Director Compensation

Our directors currently do not receive any fees or other compensation for their services as directors, but they are reimbursed for travel and other out-of-pocket expenses in connection with their attendance at meetings of our and Fountain’s Boards of Directors.

Attendance by Directors at Meetings

Board of Directors Meetings. Our Board of Directors met four times during Fiscal 2004. Each director attended 75% or more of the aggregate number of meetings of the Board of Directors and any committees on which he served.

Annual Meetings. Attendance by our directors at Annual Meetings gives directors an opportunity to meet, talk with and hear the concerns of shareholders who attend those meetings, and it gives those shareholders access to our directors that they may not have at any other time during the year. Our Board of Directors recognizes that directors have their own business interests and are not our full-time employees and that it is not always possible for them to attend Annual Meetings. However, our Board’s policy is that attendance by directors at our Annual Meetings is beneficial to us and to our shareholders and that our directors are strongly encouraged to attend each Annual Meeting whenever possible. Four of our seven directors then in office attended our last Annual Meeting held during November 2003.

Committees

As further described below, our Board of Directors has appointed several standing committees, including an Audit Committee and a Corporate Governance Committee that performs the functions of both a nominations committee and a compensation committee.

Audit Committee

Function. The Audit Committee acts under a written charter that was revised and reapproved by our Board of Directors during 2004. Under its revised charter, the Committee, among other things, appoints our independent accountants each year and approves the compensation and terms of engagement of our accountants, approves services proposed to be provided by the independent accountants, and monitors and oversees the quality and integrity of our accounting process and systems of internal controls. The Committee reviews various reports by our independent accountants, including its annual report on our audited consolidated financial statements, and it oversees our internal audit program. A copy of the Audit Committee’s revised charter is attached as an Appendix to this Proxy Statement. The Committee met twice during Fiscal 2004.

Members. Current members of the Audit Committee are David C. Miller - Chairman, George L. Deichmann III and Guy L. Hecker, Jr. We believe that each member of the Committee is “independent” as that term is defined by the current listing standards of The Nasdaq Stock Market.

Our Audit Committee Chairman, David C. Miller, is a certified public accountant with a total of 23 years of experience in public accounting. Our Board of Directors has determined that Mr. Miller is an “audit committee financial expert” as that term is defined by rules of the Securities and Exchange Commission.

Audit Committee Report . Our management is responsible for our financial reporting process, including our system of internal controls and disclosure controls and procedures, and for the preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Our independent accountants are responsible for auditing those financial statements. The Audit Committee oversees and reviews those processes. In connection with the preparation and audit of our consolidated financial statements for Fiscal 2004, the Audit Committee has:

5

Based on that review and discussion, the Audit Committee recommended to our Board of Directors that our audited consolidated financial statements be included in our 2004 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

The Audit Committee:

Corporate Governance Committee

During April 2004, our Board of Directors appointed a new Corporate Governance Committee which will operate under a written charter approved by the Board and perform the function of both a nominations committee and a compensation committee.

Members. Members of the committee are David C. Miller - Chairman, Robert L. Stallings III and A. Myles Cartrette, each of whom we believe is an “independent director” as that term is defined by the current listing standards of The Nasdaq Stock Market. A copy of the Committee’s charter is available to our shareholders on our Internet website at www.fountainpowerboats.com.

Nominations Committee Functions. Our Board of Directors previously did not have a standing nominations committee or any committee serving a similar purpose. In the future, and among other duties and responsibilities assigned to it from time to time, the Corporate Governance Committee will function as a nominations committee by identifying individuals who are qualified to become directors and recommending candidates to the Board for selection as nominees for election as directors at our Annual Meetings and for appointment to fill vacancies on the Board. After receipt of the Committee’s recommendations, the Board will make all final decisions regarding the selection of nominees. Since the Committee was not appointed until late in Fiscal 2004, it did not meet or take any action during the year in its capacity as a nominations committee.

The Committee’s Charter provides that the Committee will consider recommendations of candidates submitted in writing by shareholders and that, in identifying candidates to be recommended to the Board of Directors, the Committee will seek to identify and recommend individuals who have high personal and professional integrity, who demonstrate exceptional ability and judgment, and who, with other members of the Board, will be effective in collectively serving the long-term interests of our shareholders. We intend for the Committee to develop procedures to be followed by shareholders who wish to recommend candidates to the Committee (including deadlines for submitting recommendations and information regarding candidates that shareholders should provide with their recommendations). The Committee also may develop other criteria or minimum qualifications for use in identifying candidates, but it has not yet done so.

Compensation Committee Functions. We are a separate company from Fountain, but Fountain is our wholly-owned subsidiary and the Boards of Directors of the two companies are the same. Our executive officers are compensated by Fountain for their services as officers of that company and, with the exception of stock options, they receive no separate or additional compensation from us. In the past, Fountain’s full Board of

6

Directors considered and took action on matters pertaining to the compensation of executive officers, and neither we nor Fountain had a standing compensation committee. In the future, and among other duties and responsibilities assigned to it from time to time, the Corporate Governance Committee will operate as a compensation committee of the Boards of Directors. In that capacity, it will make recommendations to the Boards regarding the amounts of cash and other compensation paid or provided to our executive officers, the adoption of incentive or other compensation plans, and other compensation and employee benefit matters. After receipt of the Committee’s recommendations, the Boards will make all final decisions regarding executive compensation matters. However, since the Committee was not appointed until late in the year, it did not meet or take any action during Fiscal 2004 in its capacity as a compensation committee or with respect to compensation paid during Fiscal 2004.

Compensation Committee Interlocks and Insider Participation. Reginald M. Fountain, Jr., who serves as Chairman, President, and Chief Executive Officer of both companies, participates in deliberations of Fountain’s Board of Directors pertaining to executive compensation, but he does not participate in deliberations regarding his own compensation. Mr. Fountain is the owner of a company that leases an airplane to Fountain for business purposes. During Fiscal 2004, Fountain paid that company $259,189 in rentals based on actual hours of business use by Fountain. From time to time, Fountain also rents apartments from a company owned by Mr. Fountain as temporary housing for consultants and new employees. During 2004, Fountain paid that company $18,592 in apartment rental fees.

David L. Woods, one of our directors, is co-owner and manager of Pier 57 Boat Sales and Service, which is a Fountain dealer. During Fiscal 2004, Mr. Woods’ dealership purchased 35 boats from Fountain for an aggregate wholesale price of $6,075,775 (approximately 10.5% of Fountain’s aggregate sales for that fiscal year), received payments of approximately $8,000 from Fountain under dealer sales award and promotion programs that are available to all dealers, and paid Fountain approximately $50,000 for parts and non-warranty service work.

David C. Miller, one of our directors, is a certified public accountant. During 2004, he provided us with certain consulting services regarding accounting and tax issues, auditing, and related financial matters, and we paid Mr. Miller $2,000 per month for those services. Our consulting arrangement with Mr. Miller was discontinued on February 29, 2004, and, since that date, he has not provided any consulting services to us or received any consulting fees or other compensation from us.

Board Report on Executive Compensation. Our goal is to provide an executive compensation program that will enable us to attract and retain qualified and motivated individuals as executive officers. Currently, Fountain’s and our executive compensation program includes only: (1) base salary paid by Fountain, (2) cash bonuses paid by Fountain to selected executive officers, (3) stock options we issue to selected employees, and (4) contributions by Fountain to the individual accounts of all participating employees under Fountain’s Section 401(k) plan. In addition, Fountain provides other employee benefit and welfare plans customary for companies its size.

Base salary paid by Fountain to our President and Chief Executive Officer, Reginald M. Fountain, Jr., is set by Fountain’s Board of Directors from time to time based on its evaluation of Mr. Fountain’s individual level of responsibility and performance and, in particular, his historical importance and current leadership and direction in the development and growth of Fountain’s business. Mr. Fountain’s employment agreement entered into with Fountain during 1989 provides for base salary of not less than $104,000. In recent years, he has received base salary at a rate of $350,000 per year with no salary increase. For a portion of Fiscal 2003, Mr. Fountain voluntarily reduced the rate at which salary was paid to him with the result that, during the year, he actually received aggregate salary payments of only $265,385. However, since that salary reduction was voluntary, the amount of the reduction was still treated as taxable compensation to Mr. Fountain even though he did not receive it, and accounting rules required that we account for the net amount of the reduction, after required tax withholdings, as a contribution by Mr. Fountain to our capital. For that reason, Mr. Fountain’s salary for Fiscal 2003 is listed in the Summary Compensation Table below as the full $350,000 on which he was taxed rather than the reduced amount of salary he actually received.

7

Pursuant to his employment agreement, Mr. Fountain may also receive a cash bonus each year equal to 5% of our consolidated net income before deductions for income taxes, but not more than $250,000. The cash bonuses earned by Mr. Fountain for Fiscal 2004 and 2003 were calculated pursuant to that arrangement and are shown in the Summary Compensation Table below. No cash bonuses were earned for Fiscal 2002.

Salary paid by Fountain to our Chief Financial Officer, Irving L. Smith, is approved by the Board of Directors. Mr. Smith’s salary for Fiscal 2004, 2003, and 2002 is shown in the Compensation Table below.

The salaries and cash bonuses paid to Fountain’s other officers are determined by Mr. Fountain based on his judgment of the levels of responsibility, qualifications, experience, and performance of the individual officers, as well as the company’s size, complexity, growth, and financial performance. The amounts of contributions to the separate accounts of officers under Fountain’s 401(k) plan are determined solely by the terms of that plan. Except as described above with respect to Mr. Fountain’s cash bonus, the performance review process and, thus, the setting of salaries and the awarding of cash bonuses, largely are subjective and there are no specific formulae, objective criteria, or other such mechanisms by which the salary of, or the amount of the cash bonus paid to, any officer, including Mr. Fountain, are tied empirically to his individual performance or to Fountain’s financial performance.

Section 162(m) of the Internal Revenue Code of 1986, as amended, limits the deductibility of annual compensation in excess of $1,000,000 paid to certain executive officers of public corporations. As none of the companies’ officers receive annual compensation approaching that amount, Fountain’s Board of Directors has not yet adopted a policy with respect to Section 162(m).

In the future, the Corporate Governance Committee will operate as a compensation committee of our and Fountain’s Boards of Directors and make recommendations to the Boards regarding the amounts of cash and other compensation paid or provided to our executive officers, the adoption of incentive or other compensation plans, and other compensation and employee benefit matters. After receipt of the Committee’s recommendations, the Boards still will make all final decisions regarding executive compensation matters.

Fountain’s Board of Directors:

Executive Officers

We consider Fountain’s and our officers who are listed below to be our executive officers.

Reginald M. Fountain, Jr . , age 64, currently serves as our and Fountain’s Chairman, President, and Chief Executive Officer. He founded Fountain during 1979 and became our Chief Executive Officer upon our acquisition of Fountain during 1986.

Irving L. Smith , age 61, was appointed to serve as our and Fountain’s Chief Financial Officer during March 2003. Prior to that, he served as our Director for Information Technology from March 2001 through February 2003. Previously, he was President and owner of ISA Group, Inc., a financial, manufacturing and information technology consulting firm.

Robert D. Knight, age 47, was appointed to serve as Fountain’s Executive Vice President of Business Development on September 15, 2004. Prior to becoming our employee, he served as Vice President of Invensys, where he had been employed for 12 years. The company engaged in energy services automation, controls and process solutions.

8