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,
2009




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   ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232-405 of this
chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files.)


Yes   ̈    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 file   ̈
                      Accelerated
      file
                      oNon-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 January 31, 2009 was approximately $725,456 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 2,287,678 shares of common stock outstanding as of January 31,
2010.














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”,“the Company” or “Brownie’s”), 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. The Company’s common stock is quoted on the OTCBB under the
symbol “BWMG”. The Company’s website is www.Browniesmarinegroup.com.




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 diving and marine based products are generally marketed under the
Brownie’s
Third Lung, Brownie’s Tankfill,and Brownie’s Public
Safety trade names.




Executive
Summary and Business Strategy




From a
garage based business making hookah diving systems in the late 1960’s, the
Company has grown into a niche manufacturing and distribution Company with
dive-oriented products classified into three categories: Brownie’s Third Lung,
Brownie’s Tankfill, and Brownie’s Public Safety.  The Company serves
middle income boat owners, higher income yacht owners, recreational divers, and
military and public safety officers.




The
Company strives for meticulous attention to detail and high quality product
innovation.  We believe in the boat/diving industry Brownie’s Marine
Group is known as the industry standard for surface supplied “family” dive
systems and Scuba Tankfill Systems for yacht diving.  Brownie’s
products and support services begin in shallow-water dive systems and extend
into deep-water with mixed gas support systems for exploration divers and
submersibles/submarines.




The
Company holds numerous patents and has a dedicated product development and
intellectual property program.  For the Company, 2009 produced
milestone achievements in core technologies that translate into new product
development.  We believe the release of new products will clearly
establish Brownie’s as the leader in the diving industry.




The
Company is dedicated to designing and building the world’s finest and most
innovative products, and to setting the industry standard for the world’s best
yacht based diving systems.  While Brownie’s Third Lung hookah diving
units were the very first product sold by the Company, the Company recognized
early on that there was a need for tank filling systems and unique diving
application.  This realization was the catalyst for the addition of
the two product categories: Brownie’s Tankfill and Brownie’s Public
Safety.   Brownie’s Tankfill designs, builds, and sells diving
solutions from marine-ready tank filling compressors, Nitrox MakersTM, complete
dive lockers, and full submarine support systems.  Brownie’s Public
Safety features highly specialized diving gear for rescue and safety
professionals and a unique automatic floatation device for body-armor that can
also be integrated into foul weather jackets, traditional load bearing harnesses
and other garments (GI-PFD).  The following paragraphs further
describe the business and sales models for each of the categories of products
sold:




1


Brownie’s Third Lung hookah
systems have long been a dominant figure in gasoline powered, high-performance,
and feature rich hookah systems. Taking full advantage of the proprietary
compressor system, a complete series of traditional “fixed speed” electric
compressors were developed for the built-in-boat market in 2005. Brownie’s has
never offered for sale a floating battery powered hookah due to the inadequate
performance/runtime afforded by previous technology. After years of inventing,
testing and development, Brownie’s intends to introduce multiple battery powered
models in 2010 that provide performance and runtimes as great as 300% better
than the best device on the market at the end of 2009. Our battery powered
hookah system will provide divers with gasoline-free all day shallow diving
experiences. We believe the multiple inventions incorporated into the
development of this product will produce multiple patents over the next few
years.  The Company has begun the patent application
process.




Brownie’s Tankfill designs,
manufactures, sells and installs Scuba tank fill systems for on-board yacht use
under the brand “Yacht-Pro”.  Brownie’s Tankfill provides complete
diving packages and dive training solutions for yachts.  Brownie’s
Tank Fill installs Nitrox systems which allow yacht owners to fill tanks on
board.  The Yacht-Pro compressor systems offer a completely
marine-prepared, VFD (variable frequency drive)-driven, automated alternative to
other compressors on the market.  Brownie’s Tankfill also designs
complete dive lockers, mixed gas production and distribution systems, and the
unique Nitrox MakerTM.  Nitrox is oxygen-enriched air, which reduces
the effects of nitrogen on divers; it is the industry standard for dive
professionals. The Nitrox MakerTM continuously generates the oxygen rich
breathing gas directly from low-pressure air; no stored oxygen or other gases
are required onboard. We believe a parallel product analogy to this device is
the fresh water-maker that swept through the yachting industry over the last
two-decades.  While less yacht owners may opt for diving systems then
fresh water-makers, there is a broad market potential for yacht owners that will
want to have an uninterrupted supply of the premium breathing gas.




Brownie’s Public Safety
designs, manufactures, distributes, and sells the RES (Rapid Entry System)/
HELOTM system, a complete mini SCUBA system designed for quick water
rescues.  The HELOTM system can be donned in less than 60 seconds
and stored in a briefcase-size padded bag.  Brownie's Public Safety
recently introduced the GI-PFDTM (Garment Integrated Personal Flotation DeviceTM)
System for body armor flotation. This system can reliably support the distressed
or unconscious wearer in a true life-saving position.  This patented
device addresses a heretofore unaddressed need; law-enforcement, coast guard and
military personnel are beginning to wear heavy (life-threatening in the water)
body armor during waterborne patrol, inspection, and surveillance
missions.  The system helps the personnel float in heavy armor,
hopefully saving their lives. Multiple avenues of revenue generation are being
explored for this unique product group in an effort to maximize value to the
Company.




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.




2


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.




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.




3


Rapid Entry
System (RES) and HELOTMSystem:  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 a 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 do not 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, the diver can more easily
control his gear during deployment, further adding to the comfort and
safety.




The
Dive Industry and Growth Strategy




Currently,
we believe that no company in the dive industry offers a complete line of
products and services to serve all divers’ needs.  The dive equipment
manufacturing industry is highly fragmented with multiple manufacturers
producing very similar products.  The top-ten volume leaders in the
dive manufacturing industry provide the same product mix: Scuba BC’s (buoyancy
compensators), regulators, gauges, masks, fins, snorkels, wetsuits, and a few of
the necessary accessories.  These mature companies offer the product
selection to the “diving” market as defined during their original growth phase
of the last 2-3 decades.




New
markets and classes of divers have developed during this period.  The
sport sector of Third Lung and Kayak diving have emerged as a result of snorkel
divers that wanted to sustain depth or Scuba divers that wanted more time in
shallow waters with enhanced efficiency.  SNUBA, a licensing company
with a scuba tank in raft dive system offered purely as a luxury
destination/resort dive experience reports that they have now exceeded the
5-million diver introduction mark (http://www.snuba.com/
did_you_know.asp). We believe our TOOKA device is an improvement over the
SNUBA and we intend to use our TOOKA to enter the introductory diver
market.  Alternatively, more aggressive and affluent Scuba divers have
created the leading or extreme edge of the sport and now use exotic mixed gas
rebreathers, Nitrox/Trimix production devices for home and boat use,
long-duration underwater lights and propulsion vehicles. There are reportedly
some 10-15,000 divers entering the high-tech end of the sport each year. With
millions of snorkels and Snuba type divers giving the sport a try at the surface
while some 10,000 or so venture in the depths, our plan is to focus on the entry
level consumer, introducing more potential customers to diving.




The dive
training, travel, and retail sector is highly fragmented, dominated by many mom
and pop shops.  These shops are typically operated, more as a hobby by
a “lover of diving” than by retail professionals.  A traditional dive
store offers a similar selection to a dive shop of 2-3 decades ago while
marginally representing the product lines of multiple manufacturers. The result
is generally disappointing for both the consumer and the manufacturer. We
believe that consumers prefer shopping for the whole dive experience in one
place beginning with a full array of products and services. The addition of an
audio-visual program throughout the retail facility will help excite the
consumer, educate them about travel and equipment use applications, and keep
them interested in diving. We intend to deliver a retail experience that offers
the full spectrum of education, travel planning, destination outfitting, and
product options to service all types of divers.




Brownie’s
management has prior experience with the purchase and operation of dive shops in
north and south Florida with above standard results (prior to Brownie’s Marine
Group, Inc.).  Based on management experience, the Company believes
that a unique retail strategy can be employed to increase profitability in many
existing retail locations, some that are existing dealers, and to co-locate and
partner in existing outdoor retail establishments and to expand to new locations
as time and conditions permit.




The
Company has also formed a key test market relationship with West Marine in
several Florida locations. West Marine has 375 stores in 38 states, Puerto Rico
and Canada.  Brownie’s unique product line plan is optimized to become
the boater’s first choice in diving.  By co-locating in the West
Marine stores, costs are minimized and exposure is maximized. A sales training
program and improved display systems will be introduced in to this important
channel as part of this new growth plan. We intend to negotiate and enter into
similar relationships with additional retail companies, including, but not
limited to, REI, Bass Pro Shops, and Gander Mountain.




4


The Company has expanded in the past
through internal growth.However,Brownie’s management believes that the
most efficient and effective method of future growth will be to acquire existing
companies and form strategic alliances.




Diving
and Ecotourism Growth Strategy




The
diving, boating and ecotourism markets are key to the expansion of the Brownie’s
brand. Each of these industries has experienced growth over the past several
decades, but we believe each industry also has significant
weaknesses.  The dive industry has focused on the initial
certification of divers for revenue.  According to industry data,
follow up has been poor; causing many divers to quit diving after their first
experience. The Company intends to implement a follow-up program, facilitate
proper selection of equipment for divers, and institute mentoring programs. We
believe an even broader base of consumers will initially be cultivated at the
resort level with the new TOOKA and battery Brownie systems.  Starting
new divers in an easier to master dive objective, such as moving from snorkeling
to hookah, should attract and maintain a greater population of proficient
divers, as “comfortable” divers keep diving.




The
boating industry has been hit hard by the economic downturn coupled with the
recent increase in fuel prices.  We will work with boaters to enhance
their on-water experience by exploiting the diving activities that they can
easily add as an accessory to their investment in boating. Brownie’s OEM BIAS
program will improve the overall value at the manufacturing level and consumer
experience by elimination of waste during the design/build phase. They can blow
their horns, open air-powered doors and dive directly from a BIAS
package.




Finally,
we will work with authentic ecotourism promoters and providers to help protect
our natural resources world while carefully exploring them. We believe these
markets offer tremendous potential to Brownie’s future
growth.  Further, we believe the following points indicate the
inherent attractiveness to the Brownie’s brand:




Divers




·
            Studies
      indicate that there are between 1.6 and 2.4 million active divers in the
      United States, with a 25% increase between 1997 and 2006. (source:
      PADI/DEMA)




·
            There
      are over 500,000 new divers certified each year worldwide by PADI and PADI
      certifies fewer than 50% of divers internationally.  PADI
      certifies approximately 56% of US divers.
(PADI)




·
            In
      2006, PADI provided continuing education certifications for 386,437 divers
      worldwide, this is an increase of 77,607 diver continuing education
      certifications from 2000 when it provided continuing education to 308,830
      divers.  This is an increase of
25%.




Boaters




·
            Use
      increased in outboard, inboard and stern drive boats from
      1997-2006.  The number of boats in use increased from 16.23
      million in 1997 to 17.73 million in 2006, an increase of 1.5 million boats
      in use.  (source:
USCG/NMMA)




·
            Almost
      73 million adults went boating in the US in 2006; this represents 32.1 %
      of the adult population. (source:
NSGA/NMMA)




Tourism:“Travel undertaken for pleasure”(source: International Ecotourism Society)




As the
largest business sector in the world economy, the travel & tourism industry
is responsible for over 230 million jobs and over 10% of the gross domestic
product worldwide.  In over 150 countries, tourism is one of five top
export earners. In 60 countries, tourism is the number one export.




5


Global
Growth of Tourism:




·
            1950:
      25 million tourist arrivals.


·
            1990’s:
      Tourism grew globally at 7% per
year.


·
            2004:
      760 million tourism arrivals corresponded to a 10% global
      growth.


·
            2005:
      The number of international tourist arrivals recorded worldwide grew by
      5.5% and exceeded 800 million for the first time
  ever.


·
            2020:
      Global tourism is forecast to reach 1.56 billion international
      arrivals.




Ecotourists(source: www.ecotourism.org)




Size of Global
Ecotourism:




·
            Beginning
      in 1990s, ecotourism has been growing 20% - 34% per
  year


·
            In
      2004, ecotourism/nature tourism was growing globally 3 times faster than
      the tourism industry as a whole.


·
              Nature
      tourism is growing at 10%-12% per annum in the international
      market.


·
              Sun-and-sand
      resort tourism has now “matured as a market” and its growth is projected
      to remain flat. In contrast, “experiential” tourism—which encompasses
      ecotourism, nature, heritage, cultural, and soft adventure tourism, as
      well as sub-sectors such as rural and community tourism—is among the
      sectors expected to grow most quickly over the next two
      decades.


·
              United
      Nations Environment Program (UNEP) and Conservation International have
      indicated that most of tourism’s expansion is occurring in and around the
      world’s remaining natural
areas.


·
              Sustainable
      tourism could grow to 25% of the world’s travel market within six years,
      taking the value of the sector to US$473.6 billion a
  year.


·
              Analysts
      predict a growth in eco-resorts and hotels, and a boom in nature tourism —
      a sector already growing at 20% a year — and suggest early converts to
      sustainable tourism will make market
gains.




Brownie’s
is closely monitoring the momentum being produced by ecotourism and modeling our
business practices and products to assist in the development of a new class of
divers - shallow-water, low-impact and trendy-Diving Made Easy.




Trade
names and Patents




The
Company has a product development and intellectual property
program.  It holds numerous patents and trademarks on its own and or
through licensing agreements.




Trade
names




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 trade names, 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 owns a number of patents acquired as follows:




6


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.




Effective
March 3, 2009 the Company acquired from Mr. Carmichael, six other patents both
issued and pending, some 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 2009 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.




Effective
December 31, 2009, The Company acquired from Mr. Carmichael six patents, four
issued and the rights to intellectual property in progress.  The four
issued patents relate to Inflatable dive marker and collection
bags.  The intellectual property in progress relates to a three
dimensional dive flag, and a novel dive raft and float system for
divers.




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.




Tradeshows




In 2009,
the Company was represented at the following annual trade shows: Miami Yacht and
Brokerage Show and the Fort Lauderdale International Boat Show.  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’s main website is Browniesmarinegroup.com.  Additionally, all
our products are marketed on our primary customers’ websites.  In
addition, to these websites, numerous other websites have quick links to the
Company’s website.  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.




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, 2009 and 2008, were $64,508 and $26,510, respectively.




7


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.  The Company
sells to three entities owned by the brother of Robert Carmichael, the Companies
Chief Executive officer: Brownie’s Southport Divers, Brownie’s Palm Beach Divers
and Brownie’s Yacht Toys.  Combined sales to these entities for the
years ended December 31, 2009 and 2008 represented 21.18% and 16.34%,
respectively, of total net revenues.  Our largest customer and Brownie
dealer is Brownie’s Southport Divers.  In addition, for the year ended
December 31, 2009 sales to one unrelated customer represented 20.49% of total
net revenues.  Sales to no other customers represented greater than
10% of net revenues for the years ended December 31, 2009 and 2008.




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, 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.




8


Personnel




We
currently have seventeen (17) full time employees and (1) part time employee at
our facility in Fort Lauderdale, Florida:  nine (9) are classified as
exempt sales and administrative or management, and nine (9) are classified as
nonexempt 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 the second and third quarters of the year.  The peak
season for Brownie’s Tankfill’s products is 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.  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.




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.




9


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 with 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.




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.




10


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.




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, 2009
financial statements.




Item
      3.
            Legal
      Proceedings.




None.


11


Item
      4.
            Removed
      and Reserved




PART
II




Item
      5.
              Market
      for Common Equity, Related Stockholder Matters, and Small Business Issuer
      Purchases of Equity
Securities.




The
Company’s common stock is quoted on the Over-the-Counter Bulletin Board under
the symbol “BWMG”.  The Company’s high and low bid prices by quarter
during 2009 and 2008, as provided by the Over the Counter Bulletin Board are
provided below. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions.  On March 12, 2010, the closing price of our common
stock, as reported on the Over-the-Counter Bulletin Board, was $0.99 per
share.




Calendar
      Year 2009High
      Bid
                
                
                Low
      BidFirst
      Quarter
                
                $
                .20
                
                
                $
                .15Second
      Quarter
                
                $
                1.01
                
                
                $
                .13Third
      Quarter
                
                $
                .25
                
                
                $
                .25Fourth
      Quarter
                
                $
                .25
                
                
                $
                .25





Calendar
      Year 2008High
      Bid
                        
                        
                        Low
      BidFirst
      Quarter
                        
                        $
                        1.10
                        
                        
                        $
                        .55Second
      Quarter
                        
                        $
                        1.10
                        
                        
                        $
                        .30Third
      Quarter
                        
                        $
                        1.89
                        
                        
                        $
                        .65Fourth
      Quarter
                        
                        $
                        .90
                        
                        
                        $
                        .15





Holders
of Common Stock




As of
March 12, 2010, 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, 2009.




12


Equity
Compensation Plan Information as of December 31, 2009




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
                                                          
                                                          
                                                          400,000
                                                          
                                                          
                                                          $
                                                          .68
                                                          
                                                          
                                                          
                                                          0Equity
      Compensation Plans Not Approved by Security Holders
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —Total
                                                          
                                                          
                                                          400,000
                                                          
                                                          
                                                          $
                                                          .68
                                                          
                                                          
                                                          
                                                          0




Sales
of Unregistered Securities




During
2009 the Company sold securities without registration under the Securities Act
of 1933 (the “Securities Act”) in reliance upon the exemption provided in
Section 4(2) as described below.  The securities were issued with a
legend restricting their transferability absent registration of applicable
exemption.




Effective
October 1, 2009 and December 1, 2009, the Company granted 75,000 and 115,000,
respectively, of fully vested incentive stock options under the Plan to a total
of four consultants under the Plan.  The fair value of the options was
determined to be $47,500 using the Black-Scholes Model.  The options
were granted for consulting services to be provided over the course of a year.
Accordingly, the Company will recognize consulting expense over the term of the
consulting agreements.  However, as of December 31, 2009, the Company
recorded prepaid equity based compensation and additional paid in capital as a
component of shareholders’ equity for the related consulting services as yet to
be provided as of that date.




Effective
December 30, 2009, the Company issued warrants to purchase 100,000 shares of
restricted common stock for certain legal and advisory services to be performed
in 2010 to an outside attorney.  The warrants are exercisable at $0.25
per share and vest in two tranches of 50,000 each, on June 30, 2010 and December
31, 2010, respectively.  The agreement provides for a cashless
exercise of the tranches. The fair value of the warrants was determined to be
$25,000 using the Black-Scholes Model.  The stock warrants are in lieu
of payment for these services and as such the Company will recognize operating
expense over the term of the agreement.  Accordingly, the Company
recognized $0 as operating expense for the options in the year ended December
31, 2009.




Effective
December 30, 2009, the Company granted 50,000 shares of restricted common stock
to an outside attorney for certain legal and advisory services provided in 2009.
The stock was valued at the fair market price on the effective date of grant, or
$12,500.  Accordingly, the Company recognized $12,500 as legal expense
associated with the stock issue.




Effective
December 31, 2009, the Company entered into a Patent Purchase Agreement with
Robert M. Carmichael, the Chief Executive Officer of the Company.  In
exchange for the Intellectual Property (“IP), the Company granted Mr. Carmichael
400,000 shares of common stock.  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.  Accordingly, the Company realized a $100,000 loss on the
transaction, the fair market value of the stock on the December 31, 2009 grant
date less the $0 historical cost.  By acquiring the IP the Company (i)
has an opportunity to further develop the IP, (ii) has the ability to
incorporate the IP into current and future products, and (iii) has the
opportunity to license the IP to third parties.




13


Pursuant
to an Agreement and Release effective December 31, 2009, the Company
granted 52,140 shares of restricted common stock to an outside attorney for
legal and advisory services valued at $13,035 provided through December 31,
2009.  Accordingly, the stock granted was valued at the fair market
price on the date of the Agreement, or $51,619.  Accordingly, as of
December 31, 2010, $13,035 was recognized as legal expense, and $38,584 was
recognized as a loss on the transaction.




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, 2009 and 2008, BWMG had net loss and net income of
$(451,227) and $219,688, 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:




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.




Property, Plant, and
Equipment – Property, Plant and Equipment 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.




14


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 expenses the costs of producing advertisements and
marketing material at the time production occurs, and expenses the costs of
communicating advertisements and participating in trade shows in the period in
which occur.  Advertising and trade show expense incurred for the
years ended December 31, 2009 and 2008, was $22,105 and $38,948,
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.




Income taxes – The
Company accounts for its income taxes under the assets and liabilities method,
which requires recognition of deferred tax assets and liabilities for future tax
consequences of events that have been included in the financial statements.
Under this method, deferred tax assets and liabilities are determined based on
the differences between the financial statements and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income in the period that
includes the enactment date.




The
Company records net deferred tax assets to the extent the Company believes these
assets will more likely than not be realized.  In making such
determination, the Company considers all available positive and negative
evidence, including future reversals of existing taxable temporary differences,
projected future taxable income, tax planning strategies and recent financial
operations.  A valuation allowance is established against deferred tax
assets that do not meet the criteria for recognition.  In the event
the Company were to determine that it would be able to realize deferred income
tax assets in the future in excess of their net recorded amount, they would make
an adjustment to the valuation allowance which would reduce the provision for
income taxes.




The
Company follows the accounting guidance which provides that a tax benefit from
an uncertain tax position may be recognized when it is more likely than not that
the position will be sustained upon examination, including resolutions of any
related appeals
or litigation processes, based on the technical merits. Income tax positions
must meet a more-likely-than-not recognition threshold at the effective date to
be recognized initially and in subsequent periods.  Also included is
guidance on measurement, derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.




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 all compensation related to
stock, options or warrants using a fair value based method whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is
usually the vesting period.  The Company uses the Black-Scholes
pricing model to calculate the fair value of options and warrants issued to both
employees and non-employees.  Stock issued for compensation is valued
using the market price of the stock on the date of the related
agreement.




15


Effective
December 30, 2009 and December 31, 2009, respectively, the Company granted stock
to two outside attorneys for certain legal services performed in
2009.  See Note 11. STOCK GRANTED FOR LEGAL
SERVICES. Also, the Company granted warrants to purchase common stock for
certain legal services to be performed in 2010 to one of the outside
attorneys.  See Note 12.  STOCK
WARRANTS.




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 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 years ended December
31, 2009 and 2008 since their effect was antidilutive.




Recent
Accounting Pronouncements




On July
1, 2009, the FASB officially launched the FASB ASC 105 –“Generally Accepted
Accounting Principles”, which established the FASB Accounting Standards
Codification (“the Codification”), as the single official source of
authoritative, nongovernmental, U.S. GAAP, in addition to guidance issued by the
Securities and Exchange Commission.  The Codification is designed to
simplify U.S. GAAP into a single, topically ordered structure.  All
guidance contained in the Codification carries an equal level of
authority.  The Codification is effective for interim and annual
periods ending after September 15, 2009.  Accordingly, the Company
refers to the Codification in respect of the appropriate accounting standards
throughout this document as “FASB ASC”.  Implementation of the
Codification did not have any impact on the Company’s consolidated financial
statements.




In August
2009, the FASB issued ASU No. 2009-05 – “Fair Value Measurements and Disclosures
(Topic 820) – Measuring Liabilities at Fair Value”.  This ASU
clarifies the fair market value measurement of liabilities.  In
circumstances where a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more of the following techniques: a technique that uses quoted
price of the identical or a similar liability or liabilities when traded as an
asset or assets, or another valuation technique that is consistent with the
principles of Topic 820 such as an income or market approach.  ASU No.
2009-05 was effective upon issuance and it did not result in any significant
financial impact on the Company upon adoption.




In
September 2009, the FASB issued ASU No. 2009-12 – “Fair Value Measurements and
Disclosures (Topic 820) – Investments in Certain Entities That Calculate Net
Asset Value per Share (or its equivalent)”.  This ASU permits use of a
practical expedient, with appropriate disclosures, when measuring the fair value
of an alternative investment that does not have a readily determinable fair
value.  ASU No. 2009-12 is effective for interim and annual periods
ending after December 15, 2009, with early application
permitted.  Since the Company does not currently have any such
investments, it does not anticipate any impact on its financial statements upon
adoption.




In
October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition
(Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB
Emerging Issues Task Force), which amends ASC 605-25, Revenue Recognition:
Multiple-Element Arrangements. ASU No. 2009-13 addresses how to determine
whether an arrangement involving multiple deliverables contains more than one
unit of accounting and how to allocate consideration to each unit of accounting
in the arrangement. This ASU replaces all references to fair value as the
measurement criteria with the term selling price and establishes a hierarchy for
determining the selling price of a deliverable. ASU No. 2009-13 also
eliminates the use of the residual value method for determining the allocation
of arrangement consideration. Additionally, ASU No. 2009-13 requires
expanded disclosures. This ASU will become effective for revenue arrangements
entered into or materially modified after the fiscal year 2010. Earlier
application is permitted with required transition disclosures based on the
period of adoption. We are currently evaluating the application date and the
impact of this standard on our consolidated financial statements.




16


In June 2009, the FASB issued SFAS No.
167, “Amendments to FASB Interpretation No. 46(R)”.  SFAS No. 167
addresses the effect on FASB Interpretation 46(R), “Consolidation of Variable
Interest Entities” of the elimination of the qualifying special-purpose entity
concept of SFAS No. 166, “Accounting for Transfers of Financial
Assets”.  SFAS No. 167 also amends the accounting and disclosure
requirements of FASB Interpretation 46(R) to enhance the timeliness and
usefulness of informationabout an enterprise’s
involvement in a variable interest entity. This Statement shall be effective as
of the Company’s first interim reporting period that begins after November 15,
2009. Earlier application isprohibited.  The Company
does not anticipate any significant financial impact from adoption of SFAS No.
167. As of December 31, 2009, SFAS No. 167 has not been added to the
Codification.




In June 2009, the FASB issued SFAS No.
166, “Accounting for Transfers of Financial Assets – an amendment of FASB
Statement No. 140”.  SFAS No. 166 amends SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”
by eliminating the concept of special-purpose entity, requiring the reporting
entity to provide more information about sales of securitized financial assets
and similar transactions, particularly if the seller retains some risk to the
assets, changes the requirements for the de-recognition of financial assets, and
provides for the sellers of the assets to make additional
disclosures.This Statement shall be
effective as of the Company’s first interim reporting period that begins after
November 15, 2009. Earlier application is prohibited.  The Company
does not anticipate any significant financial impact from adoption of SFAS No.
166. As of December 31, 2009, SFAS No. 166 has not been added to the
Codification.




In May
2009 and as updated February 2010, the FASB issued FASB ASC 855, “Subsequent
Events”.  This Statement addresses accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or available to be issued.  FASB ASC 855 requires
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date, the date issued.  The Company adopted
this Statement in the second quarter of 2009.  As a result the date
through which the Company has evaluated subsequent events and the basis for that
date have been disclosed in Note 1, Subsequent
Events.




In April
2009, the FASB issued an update to FASB ASC 820, “Fair Value Measurements and
Disclosures”, related to providing guidance on when the volume and level of
activity for the asset or liability have significantly decreased and identifying
transactions that are not orderly.  The update clarifies the
methodology to be used to determine fair value when there is no active market or
where the price inputs being used represent distressed sales.  The
update also reaffirms the objective of fair value measurement, as stated in FASB
ASC 820, which is to reflect how much an asset would be sold in and orderly
transaction, and the need to use judgment to determine if a formerly active
market has become inactive, as well as to determine fair values when markets
have become inactive.  The Company adopted this Statement in the
second quarter of 2009 without significant financial impact.




In April
2009, the FASB issued ASC 320, “Investments – Debt and Equity”, that amends
current other-than-temporary guidance for debt securities through increased
consistency in the timing of impairment recognition and enhanced disclosures
related to credit and noncredit components impaired debt securities that are not
expected to be sold.  Also, the Statement increases disclosures for
both debt and equity securities regarding expected cash flows, securities with
unrealized losses, and credit losses.  The Company adopted this
Statement in the second quarter of 2009 without significant impact to our
financial statements.




In April
2009, the FASB issued an update to FASB ASC 825, “Financial Instruments”, to
require interim disclosures about the fair value of financial
instruments”.  This update enhances consistency in financial reporting
by increasing the frequency of fair value disclosures of those assets and
liabilities falling within the scope of FASB ASC 825. The Company adopted this
update in the second quarter of 2009 without significant impact to the financial
statements.




In April
2009, the FASB issued an update to FASB ASC 805, “Business Combinations”, that
clarifies and amends  FASB ASC 805, as it applies to all assets
acquired and liabilities assumed in a business combination that arise from
contingencies.  This update addresses initial recognition and
measurement issues, subsequent measurement and accounting, and disclosures
regarding these assets and liabilities arising from contingencies in a business
combination.  The Company adopted this Statement in the second quarter
of 2009 without significant impact to the financial statements.




17


In
January 2009, the FASB issued an update to FASB ASC 325, “Investments – Other”,
which amends the impairments guidance on recognition of interest income and
impairment on purchased beneficial interests and beneficial interests that
continue to be held by a transferor in securitized financial assets to achieve
more consistent determination of whether an other-than-temporary impairment has
occurred. The update also retains and emphasizes the objective of an
other-than-temporary impairment assessment and the related disclosure
requirements in FASBASC 320, “Investments – Debt and Equity Securities”, and
other related guidance.  The adoption of this update in the second
quarter of 2009 did not have a significant impact on the Company’s financial
statements.




In
November 2008, EITF issued new guidance under FASB ASC 350, “Intangibles –
Goodwill and Other” on accounting for defensive intangible
assets”.  The new guidance applies to all acquired intangible assets
in which the acquirer does not intend to actively use the asset but intends to
hold (lock up) the asset to prevent its competitors from obtaining or using the
asset (a defensive asset).  This guidance was adopted by the Company
in January 2009 without impact to the financial statements.




In May
2008, the FASB issued an update to FASB ASC 470, “Debt”, with respect to
accounting for convertible debt instruments that may be settled in cash upon
conversion including partial cash settlement.  This update 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 ASC 815, “Derivatives and
Hedging”.  Additionally, this update 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 update 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 update would
apply.  This update was adopted in January 2009 without significant
financial impact.




In March
2008, the FASB issued an update to FASB ASC 815, “Derivatives and
Hedging”.  This update is intended to enhance the current disclosure
framework in FASB ASC 815.  Under this update, 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 FASB ASC 815 and its related interpretations, and (c), how
derivative instruments and related hedged items effect an entity’s financial
position, financial performance and cash flows.  This update is
effective for all financial statements issued for fiscal and interim periods
beginning after November 15, 2008.  The Company does not currently
have any derivative instruments, nor does it engage in hedging activities,
therefore, the Company’s adoption of this update in the first quarter of 2009
was without significant financial impact.




In
December 2007, the FASB issued an update to FASB ASC 805, “Business Combinations
“which 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
adopted this SFAS in the first quarter of 2009 without significant financial
impact.




In
December 2007, the FASB issued an update to FASB ASC 810, “Consolidation”, which
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.
This update is effective for the Company as of January 1, 2009. The Company
adopted this update in January 2009 without significant impact on the
consolidated financial position, results of operations, and
disclosures.




18


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.




Results
of Operations for the Year Ended December 31, 2009, As Compared To the Year
Ended December 31, 2008




Net revenues.  For
the year ended December 31, 2009, we had net revenues of $2,384,705 as compared
to net revenues of $4,697,737 for the year ended December 31, 2008, a decrease
of $2,313,032 or 49.24%.  The decrease is primarily attributable to a
decrease in low pressure hookah system sales of approximately $670,000, and a
decrease in tankfill system sales of approximately $1,630,000.  The
Company had four large custom tankfill projects during the year ended December
31, 2008 that contributed approximately $1,400,000 to net revenues for that
period while there were no comparable sales during the year ended December 31,
2009.  The Companyattributes the overall
decline in all product salesto be reflective of the
depressed state of the economy.  The Company’s products are largely
non-essential, disposable income type items, and therefore are more likely to be
sacrificed by consumers in preference for essential goods during depressed
economic conditions.




Cost of net
revenues.  For the year ended December 31, 2009, we had cost of
net revenues of $1,714,341 as compared with cost of net revenues of $3,024,723
for the year ended December 31, 2008, a decrease of $1,310,382, or
43.32%.  The decrease in cost of net revenues for the year ended
December 31, 2009 as compared to the year ended December 31, 2008 is primarily a
result of the lower net revenues resulting in a related decline in total cost of
material sold.  As a percentage of net revenues, cost of materials
sold for the year ended December 31, 2009 remained fairly constant as compared
to the year ended December 31, 2008, and amounted to approximately $1,060,000 of
the decline in cost of net revenues. The approximate $250,000 balance of the
decline for the year ended December 31, 2009 as compared to the year ended
December 31, 2008 is primarily due to a decline in direct labor resulting from
less overtime, elimination of some royalty expense resulting from the purchase
of underlying patents, reduction in freight expense, and reduction of
subcontract labor.  These measures toward cost reduction and more
efficient labor utilization were in an effort to maximize cash available to
support operations.




Gross profit.  For
the year ended December 31, 2009, we had a gross profit of $670,364 as compared
to gross profit of $1,673,014 for the year ended December 31, 2008, a decrease
of $1,002,650, or 59.93%.  This decrease is primarily attributable to
the decrease in net revenues for the year ended December 31, 2009 as compared to
the year ended December 31, 2008.




Operating
expenses.  For the year ended December 31, 2009, we had total
operating expenses of $975,972 as compared to total operating expenses of
$1,134,794 for the year ended December 31, 2007, a decrease of $158,822, or
14.00%.  Research and development costs increased $37,998, and
selling, general and administrative costs decreased $196,820. The increase in
research and development was primarily for allocation of salaries for increased
time spent on research and development activities during the
period.  The decrease in sales and administrative costs is primarily a
result of a decrease in overall payroll and subcontract costs attributable to
fewer hours worked and less overtime, a reduction in accrued vacation expense
due to more vacation time being taken, and an overall reduction in controllable
costs such as supplies and office expense.  In addition, there was
less travel and advertising for the year ended December 31, 2009 as compared to
year ended December 31, 2008.   These measures toward cost
reduction and more efficient labor utilization were in an effort to maximize
cash available to support operations.




19


Other (income) expense,
net.  For the year ended December 31, 2009, we had other
expense, net of $304,401 as compared to other expense, net of $99,934 for the
year ended December 31, 2008, an increase of $204,467, or
204.60%.  This account is comprised of other (income) expense, net
(“other expense”) and interest expense.  Interest expense for the
period decreased $8,641 and other expense increased $213,108.  The
interest expense decrease is a net of $16,328 decrease in interest expense–
related parties, which was partially offset by a $7,687 increase in other
interest.  The decline in interest expense – related parties is
primarily a result of pay down and retirement of some related party debt inAugust
2008.  The increase in other interest expense is primarily a result of
a higher average credit line balance outstanding for the year ended December 31,
2009 as compared to the year ended December 31, 2008.  Other expense
is comprised of transactions that are of a generally non recurring
nature.  The $213,108 increase in other expense for the period is
primarily a result of $63,000 loss on purchase of Intellectual Property (“IP”)
through issuance of stock options, $100,000 loss on purchase of IP through
issuance of stock, and $38,584 loss on payment of legal expenses through
issuance of stock.  There were no comparable transactions for the same
period in 2008.  The $38,584 loss on payment of legal expenses was the
fair market value of the stock on the date of grant less the fair market value
of the legal expense owed.  The $163,000 loss on the purchase of the
IP was the fair market value of the options granted in exchange for the IP using
the Black-Scholes valuation model plus the fair market value of the stock on the
grant date less the $0 historical cost of Robert M Carmichael, the seller and
Chief Executive Officer of the Company.  By acquiring the 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.




Provision for income tax
benefit.  For the year ended December 31, 2009, we had a
provision for income tax benefit of $158,782, as compared to a provision for
income tax expense of $218,618 for the year ended December 31, 2008, an increase
in provision for income tax benefit of $377,400 or 172.63%.  This
increase is primarily attributable to the net loss for the year ended December
31, 2009 and the utilization of a significant portion of that loss as a
carryback to 2008 to recouperate income taxes paid.




Net loss.  For the
year ended December 31, 2009, we had net loss of $451,227 as compared to net
income of $219,668 for the year ended December 31, 2008, an increase in net loss
of $670,895, or 305.41%.  The increase is attributable to a net
decrease in gross profit of $1,002,650, a decrease in operating expenses of
$158,822, an increase in other expenses, net of $204,467, and an increase in the
provision for income tax benefit of $377,400.




Liquidity
and Capital Resources




As of
December 31, 2009, the Company had cash and current assets of $704,629 and
current liabilities of $859,066, or a current ratio of .82.  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.




On
February 10, 2010, the Company formalized an extension and modification of their
revolving line of credit that matured on December 2, 2009.  Under the
terms of the modification, the balance due under the revolving line of credit
plus accrued interest was termed out with monthly principal and interest
payments of $1,200 bearing an interest rate of $6.5% per annum. The term of the
loan is one year, maturing on February 12, 2011, with a balloon payment of
$198,816.  Related party debt has been subordinated to this
loan.




Effective
December 31, 2009, the Company signed an Independent Consulting and
Advisory Agreement with a registered broker dealer.




Under the
terms of the Independent Consultant and Advisory Agreement, the broker dealer
will provide the Company with business and financial consulting and advisory
services for a period up to 12 months.  In consideration for the
services to be provided to the Company by the broker dealer, the Company has
agreed to pay the broker dealer $5,000 per month commencing with the month of
January 2010.  In an effort to accommodate initial cash flow needs of
the Company, payment will be subject to the receipt of $750,000 under a private
offering.  Prior to receipt of $750,000, the fee shall be accrued and
the Company, at its option, may pay 1/3 of the accrued fee in shares of Common
Stock valued at current market price.  The agreement may be terminated
by the Company at any time without penalty.  Under the agreement, the
broker dealer or its designees shall also purchase for $100, a number of shares
of Common Stock equal to 5% of issued and outstanding number of shares on a
fully diluted basis as of the date of the agreement and an option to purchase
for an additional $100, a number of shares of Common Stock equal to 5% of the
securities sold under a future offering through the broker
dealer.  The shares and option shall vest upon receipt of $750,000
under the offering.  Any offering may result in significant
dilution.




20


If the
Independent Consultant and Advisory Agreement is terminated by the Company
within the first nine months, the Company has the option to repurchase equity
issued to the broker dealer at $0.25 per share within the first three months,
$0.375 per share within the next three months and $0.50 per share in the next
three months.  Furthermore, in the event that the broker dealer is
responsible for introducing the Company to entities that enter into a merger or
acquisition, joint venture, strategic alliance or distribution agreement with
the Company, the Company shall pay the broker dealer an amount equal to 5% of
the value of such transaction.




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, 2009 is adequate to
maintain the Company's operations for at least the next twelve
months.




Contractual
obligations of the Company as of December 31, 2009 are set forth in the
following table:




Payments
due by period


Contractual
      Obligations
                        
                        Total
                        
                        
                        Less than1year
                        
                        
                        1-3
      years
                        
                        
                        3-5
      years
                        
                        
                        More
      than 5
                          yearsLong-Term
      Debt Obligations
                        
                        $
                        1,439,117
                        
                        
                        $
                        384,832
                        
                        
                        $
                        383,323
                        
                        
                        $
                        201,983
                        
                        
                        $
                        468,979Operating
      Lease Obligations
                        
                        
                        31,971
                        
                        
                        
                        7,378
                        
                        
                        
                        22,134
                        
                        
                        
                        2,459
                        
                        
                        
                        —Purchase
      Obligations
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Other
      Long-Term Liabilities Reflected on the Company’s Balance Sheet under
      GAAP
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Total
                        
                        $
                        1,471,088
                        
                        
                        $
                        392,210
                        
                        
                        $
                        405,457
                        
                        
                        $
                        204,442
                        
                        
                        $
                        468,979






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.




Item
      8.
            Financial
      Statements.




Our
consolidated financial statements appear beginning at page F-1.




Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.




None.




Item
      9A.(T)
            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.




21


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, 2009, 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, 2009.




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.




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
            
            47
            
            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.




22


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, except Mr. Carmichael filed a Form 4
late.  The Form 4 contained one transaction covering the issuance of
options effective December 31, 2009.




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 was 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.




23





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, 2009 and 2008 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
                          Compensation
                          ($)
                        
                        
                        All
      Other
                          Compen-
                          sation
                          ($)
                        
                        
                        TotalRobert
      M. Carmichael, President, Principal Executive
                        
                        2009
                        
                        $
                        83,544
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        83,544
                        (2)Officer,
      and Principal Financial Officer
                        
                        2008
                        
                        $
                        105,398
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        15,000
                        (1)
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        102,398
                        (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,
                                                      
                                                      
                                                      100,000
                                                      (1)
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      1.07
                                                      
                                                      December 31,
      2013and
      Principal Financial Officer
                                                      
                                                      
                                                      315,000
                                                      (2)
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      1.00
                                                      
                                                      None


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


(2)
            See
      discussion of options issued for purchase of Intellectual Property as
      disclosed under “Item 13. Certain Relationships and Related Transactions,
      and Director Independence.”




Director
Compensation




None paid
during 2009.




Employment
Agreements




None.




24


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 January 31, 2010 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 2,287,678
shares of common stock outstanding as of January 31, 2010 together with
securities exercisable or convertible into shares of common stock within 60 days
of January 31, 2010 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
January 31, 2010 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
                              
                              
                              1,917,754
                              (1)(2)
                              
                              
                              70.1
                              %Common
                              
                              All
      officers and directors as aGroup
      (1 person)
                              
                              
                              1,917,754
                              (1)(2)
                              
                              
                              70.1
                              %


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


(2)
            Includes
      44,440 shares owned by GKR Associates, LLC, a Company that Mr. Carmichael
      has a financial interest.




Equity
Compensation Plan




See
Equity Incentive Plan Note to the financial statements for the year ended
December 31, 2009 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,
2009:





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.
                    
                    $
                    307,412Promissory
      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, having a carrying value of $1,148,425 at December 31,
      2009, bearing 6.99% interest per annum, due in monthly principal and
      interest payments of $1,980, maturing on February 22,
2012.
                    
                    
                    49,315356,727Less
      amounts due within one year
                    
                    
                    137,408Long-term
      portion of notes payable – related parties
                    
                    $
                    219,319




25




As of
December 31, 2009, principal payments on the notes payable – related parties are
as follows:




2010
                    
                    $
                    137,4082011
                    
                    
                    95,2182012
                    
                    
                    82,1522013
                    
                    
                    41,9492014
                    
                    
                    —Thereafter
                    
                    
                    —$
                    356,727


As of
December 31, 2009, the Company was approximately eight months in arrears on
payments due under the Note payable to the Chief Executive
Officer.  No default notice has been received and the Company plans to
make payments as able.  See Other liabilities and
accrued interest– related parties within this Note for the related
accrued interest also in arrears.




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, having a carrying value of $1,172,227 at December 31,
      2008, 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





Net revenues and accounts
receivable – related parties – The Company sells products to three
entities, Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and
Brownie’s Yacht Toys, owned by the brother of the Company’s Chief Executive
Officer.  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 years ended December 31, 2009 and 2008, was $505,154 and
$767,753, respectively.  Combined net revenues from Robert Carmichael
and 940 Associates, Inc., an entity owned by Robert Carmichael, the Chief
Executive officer, for the years ended December 31, 2009 and 2008 was $39,165
and $15,378, respectively.  Accounts receivable from Brownie’s
SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys
at December  31, 2009, was $10,459, $3,078, and $882,
respectively.  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. at December 31,
2009 was $0 and $0, respectively.  Accounts receivable from Robert
Carmichael and 940 Associates, Inc. at December 31, 2008 was $2,602 and $13,679,
respectively.




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.




26


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
royalty expense for the above agreements for the years ended December 31, 2009
and 2008, was $69,787 and $121,040, respectively.  At December 31,
2008 the Company was approximately one month in arrears on royalty payments
due.  As of December 31, 2009, the Company was approximately twelve
months in arrears on royalty payments due. No default notice has been received
and the Company plans to make payments as able.




Patent Purchase
Agreements – Effective December 31, 2009, the Company entered into a
Patent Purchase Agreement with Robert M. Carmichael, the Chief Executive Officer
of the Company.  In exchange for the Intellectual Property (“IP), the
Company agreed to issue Mr. Carmichael 400,000 shares of common
stock.  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.  Accordingly, the
Company realized a $100,000 loss on the transaction, the fair market value of
the stock on the December 31, 2009 grant date less the $0 historical
cost.  By acquiring the IP the Company (i) has an opportunity to
further develop the IP, (ii) has the ability to incorporate the IP into current
and future products, and (iii) has the opportunity to license the IP to third
parties.




Effective
March 3, 2009, the Company entered into a Patent 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 (“IP), 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 on the March 3, 2009 grant
date using the Black-Scholes valuation model less the $0 historical
cost.  By acquiring the 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.




Other liabilities and
accrued interest– related parties




Other
liabilities and accrued interest– related parties consists of the following
at:




December 31, 2009
                
                
                December 31, 2008Accrued
      interest on Notes payable – related parties
                
                $
                18,205
                
                
                $
                4,151Accounts
      payable – 940 Associates, Inc.
                
                
                365
                
                
                
                —Other
      liabilities – related parties
                
                $
                18,570
                
                
                $
                4,151




27




Principal
Accounting Fees and Services.




Fees
to Auditors Fiscal Year ended December 31, 2009




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,
2009 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, 2009
or services that are normally provided in connection with statutory and
regulatory filings or engagements during the fiscal year ending
December 31, 2009 was $39,819.




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, 2009 were $-0-.




Tax
Fees:  The aggregate fees, including expenses, billed by
principal accountants for tax compliance, tax advice and tax planning during
year 2009 was $5,500.




All Other
Fees:  The aggregate fees, including expenses, billed for all
other services rendered to the Company by principal accountants during year 2009
was $-0-.




Fees
to Auditors Fiscal Year ended December 31, 2008




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, 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 during the year ended December 31, 2008 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 2008
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.




28





PART
IV




Item
      14.
            Exhibits,
      Financial Statements 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, 2002.2.3
                    
                    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, 2002.3.1
                    
                    Articles
      of Incorporation
                    
                    Incorporated
      by reference to Exhibit 3.1 of 10Q for the quarter ended September 30,
      2009 filed on November 13, 2009.3.2
                    
                    Articles
      of Amendment
                    
                    Incorporated
      by reference to the appendix to the Company's Definitive Information
      Statement on Schedule 14C filed July 31, 2007.3.2
                    
                    Bylaws
                    
                    Incorporated
      by reference to Exhibit 3.04 to the Registration Statement on Form
      10-SB.5.1
                    
                    2007
      Stock Option Plan
                    
                    Incorporated
      by reference to the appendix to the Company's Definitive Information
      Statement on Schedule 14C filed July 31, 2007.10.1
                    
                    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,
      2004.10.2
                    
                    Non-Exclusive
      License Agreement - BC Keel Trademark
                    
                    Incorporated
      by reference to Exhibit 10.18 to Form 10QSB for the quarter ended
      June 30, 2005 filed August 15, 2005.10.3
                    
                    Exclusive
      License Agreement – Brownie’s Third Lung, Brownie’s Public Safety,
      Tankfill, and Related Trademarks and Copyrights
                    
                    Incorporated
      by reference to Exhibit 10.20 to Form 10QSB for the quarter ended
      June 30, 2005 filed August 15, 2005.10.4
                    
                    Non-Exclusive
      License Agreement – Garment Integrated or Garment Attachable Flotation Aid
      and/or PFD
                    
                    Incorporated
      by reference to Exhibit 10.22 to Form 10QSB for the quarter ended
      June 30, 2005 filed August 15, 2005.10.5
                    
                    Non-Exclusive
      License Agreement – SHERPA Trademark and Inflatable Flotation Aid/Signal
      Device Technology
                    
                    Incorporated
      by reference to Exhibit 10.24 to Form 10QSB for the quarter ended
      June 30, 2005 filed August 15, 2005.10.6
                    
                    Non-Exclusive
      License Agreement - Tank-Mounted Weight, BC or PFD-Mounted Trim Weight or
      Trim Weight Holding System
                    
                    Incorporated
      by reference to Exhibit 10.25 to Form 10QSB for the quarter ended
      June 30, 2005 filed August 15,
2005.




29





Exhibit No.
                      
                      Description
                      
                      Location10.7
                      
                      Exclusive
      License Agreement – Brownie’s Third Lung and Related Trademarks and
      Copyright
                      
                      Incorporated by
      reference to Exhibit 10.26 to Form 10KSB for the year ended December
      31, 2006 filed April 4, 2007.10.8
                      
                      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 Form 10KSB for the year ended December
      31, 2006 filed April 4, 2007.10.9
                      
                      First
      Mortgage dated February 22, 2007 between Trebor Industries, Inc. and
      Colonial  Bank
                      
                      Incorporated
      by reference to Exhibit 10.29 to Form 10KSB for the year ended December
      31, 2006 filed April 4, 2007.10.10
                      
                      Note
      dated February 22, 2007 payable to GKR Associates, Inc.
                      
                      Incorporated
      by reference to Exhibit 10.30 to Form 10KSB for the year ended December
      31, 2006 filed April 4, 2007.10.11
                      
                      Second
      Mortgage dated February 22, 2007 between Trebor Industries, Inc.
      and  GKR Associates, LLC
                      
                      Incorporated
      by reference to Exhibit 10.31 to Form KSB for the year ended
      December 31, 2006 filed April 4, 2007.10.12
                      
                      Promissory
      Note dated January 1, 2007 payable to Robert M.
      Carmichael
                      
                      Incorporated
      by reference to Exhibit 10.32 to Form 10KSB for the year ended
      December 31, 2006 filed April 4, 2007.10.13
                      
                      Asset
      Purchase Agreement between Trebor Industries, Inc. and Robert
      Carmichael
                      
                      Incorporated
      by reference to Form 8K filed on August 1, 2008.10.14
                      
                      Asset
      Purchase Agreement between Trebor Industries, Inc. and Robert
      Carmichael
                      
                      Incorporated
      by reference to Form 8K filed on March 5, 2009.10.15
                      
                      Asset
      Purchase Agreement between Trebor Industries, Inc. and Robert
      Carmichael
                      
                      Incorporated
      by reference to Form 8K filed on January 19, 2010.14.0
                      
                      Code
      of Ethics
                      
                      Incorporated
      by reference to Exhibit 14 of Form 10K for the year ended December 31,
      2008 filed on March 23, 2009.31.1
                      
                      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




30





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
      31, 2010
              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
      31, 2010
              By:
              /s/ Robert M.
      CarmichaelRobert
      M. CarmichaelDirector









BROWNIE'S
MARINE GROUP, INC.


TABLE
OF CONTENTS FOR CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008





PAGE(S)REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                                
                                F-1CONSOLIDATED
      BALANCE SHEETS AS OF DECEMBER 31, 2009 AND 2008
                                
                                F-2CONSOLIDATED
      STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2009 AND
      2008
                                
                                F-3CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER
      31, 2009 AND 2008
                                
                                F-4CONSOLIDATED
      STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2009 AND
      2008
                                
                                F-5NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                
                                F-6 TO F-22









REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors and Stockholders of
 Brownie's
Marine Group, Inc.
 
 We have
audited the accompanying consolidated balance sheets of Brownie's Marine Group,
Inc. as of December 31, 2009 and 2008, and the related consolidated statements
of operations, stockholders’ equity, and cash flows for each of the years in the
two-year period ended December 31, 2009.  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 audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our 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, 2009 and 2008, and the results of its operations and its cash
flows for each of the years in the two-year period ended December 31, 2009 in
conformity with accounting principles generally accepted in the United States of
America.
 
 
 /s/ L.L.
Bradford & Company, LLC
 March 30,
2010
 Las
Vegas, Nevada




F-1




BROWNIE'S
MARINE GROUP, INC.


CONSOLIDATED
BALANCE SHEETS





December
      31,
                  
                  
                  December
      31,2009
                  
                  
                  2008ASSETSCurrent
      assetsCash
                  
                  $
                  2,713
                  
                  
                  $
                  3,532Accounts
      receivable, net of $31,000 and $25,000 allowance for doubtful
      accounts, respectively
                  
                  
                  9,704
                  
                  
                  
                  34,328Accounts
      receivable - related parties
                  
                  
                  14,419
                  
                  
                  
                  41,059Inventory
                  
                  
                  488,694
                  
                  
                  
                  735,036Income
      tax refunds receivable
                  
                  
                  121,802
                  
                  
                  
                  —Prepaid
      expenses and other current assets
                  
                  
                  67,078
                  
                  
                  
                  94,079Costs
      and estimated earnings in excess of billings on uncompleted
      contract
                  
                  
                  —
                  
                  
                  
                  287,861Deferred
      tax asset, net - current
                  
                  
                  219
                  
                  
                  
                  456Total
      current assets
                  
                  
                  704,629
                  
                  
                  
                  1,196,351Property,
      plant and equipment, net
                  
                  
                  1,165,940
                  
                  
                  
                  1,199,554Deferred
      tax asset, net - non-current
                  
                  
                  42,685
                  
                  
                  
                  —Other
      assets
                  
                  
                  6,968
                  
                  
                  
                  6,968Total
      assets
                  
                  $
                  1,920,222
                  
                  
                  $
                  2,402,873LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable and accrued liabilities
                  
                  $
                  391,767
                  
                  
                  $
                  369,488Customer
      deposits
                  
                  
                  11,365
                  
                  
                  
                  194,425Royalties
      payable - related parties
                  
                  
                  49,611
                  
                  
                  
                  42,865Income
      taxes payable
                  
                  
                  —
                  
                  
                  
                  30,649Other
      liabilities
                  
                  
                  2,921
                  
                  
                  
                  4,232Other
      liabilities and accrued interest - related parties
                  
                  
                  18,570
                  
                  
                  
                  4,151Notes
      payable - current portion
                  
                  
                  247,424
                  
                  
                  
                  244,188Notes
      payable - related parties - current portion
                  
                  
                  137,408
                  
                  
                  
                  86,677Total
      current liabilities
                  
                  
                  859,066
                  
                  
                  
                  976,675Long-term
      liabilitiesDeferred
      tax liability, net - non-current
                  
                  
                  —
                  
                  
                  
                  2,411Notes
      payable - long-term portion
                  
                  
                  834,966
                  
                  
                  
                  882,410Notes
      payable - related parties - long-term portion
                  
                  
                  219,319
                  
                  
                  
                  314,356Total
      liabilities
                  
                  
                  1,913,351
                  
                  
                  
                  2,175,852Commitments
      and contingenciesStockholders'
      equityCommon
      stock; $0.001 par value; 250,000,000 shares authorized, and
                    1,785,538
      and 1,785,538 shares issued and outstanding, respectively
                  
                  
                  1,785
                  
                  
                  
                  1,785Common
      stock payable; $0.001 par value; 450,000 shares
                  
                  
                  502
                  
                  
                  
                  —Prepaid
      equity based compensation
                  
                  
                  (43,542
                  )
                  
                  
                  —Additional
      paid-in capital
                  
                  
                  1,358,333
                  
                  
                  
                  1,084,216Accumulated
      deficit
                  
                  
                  (1,310,207
                  )
                  
                  
                  (858,980
                  )Total
      stockholders' equity
                  
                  
                  6,871
                  
                  
                  
                  227,021Total
      liabilities and stockholders' equity
                  
                  $
                  1,920,222
                  
                  
                  $
                  2,402,873





See
Accompanying Notes to Consolidated Financial Statements


F-2


BROWNIE'S
MARINE GROUP, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS





Year Ended December 31,2009
                        
                        
                        2008Net
      revenuesNet
      revenues
                        
                        $
                        1,840,386
                        
                        
                        $
                        3,914,606Net
      revenues - related parties
                        
                        
                        544,319
                        
                        
                        
                        783,131Total
      net revenues
                        
                        
                        2,384,705
                        
                        
                        
                        4,697,737Cost
      of net revenuesCost
      of net revenues
                        
                        
                        1,644,554
                        
                        
                        
                        2,903,683Royalties
      expense - related parties
                        
                        
                        69,787
                        
                        
                        
                        121,040Total
      cost of net revenues
                        
                        
                        1,714,341
                        
                        
                        
                        3,024,723Gross
      profit
                        
                        
                        670,364
                        
                        
                        
                        1,673,014Operating
      expensesSelling,
      general and administrative
                        
                        
                        911,464
                        
                        
                        
                        1,108,284Research
      and development costs
                        
                        
                        64,508
                        
                        
                        
                        26,510Total
      operating expenses
                        
                        
                        975,972
                        
                        
                        
                        1,134,794Income
      (loss) from operations
                        
                        
                        (305,608
                        )
                        
                        
                        538,220Other
      (income) expense,  netOther
      expense, net
                        
                        
                        202,625
                        
                        
                        
                        (10,483
                        )Interest
      expense
                        
                        
                        75,760
                        
                        
                        
                        68,073Interest
      expense - related parties
                        
                        
                        26,016
                        
                        
                        
                        42,344Total
      other expense, net
                        
                        
                        304,401
                        
                        
                        
                        99,934Net
      (loss) income before provision for income taxes
                        
                        
                        (610,009
                        )
                        
                        
                        438,286Provision
      for income tax (benefit) expense
                        
                        
                        (158,782
                        )
                        
                        
                        218,618Net
      (loss) income
                        
                        $
                        (451,227
                        )
                        
                        $
                        219,668Basic
      (loss) income per common share
                        
                        $
                        (0.25
                        )
                        
                        $
                        0.13Diluted
      (loss) income per common share
                        
                        $
                        (0.25
                        )
                        
                        $
                        0.13Basic
      weighted average common shares outstanding
                        
                        
                        1,785,538
                        
                        
                        
                        1,727,341Diluted
      weighted average common shares outstanding
                        
                        
                        1,785,538
                        
                        
                        
                        1,727,341





See
Accompanying Notes to Consolidated Financial Statements


F-3





BROWNIE'S
MARINE GROUP, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY





Prepaid
                              
                              
                              Additional
                              
                              
                              
                              
                              
                              TotalCommon
      stock
                              
                              
                              Common
      stock payable
                              
                              
                              Equity
      based
                              
                              
                              paid-in
                              
                              
                              Accumulated
                              
                              
                              stockholders'Shares
                              
                              
                              Amount
                              
                              
                              Shares
                              
                              
                              Amount
                              
                              
                              compensation
                              
                              
                              capital
                              
                              
                              deficit
                              
                              
                              equity
      (deficit)Balance,
      December 31, 2007
                              
                              
                              1,685,538
                              
                              
                              
                              1,685
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              839,666
                              
                              
                              
                              (1,078,648
                              )
                              
                              
                              (237,297
                              )Purchase
      of Asset and Patents effective 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
                              )
                              
                              
                              227,021Purchase
      of issued and pending patents for stock options granted on March
      3, 2009
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              63,000
                              
                              
                              
                              —
                              
                              
                              
                              63,000Prepaid
      equity based compensation incentive stock options granted effective
      October 1 and December 1, 2009
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (47,500
                              )
                              
                              
                              47,500
                              
                              
                              
                              —
                              
                              
                              
                              —Purchase
      of Intellectual Property effective December 31, 2008
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              400,000
                              
                              
                              
                              400
                              
                              
                              
                              —
                              
                              
                              
                              99,600
                              
                              
                              
                              —
                              
                              
                              
                              100,000Common
      stock payable effective December 30, and 31, 2009 for legal
      services
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              102,140
                              
                              
                              
                              102
                              
                              
                              
                              —
                              
                              
                              
                              64,017
                              
                              
                              
                              —
                              
                              
                              
                              64,119Current
      period amortization of prepaid equity based
    compensation
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              3,958
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              3,958Net
      loss
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (451,227
                              )
                              
                              
                              (451,227
                              )Balance,
      December 31, 2009
                              
                              
                              1,785,538
                              
                              
                              $
                              1,785
                              
                              
                              
                              502,140
                              
                              
                              $
                              502
                              
                              
                              $
                              (43,542
                              )
                              
                              $
                              1,358,333
                              
                              
                              $
                              (1,310,207
                              )
                              
                              $
                              6,871





See
Accompanying Notes to Consolidated Financial Statements


F-4





BROWNIE'S
MARINE GROUP, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year ended December 31,2009
                  
                  
                  2008Cash
      flows from operating activities:Net
      (loss) income
                  
                  $
                  (451,227
                  )
                  
                  $
                  219,668Adjustments
      to reconcile net (loss) income to net cash provided by (used in)
      operating activities:Depreciation
                  
                  
                  36,614
                  
                  
                  
                  39,396Amortization
                  
                  
                  600
                  
                  
                  
                  —Change
      in deferred tax asset, net
                  
                  
                  (44,336
                  )
                  
                  
                  84,235Change
      in deferred tax liability, net
                  
                  
                  (523
                  )
                  
                  
                  2,411Issuance
      of equity based stock options
                  
                  
                  3,958
                  
                  
                  
                  31,650Issuance
      of common stock for legal services
                  
                  
                  64,119
                  
                  
                  
                  —Gain
      on sale of fixed asset
                  
                  
                  (2,000
                  )
                  
                  
                  —Issuance
      of common stock for intellectual property
                  
                  
                  163,000
                  
                  
                  
                  —Changes
      in operating assets and liabilities:Change
      in accounts receivable, net
                  
                  
                  24,624
                  
                  
                  
                  549Change
      in accounts receivable - related parties
                  
                  
                  26,640
                  
                  
                  
                  (37,424
                  )Change
      in inventory
                  
                  
                  246,342
                  
                  
                  
                  (78,733
                  )Change
      in prepaid expenses and other current assets
                  
                  
                  27,001
                  
                  
                  
                  (12,200
                  )Change
      in costs and estimated earnings in excess of billings on uncompleted
      contract
                  
                  
                  287,861
                  
                  
                  
                  (287,861
                  )Change
      in accounts payable and accrued liabilities
                  
                  
                  22,279
                  
                  
                  
                  (37,896
                  )Change
      in customer deposits
                  
                  
                  (183,060
                  )
                  
                  
                  (91,795
                  )Change
      in income tax refunds receivable
                  
                  
                  (121,802
                  )
                  
                  
                  —Change
      in income taxes payable
                  
                  
                  (30,649
                  )
                  
                  
                  30,649Change
      in other liabilities
                  
                  
                  (1,311
                  )
                  
                  
                  (5,245
                  )Change
      in other liabilities and accrued interest - related
parties
                  
                  
                  14,419
                  
                  
                  
                  (103,358
                  )Change
      in royalties payable - related parties
                  
                  
                  6,746
                  
                  
                  
                  27,602Net
      cash provided by (used in) operating activities
                  
                  
                  89,295
                  
                  
                  
                  (218,352
                  )Cash
      flows from investing activities:Proceeds
      from receivable purchased through issuance of common stock in conjunction
      with asset/patent acquisition
                  
                  
                  —
                  
                  
                  
                  228,000Payment
      for receivable purchased through issuance of common stock in conjunction
      with asset/patent acquisition
                  
                  
                  —
                  
                  
                  
                  (15,000
                  )Sale
      of fixed asset
                  
                  
                  2,000
                  
                  
                  
                  —Purchase
      of fixed assets
                  
                  
                  (3,600
                  )
                  
                  
                  (9,052
                  )Net
      cash (used in) provided by investing activities
                  
                  
                  (1,600
                  )
                  
                  
                  203,948Cash
      flows from financing activities:Proceeds
      from borrowings on notes payable
                  
                  
                  70,000
                  
                  
                  
                  200,000Principal
      payments on notes payable
                  
                  
                  (114,208
                  )
                  
                  
                  (44,832
                  )Principal
      payments on notes payable - related parties
                  
                  
                  (44,306
                  )
                  
                  
                  (279,748
                  )Net
      cash used in financing activities
                  
                  
                  (88,514
                  )
                  
                  
                  (124,580
                  )Net
      change in cash
                  
                  
                  (819
                  )
                  
                  
                  (138,984
                  )Cash,
      beginning of period
                  
                  
                  3,532
                  
                  
                  
                  142,516Cash,
      end of period
                  
                  $
                  2,713
                  
                  
                  $
                  3,532Supplemental
      disclosures of cash flow information:Cash
      paid for interest
                  
                  $
                  87,669
                  
                  
                  $
                  113,420Cash
      paid for income taxes
                  
                  $
                  38,528
                  
                  
                  $
                  91,408Supplemental
      disclosures of non-cash investing activities and future operating
      activities:Prepaid
      equity based compensation for incentive stock options granted effective
      October 1 and December 31, 2009
                  
                  $
                  47,500
                  
                  
                  $
                  —Stock
      options and additional paid in capital issued for purchase of issued and
      pending patents on March 3, 2009
                  
                  $
                  63,000
                  
                  
                  $
                  —Common
      stock  payable and additional paid in capital issued for
      purchase of intellectual property on December 31, 2009
                  
                  $
                  100,000
                  
                  
                  $
                  —Common
      stock and additional paid in capital issued toward patent/asset purchase
      on July 31, 2008
                  
                  $
                  —
                  
                  
                  $
                  213,000





See
Accompanying Notes to Consolidated Financial Statements


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.  The
Company’s common stock is quoted on the OTCBB under the symbol
“BWMG”.




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 2008 financial statement amounts
to conform to the 2009 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.




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.




Property, Plant, and
Equipment – Property, Plant and Equipment 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.




F-6


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





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





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 expenses the costs of producing advertisements and
marketing material at the time production occurs, and expenses the costs of
communicating advertisements and participating in trade shows in the period in
which occur.  Advertising and trade show expense incurred for the
years  ended December 31, 2009 and 2008, was $22,105 and $38,948,
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.





Income taxes – The
Company accounts for its income taxes under the assets and liabilities method,
which requires recognition of deferred tax assets and liabilities for future tax
consequences of events that have been included in the financial statements.
Under this method, deferred tax assets and liabilities are determined based on
the differences between the financial statements and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income in the period that
includes the enactment date.





The
Company records net deferred tax assets to the extent the Company believes these
assets will more likely than not be realized.  In making such
determination, the Company considers all available positive and negative
evidence, including future reversals of existing taxable temporary differences,
projected future taxable income, tax planning strategies and recent financial
operations.  A valuation allowance is established against deferred tax
assets that do not meet the criteria for recognition.  In the event
the Company were to determine that it would be able to realize deferred income
tax assets in the future in excess of their net recorded amount, they would make
an adjustment to the valuation allowance which would reduce the provision for
income taxes.





The
Company follows the accounting guidance which provides that a tax benefit from
an uncertain tax position may be recognized when it is more likely than not that
the position will be sustained upon examination, including resolutions of any
related appeals or litigation processes, based on the technical merits. Income
tax positions must meet a more-likely-than-not recognition threshold at the
effective date to be recognized initially and in subsequent
periods.  Also included is guidance on measurement, derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.





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


F-7


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





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





Stock-based
compensation – The Company accounts for all compensation related to
stock, options or warrants using a fair value based method whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting
period.  The Company uses the Black-Scholes pricing model to calculate
the fair value of options and warrants issued to both employees and
non-employees.  Stock issued for compensation is valued using the
market price of the stock on the date of the related agreement.





Effective
December 30 and December 31, 2009, respectively, the Company granted stock to
two outside attorneys for certain legal services performed in
2009.  See Note 11. STOCK GRANTED FOR LEGAL
SERVICES.  Also, to one of the same attorneys, stock warrants
were granted for certain legal services to be performed in 2010.  See
Note 12.  STOCK
WARRANTS.





Effective
December 1, 2009 and December 31, 2008, the Company granted incentive stock
options to certain key employees, consultants and officers for compensation
under the Equity Incentive Plan.  See Note 10. 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 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 years
ended December 31, 2009 and 2008 since their effect was
antidilutive.





Subsequent events–
We have evaluated all subsequent events through March 31, 2010, the date the
financial statements were issued.





New accounting
pronouncements – On July 1, 2009, the FASB officially launched the FASB
ASC 105 –“Generally Accepted Accounting Principles”, which established the FASB
Accounting Standards Codification (“the Codification”), as the single official
source of authoritative, nongovernmental, U.S. GAAP, in addition to guidance
issued by the Securities and Exchange Commission.  The Codification is
designed to simplify U.S. GAAP into a single, topically ordered
structure.  All guidance contained in the Codification carries an
equal level of authority.  The Codification is effective for interim
and annual periods ending after September 15, 2009.  Accordingly, the
Company refers to the Codification in respect of the appropriate accounting
standards throughout this document as “FASB ASC”.  Implementation of
the Codification did not have any impact on the Company’s consolidated financial
statements.





In August
2009, the FASB issued ASU No. 2009-05 – “Fair Value Measurements and Disclosures
(Topic 820) – Measuring Liabilities at Fair Value”.  This ASU
clarifies the fair market value measurement of liabilities.  In
circumstances where a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more of the following techniques: a technique that uses quoted
price of the identical or a similar liability or liabilities when traded as an
asset or assets, or another valuation technique that is consistent with the
principles of Topic 820 such as an income or market approach.  ASU No.
2009-05 was effective upon issuance and it did not result in any significant
financial impact on the Company upon adoption.


F-8


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





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





New accounting
pronouncements (continued) – In September 2009, the FASB issued ASU No.
2009-12 – “Fair Value Measurements and Disclosures (Topic 820) – Investments in
Certain Entities That Calculate Net Asset Value per Share (or its
equivalent)”.  This ASU permits use of a practical expedient, with
appropriate disclosures, when measuring the fair value of an alternative
investment that does not have a readily determinable fair value.  ASU
No. 2009-12 is effective for interim and annual periods ending after December
15, 2009, with early application permitted.  Since the Company does
not currently have any such investments, it does not anticipate any impact on
its financial statements upon adoption.





In
October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition
(Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB
Emerging Issues Task Force), which amends ASC 605-25, Revenue Recognition:
Multiple-Element Arrangements. ASU No. 2009-13 addresses how to determine
whether an arrangement involving multiple deliverables contains more than one
unit of accounting and how to allocate consideration to each unit of accounting
in the arrangement. This ASU replaces all references to fair value as the
measurement criteria with the term selling price and establishes a hierarchy for
determining the selling price of a deliverable. ASU No. 2009-13 also
eliminates the use of the residual value method for determining the allocation
of arrangement consideration. Additionally, ASU No. 2009-13 requires
expanded disclosures. This ASU will become effective for revenue arrangements
entered into or materially modified after the fiscal year 2010. Earlier
application is permitted with required transition disclosures based on the
period of adoption. We are currently evaluating the application date and the
impact of this standard on our consolidated financial statements.





In June 2009, the FASB issued SFAS No.
167, “Amendments to FASB Interpretation No. 46(R)”.  SFAS No. 167
addresses the effect on FASB Interpretation 46(R), “Consolidation of Variable
Interest Entities” of the elimination of the qualifying special-purpose entity
concept of SFAS No. 166, “Accounting for Transfers of Financial
Assets”.  SFAS No. 167 also amends the accounting and disclosure
requirements of FASB Interpretation 46(R) to enhance the timeliness and
usefulness of informationabout an enterprise’s
involvement in a variable interest entity. This Statement shall be effective as
of the Company’s first interim reporting period that begins after November 15,
2009. Earlier application is prohibited.  The Company does not
anticipate any significant financial impact from adoption of SFAS No. 167. As of
December 31, 2009, SFAS No. 167 has not been added to the
Codification.





In June 2009, the FASB issued SFAS No.
166, “Accounting for Transfers of Financial Assets – an amendment of FASB
Statement No. 140”.  SFAS No. 166 amends SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”
by eliminating the concept of special-purpose entity, requiring the reporting
entity to provide more information about sales of securitized financial assets
and similar transactions, particularly if the seller retains some risk to the
assets, changes the requirements for the de-recognition of financial assets, and
provides for the sellers of the assets to make additional
disclosures.This Statement shall be
effective as of the Company’s first interim reporting period that begins after
November 15, 2009. Earlier application is prohibited.  The Company
does not anticipate any significant financial impact from adoption of SFAS No.
166. As of December 31, 2009, SFAS No. 166 has not been added to the
Codification.





In May
2009 and as updated February 2010, the FASB issued FASB ASC 855, “Subsequent
Events”.  This Statement addresses accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or available to be issued.  FASB ASC 855 requires
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date, the date issued.  The Company adopted
this Statement in the second quarter of 2009.  As a result the date
through which the Company has evaluated subsequent events and the basis for that
date have been disclosed in Note 1, Subsequent
Events.




F-9


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





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





New accounting
pronouncements (continued) – In April 2009, the FASB issued an update to
FASB ASC 820, “Fair Value Measurements and Disclosures”, related to providing
guidance on when the volume and level of activity for the asset or liability
have significantly decreased and identifying transactions that are not
orderly.  The update clarifies the methodology to be used to determine
fair value when there is no active market or where the price inputs being used
represent distressed sales.  The update also reaffirms the objective
of fair value measurement, as stated in FASB ASC 820, which is to reflect how
much an asset would be sold in and orderly transaction, and the need to use
judgment to determine if a formerly active market has become inactive, as well
as to determine fair values when markets have become inactive.  The
Company adopted this Statement in the second quarter of 2009 without significant
financial impact.





In April
2009, the FASB issued ASC 320, “Investments – Debt and Equity”, that amends
current other-than-temporary guidance for debt securities through increased
consistency in the timing of impairment recognition and enhanced disclosures
related to credit and noncredit components impaired debt securities that are not
expected to be sold.  Also, the Statement increases disclosures for
both debt and equity securities regarding expected cash flows, securities with
unrealized losses, and credit losses.  The Company adopted this
Statement in the second quarter of 2009 without significant impact to our
financial statements.





In April
2009, the FASB issued an update to FASB ASC 825, “Financial Instruments”, to
require interim disclosures about the fair value of financial
instruments”.  This update enhances consistency in financial reporting
by increasing the frequency of fair value disclosures of those assets and
liabilities falling within the scope of FASB ASC 825. The Company adopted this
update in the second quarter of 2009 without significant impact to the financial
statements.





In April
2009, the FASB issued an update to FASB ASC 805, “Business Combinations”, that
clarifies and amends  FASB ASC 805, as it applies to all assets
acquired and liabilities assumed in a business combination that arise from
contingencies.  This update addresses initial recognition and
measurement issues, subsequent measurement and accounting, and disclosures
regarding these assets and liabilities arising from contingencies in a business
combination.  The Company adopted this Statement in the second quarter
of 2009 without significant impact to the financial statements.





In
January 2009, the FASB issued an update to FASB ASC 325, “Investments – Other”,
which amends the impairments guidance on recognition of interest income and
impairment on purchased beneficial interests and beneficial interests that
continue to be held by a transferor in securitized financial assets to achieve
more consistent determination of whether an other-than-temporary impairment has
occurred. The update also retains and emphasizes the objective of an
other-than-temporary impairment assessment and the related disclosure
requirements in FASBASC 320, “Investments – Debt and Equity Securities”, and
other related guidance.  The adoption of this update in the second
quarter of 2009 did not have a significant impact on the Company’s financial
statements.





In
November 2008, EITF issued new guidance under FASB ASC 350, “Intangibles –
Goodwill and Other” on accounting for defensive intangible
assets”.  The new guidance applies to all acquired intangible assets
in which the acquirer does not intend to actively use the asset but intends to
hold (lock up) the asset to prevent its competitors from obtaining or using the
asset (a defensive asset).  This guidance was adopted by the Company
in January 2009 without impact to the financial statements.




F-10


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





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





New accounting
pronouncements (continued) – In May 2008, the FASB issued an update to
FASB ASC 470, “Debt”, with respect to accounting for convertible debt
instruments that may be settled in cash upon conversion including partial cash
settlement.  This update 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 ASC 815,
“Derivatives and Hedging”.  Additionally, this update 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 update
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 update would
apply.  This update was adopted in January 2009 without significant
financial impact.





In March
2008, the FASB issued an update to FASB ASC 815, “Derivatives and
Hedging”.  This update is intended to enhance the current disclosure
framework in FASB ASC 815.  Under this update, 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 FASB ASC 815 and its related interpretations, and (c), how
derivative instruments and related hedged items effect an entity’s financial
position, financial performance and cash flows.  This update is
effective for all financial statements issued for fiscal and interim periods
beginning after November 15, 2008.  The Company does not currently
have any derivative instruments, nor does it engage in hedging activities,
therefore, the Company’s adoption of this update in the first quarter of 2009
was without significant financial impact.





In
December 2007, the FASB issued an update to FASB ASC 805, “Business Combinations
“which 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
adopted this SFAS in the first quarter of 2009 without significant financial
impact.





In
December 2007, the FASB issued an update to FASB ASC 810, “Consolidation”, which
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.
This update is effective for the Company as of January 1, 2009. The Company
adopted this update in January 2009 without significant impact on the
consolidated financial position, results of operations, and
disclosures.




2.
            INVENTORY





Inventory
consists of the following as of:





December 31, 2009
                  
                  
                  December 31, 2008Raw
      materials
                  
                  $
                  303,230
                  
                  
                  $
                  485,367Work
      in process
                  
                  
                  —
                  
                  
                  
                  —Finished
      goods
                  
                  
                  185,464
                  
                  
                  
                  249,669$
                  488,694
                  
                  
                  $
                  735,036




F-11


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





3.
            PREPAID EXPENSES AND
      OTHER CURRENT ASSETS





Prepaid
expenses and other current assets totaling $67,078 at December 31, 2009,
consists of $48,645 of prepayments for inventory, $14,116 of prepaid insurance,
$1,651 of prepaid software maintenance, $2,248 sales tax refund due, and $418
other prepaid and expenses and 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.




4.
            PROPERTY, PLANT AND
      EQUIPMENT





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





December 31, 2009
                  
                  
                  December 31, 2008Building,
      leasehold improvements, and land
                  
                  $
                  1,224,963
                  
                  
                  $
                  1,221,362Furniture,
      fixtures, vehicles and equipment
                  
                  
                  115,610
                  
                  
                  
                  248,7871,340,573
                  
                  
                  
                  1,470,149Less:  accumulated
      depreciation and amortization
                  
                  
                  174,633
                  
                  
                  
                  270,595$
                  1,165,940
                  
                  
                  $
                  1,199,554





In the
fourth quarter of 2009, the Company wrote off approximately $125,000 of fully
depreciated furniture, fixtures and equipment.  Accordingly, there was
no financial impact.  The fixed assets were without significant fair
market value individually and in the aggregate.





5.
            CUSTOMER CREDIT
      CONCENTRATIONS





The
Company sells to three entities owned by the brother of Robert Carmichael, the
Companies Chief Executive officer as further discussed in Note 6 – RELATED PARTIES
TRANSACTIONS.  Combined sales to these entities for the years
ended December 31, 2009 and 2008 represented 21.18% and 16.34%, respectively, of
total net revenues.  In addition, for the year ended December 31, 2009
sales to one unrelated customer represented 20.49% of total net
revenues.  Sales to no other customers represented greater than 10% of
net revenues for the years ended December 31, 2009 and 2008.




F-12


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





RELATED PARTIES
TRANSACTIONS





Notes payable – related
parties





Notes
payable – related parties consists of the following as of December 31,
2009:





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.
                      
                      $
                      307,412Promissory
      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, having a carrying value of
      $1,148,425
                        at
      December 31, 2009, bearing 6.99% interest per annum, due in monthly
                        principal
      and interest payments of $1,980, maturing on February 22,
      2012.
                      
                      
                      49,315356,727Less
      amounts due within one year
                      
                      
                      137,408Long-term
      portion of notes payable – related parties
                      
                      $
                      219,319





As of
December 31, 2009, principal payments on the notes payable – related parties are
as follows:





2010
                      
                      $
                      137,4082011
                      
                      
                      95,2182012
                      
                      
                      82,1522013
                      
                      
                      41,9492014
                      
                      
                      —Thereafter
                      
                      
                      —$
                      356,727





As of
December 31, 2009, the Company was approximately eight months in arrears on
payments due under the Note payable to the Chief Executive
Officer.  No default notice has been received and the Company plans to
make payments as able.  See Other liabilities and
accrued interest– related parties within this Note for the related
accrued interest also in arrears.


F-13


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





6.
            RELATED PARTY
      TRANSACTIONS (continued)





Notes payable – related
parties (continued)





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, having a carrying value of
      $1,172,227
                        at
      December 31, 2008, 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





Net revenues and accounts
receivable – related parties – The Company sells products to three
entities, Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and
Brownie’s Yacht Toys, owned by the brother of the Company’s Chief Executive
Officer.  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 years ended December 31, 2009 and 2008, was $505,154 and
$767,753, respectively.  Combined net revenues from Robert Carmichael
and 940 Associates, Inc., an entity owned by Robert Carmichael, the Chief
Executive officer, for the years ended December 31, 2009 and 2008 was $39,165
and $15,378, respectively.  Accounts receivable from Brownie’s
SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys
at December 31, 2009, was $10,459, $3,078, and $882
respectively.  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. at December 31, 2009
was $0 and $0, respectively.  Accounts receivable from Robert
Carmichael and 940 Associates, Inc., and Trebor Industries, Inc. at December 31,
2008 was $2,602 and $13,697, respectively.





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.


F-14


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





6.
            RELATED PARTY
      TRANSACTIONS (continued)





Total
royalty expense for the above agreements for the years ended December 31, 2009
and 2008, was $69,787 and $121,040, respectively.    At
December 30, 2008 the Company was approximately one month in arrears on royalty
payments due.  As of December 31, 2009, the Company was approximately
twelve months in arrears on royalty payments due. No default notice has been
received and the Company plans to make payments as able.





Patent Purchase
Agreements – Effective December 31, 2009, the Company entered into a
Patent Purchase Agreement with Robert M. Carmichael, the Chief Executive Officer
of the Company.  In exchange for the Intellectual Property (“IP), the
Company granted Mr. Carmichael 400,000 shares of common stock.  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.  Accordingly, the Company realized a
$100,000 loss on the transaction, the fair market value of the stock on the
December 31, 2009 grant date less the $0 historical cost.  By
acquiring the IP the Company (i) has an opportunity to further develop the IP,
(ii) has the ability to incorporate the IP into current and future products, and
(iii) has the opportunity to license the IP to third parties.





Effective
March 3, 2009, the Company entered into a Patent 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 (“IP), 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 on the March 3, 2009 grant
date using the Black-Scholes valuation model less the $0 historical
cost.  By acquiring the 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.





Other liabilities and
accrued interest– related parties





Other
liabilities and accrued interest– related parties consists of the following
at:





December 31, 2009
                    
                    
                    December 31, 2008Accrued
      interest on Notes payable – related parties
                    
                    $
                    18,205
                    
                    
                    $
                    4,151Accounts
      payable – 940 Associates, Inc.
                    
                    
                    365
                    
                    
                    
                    —Other
      liabilities – related parties
                    
                    $
                    18,570
                    
                    
                    $
                    4,151




F-15


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





7.
            ACCOUNTS PAYABLE AND
      ACCRUED LIABILITIES





Accounts
payable and accrued liabilities of $391,767 at December 31, 2009 consists of
$232,065 accounts payable trade, $60,574 balance of legal expenses that was a
Company expense prior to the reverse merger with Trebor Industries, Inc.,
$69,981 of accrued payroll and related fringe benefits, $24,000 accrued real
estate taxes, $1,542 of accrued interest, and $3,605 of other accrued
liabilities.





Accounts
payable and accrued liabilities of $369,488 at December 31, 2008 consists of
$226,774 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, $1,487 of accrued
interest, and $1,581 of other accrued liabilities.




8.
            OTHER
      LIABILITIES





Other
liabilities of $2,921 at December 31, 2009 consists of on-line training
liability. Other liabilities of $4,232 at December 31, 2008 consists of $4,193
on-line training liability and $39 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.





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 were redeemed and the related payments were 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.  The Company continues to monitor and maintain a reserve for
certificate redemption that approximates the historical redemption rate that is
10%.


F-16


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





9.
            NOTES
      PAYABLE





Notes
payable consists of the following as of December 31, 2009:





Revolving
      Line of Credit secured by a third mortgage on the real property of the
      Company with a carrying value of $1,148,425 at December 31, 2009, bearing
      interest at the lender’s base rate plus 1.00% per
      annum.  Interest payments are due monthly on the outstanding
      principal balance and the Line of Credit matures on December 2,
      2009.
                    
                    $
                    199,990Promissory
      note payable secured by a first mortgage on the real property of the
      Company having a carrying value of $1,148,425 at December 31, 2009,
      interest at 6.99% per annum, due in monthly principal and interest
      payments of $9,038, maturing on January 22, 2022.
                    
                    
                    882,4001,082,390Less
      amounts due within one year
                    
                    
                    247,424Long-term
      portion of notes payable
                    
                    $
                    834,966





As of
December 31, 2009, principal payments on the notes payable are as
follows:





2010
                    
                    $
                    247,4242011
                    
                    
                    50,9072012
                    
                    
                    54,4752013
                    
                    
                    58,6232014
                    
                    
                    62,915Thereafter
                    
                    
                    608,046$
                    1,082,390





The
Company negotiated an extension and modification of its Revolving Line of Credit
that matured on December 2, 2009. While the Company and the lender generally
agreed to terms of the modification during December 2009, a formal agreement was
not completed until 2010.  See Note 15. SUBSEQUENT EVENTS for
terms and conditions of the modification.


F-17


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





9.
            NOTES PAYABLE
      (continued)





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





Revolving
      Line of Credit secured by a third mortgage on the real property of the
      Company with a carrying value of $1,172,227 at December 31, 2008, bearing
      interest at the lender’s base rate plus 1.00% per
      annum.  Interest payments are due monthly on the outstanding
      principal balance and the Line of Credit matures on December 2,
      2009.
                    
                    $
                    200,000Promissory
      note payable secured by a first mortgage on the real property of 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 interest
      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 balance available under the line of credit was increased
from $100,000 to $200,000 subject to the same terms and conditions with the
exception that the maturity date was extended to December 2,
2009.





10.
            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
October 1, 2009 and December 1, 2009 the Company granted 75,000 and 115,000
incentive stock options, respectively, to certain consultants under the
Plan.  The fair value of the options was determined to be $47,500
using the Black-Scholes Model.  The options that have a term of one
year were issued in conjunction with consulting agreements for certain business
and financial advisory services.  The stock options are in lieu of
payment for these services and as such the Company will recognize operating
expense over the term of the agreements.  Accordingly, the Company
recognized $3,958 as operating expense for the options in the year ended
December 31, 2009. As of December 31, 2009, prepaid equity based compensation
totaled $43,542 and is reflected as a component of shareholders’ equity for the
related consulting services as yet to be provided as of that date.





Effective
December 31, 2008, the Company granted 210,000 fully vested incentive stock
options to certain key employees, consultants and officers under the
Plan.  The fair value of the options was determined to be $31,650
using the using the Black-Scholes Model.  Accordingly, the Company
recognized $31,650 as operating expense for the options as of December 31,
2008.





As of
December 31, 2009 all Stock Options authorized under Plan had been
granted.


F-18


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





11.
            STOCK ISSUED FOR LEGAL
      SERVICES





Effective
December 30, 2009, the Company granted 50,000 shares of restricted common stock
to an outside attorney for certain legal and advisory services provided in 2009.
The stock was valued at the fair market price on the effective date of grant, or
$12,500.  The underlying the stock as granted did not assign a stated
value to the services rendered.  Accordingly, the Company recognized
$12,500 as legal expense associated with the stock issue.  See Note
12. Stock
Warrants for a discussion of the warrants granted.





Pursuant
to an Agreement and Release dated February 9, 2010, the Company granted 52,140
shares of restricted common stock to an outside attorney for legal and advisory
services valued at $13,035 provided through December 31,
2009.   The effective date of the Agreement is stated as December
31, 2009.  Accordingly, the stock granted was valued at the fair
market price on the date of the Agreement, or $51,619.  Accordingly,
as of December 31, 2010, $13,035 was recognized as legal expense, and $38,584
was recognized as a loss on the transaction.




12.
            STOCK
      WARRANTS





Effective
December 30, 2009, the Company issued to an outside attorney warrants to
purchase 100,000 shares of restricted common stock for certain legal and
advisory services to be performed in 2010, as evidenced by a signed
proposal.  The warrants are exercisable at fair market value as of the
date of grant, and will vest in two tranches of 50,000 each, on June 30, 2010
and December 31, 2010, respectively.  In addition, the agreement
provides for a cashless exercise of the tranches.  The fair value of
the warrants was determined to be $25,000 using the Black-Scholes
Model.  The stock warrants are in lieu of payment for these services
and as such the Company will recognize operating expense over the term of the
agreement.  Accordingly, the Company recognized $0 as operating
expense for the options in the year ended December 31, 2009.




F-19


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





13.
            INDEPENDENT CONSULTANT
      AND ADVISORY AGREEMENT




Effective
December 31, 2009, the Company signed an Independent Consulting and
Advisory Agreement with a registered broker dealer.
  Under the
terms of the Independent Consultant and Advisory Agreement, the broker dealer
will provide the Company with business and financial consulting and advisory
services for a period up to 12 months.  In consideration for the
services to be provided to the Company by the broker dealer, the Company has
agreed to pay the broker dealer $5,000 per month commencing with the month of
January 2010.  In an effort to accommodate initial cash flow needs of
the Company, payment will be subject to the receipt of $750,000 under a private
offering.  Prior to receipt of $750,000, the fee shall be accrued and
the Company, at its option, may pay 1/3 of the accrued fee in shares of Common
Stock valued at current market price.  The agreement may be terminated
by the Company at any time without penalty.  Under the agreement, the
broker dealer or its designees shall also purchase for $100, a number of shares
of Common Stock equal to 5% of issued and outstanding number of shares on a
fully diluted basis as of the date of the agreement and an option to purchase
for an additional $100, a number of shares of Common Stock equal to 5% of the
securities sold under a future offering through the broker
dealer.  The shares and option shall vest upon receipt of $750,000
under the offering.  Any offering may result in significant
dilution.
  If the
Independent Consultant and Advisory Agreement is terminated by the Company
within the first nine months, the Company has the option to repurchase equity
issued to the broker dealer at $0.25 per share within the first three months,
$0.375 per share within the next three months and $0.50 per share in the next
three months.  Furthermore, in the event that the broker dealer is
responsible for introducing the Company to entities that enter into a merger or
acquisition, joint venture, strategic alliance or distribution agreement with
the Company, the Company shall pay the broker dealer an amount equal to 5% of
the value of such transaction.




14.
            INCOME
      TAXES





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





December 31, 2009
                    
                    
                    December 31, 2008Current
      taxesFederal
                    
                    $
                    (108,739
                    )
                    
                    $
                    108,739State
                    
                    
                    (5,184
                    )
                    
                    
                    23,233Current
      taxes
                    
                    
                    (113,923
                    )
                    
                    
                    131,972Change
      in deferred taxes
                    
                    
                    (97,519
                    )
                    
                    
                    95,441Change
      in valuation allowance
                    
                    
                    52,660
                    
                    
                    
                    (8,795
                    )Provision
      for income tax (benefit) expense
                    
                    $
                    (158,782
                    )
                    
                    $
                    218,618





The
following is a summary of the significant components of the Company’s deferred
tax assets and liabilities at December 31, 2009:




Deferred
      tax assets:Stock
      options
                      
                      $
                      33,527Allowance
      for doubtful accounts
                      
                      
                      10,540Net
      operating loss carryforward
                      
                      
                      72,382On-line
      training certificate reserve
                      
                      
                      438Total
      deferred tax assets
                      
                      
                      116,887Valuation
      allowance
                      
                      
                      (72,095
                      )Deferred
      tax assets net of valuation allowance
                      
                      
                      44,792Less
      deferred tax assets – non-current, net of valuation
    allowance
                      
                      
                      44,573Deferred
      tax assets – current, net of valuation allowance
                      
                      $
                      219Deferred
      tax liabilityDepreciation
      and amortization timing differences
                      
                      $
                      1,888Less
      deferred tax liability – non-current
                      
                      
                      1,888Deferred
      tax liability – current
                      
                      $
                      —




F-20


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





14.
            INCOME TAXES
      (continued)





The
effective tax rate used for calculation of the deferred taxes as of December 31,
2009 was 34%.  The Company has established a valuation allowance
against deferred tax assets of $72,095 comprised predominantly of a 75% reserve
against the deferred tax assets attributable to the stock options, a 100%
reserve against the allowance for doubtful accounts, and a 50% reserve against
part of the net operating loss that must be carried forward due to the
uncertainty regarding realization.





At
December 31, 2009, the Company had income tax refunds receivable of $121,802
comprised of tax refunds due from the state and federal government of $9,357 and
$112,445, respectively.  The state income tax refund receivable is
attributable to a 2008 state income tax overpayment carried forward into 2009
and not utilized as a result of the Company’s net operating loss in
2009.  The federal income tax refund receivable it attributable to net
operating loss carryback from 2009 to recuperate taxes paid in
2008.





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 liabilityDepreciation
      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 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-21


BROWNIE’S
MARINE GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





14.
            INCOME TAXES
      (continued)





The
significant differences between the statutory tax rate and the effective tax
rates for the Company for the years ended are as follows:





December 31, 2009
                      
                      
                      December 31, 2008Statutory
      tax rate (benefit) expense
                      
                      
                      —
                      %
                      
                      
                      34
                      %Increase
      (decrease) in rates resulting from:Net
      operating loss carryforward or carryback
                      
                      
                      (32
                      )%
                      
                      
                      5
                      %Equity
      based compensation and loss
                      
                      
                      —
                      %
                      
                      
                      8
                      %State
      taxes
                      
                      
                      —
                      %
                      
                      
                      3
                      %Change
      in valuation allowance
                      
                      
                      8
                      %
                      
                      
                      (2
                      )%Depreciation
      and amortization
                      
                      
                      —
                      %
                      
                      
                      5
                      %Domestic
      production deduction
                      
                      
                      —
                      %
                      
                      
                      (2
                      )%Other
                      
                      
                      (2
                      )%
                      
                      
                      ( 1
                      )%Effective
      tax rate (benefit) expense
                      
                      
                      (26
                      )%
                      
                      
                      50
                      %





15.
            SUBSEQUENT
      EVENTS





On
February 10, 2010, the Company formalized an extension and modification of their
revolving line of credit that matured on December 2, 2009.  Under the
terms of the modification, the balance due under the revolving line of credit
plus accrued interest was termed out with monthly principal and interest
payments of $1,200 bearing an interest rate of $6.5% per annum. The term of the
loan is one year, maturing on February 12, 2011, with a balloon payment of
$198,816.  Related party debt has been subordinated to this
loan.


F-22