Brownie's Marine Group, Inc - FORM 10-K

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EX-32.1 - Brownie's Marine Group, Inc	v178946_ex32-1.htm
EX-32.2 - Brownie's Marine Group, Inc	v178946_ex32-2.htm
EX-31.1 - Brownie's Marine Group, Inc	v178946_ex31-1.htm
EX-31.2 - Brownie's Marine Group, Inc	v178946_ex31-2.htm

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. 1st Street, 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 registered

None	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	o

Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act)

Yes ¨ No x

The aggregate market value of the Company's voting stock held by non-affiliates as of 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 Makers™, 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:

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 Maker™. Nitrox is oxygen-enriched air, which reduces the effects of nitrogen on divers; it is the industry standard for dive professionals. The Nitrox Maker™ 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)/ HELO™ system, a complete mini SCUBA system designed for quick water rescues. The HELO™ 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-PFD™ (Garment Integrated Personal Flotation Device™) 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 PELETON™ Hose System revolutionizes hose management for recreational surface supplied diving. It reduces the work required of any single diver by dispersing the load over the entire group. We use a single, larger diameter hose as a main downline with up to four individual hoses attached to it. This configuration not only reduces the weight and bulk of the hose required, but also reduces drag and entanglement. An entire line of deck-mounted systems is available for commercial applications that demand extremely high performance. In addition to the gasoline-powered units, a series of electric powered systems is also available for light to commercial duty. Powered by battery for portability or household current for virtually unlimited dive duration, these units are used primarily by businesses that work in a marine environment.

E-Reel and Built-in Battery Systems: Taking convenience one step further, the Company has developed two surface supplied air products that it believes makes boat diving even easier. The Built-in Battery System builds a battery powered electric unit into the boat, eliminating the need to transport the compressor/motor assembly. The need for a flotation tube is also removed, as the boat itself serves in that capacity. The E-Reel advances this idea by adding a reel system to provide compact storage of up to 150 feet of hose. Boaters can perform their own in-water maintenance and inspections, or just dive for enjoyment. The hose is manually pulled from the reel supporting up to two divers to a depth of fifty feet. When the dive is complete, the hose is automatically recoiled and stowed by the simple activation of a switch.

Brownie’s Integrated Air Systems (BIAS™): 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.

NitroxMaker™: 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 NitroxMaker™, the user simply dials-in a desired oxygen level from 21% to 40%, eliminating the need to transport and handle pure oxygen. The resulting diving gas mix is monitored with digital oxygen analyzers, removing the calculations required to blend or mix the gas.

Rapid Entry System (RES) and HELO™ System: The Brownie’s Public Safety product line exists to address the needs of the public safety dive market. The inherent speed and ease of donning our Drop Weight Cummerbelt with Egressor Add-on Kit identified it as 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.

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.

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 Lung™, browniedive.com, Brownie’s, Brownie’s Third Lung oval symbol, browniedive, NitroxMaker™, 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:

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.

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.

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.

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.

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.

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 2009
	High Bid		Low Bid
First Quarter	$	.20	$	.15
Second Quarter	$	1.01	$	.13
Third Quarter	$	.25	$	.25
Fourth Quarter	$	.25	$	.25

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

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		0

Equity 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 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.

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.

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.

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.

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 information about 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.

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.

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.

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 Company attributes the overall decline in all product sales to 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.

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 in August 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.

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 than 1 year		1-3 years		3-5 years		More than 5 years

Long-Term Debt Obligations	$	1,439,117	$	384,832	$	383,323	$	201,983	$	468,979

Operating 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.

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.

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.

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 ($)		All Other Compen- sation ($)		Total

Robert 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) Executive compensation 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 Awards

Name

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, 2013

and 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.

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 Class

Common	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 a Group (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.	$	307,412

Promissory 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.		49,315
		356,727

Less amounts due within one year		137,408

Long-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	$	137,408
2011		95,218
2012		82,152
2013		41,949
2014		—
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.	$	333,737

Promissory 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.		67,296

		401,033

Less amounts due within one year		86,677

Long-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.

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, 2008

Accrued interest on Notes payable – related parties	$	18,205	$	4,151

Accounts payable – 940 Associates, Inc.		365		—

Other liabilities – related parties	$	18,570	$	4,151

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.

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.

PART IV

Item 14.

Exhibits, Financial Statements Schedules

Our consolidated financial statements appear beginning at F-1.

Exhibits

Exhibit No.	Description	Location

2.2	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.

Exhibit No.	Description	Location

10.7	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 herewith

31.2	Certification Pursuant to Rule 13a-14(a)/15d-14(a)	Provided herewith

32.1	Certification Pursuant to Section 1350	Provided herewith

32.2	Certification Pursuant to Section 1350	Provided herewith

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. Carmichael
		Robert M. Carmichael
		President, Chief Executive Officer,
		Chief Financial Officer and
		Principal 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. Carmichael
		Robert M. Carmichael
		Director

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-1

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2009 AND 2008		F-2

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008		F-3

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008		F-4

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008		F-5

NOTES 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			2008
ASSETS

Current assets
Cash	$	2,713		$	3,532
Accounts receivable, net of $31,000 and $25,000 allowance for doubtful accounts, respectively		9,704			34,328
Accounts receivable - related parties		14,419			41,059
Inventory		488,694			735,036
Income tax refunds receivable		121,802			—
Prepaid expenses and other current assets		67,078			94,079
Costs and estimated earnings in excess of billings on uncompleted contract		—			287,861
Deferred tax asset, net - current		219			456
Total current assets		704,629			1,196,351

Property, plant and equipment, net		1,165,940			1,199,554

Deferred tax asset, net - non-current		42,685			—
Other assets		6,968			6,968

Total assets	$	1,920,222		$	2,402,873

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Accounts payable and accrued liabilities	$	391,767		$	369,488
Customer deposits		11,365			194,425
Royalties payable - related parties		49,611			42,865
Income taxes payable		—			30,649
Other liabilities		2,921			4,232
Other liabilities and accrued interest - related parties		18,570			4,151
Notes payable - current portion		247,424			244,188
Notes payable - related parties - current portion		137,408			86,677
Total current liabilities		859,066			976,675

Long-term liabilities
Deferred tax liability, net - non-current		—			2,411
Notes payable - long-term portion		834,966			882,410
Notes payable - related parties - long-term portion		219,319			314,356

Total liabilities		1,913,351			2,175,852

Commitments and contingencies

Stockholders' equity
Common 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			1,785
Common stock payable; $0.001 par value; 450,000 shares		502			—
Prepaid equity based compensation		(43,542	)		—
Additional paid-in capital		1,358,333			1,084,216
Accumulated deficit		(1,310,207	)		(858,980	)
Total stockholders' equity		6,871			227,021

Total 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			2008

Net revenues
Net revenues	$	1,840,386		$	3,914,606
Net revenues - related parties		544,319			783,131
Total net revenues		2,384,705			4,697,737

Cost of net revenues
Cost of net revenues		1,644,554			2,903,683
Royalties expense - related parties		69,787			121,040
Total cost of net revenues		1,714,341			3,024,723

Gross profit		670,364			1,673,014

Operating expenses
Selling, general and administrative		911,464			1,108,284
Research and development costs		64,508			26,510
Total operating expenses		975,972			1,134,794

Income (loss) from operations		(305,608	)		538,220

Other (income) expense, net
Other expense, net		202,625			(10,483	)
Interest expense		75,760			68,073
Interest expense - related parties		26,016			42,344
Total other expense, net		304,401			99,934

Net (loss) income before provision for income taxes		(610,009	)		438,286

Provision for income tax (benefit) expense		(158,782	)		218,618

Net (loss) income	$	(451,227	)	$	219,668

Basic (loss) income per common share	$	(0.25	)	$	0.13
Diluted (loss) income per common share	$	(0.25	)	$	0.13

Basic weighted average common shares outstanding		1,785,538			1,727,341
Diluted 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					Total
	Common 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		—			213,000

Operating expense recognized for incentive stock options issued effective December 31, 2008		—		—		—		—		—			31,650		—			31,650

Net income		—		—		—		—		—			—		219,668			219,668

Balance, December 31, 2008		1,785,538		1,785		—		—		—			1,084,216		(858,980	)		227,021

Purchase of issued and pending patents for stock options granted on March 3, 2009		—		—		—		—		—			63,000		—			63,000

Prepaid 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		—			100,000

Common stock payable effective December 30, and 31, 2009 for legal services		—		—		102,140		102		—			64,017		—			64,119

Current period amortization of prepaid equity based compensation		—		—		—		—		3,958			—		—			3,958

Net 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			2008

Cash flows from operating activities:
Net (loss) income	$	(451,227	)	$	219,668
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation		36,614			39,396
Amortization		600			—
Change in deferred tax asset, net		(44,336	)		84,235
Change in deferred tax liability, net		(523	)		2,411
Issuance of equity based stock options		3,958			31,650
Issuance 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			549
Change 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	)		30,649
Change 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			27,602
Net 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		—			228,000
Payment 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	)		203,948

Cash flows from financing activities:
Proceeds from borrowings on notes payable		70,000			200,000
Principal 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			142,516

Cash, end of period	$	2,713		$	3,532

Supplemental disclosures of cash flow information:
Cash paid for interest	$	87,669		$	113,420

Cash paid for income taxes	$	38,528		$	91,408

Supplemental 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.

F-6

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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.

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)

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.

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.

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.

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.

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.

INVENTORY

Inventory consists of the following as of:

	December 31, 2009		December 31, 2008

Raw materials	$	303,230	$	485,367
Work 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, 2008

Building, leasehold improvements, and land	$	1,224,963	$	1,221,362
Furniture, fixtures, vehicles and equipment		115,610		248,787
		1,340,573		1,470,149
Less: 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.	$	307,412

Promissory 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.		49,315

		356,727

Less amounts due within one year		137,408

Long-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	$	137,408
2011		95,218
2012		82,152
2013		41,949
2014		—
Thereafter		—

	$	356,727

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.	$	333,737

Promissory 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.		67,296

		401,033

Less amounts due within one year		86,677

Long-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.

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.

Other liabilities and accrued interest– related parties

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

	December 31, 2009		December 31, 2008

Accrued interest on Notes payable – related parties	$	18,205	$	4,151

Accounts 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.	$	199,990

Promissory 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.		882,400

		1,082,390

Less amounts due within one year		247,424

Long-term portion of notes payable	$	834,966

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

2010	$	247,424
2011		50,907
2012		54,475
2013		58,623
2014		62,915
Thereafter		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.	$	200,000

Promissory 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.		926,598

		1,126,598

Less amounts due within one year		244,188

Long-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

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.

14.	INCOME TAXES

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

	December 31, 2009			December 31, 2008
Current taxes
Federal	$	(108,739	)	$	108,739
State		(5,184	)		23,233
Current taxes		(113,923	)		131,972
Change in deferred taxes		(97,519	)		95,441
Change 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	$	33,527
Allowance for doubtful accounts		10,540
Net operating loss carryforward		72,382
On-line training certificate reserve		438
Total deferred tax assets		116,887
Valuation allowance		(72,095	)

Deferred tax assets net of valuation allowance		44,792

Less deferred tax assets – non-current, net of valuation allowance		44,573

Deferred tax assets – current, net of valuation allowance	$	219

Deferred tax liability
Depreciation and amortization timing differences	$	1,888

Less deferred tax liability – non-current		1,888

Deferred 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	$	10,761
Allowance for doubtful accounts		8,500
On-line training certificate reserve		629
Total deferred tax assets		19,890
Valuation allowance		(19,434	)

Deferred tax assets net of valuation allowance		456

Less deferred tax assets – non-current		—

Deferred tax assets – current	$	456

Deferred tax liability
Depreciation and amortization timing differences	$	2,411

Less deferred tax liability – non-current		2,411

Deferred 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, 2008
Statutory 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

F-22

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Brownie's Marine Group, Inc Reports

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