ITEM 2. MANAGEMENT'S PLAN OF OPERATION AND DISCUSSION AND ANALYSIS

Introductory Statements

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.

Overview

United Companies Corporation, a Nevada corporation, entered into a Share Exchange Agreement, dated March 23, 2004, by and among United, Trebor Industries, Inc., d/b/a Brownie's Third Lung, a Florida corporation, and Robert Carmichael. Pursuant to the Share Exchange Agreement, Mr. Carmichael exchanged 377 shares of common stock, par value $1.00 per share, of Trebor, which constitutes all of the issued and outstanding shares of capital stock of Trebor, for 95,000,000 shares of common stock, par value $0.001 per share, of United. Pursuant to the Share Exchange Agreement, Trebor became a wholly owned subsidiary of United.

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 United's Executive Vice-President and Chief Operating Officer. Mr. Carmichael has operated Trebor Industries, Inc. as its President since 1986. He is the holder or co-holder of numerous patents that are used by Trebor Industries, Inc. and several other major players in the diving industry. Prior to the share exchange transaction with Trebor, United had no on-going operations. United had been seeking potential operating businesses and business opportunities, with the intent to acquire or merge with such businesses.

On February 12, 2002, United filed with the Securities and Exchange Commission a Form S-4 Proxy Statement and Registration Statement in conjunction with Avid Sportswear & Golf Corp., a Nevada corporation, describing a proposed merger of Avid with and into Merger Co., a wholly-owned subsidiary of United. On January 28, 2003, the Commission declared the Form S-4 Proxy Statement and Registration Statement effective. At a special meeting of Avid shareholders held on February 20, 2003, the shareholders approved (i) the Merger Agreement, dated June 18, 2002, by and among Avid, United and Merger Co. and (ii) the related Articles of Merger. Merger Co. became the surviving entity and assumed all of Avid's assets and liabilities. At the time of the merger, outstanding shares of Avid common stock were converted automatically into shares of United common stock on a fifty (50) for one (1) basis. In the opinion of Avid's management, the excess of Avid's liabilities over its assets and the lack of available funding made any other acquisition or merger, other than the merger with Merger Co., unlikely.

Effective March 23, 2004, United sold all of its ownership interest in its wholly-owned subsidiary, Merger Co., to Gateway Connections Limited, an international business company formed under the laws of Belize.

United through its wholly owned subsidiary Trebor Industries, Inc., does business under the name "Brownie's Third Lung." Brownie's designs, tests, manufactures and distributes recreational hookah diving, and yacht based SCUBA air compressor and Nitrox Generation Systems. Brownie's also designs, develops and produces a line of SCUBA and water safety products targeted at the public safety diver and recreational boating markets. Brownie's sells its products from its headquarters and factory in Fort Lauderdale, Florida.

Financial Performance

United has a history of losses. Trebor Industries, Inc. acquired by share exchange on March 23, 2004, has historically had both profitable and unprofitable years. For the year ended December 31, 2004, United sustained losses of $510,922, which includes United's wholly owned subsidiary Trebor Industries, Inc. For the year ended December 31, 2003, United sustained a loss of $187,069, which solely reflects the operations of Trebor Industries, Inc. For the three and six months ended June 30, 2005, United had net income and net loss of $63,992 and $(6,403), respectively.

Results Of Operations For The Three Months Ended June 30, 2005, As Compared To The Three Months Ended June 30, 2004

The following discussion of United's results of operations compares United's three months ended June 30, 2005, results of operations with United's three months ended June 30, 2004.

Net Revenues. For the three months ended June 30, 2005, we had net revenues of $856,721 as compared to net revenues of $726,106 for the three months ended June 30, 2004, an increase of $130,615 or 17.99%. This net increase is primarily attributable to an individual customer sale of air banks in the second quarter of 2005 for approximately $250,000, combined with a decrease of approximately $120,000 in hookah system, tank fill system, and public safety system sales. We believe the overall decrease in the hookah and tank fill system sales in the second quarter of 2005 as compared to the second quarter of 2004 is attributed to new programs introduced in 2005: an annual buy program for Brownie dealers, and an OEM pricing program for yacht builders. Both of these programs serve to better facilitate revenue recognition more evenly throughout the year instead of seasonal highs and lows. This is evident in the results for the six months ended June 30, 2005 in that overall sales for hookah and tank fill systems is up from the same period in 2004. Public safety system sales were down approximately $6,000 from the second quarter of 2004 compared to the second quarter of 2005. This decline is attributed to the scale back of sales promotion in this area in favor of marketing efforts to seek one large dealer for public safety system sales. Toward this end, the Company was successful in signing a sales contract during the second quarter of 2005 and as a result, we anticipate sales will more than double in the Public Safety category by the year ended 2005 compared to the year ended 2004.

Cost of Revenues. For the three months ended June 30, 2005, we had cost of revenues of $494,120, as compared with cost of revenues of $498,826 for the three months ended June 30, 2004, a decrease of $4,706 or 0.94%. Total material cost as a percentage of net revenues remained fairly consistent in the three months ended June 30, 2005 as compared to same period in 2004 with a .72% decline. This slight decline is a net of an approximate 5% decline in the material cost of the hookah systems, an increase of approximately 11% in the material cost of tank fill systems primarily as a result of the increase in cost of steel, gauges, fittings, silencers, and other components, and a lower than average material cost on an approximately $250,000 air bank system sale made during the second quarter of 2005. Manufacture of the air bank system was more labor intensive than material cost intensive. As an added cost savings measure, instead of using overtime direct labor to complete the air bank systems, salaried management did the bulk of the labor on the project during after hours, further reducing the cost of revenues. Overall material cost for the three months ended June 30, 2005 compared to the three months ended June 30, 2005, was $47,380 higher as a result of the net between the increase in material cost as a result of the higher sales volume reduced by overall material cost percentage decrease attributed to the air bank system sale. In addition, cost reductions of approximately $52,000 for the second quarter 2005 compared to the second quarter of 2004 were recognized in the following areas: an approximate $13,000 reduction in direct labor, about $11,000 reduction in subcontract labor, about a $15,000 reduction in overhead allocation, approximately a $5,000 decrease in freight expense, sale of scrap inventory reducing scrap cost by about $4,500, a decrease in supplies expense of about $1,600, and a $1,900 decrease in other expenses.

Gross Profit. For the three months ended June 30, 2005, we had a gross profit of $362,601, as compared to gross profit of $227,280 for the comparable period in 2004, an increase of $135,321 or 59.54%. This is primarily attributable to an increase in sales and the lesser net increase in cost of revenues as well as the approximate $52,000 other cost reductions as further detailed in Cost of Revenues for the three months ended June 30, 2005 compared to the three months ended June 30, 2004.

Operating Expense. For the three months ended June 30, 2005, we had total operating expenses of $255,393, as compared to total operating expenses of $350,716 for the three months ended June 30, 2004, a decrease of $95,323 or 27.18%. This decrease is attributable to a decrease in research and development expense of $14,808 and a decrease in other operating costs of $80,515. Overall the Company has been implementing cost cutting measures across the board to improve profitability and cash flows. The most significant of the operating expense reductions for the three months ended June 30, 2005, as compared to the three months ended June 30, 2004, are in legal expense and royalty expense, decreases of $56,517, and $14,915 respectively. We attribute the decrease in legal expense to two factors: (1) the Company had high legal costs in the second quarter of 2004 related to the merger between United Companies Corporation and Trebor Industries, Inc., and preparation of all the related documents including convertible debenture and standby equity distribution agreements, and (2) the Company's consultants have assumed at a lesser cost to the Company many of the non-attorney specific services previously done by the attorneys. The decrease in royalty expense is directly attributable to the renegotiated royalty agreements effective January 1, 2005, that provide for a 75% royalty reduction during the year ended 2005. Research and Development (R&D) cost has predominantly been an allocation of in-house labor from its various functional categories to R&D for time spent in this area. In line with cost cutting measures and to focus on profits and cash flows, labor was utilized more in the area of generating revenue instead of R&D in the second quarter of 2005 as compared to the second quarter of 2004.

Interest Expense. For the three months ended June 30, 2005, we had interest expense of $21,983, as compared to $307,713 for the three months ended June 30, 2004, a decrease of $285,730 or 92.86%. This net decrease is primarily attributable to interest of $285,714 that was recorded in the second quarter of 2004 on the beneficial conversion feature of the convertible debenture issued in that quarter.

Net Loss. For the three months ended June 30, 2005, we had a net income of $63,992, as compared to a net loss of $428,422 for the three months ended June 30, 2004, an increase in net income of $492,414 or 114.94%. The increase is primarily attributable to the increase in Gross Profit, decrease in Operating Expenses, and decrease in Other Expenses in the second quarter of 2005 as compared to the second quarter of 2004.

Results Of Operations For The Six Months Ended June 30, 2005, As Compared To The Six Months Ended June 30, 2004

The following discussion of United's results of operations compares United's six months ended June 30, 2005, with United's results of operations for six months ended June 30, 2004.

Net Revenues. For the six months ended June 30, 2005, we had net revenues of $1,547,063 as compared to net revenues of $1,172,365 for the six months ended June 30, 2004, an increase of $374,698 or 31.96%. This net increase is primarily attributable to a large individual customer sale of air banks for approximately $250,000 in the second quarter of 2005, as well as an overall increase in hookah system and tankfill system sales during the six months ended June 30, 2005 as compared to the six months ended June 30, 2004. We believe the increase in hookah system sales is largely a result of successful efforts to expand our hookah market beyond the Scuba dive retailers and into sporting goods and boating retailers. We also believe our marketing efforts to reach owners of large vessels for tank fill system sales by establishing OEM relationships with yacht builders, is proving successful. We presented an OEM package to the major yacht builders attending the most recent Fort Lauderdale International Boat Show, the Yacht Brokerage Show in Miami, and the Palm Beach Boat Show. In response to our presentations, during the first quarter of 2005, two large boat builders signed on to the OEM program.

Cost of Revenues. For the six months ended June 30, 2005, we had cost of revenues of $986,350, as compared with cost of revenues of $844,671 for the six months ended June 30, 2004, an increase of $141,679 or 16.77%. Overall material cost for the six months ended June 30, 2005 was approximately $193,151 higher than for the six months ended June 30, 2004. The increase is predominately a result of higher sales volume thus resulting in higher material cost. Additionally for the six months ended June 30, 2005, material cost as a percentage of net revenues increased approximately 2.6% as compared to the six months ended June 30, 2004. This net increase is attributed to a number of factors including higher than average material cost on items that the Company acts as a dealer for, lower than average material cost on a large air bank sale in the second quarter of 2005 that was more labor than material intensive, an overall decrease in the cost of material used in the hookah systems, and a second quarter 2005 increase in the cost of material used in the tankfill systems, particularly, increases in the cost of stainless steel, fittings, gauges and silencers. In addition, net cost reductions of approximately $51,000 for the six months ended June 30, 2005, compared to the six months ended June 30, 2004, were recognized in the following areas: an approximate $24,000 reduction in direct labor, about $9,000 reduction in subcontract labor, about a $24,000 reduction in overhead allocation, approximately a $9,000 increase in freight expense, and a decrease in supplies expense of about $3,000.

Gross Profit. For the six months ended June 30, 2005, we had a gross profit of $560,713, as compared to gross profit of $327,694 for the comparable period in 2004, an increase of $233,019 or 71.11%. This is primarily attributable to an increase in sales and the lesser net increase in cost of revenues as well as the approximate $51,000 cost reductions as further detailed in Cost of Revenues for the six months ended June 30, 2005, compared to the six months ended June 30, 2004.

Operating Expense. For the six months ended June 30, 2005, we had total operating expenses of $499,257, as compared to total operating expenses of $614,488 for the six months ended June 30, 2004, a decrease of $115,231 or 18.75%. This decrease is attributable to a decrease in research and development expense of $24,597 and a decrease in other operating costs of $90,634. Overall the Company has been implementing cost cutting measures across the board to improve profitability and cash flows. The most significant of the operating expense reductions for the six months ended June 30, 2005 as compared to the six months ended June 30, 2004 are in legal expense and royalty expense, decreases of $52,174, and $28,735, respectively. We attribute the decrease in legal expense to two factors: (1) the Company had high legal costs in the second quarter of 2004 related ongoing matters related to the merger between United Companies Corporation and Trebor Industries, Inc. in March of 2004, and preparation of all the related documents including convertible debenture and standby equity distribution agreements that had effective dates in April 2004, and (2) the Company's consultants have assumed at a lesser cost to the Company many of the non-attorney specific services previously done by the attorneys. The decrease in royalty expense is directly attributable to the renegotiated royalty agreements effective January 1, 2005, that provide for a 75% royalty reduction period during the year ended 2005. Research and Development (R&D) cost has predominantly been an allocation of in-house labor from its various functional categories to R&D for time spent in this area. In line with cost cutting measures and to focus on profits and cash flows, labor was utilized more in the area of generating revenue instead of R&D in during the six months ended June 30, 2005, as compared to the same period in 2004.

Interest Expense. For the six months ended June 30, 2005, we had interest expense of $44,585, as compared to $327,344 for the six months ended June 30, 2004, a decrease of $282,759 or 86.38%. This net decrease is primarily attributable to interest of $285,714 that was recorded in the second quarter of 2004 on the beneficial conversion feature of the convertible debenture issued in that quarter.

Net Loss. For the six months ended June 30, 2005, we had a net loss of $6,403, as compared to a $614,524 net loss for the six months ended June 30, 2004, a decrease of $608,121 or 98.96%. The decrease is primarily attributable to the increase in Gross Profit, decrease in Operating Expenses, and decrease in Other Expenses for the six months ended June 30, 2005 as compared to the same period in 2004.

Liquidity And Capital Resources

As of June 30, 2005, we had cash and current assets of $548,773. As of June 30, 2005, we had current liabilities of $643,410, consisting primarily of accounts payable and accrued liabilities $516,357, customer deposits of $59,288, other liabilities of $22,382, notes payable - current portion of $9,682, notes payable - current portion - related parties of $31,217, and loan payable - related party of $4,484. As of June 30, 2005, we had a working capital deficit of $94,637. It appears that external financing will be necessary to fund some of our operations for the foreseeable future.

On April 2, 2004, we entered into a Standby Equity Distribution Agreement with Cornell Capital Partners. Pursuant to the Standby Equity Distribution Agreement, we may, at our discretion, periodically issue and sell shares of our common stock for a total purchase price of $5 million. If we request advances under the Standby Equity Distribution Agreement, Cornell Capital partners will purchase shares of common stock of United for 95% of the lowest closing bid price on the Over-the-Counter Bulletin Board or other principal market on which our common stock is traded for the 5 days immediately following the advance notice date. Cornell Capital Partners will retain 5% of each advance under the Standby Equity Distribution Agreement. We may not request advances in excess of a total of $5 million. The maximum of each advance is equal to $100,000, and up to a maximum of $400,000, in the aggregate, in any thirty-day period.

As of April 2, 2004, we issued a Secured Convertible Debenture to Cornell Capital Partners in the principal amount of $250,000. The convertible debenture is convertible into shares of our common stock as a price per share that is equal to the lesser of: (i) an amount equal to 120% of the closing bid price of our common stock as of the date of the convertible debenture or (ii) an amount equal to 80% of the average of the lowest daily volume weighted average price of our common stock for the five trading days immediately preceding the conversion date. The convertible debenture accrues interest at a rate of 5% per year and is convertible at the holder's option. The convertible debenture has a term of 3 years. At United's option, the convertible debenture may be paid in cash or converted into shares of our common stock unless converted earlier by the holder. Except after an event of default, as set forth in the Secured Convertible Debenture be entitled to convert such debenture for a number of shares of common stock of United in excess of that number of shares which, upon giving effect to such conversion, would cause the aggregate number of shares of common stock beneficially held by such holder and its affiliated to exceed 4.99% of the outstanding shares of common stock of United. On July 23, 2004, we issued a second Secured Convertible Debenture in the principal amount of $125,000, with the same terms and conditions as the Secured Convertible Debenture issued on April 2, 2004, as described above.

Certain Business Risks

The Company is subject to various risks, which may materially harm its business, financial condition and results of operations. You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase the Company's common stock. These are not the only risks and uncertainties that the Company faces. If any of these risks or uncertainties actually occur, 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.

We Have Historically Lost Money And Losses May Continue In The Future

On March 23, 2004, United entered into a share exchange transaction with Trebor Industries, Inc., d/b/a Brownie's Third Lung and Robert Carmichael. Pursuant to this share exchange transaction, United acquired all of the issued and outstanding capital stock of Trebor Industries and Trebor Industries became a wholly owned subsidiary of United. Trebor Industries designs, manufactures and sells surface-supplied air units for the recreational diving industry. United has a history of losses. Historically, Trebor has had both profitable and unprofitable years. As of June 30, 2005, we had an accumulated deficit of $1,616,994. For the six months ended June 30, 2005 we incurred a net loss of $6,403. For the year ended December 31, 2004 we incurred a net loss of $510,922. For the year ended December 31, 2003 we incurred a net loss of $187,609 that solely reflects the operations of Trebor as United had no such operations for that period.

If we incur any problems in drawing down our Standby Equity Distribution Agreement, we may experience significant liquidity and cash flow problems. If we are not successful in reaching and maintaining profitable operations, we may not be able to attract sufficient capital to continue our operations. Our inability to obtain adequate financing will result in the need to curtail business operations and will likely result in a lower stock price.

We May Need To Raise Additional Capital To Finance Operations

As of June 30, 2005, we had $43,910 of cash on hand and our total current assets were $548,773. Our current liabilities were $643,410 as of June 30, 2005. We will need to raise additional capital to fund our anticipated operating expenses. Among other things, external financing may be required to cover our operating costs. Unless we obtain profitable operations, it is unlikely that we will be able to secure additional financing from external sources. As of August 1, 2005, we estimate that we will require $1 million to fund our anticipated operating expenses for the next twelve months if we maintain sales growth at the same rate. To step up sales growth at a more aggressive rate, we would require approximately $1.5 to $2.5 million to fund our anticipated operating expenses for the next twelve months. The sale of our common stock to raise capital may cause dilution to our existing shareholders. Our inability to obtain adequate financing will result in the need to curtail business operations. Any of these events would be materially harmful to our business and may result in a lower stock price. Our inability to obtain adequate financing will result in the need to curtail business operations and you could lose your entire investment. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We Are Subject To A Working Capital Deficit, Which Means That Our Current Assets On June 30, 2005 Were Not Sufficient To Satisfy Our Current Liabilities

We had a working capital deficit $94,637 at June 30, 2005, which means that our current liabilities as of that date exceeded our current assets by $94,637. Current assets are assets that are expected to be converted to cash within one year and, therefore, may be used to pay current liabilities as they become due. Our working capital deficit means that our current assets on June 30, 2005 were not sufficient to satisfy all of our current liabilities on that date. If our ongoing operations do not begin to provide sufficient profitability to offset the working capital deficit we may have to raise capital or debt to fund the deficit.

Our Obligations Under The Secured Convertible Debentures Issued to Cornell Capital Partners, L.P. Are Secured By All Of Our Assets

Our obligations under the secured convertible debentures in the principal amount of $335,000 issued to Cornell Capital Partners are secured by all of our assets. As a result, if we default under the terms of these secured convertible debentures, Cornell Capital Partners could foreclose its security interest and liquidate all of the assets of the Company. This would force us to cease our operations.

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. Prior to this offering, 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.

We May Not Be Able To Access Sufficient Funds When Needed Under The Standby Equity Distribution Agreement And The Price Of Our Common Stock Will Affect Our Ability To Draw Down On The Standby Equity Distribution Agreement

Currently, we are dependent upon external financing to fund our operations. Our financing needs are expected to be provided, in large part, by our Standby Equity Distribution Agreement. The amount of each advance under the Standby Equity Distribution Agreement is subject to a maximum amount equal to $100,000 and up to an aggregate maximum advance amount equal to $400,000 in any thirty-calendar-day period. Because of this maximum advance restriction, we may not be able to access sufficient funds when needed.

In addition, there is an inverse relationship between the price of our common stock and the number of shares of common stock, which will be issued under the Standby Equity Distribution Agreement. Based on our recent stock price of $0.004, we would have to issue to Cornell Capital Partners 1,250,000,000 shares of our common stock in order to draw down the entire $5 million available to us under the Standby Equity Distribution Agreement. On July 16, 2004, we filed with the United States Securities and Exchange Commission a registration statement on Form SB-2 registering 118,000,000. Our Articles of Incorporation currently authorize United to issue 250 million shares and, as of August 1, 2005, we had 119,180,909 shares of common stock issued and outstanding. In the event we desire to draw down any available amounts remaining under the Standby Equity Distribution Agreement after we have issued the 118,000,000 shares that we registered in the Form SB-2, we will have to obtain shareholder approval to amend our Articles of Incorporation to increase our authorized shares of common stock and file a new registration statement to cover such additional shares that we would issue for additional draw downs on the Standby Equity Distribution Agreement. Unless we obtain profitable operations, it is unlikely that we will be able to secure additional financing from external sources other than our Standby Equity Distribution Agreement. Therefore, if we are unable to draw down on our Standby Equity Distribution Agreement, we may be forced to curtail or cease our business operations.

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 in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks are stock:

o With a price of less than $5.00 per share;

o That are not traded on a "recognized" national exchange;

o Whose prices are not quoted on the Nasdaq automated quotation system (Nasdaq listed stock must still have a price of not less than $5.00 per share); or

o In issuers with net tangible assets less than $2.0 million (if the issuer has been in continuous operation for at least three years) or $5.0 million (if in continuous operation for less than three years), or with average revenues of less than $6.0 million for the last three years.

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 Could Fail To Attract Or Retain Key Personnel

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.

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 in the absence of a Chief Financial Officer and Chief Operations Officer. The loss of the services of these consultants prior to our ability to attract and retain a Chief Financial Officer or Chief Operations Officer 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.

Effective January 1, 2005, the Company entered into a two-year consulting agreement with one of the Consultants as referred to above for management and strategic services. The consulting agreement calls for a monthly consulting fee and provides for warrants to purchase 28,571,428 shares of the Company's Common Stock. The exercise price of the warrants is $.007 per share, which equaled the closing price of the Company's Common stock on January 1, 2005, the effective date of the agreement. The rights to exercise the warrants shall vest in four equal tranches of 7,142,857 current shares at six months, twelve months, eighteen months, and twenty-four months. The Company can terminate the Consulting Agreement at any time for "Cause" as defined in the Consulting Agreement. The Consultant may terminate the Consulting Agreement at any time for non-payment of monies due, and such condition remains uncured for a period of sixty days.

Our Failure To Obtain Intellectual Property And Enforce Protection Would 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 inventory 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 products in the Brownie's Third Lung and Brownie's Tank Fill lines depend largely upon a number of factors related to consumer spending, including future economic conditions affecting disposable consumer income such as employment, business conditions, tax rates, and interest rates. In addition our opportunities are highly dependent upon the level of consumer spending on recreational marine accessories and dive gear, discretionary spending items. There can be no assurance that consumer spending in general will not decline, thereby adversely affecting our growth, net sales and profitability or that our business will not be adversely affected by future downturns in the economy, boating industry, or dive industry. If consumer spending on recreational marine accessories and dive gear declines, 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 believes it 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.

Investors Should Not Rely On An Investment In Our Stock For The Payment Of Cash Dividends

We have not paid any cash dividends on our capital stock and we do not anticipate paying cash dividends in the future. Investors should not make an investment in our common stock if they require dividend income. Any return on an investment in our common stock will be as a result of any appreciation, if any, in our stock price.

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.