, 2007Current
      taxes:Federal
                    
                    $
                    108,739
                    
                    
                    $
                    (12,196
                    )State
                    
                    
                    23,233
                    
                    
                    
                    (5,626
                    )Current
      taxes
                    
                    
                    131,972
                    
                    
                    
                    (17,822
                    )Change
      in deferred taxes
                    
                    
                    95,441
                    
                    
                    
                    (39,030
                    )Change
      in valuation allowance
                    
                    
                    (8,795
                    )
                    
                    
                    (771
                    )Provision
      for income tax expense (benefit)
                    
                    $
                    218,618
                    
                    
                    $
                    (57,623
                    )








The
following is a summary of the significant components of the Company’s deferred
tax assets and liabilities at December 31, 2008:




Deferred
      tax assets:Stock
      options
            
            $
            10,761Allowance
      for doubtful accounts
            
            
            8,500On-line
      training certificate reserve
            
            
            629Total
      deferred tax assets
            
            
            19,890Valuation
      allowance
            
            
            (19,434
            )Deferred
      tax assets net of valuation allowance
            
            
            456Less:
      deferred tax assets – non-current
            
            
            —Deferred
      tax assets – current
            
            $
            456Deferred
      tax liability:Depreciation
      and amortization timing differences
            
            $
            2,411Less:
      deferred tax liability – non-current
            
            
            2,411Deferred
      tax liability – current
            
            $
            —





The
effective tax rate used for calculation of the deferred taxes as of December 31,
2008 was 34%.


As of
December 31, 2008, the Company fully utilized the federal net operating loss
(“NOL”) carryforward that would have otherwise expired in 2026.  The
Company has established a valuation allowance of $19,434 comprised predominantly
of a 100% reserve against the deferred tax assets attributable to both the stock
options and the allowance for doubtful accounts due to the uncertainty regarding
realization.


F -
19


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS







13.
            INCOME TAXES
      (continued)





The
following is a summary of the significant components of the Company’s deferred
tax assets and liabilities at December 31, 2007:




Deferred
      tax assets:Stock
      warrants
            
            $
            33,769Allowance
      for doubtful accounts
            
            
            3,060Depreciation
      and amortization timing differences
            
            
            22,174Net
      loss carry forward
            
            
            52,936On-line
      training certificate reserve
            
            
            981Total
      deferred tax assets
            
            
            112,920Valuation
      allowance
            
            
            (28,229
            )Deferred
      tax assets net of valuation allowance
            
            
            84,691Less:
      deferred tax assets – non-current
            
            
            (52,363
            )Deferred
      tax assets – current
            
            $
            32,328





The
effective tax rate used for calculation of the deferred taxes as of December 31,
2007 was 34%.


As of
December 31, 2007, the Company has available a net operating loss carry forward
that will expire in 2026. The Company established a valuation allowance for 25%
of the tax benefit due to the uncertainty regarding realization.





The
significant differences between the statutory federal tax rate and the effective
tax rates for the Company for the years ended December 31, 2008 and 2007 are as
follows




December 31, 2008
                        
                        
                        December 31,2007Statutory
      federal tax rate (benefit)
                        
                        
                        34
                        %
                        
                        
                        34
                        %Increase
      (decrease) in rates resulting from:Net
      operating loss
                        
                        
                        5
                        %
                        
                        
                        (1,094
                        )%Stock
      based compensation
                        
                        
                        8
                        %
                        
                        
                        —State
      taxes
                        
                        
                        3
                        %
                        
                        
                        67
                        %Depreciation
      and amortization
                        
                        
                        5
                        %
                        
                        
                        (264
                        )%Allowance
      for doubtful accounts reserve
                        
                        
                        (1
                        )%
                        
                        
                        50
                        %Domestic
      production deduction
                        
                        
                        (2
                        )%
                        
                        
                        —On-line
      training certificate reserve
                        
                        
                        —
                        
                        
                        
                        (460
                        )%Change
      in valuation allowance
                        
                        
                        (2
                        )%
                        
                        
                        (15
                        )%Other
                        
                        
                        —
                        
                        
                        
                        491
                        %Statutory
      federal tax rate (benefit)
                        
                        
                        50
                        %
                        
                        
                        (1,191
                        )%





14.
            PRODUCT
      RECALL





In
September 2008, the Company issued a voluntary product recall as a result of an
internal engineering audit.  Some inconsistencies were discovered with
some components used in the direct drive low-pressure (hookah)
compressors.  These inconsistencies may result in premature wear of
the compressor components and possible cessation of air flow and affected
certain units manufactured since July 2007.  Further details regarding
the product recall are available on the Company’s website, browniedive.com,
Technical Bulletin 080909.  As a result, shipments were temporarily
suspended during part of the third quarter of 2008 to address the
recall.  Recall costs were included as part of fixed labor costs since
the majority of products that were the subject of the recall passed inspection
without any replacement of components necessary.


F -
20


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS







15.
            SUBSEQUENT
      EVENT





Effective
March 3, 2009, the Company entered into an Asset Purchase Agreement with
Robert M. Carmichael, the Chief Executive Officer of the Company.  The
Company purchased several patents it had previously been paying royalties on and
several related unissued patents.  In exchange for the Intellectual
Property, the Company issued Mr. Carmichael 315,000 stock options at a $1.00
exercise price.  For financial reporting purposes the Company has
valued the group of Patents at $0 which is the lower of Mr. Carmichael’s
historical cost as compared to the fair market value of the stock options on the
date of the transaction as determined using the Black-Scholes Valuation
Model.  Accordingly, the Company realized a $63,000 loss on the
transaction, the fair market value of the options granted effective March 3,
2009 less the $0 historical cost.  By acquiring the Intellectual
Property (“IP”) the Company (i) eliminated an estimated $41,000 net discounted
cash flows it would otherwise have had to pay related to the IP through 2018,
(ii) has an opportunity to further develop the IP, (iii) has the ability to
incorporate the IP into current and future products, and (iv) has the
opportunity to license the IP to third parties.


F -
21